Why Hispanics Need to Learn How to Invest
By Zach Lopez
By Zach Lopez
The inflation and oil supply disruptions of the 1970s and early 1980s was the start of what caused the major inflation and higher cost of living in the U.S. Before the 1970s, a household normally had one person working to have a middle class standard of living. Now you need two people working to maintain the same standard of living. The cost of living continues to go up where two adults working in a household is not enough.
The economy is worst for those that don’t have a college education.
As the chart above shows, in 1964 most educational levels had similar wages. The college educated did see wage growth and was able to keep up with inflation. However, the high school graduates and dropouts have been left behind and their inflation adjusted incomes have declined from their peaks of the early 1970s.
As the above table shows, Hispanics make the least in every educational level.
A person with only a high school education or less makes about $500 to $600 a weak or about $24,000 annually.
If this person has a family of four, the family would be considered living in poverty.
The New Normal: Slower U.S. Economic Growth
Before the global financial crisis of 2008, Dr. Mohamed El-Eraian (former CEO and co-CIO of Pimco, one of the world’s largest bond money managers), wrote a book titled When Markets Collide. The book received quite a bit of buzz when it came out. One of the main tenets of the book is the U.S. will face a “new normal” of slower economic growth.
So far Dr. El Eraian has been correct regarding a slower growth U.S. economy eventhough some of the reasons describing the new normal have been wrong. The book explains and many economists/analysts agree that the biggest reason for the slowdown is too much debt from households, businesses, and sovereign entities including national, state and local governments.
Ray Dalio, one of the most successful hedge fund managers in the world, produced a YouTube video on how the economy works. The video is more about how debt leverage has played an important role in the growth of the U.S. economy. The video also explains that there are economic super cycles where the debt piles up and eventually lead to a major economic debt crisis. The debt crisis takes about seven to ten years to recover. The Great Recession started in 2008, therefore we are into our 8th year according to Dalio and other economist. We have a couple more years to recover from our debt crisis. Click here to view the video.
Also as we get late in this economic cycle we can’t expect the economy to get stronger.
I’ve been following this story since the book came out, and I’ve identified other reasons for the slowdown in the U.S. economy, the “new normal”:
Of course there are other reasons for the “new normal”: high corporate taxes (effective tax rates are much lower), regulations (especially in financial services - getting a mortgage, small business loans are more difficult to get due to Dodd Frank regulations), cost of living keeps rising leaving the poor and middle class behind, high college education costs, dysfunction in Washington D.C., decaying U.S. infrastructure (roads, bridges, airports….).
Bottom line - young people face a very different economy than previous generations.
I will explain a few of the above variables that are causing the “New Normal”, slower growth for the U.S. economy.
Law of Large Numbers
Below is a long-term chart for Gross Domestic Product, GDP, growth:
The grey highlighted area are periods of recession; fortunately they are few. The average U.S. recession lasts about 10 months.
Notice that as time goes on, the growth rate slows.
We can’t expect the economy to grow above 3% on a sustainable basis when we have an $18 trillion economy.
The Financial Crisis of 2008 and Impact on Baby Boomers and Millennials
The financial crisis of 2008 that led to the Great Recession created many hardships and destroyed the confidence of many Americans, especially among Baby Boomers and Millennials.
The U.S. economy is about 70% consumer driven. The lack of confidence and high debt levels has caused weak demand from these important groups, and is another reason for the subpar growth of the U.S. economy.
Baby Boomers
Baby Boomers are individuals who were born from around 1946 to 1964. There were around 80 million births during this period.
Baby Boomers were responsible for many social, economic and investment trends, and they will probably continue to do so.
Baby boomers have been hit especially hard. Their homes and 401ks and retirement accounts have declined and they’re insecure about their jobs and the job market. They have changed their spending habits.
Baby Boomers are also starting to retire and will start applying for Social Security and Medicare. Politicians often complain about entitlements, they will only increase as Baby Boomers retire in mass. Americans, especially women, are living longer, so the growth in “entitlement” spending could increase and last for many years.
A problem for retired baby boomers (and many retirees) is historically low interest rates. Below is a long-term chart for the 10-Year Treasury:
Source: WSJ
I started my investment career as a stock broker for Merrill Lynch in 1980. I mostly sold income producing investments because interest rates were so high. I tried to get my clients to buy long-term bonds, to lock in high rates. My pitch then was “I hope when I retire that rates are double digits.” I had no idea rates would go as low as they are now.
Investors locking in double digit rates did well, not today.
Millennials
Millennials, also known as Generation Y. They number approximately 86 million (close to baby boomer numbers), and were born from the early 1980s to the early 2000s.
Millennials are also creating many social, economic and investment trends.
They faced many economic headwinds during this difficult economic cycle: high post high school education and training costs and debts, poor job markets where many are underemployed, working part-time or remain unemployed.
This generation started and made many technologies popular that are free or where goods and services are shared or rented. The first such popular service was Napster, a free file sharing service that was mostly used by users to download free music. Millennials have also invented and made popular services like bitcoin, Uber, Airbnb, Netflix, Hulu, and crowdsourcing.
Car buying, marriage, family formations, and home buying trends have changed and are less from previous generations.
Could these economic, demand trends change? Maybe for Millennials. Baby Boomers leaving the work force and retiring, probably not unless they have substantial portfolios, and if interest rates rise substantially from current levels.
