Through my various readings I’ve recently come across the term, “middle class poverty”. At its base, the term is a contradiction. “Middle class” is used to describe a person or family that is financially in the middle of the economic ladder. They cannot be in poverty because they would contradict their standing as middle class. Yet, knowing and understanding this contradiction does not stop me from grasping to understand the concept that is being expressed.
Poverty is the state of being extremely poor and middle class is the socio-economic group between the upper and working classes. We do known though that middle class people and families sometimes do lose their house to foreclosure, have items repossessed and declare bankruptcy. Throughout all these calamities, they most often stay within the perceived middle class, though they exhibit characteristics of a person or family in poverty. How could this happen?
The funny thing about the human condition is that we’re endowed with an interesting faculty known as free will. Some people like to deny they have free will and act as if fate has destined them to fall into a number of predicaments. The reality is that you have a good amount of control over your actions, especially your financial actions.
Given the monthly income you earn, you have the ability to spend the money as you choose. You can take your money and blow it at the casino, mall or any other outlet you can think of. At the end of the month you end up with $0 in your wallet or a $0 in your checking account (probably both). The next month starts and the cycle continues.
In the situation above, you have your middle class wage earner stuck in a cycle where lousy financial decisions are being made over and over. It’s a bad situation, but the person is living within his/her means. Barring any sudden disasters that put a financial strain on them, they are middle class and footloose and fancy free.
In today’s world we have more than just our regular income at our disposal. Debt financing is everywhere. Whether it is a credit card, lines of credit, pay-day check advances or other debt offerings, just about everyone can secure additional funds beyond what they currently earn. Obtaining financing through debt is a very powerful tool and can be very beneficial. It also can be disastrous.
Though debt can be a wonderful resource, it does not come without risk for misuse. If we revert back to the spending example described above and blend debt into the equation, it’s not hard to see how the financial path can easily lead to poverty.
When the need to consume goes beyond regular wages or savings on-hand, debt is used as a solution. This solution comes with a cost. The borrowing cost causes our average middle class person or family to begin servicing (paying) the debt they have incurred. The more debt they use to fuel their consumption needs/wants, the more they must service the debt. At a certain point, the liberation they have experienced through leveraging debt becomes an ever increasing burdensome weight.
Debt ultimately imposes financial restraint on the debtor, just as a dead-end street ultimately imposes a speed restraint on a driver. Either can be ignored, but the restraint will be realized in the end. As the debtor begins to see the end of his/her credit limit, actions are typically taken to reshape the impending financial future (disaster). At this point, the concept of middle class poverty begins to take shape. The free will that once was ‘free’ has now given itself over in large part to servicing debt.
A voluntary enslavement has occurred and the enslavement is impoverishing. The wage that was once free to be spent wisely or frivolously is now controlled in part by the need to pay/service the debt that has been used. The increased ability to consume that the debt once provided is gone and now the weight of debt is fully felt. This is an impoverishing predicament. As an increasing amount of income is relegated to servicing the debt, a decreasing amount of income is available for discretionary purposes (food, clothing, shelter…).
The decrease in the amount of the discretionary income, which results from the voluntary enslavement to debt, is the driving force in creating the situation where middle class poverty exists.
Middle class poverty is real because of misaligned and bad choices made by people and families. Don’t let it happen to you.
This article originally appeared in the December 2012 Newsletter.
If you think that the type of house one lives in or car one drives is a good indicator of their financial wealth, then you likely have an underdeveloped understanding of personal finance matters. Your ability to perceive wealth matters to your future because if your perception is not congruent with reality, then the likelihood you will stumble down a flawed financial path will be greater than it otherwise would be.
Why aren’t homes and cars good indicators of wealth? To answer this question, you must understand the nature of a house (primary residence) or car. Housing and cars serve a basic need in life; shelter and transportation. To get through life and succeed, all of us need both, but the threshold is pretty low. For example, an old car that has a bad paint job and a number of dents is a good source of transportation, if it doesn’t mechanically fail. Most people don’t opt for this baseline level of automobile transportation. The point is that after a certain minimum is reached, housing and cars become more of a luxury than a utility.
Luxury items are a liability, while utility items are an asset. Living in a 4,000 square foot home and owing a Mercedes are big liabilities. These items become even bigger liabilities when they are financed through debt. Debt must be serviced regularly, which normally means monthly payments. Monthly payments reduce ones disposable income available, which translates into fewer choices when either buying goods/services and/or investing.
