I have to hand it to the public relations/marketing department of Bank of America. I cannot determine if their public relations messages are genius or an insult to my intelligence.

Back in November of last year, Bank of America declared that they were not going to raise rates on credit card holders anymore. They were going to be the good guys and put a stop to all of that credit card abuse. Of course, three months later in February 2010, they were going to be limited in doing so anyway with the new Credit Card Act. My guess is that they had already raised rates on their cardholders so making that announcement was no big sacrifice. However, just like a politician, those sound bites make for good PR for anyone not really paying attention.

Now, the PR department strikes again. They announced yesterday in grand fashion that they are going to stop charging overdraft fees for debit card holders. No longer will they allow consumers to spend money that they don’t have.

So once again, you have to ask the question – Is Bank of America really making a big sacrifice and being the good guy? After all, that is a big revenue producer for them.

The answer is no for two reasons. First, the gouging consumers program of allowing customers to go into overdraft and then charging them a fee had run its course. Just like in the case of raising interest rates by credit card companies, the consumer pressure was getting to the point where credit card companies were going to be forced to stop the abuse.

Second, and what makes this so comical, federal regulators’ new regulations, which will go into effect July 1st, force banks to stop allowing customers to go into overdraft unless the customer opts into the program. Bank of America still has a program where customers can opt into the overdraft program. Plus this new Bank of America policy doesn’t go into effect until mid-June. So they are just announcing they are going to comply with the rules that they will be forced to comply with anyway.

How about changing up that press release a little bit? “Bank of America has just announced that they are going to comply with the new regulations that are to go into effect July 1st by not allowing customers to go into overdraft. However, customers can still opt into the program.”

So is this an insult to your intelligence or great PR that makes Bank of America look like the good guy?

Tags: Bank of America, Bob Brooks, Credit CARD act, federal regulators, overdraft

The real estate numbers are just not getting any better. If all of the rosy predictions are accurate, the real estate sales numbers should be showing improvement. Yet January’s pre-owned sales numbers decline 7.6%. That decline occurred even amidst the politicians trying to motivate would be homebuyers to buy homes through the extension of tax incentives.

Then we are still dealing with this ongoing foreclosure crisis. The Obama administration has taken heroic efforts to fix that problem through home modification programs. It was reported by the treasury that this program has modified only 66,000 troubled loans through the end of last year. That hardly puts a dent in the problem.

There are two aspects of the foreclosure situation that are worth considering. The first aspect is what is referred to as the shadow inventory.

The shadow inventory consists of all of the homes that are in foreclosure and have not yet hit the market. Currently, there are a little over 3 million homes that are for sale and on the market. It is estimated that there are 7 million homes in shadow inventory about to hit the market. That will triple the current level of inventory sitting on the market.

The bigger challenge is the continuation of the domino effect. More foreclosures create a larger inventory of homes which puts pressure on home prices which decreases values of home which can lead to more foreclosures. In addition, foreclosure creates more losses in the credit markets, which adds fuel to the credit crisis which affects the economy, the banking system, and employment. It is a vicious cycle.

At the heart of the foreclosure problem is the adjustable rate mortgage or ARMS. Once the ARM period is up, the rate changes and in most cases the payment goes up to the point where the homeowner cannot afford it. As a result, the home goes into foreclosure. Now that is an oversimplification look at the problem. However, it is not to far off. Last year was pretty quiet for adjustable rate mortgages. Look out for 2010! We will have the highest number of ARMs coming due since this crisis started. We don’t get a slow down in ARMs adjusting until roughly mid 2012. With unemployment this high, homeowners upside down in their homes, and the inability to refinance in many cases, how many of these ARMs will result in foreclosure?

This is just one aspect of the debt crisis that is going to take a while to resolve. Unfortunately, there are no good solutions when you are talking about a debt induced problem. Debt induced problems have to work themselves out over time until all of the bad debt has resolved itself.

Tags: adjustable rate mortgages, Bob Brooks, debt crisis, economy, Foreclosure, shadow inventory

Government big enough to supply everything you need is big enough to take everything you have. -Thomas Jefferson.

