Tuesday, January 20, 2009

The New Millionaire Lifestyle

As our two largest banks predictably fail, you can feel the panic crescendo:

Citigroup - down 96%
Bank of America -
down 91%

As these monsters are siphoned dry by e-runs, the private, bank-funded FDIC is hardly a source of comfort:



Once considered unthinkable, many banks have decided to check their reputations at the door and beat a path to the lender of last resort, in a desperate gambit to survive:



Result? The U.S. Treasury has become a relief valve for frantic cash, fleeing risky bank accounts and the stock market. Not coincidentally, a wild congressional spending spree, stuffing trillions of dollars of taxpayer money into the pockets of the world's richest bankers, has dumped an unprecedented pile of treasury instruments on the auction block.

Amazingly, short term yields are still pinned near zero, or even negative, as a mob of unsuccessful bidders anticipate the big one. Great Depression yields were not this low; speed-of-light bank runs couldn't blitz the U.S. Treasury all at once:



Yet, January 2009 finds most citizens sedate and happy, awash in a warm flow of U.S. government propaganda. Is everyone else right? Does it even matter? Let's consider at least one implication of our new world:

The New Millionaire Lifestyle

In 2006-7, a liquid millionaire could generate a lifestyle sustaining, guaranteed income. Most erroneously thought a mutual fund basket was a more suitable investment than a 6% quarterly T Bill, but still, the old millionaire figured, even if worst came to worst:

$1,000,000 @ 6% paid quarterly => $60,000/year

That was enough to survive... ...but now it isn't. Today, the same million bucks buys:

$1,000,000 @ 0.10% paid quarterly => $1,000/year

Simply put, single-millionaires are already poverty level paupers. Get used to it, fast, we're only a few months into a soon to seem endless depression. The New Millionaire Lifestyle, someone who desires the same modest $60,000 cash flow, suddenly requires $60M liquid cash. Not the kind of person we used to associate with scraping by.

But today's 0.10% yield isn't completely realistic. For months, we've seen steady 0.01% to -0.05% Treasury yields. Let's ignore for the moment the prospect of a big bank failure causing $trillions to fight for $billions in weekly auctions, potentially causing yields to dive much farther into negative territory. How much liquid cash does the the New Millionaire Lifestyle require at these recent, semi-panic yields? Nearly a billion dollars in liquid cash:

$600,000,000 @ 0.01% paid quarterly => $60,000/year

Do you still think you are wealthy? Still think you'll be drawing a comfortable company or government pension? Think you'll see useful Social Security?

Think again.

20 comments:

  1. Hi, In and Out,

    I'm sorry that I deleted your comment by accident while editing my response. Please feel free to repost it.

    Regarding my position on gold and treasuries...

    My recommendation since Oct 2007 has been for conservative investors to go 100% U.S. Treasuries plus some cash in hand.

    At the time, Treasuries were paying 6%, but it is still not to late to protect capital. 0% return is no fun, but it is better than the alternative which is losing a lot of money.

    When the banks start to fail in earnest, it could cost A LOT to get your capital through the treasury door (negative yields), so I recommend defunding all Treasuries to C of I, never back to a bank account, unless you absolutely need the money to survive.

    I am not against possessing physical gold in hand, I am for it, but like all insurance, expect to lose a good deal of money if the system holds together.

    It might not.

    ReplyDelete
  2. This is all so scary. When we say "unchartered waters", we mean it. It is not the number necessarily, but the social consequences. I can envision the numbers, but have difficulty see the social outcome.

    What would be your thoughts on that, and in what social directions are we heading into?

    ReplyDelete
  3. "Simply put, single-millionaires are already poverty level paupers."

    Great post but just one thought. Can't you also argue that, despite not getting the same returns with $1 million, they are actually getting a higher yield in terms of what deflation is doing to their now strengthened dollars? Wouldn't the millionaire from inflation be more a pauper?

    ReplyDelete
  4. http://www.thisismoney.co.uk/news/columnists/article.html?in_article_id=468531&in_page_id=19&in_author_id=4

    http://www.thisismoney.co.uk/news/article.html?in_article_id=468889&in_page_id=2

    ReplyDelete
  5. Quote: Great post but just one thought. Can't you also argue that, despite not getting the same returns with $1 million, they are actually getting a higher yield in terms of what deflation is doing to their now strengthened dollars? Wouldn't the millionaire from inflation be more a pauper?

    Answer: Yeah they can buy more planes trains and automobiles in the short run, which eats their principal, but they can no longer GENERATE money with money. So everything you do eats your principal alive.

    I do have some savings. What interest can I earn? I am earning 1/2 a percent right now. That is peanuts.

    ReplyDelete
  6. There still have not been bank runs (by joe-public). I work with some very intelligent people, and they are still putting money into their 401K's as stocks instead of money-market.

    They have not touched their bank accounts...they smile condescendingly when I talk about some extra money in the mattress or some canned food in the basement. They are in total denial that what has happened to stocks will not completely reverse in the next six months and they will continue earning 8% a year in their 401Ks.