Cars depreciate over time, especially when new, and need routine maintenance, gas to run and insurance coverage. Historically homes do not depreciate in value, but do require routine maintenance, and also require insurance. These facts are not items that lead to greater wealth, but a deterioration of wealth.
Ultimately, what people are aiming to gauge through the car one drives or house one lives in is the standard of living a person can secure given their current free cash flow. The more relevant question in terms of gauging wealth via an automobile and/or house is how much of their monthly free cash flow is committed to serving debt and other regular maintenance on a car or house.
What lies beneath the surface is hard to see and know. This is the problem when gauging wealth based on an automobile and house. Both do not generate wealth, though both are looked at in terms of a measure of wealth. Understanding this connection can go a long way in terms of clarifying your personal finance thought process.
A not so random observation…This weekend I was looking at how the S&P 500 has behaved year-over-year based on where the index start at the first trading day of the year. Since 2002, the S&P 500 has always spent part of the year in the red. By this I mean that the price of the index fell at some time during each year below its adjusted close on the first trading day of the year.
The anomaly to the trend noted above is our current year, 2012. So far the index has yet to break into negative territory. It came close during the May-June sell off, but failed to close below where it began on the first trading day of the year. We still have over a month left in the year…I suppose anything can happen.
Master Limited Partnerships (MLP) have sold off heavily since the post-election market decline. The market fears that their favored tax status will be adjusted. Either the high yields that these stocks currently carry will be depressed or investors in such companies will be hit with higher tax rates. That’s the fear. What will the reality be? Who knows. Friday saw a significant amount of buying activity in many MLPs.
For some reason the USDA was a little over a week late reporting the August food stamp data (Released this past Friday night). The most current food stamp measurements do not paint a pretty picture. The August numbers show food stamp usage at a record high of 47,102,780. Of this record-setting number, 420,947 participants were added between July and August. This month-to-month increase was the largest jump seen within one year.
In terms of economic indicators, a lot of attention is paid to changes in the unemployment rate . Between assumptions added into the unemployment calculation, such as seasonal adjustments and the fact that those who quit looking for work fall off the count of the unemployed, the unemployment rate is a murky statistic at best. The number of people receiving food stamps is a pretty straight forward measurement.
What is the rate of people on food stamps telling us? It’s demonstrating that an increasing number of people in the U.S. are claiming they are financially unable to provide a basic standard of living. Should you bet on a vibrant economic recovery knowing such information?
The U.S. currently has a population of 314 million people. Of the 314 million, roughly 239 million are adults (approx 76% of the population is over 18). If we divide the number of people on food stamps by the approximate adult population, we get that nearly 20% of the adult U.S. population is receiving food stamps.
As an indicator of future economic health, the count of those receiving food stamps does have some weakness. The number that should have been released at the very end of October or the first of November provided a measurement for August. That means not only is the information historical, it’s 2 months old. In terms of investing, it’s best to have information that is as fresh as possible and forward-looking.
In a sense, the increase/decrease of those receiving food stamps between months does provide a forward-looking gauge. You would expect that those signing up for food stamps would be in a situation where they’re experiencing a personal economic contraction. Assuming a miraculous financial turnaround does not happen in the person’s life, the contraction probably will last a number of months. Therefore, it is reasonable to extrapolate that increases in food stamp rolls will lead to an economic contraction in spending.
Consumer spending accounts for about 70% of U.S. GDP. If the number of people receiving food stamps continues to increase, we will continue to find ourselves in a cycle where a smaller portion of our population has the financial means to aid in the growth of consumer spending. At the same time, the federal government will be increasingly burdened with the need to allocate more funds to support food stamp recipients. More tax dollars will ultimately be needed to support the additional recipients, which results in an additional drag on the prospect of economic growth. This is a vicious cycle.
With the looming uncertainty of the ‘fiscal cliff’ and the news received regarding food stamp recipients, I would recommend proceeding with caution when considering new investment positions.
It pains me to hear people open up and discuss the debt they have incurred. The pain is not the result of angst or anger towards the person, but more a deep felt sorrow for the situation they are in. It’s comparable to seeing an animal stuck in a bog that continuously fights to free itself from the muck. As the animal fights to free itself from the trap it has found itself in, it either retards its own progress, remains stuck in its current state, or can only make very slow strides to stable ground.
Frivolous debt; that debt which cannot be leveraged for tax purposes or is not incurred for the generation of future wealth (e.g. A farmer taking out a loan at the beginning of a season.), represents a form of voluntary enslavement. Selling your ability to make future decisions freely may sound a little preposterous, yet many people every day willingly limit their freedom of choice because of an unquenchable desire to consume.