Note: please excuse any typos – My assistant who proofreads is out today and I am not a very good editor!

USA Today reported that on average people who hold Government jobs make more than people who hold the same occupation in the private sector. This is true for more than 8 out of 10 occupations.

The article states – “Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available. These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis.”

The government spends about $125 billion annually on 2 million citizens.

Riddle me this – How do you give Government more control of everything? First you do nothing to help the private sector create jobs. Sorry to the politicians in Washington, little too late with your job bill. The damage has been done. It will now take years to overcome what you have allowed to let happen. Second, you put as much of America on the Government payroll as possible through better paying jobs and extended unemployment benefits. How do you entice people to work for the Government? You make it much sweeter than the private sector.

Of course, the National Treasury Employees Union President has to disagree with the findings. Colleen Kelley says the comparison is faulty because it “compares apples and oranges.” Federal accountants, for example, perform work that has more complexity and requires more skill than accounting work in the private sector, she says.

Really? She said that with a straight face? I think that private sector accountants might disagree. We are talking about the numbers that are coming out of Washington where the luxury of assuming exists.

See the differences in pay here -

Tags: Bob Brooks, employment, Government, USA Today

Debt is the world’s greatest problem right now. We saw an enormous debt problem develop starting in the early 80’s slowly evolving over a few decades until it started coming apart in 2005 and completely popped in 2008, creating a crisis.

This debt problem that we face today is affecting or will affect everyone either directly or indirectly. It has affected the entire global economy. As you know, the response to this problem was not the approach which should have been taken. The politicians and leaders all over the globe should have taken a 2 step approach. First, lightly intervened to give the economies of the world a little foundation and let the debt detox process begin. Second, rebuild the infrastructure of the world of small business. That is the engine to growth. Although it would have been painful at the time, I believe that we would have been in much better shape today.

Unfortunately, that didn’t happen. Their two prong approach was totally different. First, aggressively intervene to save the system. Second, build a dependence on the government rather than rebuilding capitalism.

As a result, two unintended consequences have now occurred. First, the debt problem is even bigger and much more global in scale as we have borrowed money to stay a float. Second, they have delayed the inevitable.

When will the inevitable become reality? For a year now, we have been borrowing money just to pay the bills and service the debt. We are using debt to stay afloat. At some point, we have to face the day of reckoning. This is unsustainable.

For the problems in America, it is sustainable until printing money ceases to work. That would be the day when the need overwhelms the system. Incidentally, we could be getting closer to that point than you think.

It is not the same for the problems elsewhere. Many of these foreign countries might just be forced to face the music and default on their debt, creating the day of reckoning.

Regardless, at some point, the debt has to go away and someone has to take a loss. That is how it works. The longer we wait, the bigger and more painful the problem.

Tags: Bob Brooks, Debt, debt crisis, default, Government

“Americans do not deserve to be pushed down the economic ladder by credit card companies. It’s wrong, it’s unfair, and it must end. The CARD Act will protect Americans by bringing an end to wrongful credit card practices and helping to provide consumers with a fair chance to secure economic security in their futures.” – Senator Christopher Dodd

The whole idea behind passing the credit card act was to put a stop to consumer abuse by the credit card companies. Mainly, it was to stop credit card companies from raising rates and changing the terms and conditions of a consumer agreement for any reason. It was also designed to stop abuses such as how they allocate payments.

For example, if you had a 25% interest rate on some of your credit card debt and then 0% on another part all in the same account, they would apply your payment only to the 0%, allowing the higher interest rate debt to continue to grow. The politicians have touted this act as a stop to consumer abuse.

The proof is in the pudding. As I have stated, the credit card act is full of loopholes. Let’s read some of the language from actual credit card agreements that are post February 22nd credit card legislation enactment.

From a Capital One agreement:

Can you increase my interest charges and fees? - We may increase your interest charges for new transactions and your fees after the first year of the account…..We may change any other terms of your account at any time.

