Merry Christmas and a Happy New Bank!

Bank failures continue. Every week (usually on Friday), the FDIC moves in and takes over a few more failing banks. Most are in trouble because of bad commercial loans. There was one striking example locally where an investor group led by a Realtor bought a 5 million dollar property and couldn't even pay the taxes on it from the rents. It sold for less than half that in foreclosure. Although the bank that lost about three million dollars on that one loan was not in this state, some local banks have made similarly bad decisions.

[Memo to the right wingnuts: There has been no change in the law regarding loans to poor people to encourage home ownership, yet the banks have tightened up their lending practices. That is what mathematicians call a counterexample to the claim that politics rather than greed caused lenders to loan money without checking anything. Another counter example would be where a Swiss bank nagged an owner into refinancing a now-bankrupt resort so they could earn the origination fee.]

So how can you tell if your bank is over extended? How can you find out how many toxic loans it has, or how many bank-owned properties it owns? Easy:

An MSNBC story provided a nice, color coded map showing the extent of the problem on a state-by-state basis with links to a separate "bank tracker" site. The main article only does banks, but if you go to the main site you can choose (top of the left column) to look for banks or credit unions as well as their methodology and who has obtained TARP funding.

It is worth a look, although you do have to know where your bank has its headquarters.

What I like is that they show the time dependence of the bad assest ratio in a bar graph, so you can see the trend as well as the raw numbers in a table. For perspective, the reason their bar graphs don't max out when a bank gets to a 100% ratio between troubled assets and capital plus reserves is that the ones that have been taken over can be in the 300% to 600% territory. However, that is not the only metric. I saw one bank where the ratio was just over 100% but they had been losing over a hundred million dollars a quarter for a year.

I was glad to see that our banks and our credit union are in reasonable shape. One has a ratio around 40%, but it has been stable for most of the year and they are still making a profit. Not so for another local bank, which has advertised how helpful it is to local businesses. Their ratio has been going up by leaps and bounds, hitting 100% last quarter along with a large negative profit. I wouldn't buy any stock in that one!

And always remember: the cap on FDIC insurance applies to the sum of all of the accounts in your name, not each account.

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Upcoming unemployment data

The lead in this article says "unemployment could crack 10%. I have little doubt of that, because passing an inflection point in unemployment only means we are on our way to a turn around, not that we are there already. I'd be surprised if monthly unemployment numbers for this depression fail to reach 10%, and not too surprised if they surpass those for the worst recession in my memory -- which was 10.8% (quarterly average of 10.7%) in late 1982.

Why?

The change in the slope seen between my first post on the subject in June and my most recent post in October is indicative of a turnover, but there are indicators that it will coast upward for a few more months.

As another recent article put it, the pace of layoffs is slowing ... which means there are still layoffs and that means unemployment is still growing. The weekly claims are falling -- but are still high at 500,000. As currently shown on this page, where the employment and unemployment numbers will appear on Friday, job cuts peaked in January (the inflection point?) but we are still losing jobs.

Except for changes as people drop off of the unemployment rolls, which becomes less likely as Congress again funds an extension of unemployment benefits, we need to see job growth -- not just jobs saved -- before the unemployment rate turns around.

That is bad news for the new Republican governor of NJ, who is clearly hoping that an Obama recovery will make it possible for him to cut taxes, eliminate an 8 billion dollar deficit, and balance his budget without draconian cuts in education, medical care for elderly in nursing homes, and public safety.

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Unemployment Inflection Point?

The September unemployment data bring to a close another "quarter", so we now have an additional data point to compare to the naive projections made back when the incoming administration was hoping this was going to be a recession rather than the depression (four quarters of negative GDP growth) it turned out to be. [I figure "The Mortgage Panic of 2008" will make a good name for the triggering event.]

With that point, the inflection point is much clearer:

Click on the image to enlarge it significantly.

I emphasize the quarterly average because that was what was used in the original predictions, but also because it smooths out the noise in the monthly data.

The monthly data are still very noisy, but the break away from the rapid and accelerating ascent that had started a year earlier is much clearer now than it was just three months ago. The green and pink lines are explained below. [*] The noise is probably a result of the unseasonable timing of various things, whether it is the stimulus of car sales in what is normally an off season for car sales or the layoffs of teachers in the fall when they would normally be hired.

Unemployment is still going up, just not as fast as it had been. It is starting to turn over, but it doesn't look like it has turned over. It will go up a lot more when people re-enter the work force once they see jobs appear.