If interest rates rose substantially, it would probably mean much higher inflation, and a rise in interest income would be a wash with a higher cost of living.
The financial issues that our minority communities face are even more challenging, but we must address the educational needs of these communities as their numbers are growing.
The Global Economy Is More Competitive and Has More Participants
Post WWII the U.S. was the economic engine of the world, but this is changing.
The dominant, developed economies (Europe, U.S., Japan) are all slowing due to the size of their economies, large debt levels, aging populations, high costs, bureaucratic economies with more regulations and complacency.
Emerging economies in Latin America, South East Asia including China are the opposite: they have younger populations, they’re hungrier, they have less regulations, lower costs, and less net debt.
The U.S. now operates in a more competitive global economy and this leads to outsourcing and the consolidation of industries, fewer high paying jobs, and stagnant wages.
Outsourcing
Unions and politicians complain how U.S. companies outsource jobs overseas. U.S. companies have been very good at expanding internationally to grow their businesses. It does not make sense for Coca Cola, or General Motors to make a can of coke or cars in the U.S. and ship to their customers overseas. Those jobs need to be close to their markets.
Some jobs do go overseas because of lower costs and regulations. Below is a chart that shows the labor costs per hour for shoe manufacturing:
Source: BusinessWeek, Bloomberg
The average hourly wage of an American worker is about $21. If you were to locate a shoe factory, where would you locate it? Would it be the U.S.?
New Technology, Innovation
Technology has improved the lives of many in the world, and has made the workplace and workers much more productive. The downside of technology is that it has eliminated millions of jobs.
In the 1990s, I read an article that the vision of many technology companies was to help companies and governments across the globe automate tasks and jobs to make them more productive. Technology companies have been very successful at their goals. Again, the downside is many jobs were eliminated.
There are many jobs that have been eliminated because of technology: bank tellers, gas station attendants, checkout clerks at grocery stores, telephone land line workers, travel agents, newspaper employees….
Consolidation of Many Industries, and Downsizing among Many Companies
The consolidation of many industries, and the downsizing of companies have laid off millions of workers.
As a shareholder of some of some of these companies, gaining scale, entering new markets and offerings through mergers and acquisitions had lowered costs and increased revenue and is good for the bottom line and stock prices, but is has been bad for the millions of workers that have been laid off.
When I graduated from business school I interviewed with Goldman Sachs, Merrill Lynch, Kidder Peabody, Smith Barney, and Chemical Bank. I had three job offers early on, so I quit looking. Notice the list, only one company is independent, Goldman Sachs. The rest were swallowed up by bigger companies and basically don’t exist anymore. I know that if I graduated today, I would not have the same opportunities that graduates had 30 years ago.
Our generation has been impacted by these consolidations, mergers and acquisitions. I’ve lost several jobs due to mergers and downsizing.
I’m sure if you think about it, how many companies have you’ve worked for still exist, and how many times have you’ve been laid off because of downsizing and mergers?
No matter what industry graduates are looking to start a career in, the options they have are much fewer than our generation. Below is a list of a few industries and the consolidation they have gone through:
Source: Dan Hassey Archive and Research
This list is a sample of the many companies that existed 35 years ago, and a sample of the few large companies that remain today.
The lists of companies above are important because most of these companies were where graduates go to start their careers, receive valuable expensive training, and experience.
Visually one can see that in 1980 there were many more companies that existed compared to today, and our economy is much bigger and has a much larger work force.
When companies consolidate, or in the case of sectors like record and book stores, many high paying jobs were lost in accounting, marketing, management, finance that will not come back.
Not all companies were acquired or merged; some went bankrupt or are out of business: E.F. Hutton, Burnham Lambert, Lehman Brothers, Woolworth, and Continental Illinois.
Also, many of these industries have many companies in them, but many of these industries are dominated by a handful of huge international companies. For example banks, there are thousands of banks, but the major banks listed above hold most of the deposits and make most of the loans.
Notice that technology is an area in the economy that has expanded and provides high paying jobs, but not all graduates studied information technology.
The questions is - where do young graduates go for their first career job, training and experience?
Solution
The solution for the high cost of living, especially for higher education, stagnant wages, potential for lower Social Security benefits, and the high probability that Millenials will live much longer than past generation is the imperative that Hispanics/Mexicans learn how to successfully invest.
One concept that these groups must embrace is the time value of money. The Rule of 72 explains this. Briefly, the rule states that if you divide the number 72 by your rate of investment equals how long it takes for your money to double.
For example: if you average 10% on your investment dollar, your money would double about every 7.2 years. If you had $10,000, your money would approximately be:
$20,000 in 7.2 years
$40,000 in 14 years
$80,000 in 21 years
$160,000 in 28 years
$320,000 in 35 years
Contributions to the $10,000, especially when you’re young, could be much more.
This site will teach, explain how to invest youR investment dollar to get the best return, adjusted to risk.
Conclusion
The economy and job markets are very different for today’s young Hispanics/Mexicans, as they face many economic and financial headwinds.
Briefly, a higher cost of living, and fewer high paying jobs are leaving many young Hispanics/Mexicans behind in this economy, especially if one doesn’t have the right college education or training.
It’s imperative that young Hispanic/Mexicans learn how to invest to create financial security and wealth for themselves and their families.
This website is dedicated to helping Hispanics and other young adults to learn how to invest. The cost – FREE.