Not much has changed there…

How do you apply my Payment? – As of 2/22/10, we will apply your minimum payment to pay off lower-rate balances before paying off higher-rate balances. We will apply any portion of your payment in excess of your minimum payment to higher annual percentage rate balances before lower ones.

Since most people just pay the minimum, nothing really has changed there either.

Wells Fargo terms and conditions agreement:

Please note that if an account is opened, the terms of your account, including any of the APRs (interest rates), are subject to change.

If the politicians were really offering up consumer protection, credit card companies would not be allowed to raise rates or make changes for any reason. Further, all of the payment would be applied to higher rate debt. For all of the political grandstanding and “outage” concerning the abuse, this is not much of a solution. The good news is that the credit card industry with clear conscious can continue to shoveling campaign dollars to help their friends get re-elected.

Tags: Bob Brooks, Capital One, Credit CARD act, Credit Card Companies, Debt, interest rates, Senator Christopher Dodd, terms and conditions, Wells Fargo

Slight of hand marketing – Marketing that makes you believe one thing when the reality is something different.

As I have asserted many times before, I think that the identity theft problem in America is bad, but not as bad as these identity theft companies are making it out to be. I have also asserted that the best way to fight identity theft is to monitor your credit report for unusual activity so that you can stop it dead in its tracks. If you want the best protection, you freeze your credit files so that no one can get into them. It would be a highly unusual situation that someone would give you credit without checking your credit reports first.

Most of these companies are offering $1,000,000 guarantees for any out of pocket expenses. Let’s look at it for a second. What is the real cost to someone who has their identity stolen? It is the loss of time and the loss of income from missing time at work. That is the real loss. Beyond those real losses, for you to have a large enough problem that would warrant tens of thousands of dollars in cost, the identity theft would have had to be ongoing for years. Once again, if you were monitoring your credit reports, highly unlikely that would occur.

Let’s take a look at the marketing.

Example 1

An agent for the company comes on to talk about a serious identity theft problem one client had who called in. The client of the ID theft company had his wallet stolen out of his car and someone made unauthorized charges using the credit cards. Of course, the company fixed that problem for him.

Well I would hope so! There is no liability minus a maximum of $50 for unauthorized charges on a credit card. It is a matter of picking up a phone and reporting the fraudulent charge to the credit card company.

Example 2

It is a law enforcement agent talking about his identity theft nightmare. It is significant to use a law enforcement agent because of their experience with crime. He said that for years he watched unusual things pop up on his credit report. Then he got this sinking feeling that something had happened – you think? You don’t need to pay an identity theft company money to use common sense. If you see unusual things on your credit report, investigate it! There is a high probability that something could be occurring.

He claims that his life is over. Well, not really. You can get the identity theft cleared up. It will take some work. Even if you let one of these identity theft companies handle it, you would still be investing a great amount of time.

Then the spokesman for the ID theft company comes on and says, “He join ID theft company and we fixed his problem.” Which problem would he be referring to? Is it the guy’s current problem or problems going forward? Then the commercial talks about the 1 million dollar service guarantee.

Well, if the individual had read the terms and conditions agreement, he would have found out that the million dollar service guarantee doesn’t begin until after he joins and it is for any ID theft going forward. In other words, the guarantee doesn’t apply to the current problem. It is unclear as to if they would help in any way on current problems. The sleight of hand marketing makes it look like they will just fix everything. .

The he says, if this could happen to me (because he was aware and in law enforcement), it could happen to anyone. The reality is that it is going to happen to anyone who idly sits by and watches errors pop up on a credit report and doesn’t do anything about it.

Then you really have to be careful with this particular million dollar guarantee because the guarantee might not be valid if you violate section 4 of the agreement.

“You will not recklessly disclose or publish your Social Security number or any other Personal Information to those that would reasonably be expected to improperly use or disclose that Personal Information such as by way of example in response to “phishing” scams, unsolicited emails or pop-up messages seeking disclosure of Personal Information.”