But the good news from this end is that I have finally seen an actual stimulus-funded construction project putting people to work. (I saw a lot more in another state, one that must have had a lot of projects ready to go, while traveling recently.) It just got started, so the stimulus effects are running about 8 months behind the starting point for that program.

Time will tell if it is enough.

As to which prediction curve applies, well, that would require correcting them so they follow the Q1 2009 data point rather than the optimistic estimate used back in late December of 2008.

[*]
The green and pink lines were described in detail elsewhere in the "Predictions" section.

The green line is a straight-line extrapolation (zero curvature) based on Q3 2008 and Q4 2008. It shows that the original blue predictions of the transition team assumed a recovery was already in progress by Q1 2009.

The pink lines are a pair of extrapolations from the actual Q1 2009 data point and the Q4 2008 point. The lower line is a straight line extrapolation (zero curvature), while the higher one assumes a continuation of the acceleration of job loss (positive curvature) that took place in the previous quarters of 2008.

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The Stimulus is Working

If all politics is local, so is much of economics. This picture is worth 1000 words.


Thanks to the $8,000 first-time buyer tax credit, the house across the street has sold after being vacant for more than a year. Better yet, the house next to it has also sold after also sitting vacant for more than a year. Both were sold to young, first-time home buyers who could use help with a downpayment but could move quickly because they did not have to sell a house to make the move.

Even better, my parents home finally sold after being empty for about 18 months. It also was bought by a first-time buyer. Like the two cases on our street, the seller cut the price significantly to get rid of the property, having long since moved to another place with its own expenses, so this does not signify any recovery in the price part of the market - but it has meant work for roofers, maintenance people, surveyors, and actual real income for realtors.

Along with one other sale about a block away, all of the properties up for sale in our immediate neighborhood are "gone" - and none of them were converted to rentals. That last part is a double bonus of the stimulus plan. With prices down, people with cash can pick up potential rental properties at a song. (One house on my drive to work went from "sold" to "for rent" in one day, but it is closer to the colleges.) This plan puts an owner in the house, which is a big plus for everyone around us.

So this part of the stimulus bill is working well. The only difference between it and the "cash for clunkers" program is that it isn't using appropriated dollars so there is nothing for the Republicans to complain about yet. It remains to be seen if they will complain about having to subsidize a TAX CUT for new homebuyers in the same way they criticize a rebate for people replacing a 14 mpg truck (SUV) with a 28 mpg car that will cut each individual's demand for foreign oil in half!

Any bets?

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Commies better for Business?

The chinese economy is just rolling along (sample story), growing at +8% rather than slumping at -1% like in the US. That is despite a 20% drop in exports!

What is the difference?

Twice as much stimulus, relative to our respective GDPs.

Those crazy communists dumped 0.58 T$ into a 4.4 T$ economy. That is 13% of their GDP (IMF value).

Held back by the nay-saying Hoover wing of the Republican Party, the US has put just 0.96 T$ into our 14 T$ economy. (Made up of 168 G$ under Bush and 789 G$ under Obama.) That is just 7% of our GDP, less if you look at what we have spent.

So which system puts more national resources behind business? Clearly not ours.

There are other differences, of course. We were spending like drunken, coke snorting former Air National Guardsmen when our economy was good, so we lacked the resources to ramp up spending when the economy was bad. Perhaps more importantly, we chose to sift our stimulus money through state legislatures rather than spending it directly by the federal government like those commies do. This, along with time needed to get bids, slows down our system so much that we probably won't even spend half of it this year. So our stimulus might be only 1/5 of what China did.

The good news is that the budget deficit won't be what it is projected to be until we actually spend that money.

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Slow Progress on the Economy

This morning's news concerning new jobless claims, where the number dropped below 600,000 for the first time since the last week of January (2/5/2009 release), seems to have been ignored by the markets. Oddly, "investors" did not buy into what looks like a nascent recovery, choosing to buy 3% T bills instead.

Now it is true that the moving average is still above that 600,000 level. However, the moving average now has a sustained (slightly) negative slope -- sustained since the middle of March (when the stimulus bill was passed). I expect we will still see a lot of new jobless claims even as some stimulus projects get started (highway projects in our state are just going out to bid) because the hiring will not be in the areas where layoffs are still likely to happen.