    All I hear lately is, well, the market is stable now and not having the big swings, so it'll start going up again soon.
    -Tewkatz

    ReplyDelete
  7. "They have not touched their bank accounts...they smile condescendingly when I talk about some extra money in the mattress or some canned food in the basement."

    My favorite is when they say "If the FDIC fails then your mattress cash will be worthless anyway." I remind them that cash was anything but worthless during the Great Depression despite numerous bank failures. I've heard Dave Ramsey say the same thing and I think "Wouldn't it make sense to keep some cash on hand anyway? If it's so worthless why is everyone trying to screw me out of it?"

    ReplyDelete
  8. I think if the FDIC "fails" you can expect all-out rioting and chaos. America will not be the place to be if that happens.

    ReplyDelete
  9. I am preparing by establishing a small (about 6% of cash assets) position in physical PM's, cleaning and test firing a couple firearms I have owned for years but not used, buying a little extra ammo and a month's supply of beans, rice, camping propane, and a water filter which I need anyway for backpacking, and stashing some cash. None of these things will hurt me much if they turn out to be unnecessary. But I would feel terrible if they do turn out to be necessary and I had not done them.

    ReplyDelete
  10. "There still have not been bank runs (by joe-public). I work with some very intelligent people, and they are still putting money into their 401K's as stocks instead of money-market."

    It's really not a matter of intelligence, it is a matter of low level emotion and instinct. We are programmed to follow the herd, because it enhances our chances of survival.

    Unfortunately, "survival" means as a group. As individuals, we have to think differently to consistently maneuver into the natural selection process.

    Sometimes that means mooing with the herd, sometimes it means straying from the herd. But to prosper at all times, we must learn when to switch.

    ReplyDelete
  11. FDR - precious metals are holding steady and oil is creeping up.

    What gives?

    ReplyDelete
  12. It's looking more and more that gold's new support is 820 and resistance 880.

    ReplyDelete
  13. Might want to wait until 10:30 tommorrow to see if oil is really up or down.

    The oil supply data comes out then, normally on Wednesday but was delayed by the holiday.

    There is a chance of an oil sell off if inventories are up.

    ReplyDelete
  14. Not to mention those who were living off the % they were expecting to make off equities and got crushed last year in their principle. Many are hanging on and hoping for a rebound this year which won't come and they will be further in the hole. Then there's those who have property they thought would always go up. WHOOPS!

    ReplyDelete
  15. "Not to mention those who were living off the %..."

    Exactly right. The end of fixed income is highly deflationary because every dollar spent destroys capital.

    Low interest rates are a direct reflection of deflation, since it is harder to spin a strong dollar from a dollar than it is to produce a weak dollar from a dollar.

    The 3-M Treasury graph above is basically a picture of inflation vs deflation, where any % return below the average rate of consumption is deflationary.

    The end of fixed income also forces every dollar into the currency fire, since there is no cash flow without substantial risk. Meaning that every investor unable to turn a profit on the short side will eventually go broke, it is just a matter of time.

    Few are equipped to short, most "investors" in a boom simply leech inflation and sell that service to others to form leverage. So as long as interest rates stay very low, everyone will go broke in order of burn rate vs. capitalization.

    ReplyDelete
  16. I think you exaggerated on the amount of money
    you need to live off income. Even if I do not
    earn any interest, 60 year times my annual
    expense is really all I need, so that's about
    $3.6 million for $60 K a year. If you factor
    into the 3% yield on the 30-yr treasury,
    two million would be enough.

    ReplyDelete
  17. Personally, I own my home, and can live off $700 a month. I know, as that is how I live. You could call me an institutional saver, but you can live off very little if you live within your means.

    ReplyDelete
  18. "If you factor into the 3% yield on the 30-yr treasury, two million would be enough."

    As long as you can accept a 30 year ladder. :)

    There's nothing magic about $60K, it was simply $1M @ the 2007 rate. But I do think less than $1K/week post-tax was about the minimum for someone hoping to live a "cash millionaire's" lifestyle.

    Now, of course, that same cash millionaire will earn $20/week, pre-tax, if paid quarterly.

    ReplyDelete
  19. FDR,i dont know much about gold charts but one of the charts here depicts that gold is moving towards 1000$ in the short term.

    http://charts.barchart.com/chart.asp?sym=GLD&data=D&date=010109&den=MED&divd=n&evnt=ADV&grid=Y&jav=ADV&size=D&sky=Y&sly=Y&vol=Y&late=Y&ch1=012&arga=&argb=&argc=&ov1=&argd=&arge=&argf=&ch2=&argg=&argh=&argi=&ov2=&argj=&argk=&argl=&code=BSTKIC&org=stk

    You still think shorting gold would be a good idea at the current price? Your comments appreciated!

    ReplyDelete
  20. I hope all you guys that are all set to live off nothin don't ever have any unexpected medical bills, or get sued over something that wasn't your fault or basically experience any set backs in life whatever...because if you do than you will be rapidly reconsidering exactly how much money you need to survive.

    Anybody who is not concerned about the lack of ways to save and grow money safely has likely not experienced some of life's most 'character' building moments.

    ReplyDelete

The USA's political-economc system is best described as:

On Nov 2, 2010, I plan to vote (FOR or AGAINST) my incumbent congressman

 
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