“Reasonable” to the ID theft company might not be reasonable to you. People make mistakes all of the time by giving out their information. Well that wouldn’t be reasonable to the ID Theft company which voids the guarantee. That looks like an out to me.

These identity theft companies are sensational marketers and work to scare you into believing that you have to sign up to for their service to be safe. Most of this is over marketing and not valid.

Tags: Bob Brooks, Identity Theft, sleight of hand marketing, social security number

There are loan sharks and then there are pay day loan stores. These are the stores that lend money on no credit and charge in 319% interest. If you can’t pay back the original pay day loan, then they renew and in many cases continue to loan money which ends up putting the customer in a trap that they will never escape.

Now, you can add banks to that pay day loan category. Banks such as Wells Fargo, Fifth Third Bancorp, and US Bancorp are already running a pay day loan program. Of course they certainly don’t call it that. Here is how it works – You can take out a short-term loan for 30 days. They charge $10 per $100 borrowed. That is the equivalent of 120% interest. The Wells Fargo spokeswoman says, “the advance is less expensive than a pay day loan.” So, in other words, it is OK to charge a fee that works out to around 120% in interest. The average pay day loan is $15 per $100. Wow! It looks like Wells Fargo is doing the customers a favor.

So, why are they going this route? Federal regulators finally cracked down on the abusive business of bank overdraft fees. This is the program where they give the customer the ability to continue use a debit card even though they are debiting more than is in the account. A bank customer could have nothing in his or her account, use the debit card 7 times in a day and have 100’s of dollars in fees because they didn’t know they were at a negative balance.

Now, federal regulators say that banks will have to give the customer the ability to opt into the program rather than just abusing them. This could be a loss of 15 to 20 billion dollars in revenue. Really? We should feel sorry for a banking industry that has used abusive means to make money. Just like the credit card industry, these banks will turn to different methods to abuse consumers. Now they are going to be pay day loan sharks. Sure 120% is lower than the 391% effective interest rate for pay day loans; however, it is still abusive. Banks are just going to provide another way for customers to get themselves into a problem.

Don’t worry – it will take regulators around 5 years or so until they deem this abusive then they will clamp down on the banking industry once again. It is amazing that the very people that are suppose to protect consumers from abusive consumer practices will allow these obvious abuses to be practiced for years before doing something about it. They allowed this practice of overdraft fees to go on for years.

Tags: Debt, Fees, interest rates, loan

My apologies for the length of this post. It is something that I wanted to write about.

Bottom Line – There is a huge difference between marketing brochures and educational pieces. Marketing pieces only show one side of the story. They are designed to sell the idea that they are promoting. Educational pieces give you a balanced look so that you know both sides. They compare and contrast an idea. Don’t confuse marketing brochures with educational pieces. You are only getting one side of the story.

Read more…

In my capacity, I receive a lot of e-mails from mutual fund companies on what to say to clients when they get scared of the stock market. You have to know that advisors are trained to tell you what to say when you have complaints about the market. All of this marketing is designed to prove a thesis:

“Stocks are always the best investment and especially for the long-term.”

Said another way, you will be just fine as long as you stay invested for the long-term, you buy and hold, and you never time the market. Let me invite you to look at it another way.

A Prudent Money Look at Buy and Hold Investing

When market risk has increased, it doesn’t make sense to just buy and hold and “ride it out.” It is like living in Florida, suspecting a Category 5 hurricane is coming, and taking no precautions.

It is important to have an exit strategy when you are in a tough market. The years that you lose large sums of money are more damaging to your long-term success than the positive effect you get from the good years. So, have a plan B to remove yourself from the big bear markets.

If your only investment strategy is buy and hold investing, that is the only strategy you will ever utilize even in retirement. When a person retires, chances are they will continue to invest as they have always invested. At retirement, buy and hold can be detrimental because you cannot afford a large loss when you are taking money out on a monthly basis. Imagine the investor who continued to practice buy and hold investing and retired in 2008.

If you are going to buy and hold, practice extreme diversification and divide your investments over many different ASSET TYPES and rebalance those investments each year based on the risk levels of the stock market. We will talk more about that later in the series.