Continuing unemployment claims went up modestly. Also not surprising, because the stimulus package - which Congress put mostly in the hands of the states - won't really get rolling at creating new jobs until next month. However, that does bode well for a modest increase in the unemployment rate in July. That will probably be when we will see a market rally.

But what is going on? Are people putting new IRA or 401(k) money into fixed return investments? I'm at an age where a big chunk of mine goes that way, but I would not ignore equities at a point that might be a market bottom, particularly when there is a good chance of inflation a few years in the future. Those 10-year 3% T bills will be worthless then.

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Green Shoots?

Maybe, maybe not.

We have one REALLY BIG green shoot locally: one of the houses across the street finally sold - after nearly a year - and a young couple is moving in. (Oddly, the real estate agent never put up a "sold" sign despite all of the signs - survey stakes and inspections - that it was taken. That is either poor marketing of a successful agent or a serious case of not wanting to anger the sales gods.) The other one keeps getting lookers but no takers.

The other big news was the release of the June unemployment data, which allows us to add the first NEW data point to an infamous graph showing projected quarterly average unemployment rates. Below is an update of the graph I showed last month to correct some major misconceptions about what the economy was doing - and was going to keep doing - before Obama took office.

Click to get a full-size view.

Consistent with the flat trend in new jobless claims, we seem to have a second derivative consistent with zero. That is what the lower of the two pink lines tracks. That is an improvement over the large positive second derivative - indicating an acceleration into a depression - that was the case during the fall of last year before the initial steps were taken by the Fed and the Bush administration (drawing all sorts of grief for Bush and the lame-duck Congress) to turn it around.

Thank God that Bush didn't act like the Hoover wing of his party wanted.

So, is the slope of the "new jobless claims" data zero or negative? Is the break shown by the June unemployment data real or a statistical fluctuation? That we will not know for months, certainly not until we see if there are any significant changes in July once "stimulus" money starts to flow in the new fiscal year. Given all of the delays in getting the Stim Bill passed and then incorporated into state budgets, I didn't expect significant spending by states until well after July 1.

Locally, there are several "shovel ready" highway projects (plans and permits all in place) that are just going out to bid. One is drawing fire from idiots who think it is wasteful to build a particular project earlier than planned just to put people to work. (They must want a 4000 Dow and 15% unemployment.) In addition, most of the jobs that will be shed by local and state government were ended in June as the fiscal year drew to a close. If that sort of action was common nationwide, that may explain part of the bump up in the June job loss data (which had a big chunk from government layoffs) that has thrown the markets into a tizzy today.

This could be a good tizzy. If the Dow gets below 8000 or into the mid 7000s, it may be a great time to put some Roth IRA money into the market early. Even if we have a "stagnant" recovery like I have seen in the past (like the days of stagflation only without the inflation) we should see the GDP pick up. Remember, unemployment is a lagging indicator!

One thing is for sure: the second derivative wasn't negative back in December as the Obama economic transition team had assumed in constructing the blue graph. I wonder what the reaction of the economy would have been in January if they had shown the upper of the two pink lines as the "without" model. Actually, we don't need to wonder. It likely would have been much worse than the March collapse of the stock market as the situation became clearer to investors.

PS -
This new figure has a "credit" on it as well as a minor tweak of the green line described in my earlier article. This is the figure to borrow if you want to include my analysis showing the true starting point Obama had to work with.

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The Sub-Prime Rich

One of the details in a story about the death of Ed McMahon at age 86 concerned his financial difficulties:

In 2007, he fell and broke his neck and as a result of not being able to work, he defaulted on mortgage payments on his Hollywood mansion.

Say what?

Having a 4.8 million dollar mortgage (according to Wiki) in your 80s, a mortgage so big that it requires earning a quarter million a year at age 84 just to pay the "rent" [*], is not my idea of planning for retirement. Our plan is to pay off our house well before retirement age so our "rent" is less than $200 a month.

Apparently Ed McMahon did not have (or likely could not afford) disability insurance to cover his mortgage should he be unable to work and pay his bills. Was he counting on winning the lottery, or the American Family Publishers subscription prize drawing he used to pitch to elderly folks along with everyone else?

It actually doesn't surprise me that much to discover that someone like McMahon was living in a sub-prime mansion. That circumstance might not fit the story some want to create about defaulted loans, but it fits what I am seeing in my town. Locally, there have been several large foreclosure auctions advertised in the paper for properties worth millions. In one case, it wasn't a poor black family that spent several million of someone else's dollars on a large development consisting of rental housing and then never even pay the property taxes on it. One wonders what those real estate developers did with the rent they collected.