A troubling message has been echoing for years. It has been told over and over again that the individual consumer in society (U.S.) accounts for approximately 70% of measured GDP activity. This has led to individuals foolishly thinking that their unchecked consumption has a transcending virtue. Not only is their thirst for more stuff and entertainment being temporarily pacified, but they are also spurring the economy. Glory be to the consumer!
Your own fiscal health is primary. Going on a consumption binge in an effort to breathe life into a weak economy is secondary.
Without going into a discussion about limited resources and their economic allocation, consider where our man of consumption stands. Spending beyond one’s means is quite similar to eating beyond ones means. When a person regularly eats beyond their body’s needs, they will gain weight. For a period of time the increased amount of weight will be negligible. Some minor inconveniences may occur, but likely nothing to cause a serious shift in eating habits. Yet, the impact cannot be ignored. Whether it’s mobility, energy, health, or other measures of well-being, the extra weight is a form of baggage that is a hindrance.
Consumption via the use of debt is akin to adding extra body weight as the result of over eating. Debt is analogous to fat that weights a person down when considering future choices. It becomes a force that controls the person. The power of enslavement places the debt as the master and the debtor as the slave.
People incurring frivolous debts are living in a dream that they are soon to realize is a nightmare. The ability to consume today on the debt of tomorrow cannot be expected to exist in perpetuity. Once the line of credit is exhausted, the debt still lives. Do you want to live in a future where you serve yourself or a future where you have enslaved yourself to the debts of your past?
What you will find inside…
(This article originally was published in the 9/2/12 edition of The Market Capitalist Newsletter.)
It is common knowledge that the U.S. Federal government and many state governments have been in a fiscal bind since around 2008. This fiscal conundrum is expected to continue for at least a few more years, if not longer. As an investor, this is troubling because it is a partial reflection of an economy that had a significant contraction and has subsequently failed to generate much growth. Yet, the contraction in private tax revenues and its impact on public services does not mean that investment opportunities do not exist.
As a general rule, when a landscape changes, whether it is culturally in a specific industry or within a government, investment opportunities are likely to arise. This occurs because there is often a disconnect in terms of what was and what is. As a shift from X to Y occurs, many people do not fully realize that the shift is occurring or fail to recognize that the shift is real. Since being a successful investor has a lot to do with anticipating change, a shift in the way things are done or perceived creates opportunity.
The way in which governments function at a local, state and federal level in the U.S. are historically going through a period that is filled with a significant amount of change. The primary driver of this change is the economic reality of the Great Recession that became very apparent in late 2008 and 2009. As a result, the way and manner in which certain governmental entities are funded has and is changing.
On a local level, public schools are one, if not the most, publicly recognizable services provided through tax payer funds. These entities have their own geographic territory, board of directors, physical structures, budget, transportation service and the list goes on.
Like most government entities, the majority of public schools have felt some form of fiscal contraction of the past 4 years. When faced with this reality, decisions must be made. A great example of these necessary decisions occurred in the state of California this past winter. California faced a shortfall in projected revenues, which led to a predefined trigger mechanism to be engaged by the state. Part of this ‘trigger’ was a cut to school transportation funding by half of the state’s original budget for the year.
Ultimately, the outcry from schools, parents and other constituents was enough for legislation to be passed that amended how the funding cut would be applied. A cut occurred, but it did not hit the specific funding for school transportation.
This story illustrates a few noteworthy points for investors. First, public school funding faces a number of challenges in an environment where funding is lacking, yet some peripheral services are valued more than others. Transportation is a service in high demand by those sending their kids to public schools.
Second, even though a service, such as transportation, might be in high demand, it does not mean that it is static and won’t change in some form. In the case of transportation, operating a fleet of buses is expensive. Fixed costs are high and operating costs can vary greatly. Though transportation from school to home will most likely not fade away, the way in which operations are conducted may shift when faced with great fiscal austerity.
Student Transportation, Inc. (STB) is the 3rd largest school bus transportation company in the U.S. The company is 15 years old and operates in 16 states and Canada, transporting over 600,000 students a day.
STB is a company that should be on your investment radar if you are an investor looking for an income producing investment that also has the potential to grow. Based on the stock’s current price, the annual dividend yield is around 8.60%.
The current fiscal environment most school district face will create an opening of opportunity for STB and other similar companies. Though my analysis of STB is not at a point where I would recommend buying the stock, it is a company in a position where it could capitalize on a significant amount of growth in a service area that will see a stable amount of demand in the future.
What you will find inside…