Mutual fund marketing provides example after example of data that supports this notion that buy and hold is the only way to go. The challenge I have with some of these examples is the cherry picking of data. It is easy to pick the right set of data to support your argument. The problem is that the examples used don’t always tell the investor the whole story. If they did, then you would realize that it doesn’t ALWAYS make sense to be invested in stocks and that stocks aren’t always a great long-term investment.

Mutual Fund Claim (1) – Historically, the best opportunities to make money in stocks have been when investors are holding a lot of cash and not invested in the market. (They are pointing out that it is a great time to be invested because of the amount of money that is in money market funds and not in the stock market.)

Counter-Argument – Here is another way to look at levels of cash in the stock market. When mutual fund managers hold low levels of cash, it has always been a sign that the market is headed for trouble. As of December 2009, we are at the second lowest level. One of the two indicators is going to be right. If I were going to place my bets, I would place odds on the counter-argument.

Mutual Fund Claim (2) – Chasing performance may lower your return. This is from a study that compares an investor who tries to time the market to the investor who bought and hold. The client who tried to time the market had an average return of 1.9%. The investor who just bought and held had a 7.9% return.

Counter-Argument – It would be virtually impossible to substantiate that data without having a group of investors that were monitored individually over a long-term period. Further you would have to make a lot of assumptions to use that statistic such as trading skill of the investor, did they just pull money out on an emotional basis, did they have a strategy, etc.

Mutual Fund Claim (3) – Don’t try and time the market! They show that if you stayed invested over a certain time period, you would have made an average return of 10.4%. However if you missed the 25 best days, you would only have a return of 4.3%.

Counter-Argument – They never show the reverse of that point. What if you missed the worst days? Since no one in the mutual fund world would run the study, I ran it as proof that this is a bogus notion.

If you invested $1,000 in January 1950, it would have grown to $613,013 by December 2007.

If you missed the 30 best months, that $1,000 would have turned into $35,404.

What if you would have missed the 30 worst months between January 1950 and December 2007?

If you missed the 30 worst months, your $1,000 would have turned into $9,509,094.

Which do you think is more important? Being in there for the gains or protecting yourself in the bad markets?

Mutual Fund Claim (4) – Longer time horizons may lower your chances of loss. They show a study that says there has never been a single year of losses if you were invested for at least 25 years.

Counter-Argument – Is that really relevant? It is not about whether or not you lost money during a certain time period. It is about whether or not you reached your retirement goals over that long-period of time. If you were invested in 1929 right before the stock market crash, it would have taken you 25 years just to get back to where you were in 1929. That is 25 years of no growth. Buy and holders say that could never happen again. That was 1929 and today is a different time. When it comes to the stock market, you never want to say never.

Prudent Point – There are always two sides to a story. Keep in mind that any of this proof comes from an industry that is completely dependent on you paying commissions and staying invested forever.

Tags: Bob Brooks, Buy and Hold, Investing, investment strategy, marketing, mutual funds, risk

Consumer confidence recorded a sharp decline this morning falling from 54 to 46. Most of the decline was due to that pesky little problem called unemployment. It is the problem that Wall Street just thinks is going to go away and the Government wants you to believe is getting fixed. Jobs are available as long as you want a stimulus job or go to work for the Government.

Now I have always thought the consumer confidence index was a non-event. The Conference Board asks 5,000 people how they feel about life and draw a conclusion that the rest of America feels the same way. For whatever reason, Wall Street pays attention. No disrespect to the Confidence Board and all of their hard work with calling 5,000 individuals. I could have told you that the probability is high that the unemployment issues might be contributing to a drop in confidence.

So, what is the Obama administration to do? I mean the stimulus program (all of our money that is being spent to save the world) was supposed to produce jobs. Of course, the jobs numbers aren’t showing it. Well, in a convenient move yesterday following the release of the consumer confidence index, the Congressional Budget Office had good news to tell the world. Due to the efforts of the stimulus program, the Obama administration has produced 1 to 2.1 million jobs. That is incredible news.