[*] Footnote:
That would be just the interest on a 5.2% loan, which is probably an underestimate, so you still have to add in property taxes and insurance.

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Inflection Point ?

Unemployment is a lagging indicator.

This well-known and most basic of economic investment facts seems unknown to those on the anti-American right who are hoping for an economic disaster - hoping that the Bush-Obama effort fails to cut short the economic depression we are in - and are looking for a dark cloud (two examples) rather than green shoots [*] without offering anything other than the discredited Herbert Hoover alternative.

Unemployment does not peak and begin to fall until long after a recession, which is measured by GDP, is over. Similarly, unemployment did not start to rise in any significant way until well after this Great Recession got started about a year ago.

Last week's announcement of the latest weekly jobless claims data show continued evidence of a possible inflection point (details below the fold) in unemployment as well as the data that tell us exactly why the latest graph talked about by the bloggers above, and even on "Meet The Press" today, is utter nonsense.

Let's look at that graph to see what an inflection point is, and put our focus on the "initial value" point that represents the state of the economy before the new administration could pass, let alone implement, the stimulus plan in question. Click on the graph to see it with full resolution:


The blue curves are a report prepared by two members of the Obama transition team a few weeks before taking office. The large red dots show the quarterly average value of the seasonally adjusted unemployment rate based on phone surveys. The quarterly averages were used to construct the solid blue curve prior to Q1 2009. I also show, as smaller red dots, the monthly values. (When a monthly value falls on top of an average, I put a tiny pink dot over the red one, visible only in the full size image.) The green and pink lines are explained below in the "predictions" section.

UPDATED:
I have corrected a minor error in the green line (it should have been a bit steeper) when adding the June unemployment data to the graph. The new version, which was posted on July 2, should be used rather than this one if someone wants to use this graph or modify it further. The new graph also has an appropriate attribution on it.

It is EXTREMELY important that the Q1 2009 value of 8.07% is well above the guess of about 7.54% used in the transition team analysis, a point I highlight with a blue dot. I trust you can see that the guess they based their analysis on was really wrong, and that there is no quantitative value to the resulting predictions shown in blue. In fact, there never was any real value to those predictions.

At best, one might argue that they were only predicting that the recovery act would reduce the unemployment peak by about 1%, and do so about a year earlier than without it. At worst, one might argue that they were assuming the recovery had already started and were unaware that we are trying to fight off a depression. In between would be the position that they were hiding the true situation in an attempt to "jawbone" the economy, to avoid the sort of panic that played a major role in the development of the Great Depression.

THE DATA

It is important to realize that the unemployment data are the result of a phone survey. I was actually part of that process sometime back in the 1990s. Individuals are selected at random to join the survey population, contacted on a regular basis by phone to discern their employment status over a period of many months, and then replaced by someone new. Like any survey, those data are uncertain and fluctuate. Quarterly averages help smooth out those fluctuations.

Some data, such as weekly jobless claims, are collected from state unemployment offices and reflect a reasonably true count of what happened that week. However, in order to rush them out ASAP, the first number released is only an estimate. This past week's value will be revised next week when the new value appears.

The use of highly uncertain data in models that extrapolate into the future is extremely dangerous. A 10% error in the first point will expand into a 20% error in the next point when using equations as unstable as those in economics. This mathematics, sensitive dependence on initial conditions, is well known in the math and science community but rarely makes its way into the sort of Calculus Circus math taken by business majors - and is totally unknown to reporters and politicians.

INFLECTION POINT

An inflection point is a point were there is a change in curvature of a function like unemployment. It is a second derivative of the quantity we are looking at, which is quite different than what gets emphasized in the media.

The first derivative is the change in unemployment. If unemployment goes up, the derivative (the slope of the curve) is positive and the curve goes up. If unemployment goes down, the derivative is negative and the curve goes down.

ASIDE: The weekly jobless claims provide a window into the first derivative of unemployment *if* you know the rate of job creation and the rate at which people leave the unemployment rolls. As in late 2007, you can have 325,000 people apply for unemployment and still have almost no change in the unemployment rate.