I also found out some great news today. I figured out that my bank account at any given time could (given the right set of assumptions) have $100 to $1,000,000 dollars in it. I had no clue.

I really hope that no one is drinking enough of the Kool-Aid to believe that to be true. This is our government and they have to substantiate the spending of our money, our children’s money, our grandchildren’s money, and great grandchildren’s money. Thus they create these “estimates.”

If I were the President, I wouldn’t be working from estimates, especially ones that could be within 1,000,000 or so units. I would have an accounting of every job and every project. Come on – this is the Federal Government and it should not be that easy to track the numbers. It is all about credibility. Until then we shall live in the world of fantasy numbers. Unfortunately for the politicians, the real numbers just get in the way. By the way, try the cherry flavored Kool-Aid. It has always been my favorite.

Tags: Bob Brooks, consumer confidence index, Government, Obama Administration, stimulus, Unemployment

Do you really think that Congress is going to put into law restrictive laws that will actually harm large political contributors such as the credit card industry?

They will say the right thing and play the part of financial regulators. At the end of the day, it is business as usual in Washington. There are plenty of loopholes in this law that opens the doors for the credit industry to raise your rates.

(1) The 60 day grace period – One would think that a grace period would be a good thing. After all, if you cannot make the payment in 30 days, you have an extra 30 days to come up with it. In some case, this could be a real blessing. I think that in most cases this is a trap. You give a consumer 30 days and they will take it. You give a consumer 60 days and they will take it. There is one thing being 30 days out. Being 60 days out will be troublesome for most. They are now behind the 8 ball for two payments. It is easy to be late being 60 days removed from the due date. It would be easy to miss a payment or forget a date. Consumers who push it to the brink of 30 days run a risk. At 60 that risk doubles. If you are late, the credit card company gets to raise your rates. They will do what they have always done. They will rely on the human nature to make mistakes and take full advantage of it.

(2) Hardship – If you are in a hardship arrangement, you are of the limited protection that this act gives you. Consumer Credit Counseling or any type of arrangement that changes the terms of the debt is considered a hardship. Well, if you call in to the credit card company and tell them that you are in trouble, they offer you some help. In many cases they will tell you to go to www.helpwithmycredit.org. Guess what that site is all about? It is sponsored by some of the major credit card companies. It is a site that directs you towards a hardship program. The irony is that the very help that they are giving you is the same thing that removes you from the limited protection of the law.

(3) Credit Card Transfers – I am still trying to interpret this part of the law. In section 171 it says:

“In General- No card issuer may increase any annual percentage rate, fee, or finance charge applicable to a credit card account under an open end consumer credit plan, or terminate early a lower introductory rate, fee, or charge, except as permitted under this section.” It then spells out 4 exceptions that allow them to raise rates.

In section 172 it says:

“Except in the case of an increase described in paragraph (1), (2), (3), or (4) of section 171(b) (see above), no increase in any annual percentage rate, fee, or finance charge on any credit card account under an open end consumer credit plan shall be effective before the end of the 1-year period beginning on the date on which the account is opened.”

So they cannot raise rates except for the 4 exceptions as written in Section 171. However, section 172 allows them to raise rates but only after 1 year following the opening of the account.

I can only interpret that in one way. There is all of the credit debt prior to February 22 for which the credit card act is written. Then there are the new accounts opened after February 22 that could face interest rate increases after the first year. If that is true, it explains all of the new balance transfer offers that are hitting mailboxes. Can you imagine transferring pre-credit card act debt to a post-credit card act account for a 0% rate for 6 months? You would take the debt that was protected against interest rate increases and transfer it to an account that now will be subject to interest rate increases. That is ingenious!

So what do you do? You do what I write about in Deceptive Money. You get informed and understand the terms and conditions that go along with old and new accounts. If not, you could pay a steep price.

Tags: Bob Brooks, Congress, consumer credit counseling, Credit CARD act, Deceptive Money, grace period, hardship, interest rates, terms and conditions

There is an intense debate on Wall Street about whether or not we are heading towards a massive inflationary problem or if we are stuck in a deflationary problem. Inflation is when prices go up and deflation is when prices go down.