The second derivative is the change in the change. If it is ZERO, unemployment will continue to increase every month if it was already increasing (say from 6.10% to 6.85% to 7.60% to 8.35%) - and it will stay the same if it wasn't changing (say from 4.50% to 4.50% to 4.50%) or continue to fall if it was falling. If it is POSITIVE, like it was in all of 2008, unemployment rate will curve upward - increasing in every bigger steps. If it is NEGATIVE, as shown by the light blue curve through all of 2010, the rate will curve downward - rising and then falling like a fly ball.

ASIDE: A regular rise in weekly jobs claims indicates a positive second derivative, predicting that the unemployment increase will be bigger next month than last month. A regular fall in the weekly jobs claims indicated a negative second derivative, suggesting that the unemployment increase next month will be less than the increase this month.

The green line I drew on the graph shows the unemployment curve extrapolated for ZERO curvature - a constant increase in the unemployment rate based on the two previous points. Notice that the blue point for Q1 2009 is below the green line, indicating they believed the curvature was becoming negative (recovery starting) even before the stimulus package was proposed.

The true value for Q1, pointed out with an arrow, is well above the green line. This indicates that the curvature was positive and the rate of job loss was increasing rather than increasing - indicating the acceleration of the recession into depression. [**] The higher of the two pink lines is a projection that assumes that acceleration continues unabated, while the lower of the two assumes a transition to zero curvature, where I think we are today.

THE PREDICTIONS

I think the mistake made in constructing the blue graphs shown above was in assuming that the sharp drop in new jobless claims in late December, obvious in the graph shown at the bottom of this report on new jobless claims, indicated an inflection point for unemployment. That input would lead their model to predict a Q1 2009 value that is below the straight line projection of the previous two quarters, what was shown as a green line on my diagram and discussed above.

Feeding these data into their model doesn't just change the initial point by a significant amount (it is off by more than 0.5%, a 7% error in the value), it changes the initial slope by a huge amount (from about 2.7% per year to 4.8% per year, an 80% error in the initial slope) and makes the curvature slightly negative rather than significantly positive.

I'd really like to see a re-run of their model with the true Q1 value instead of their estimate. Rather than bending at the start of 2009, the light blue "without" curve might have soared up into the low teens. For those who think this is unlikely, look at your local government and college budgets without the stimulus money. Ours are cutting jobs even with that money. It would not surprise me to learn that we would have to cut our faculty and staff by 5 to 10% starting July 1 without the stimulus money from the recovery plan.

Another Modeling Error

They also made totally unrealistic assumptions about how long it would take to pass the stimulus bill, and thus when the tax cut would show up in my paycheck, as well as when the money would show up as actual jobs. Apart from helping with staffing shortages in the unemployment offices, little of the money in our state will go to work before July 1 - which means the effects won't kick in until Q3 rather than in Q1 as they had assumed. (I think they assumed the bill would pass by the end of January.) In addition, a big chunk of the money is going to avoid layoffs rather than put unemployed people to work. The "no layoffs" happens right away, in public funded operations like our college, but the "new jobs" construction requires bids and contracts.

GOOD NEWS ?

As pointed out up at the top, the number of new claims for unemployment insurance fell again, by more than expected. Is it real? Who knows. However, the drop from the peak a few months ago suggests the rate of job loss is no longer growing, and might be falling. We really won't know for several months whether the curvature has become negative. But even if we are at an inflection point, unemployment will continue to grow until new jobless claims are balanced by those taking jobs.

If sustained, this would be a leading indicator of improvement in the economy.

But I'm not holding my breath because there are too many affordable houses sitting vacant at prices the owners think would be reasonable if it weren't for the properties heading for foreclosure. I'll let you know when I see a "sold" sign within a half mile of our house.

[*] Footnote

Anyone who watches CNBC has heard this phrase quite often, but might not know where it comes from. It is an allusion to a famous bit of dialog from the movie Being There, where the Peter Sellers character Chance (aka Chauncey Gardiner, a gardener who likes to watch TV that gets mistaken for an erudite philosopher) says "There will be growth in the spring!" - which gets (mis)interpreted as a prediction that the economy will turn around in the spring.

[**] Footnote

I use the term depression in the sense of the normal depressions that were common in the late 19th century as a result of bubbles not unlike the real-estate bubble that started this one, not in the sense of the Great Depression. I explained this in an earlier blog about the state of the economy in early January 2009.

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Madoff's Ponzi Lesson

You all know about good old Bernie Madoff, whose recent conviction has brought the story to the forefront. CNBC assembled some of his "victims" (scare quotes because a Ponzi scheme, more so than a normal con like driveway sealers or a money switch, relies on greed rather than just pure salesmanship) to discuss the matter. You can read some of that in this story.

Now, granted, there are plenty of reasons to point to the failure of the police in this matter (the SEC regulators who are supposed to be giving speeding tickets), and one very good lesson for those of us in academia. [The person who repeatedly blew the whistle on Madoff complained on "60 Minutes" that the SEC was full of lawyers who could check that forms were filled out correctly but could not follow a simple statistical or mathematical argument. We should mention that every time a student in the liberal arts complains that ze does not need math because ze is going to be a lawyer.] But I was sorely disappointed when one person on the TV broadcast was asked point blank what lessons she had learned.

Sadly, she did not learn that the reason she only lost 2/3 of her money while others in the room had lost all of their their retirement funds was that she had only given 2/3 of it to Madoff.

The lesson from Madoff, and other recent events, is to Diversify.

Those events have reminded me of a bit of family lore that has guided a few decisions I have made over the years. Here is the story.

Both of my parents were raised during the Great Depression, so I know some things about their view of that time but almost nothing about what THEIR parents were thinking as they struggled to survive and raise kids. I'm not sure my parents knew much about their parent's economic thinking until a half century later when illness or death brought their parent's finances under their control. Those finances have a lot to tell us, and my parents made it a point to share those stories with us.

Story 1:

After my grandfather died rather suddenly, it fell to my Dad to figure out his financial records. My grandmother had never even written a check in her life, let alone have any clue about the family finances. She got her weekly cash and that was it. [So lesson 1 is that my wife and I are careful to be sure we each know as much as possible about the big picture, including our separate retirement accounts.] My Dad ended up having to visit or write every bank in Chicago plus those in another city to try to find all of the accounts and CDs my grandfather owned. [Lesson 1A is that my parents are also careful to be sure we know where their money is buried.] One can only assume that Grandpa lost a lot of money as a result of bank failures circa 1930 and had distributed his cash as widely as feasible. He had dozens of bank accounts, in addition to other investments. He would never have given it all to Bernie Madoff.

I don't have all of my retirement money in accounts managed by the same company. That was by plan. But I never really thought about the fact that we have accounts in several different banks and credit unions until now. However, we keep it down so we know where they all are.

One of his other investment strategies always struck me as a good one, but it isn't as feasible today as it used to be in the days before mergers and conglomerates. As one example, he owned stock in Borden because he liked Cracker Jack. He had bought stock in Cracker Jack, which was later bought by Borden. (Like a product, buy their stock. Of course, today Cracker Jack is owned by Frito Lay and Borden is part of Hexion Chemical that is owned by a private equity company. So much for THAT strategy!)

Story 2:

The finances of the other set of grandparents didn't become clear until they became seriously ill and had to go into nursing care. When cleaning up and out their house, they found a bag of money (mostly silver coin) under the mattress. A big bag. Turns out they had more cash than the other, apparently much better off, set of grandparents. In fact, they didn't know how much they had, so they didn't know that they could have moved into a very nice, upscale, retirement community with lifetime care. [Lesson two, learned by my parents: Know your net worth, and plan to move into a lifetime care facility while you are still healthy enough to walk in the door. Once you are sick, your choices become extremely limited.] Sadly, they also didn't know they had the funds to visit "the old country" with plenty to spare.

Paraphrased conversation. Mom: "Wasn't it uncomfortable with that bag under the bed?" Grandma: "We were used to it." When they moved from one house to another, they had somehow moved that heavy bag of money themselves so no one, including family who helped with the move, even knew it existed. I would assume that they also lost money when banks failed circa 1930. That zero interest investment strategy looks pretty bad until you look at 40% losses in the stock market or 100% losses with Bernie Madoff.

They had continued to save even while on Social Security, just to be "safe". They could do this because they owned their home, so their only living expenses were food, power, property taxes, and insurance. That could be how their cash resources remained significant even with inflation going on. [Lesson three: Don't re-mortgage your home with payments extending 20 years into retirement. Own it, and live in it. A home is a great investment if you can live in it rent free for 20 years. What you had been paying toward the mortgage becomes available for investment while you are still working, and what you don't have to pay in "rent" will make retirement income go a lot further.]

All of their decisions were not good ones, just as all of mine have not been good ones, but diversification has (so far) protected one big chunk of our investments from any loss of value in the current slump. Talking about finances within a family can be the most valuable investment of all.

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