If you are investing money, it is going to be important to get this one right. So many of the talking heads on CNBC are declaring that we are heading towards extreme inflation. They cite that the printing of money by the government is causing it. They also point to this “incredible” rebound we are seeing in the economy.

If you will bear with me, I need to put the KOOL-AID down so that I am not tempted to drink it. On the surface, it is inflationary when the Government prints enormous amounts of money. However, the story goes well beyond the printing of money. I regard these financial hosts as pretty smart people. I often wonder if these hosts are all told to always be positive no matter what? After all, they do work for CNBC, which is owned by GE, a publically traded company.

Here is the evidence of deflation:

The velocity of money – Dig out your economics book. The velocity of money measures the circulation of money throughout the economy. The velocity of money would need to be running pretty high to potentially create inflation. Currently it is very low primarily because banks aren’t lending money and consumers aren’t spending money.

A world overloaded with debt – Debt in itself is deflationary. Deflation is brought on by a debt crisis.

The money supply – The money supply has been decreasing and not increasing. You would need to see the money supply expanding at a great pace to see inflation.

The CPI and the PPI – The PPI or Producers Price Index shows whether or not the prices or increasing or decreasing at the producers level. In other words, are the widgets getting more or less expensive to make? The CPI or consumer price index shows what is happening to consumer prices. Are they going up (inflationary) or down (deflationary)?

The latest PPI numbers showed an increase in prices at the consumer level. When that happens, typically those higher costs get passed onto the consumer and are reflected in the CPI number. However, the CPI numbers released on Friday showed the first drop in 27 years. That tells me that companies are getting hit with higher costs but are not able to pass them on because the consumer is so strapped. That keeps a lid on prices. In fact, companies are dropping prices to get consumers to buy items. That in itself is deflationary.

To be fair, the CPI minus energy and food costs decreased. Yes we depend on energy and food which have been going up. I think that net effect is clearly deflationary.

In short, the reason that the printing of money is not causing inflation is simply because the printed money is not circulating. It is absorbing losses of all kinds due to the effects of the debt crisis. Until you get massive circulation which would show up in the above indicators, I think that we are stuck with deflation. Plus you better hope that it doesn’t turn into inflation. That would force the Federal Reserve Board to start aggressively raising rates which would easily throw us into a double dip recession if we aren’t already heading that way.

Tags: Bob Brooks, CPI, debt crisis, deflation, double dip recession, inflation, PPI, velocity of money

The New Credit Card Accountability Act goes into effect February 22, 2010. As with most attempts of the politicians to protect consumers from those big bad companies, there are always loopholes. So, here is what you need to know:

(1) Expect fees to either increase or be added – Credit card companies are looking at these new laws as a great opportunity to add new or increase fees. These fees could be everything from new annual account fees to an increase in late charges to new monthly fees if you want your statements mailed to you.
(2) 60 Day Grace Period – On the surface, this could appear to be a good thing. However, I think that this provision of the new card act could prove to be a disaster for consumers. I would suggest that defaults and late payments will increase by lengthening the time for several reasons. First, the longer you go from the due date the more likely you are to forget about the payment or get the due date wrong. Second, allowing yourself to get 60 days behind could really put you in a bind to the point where you might not be able to get completely current again.
(3) Business Credit Cards – This act does not cover credit cards that are personally guaranteed by the cardholder and in the business’s name. Credit card companies can continue to abuse the small business owner and get away with it.
(4) Hardships – If you work out a hardship such as credit consumer counseling or they allow any type of change to the contract to help you out, you have just entered into a hardship arrangement. Hardship arrangements remove the consumer from the protection of the credit card act. Of course as you might expect, credit card companies are encouraging troubled card holders to seek help with consumer credit counseling services.
(5) No more Universal Default Clause – They can no longer raise your interest rates for no reason. Now through the credit act, they define when they can raise rates.

• Variable rates – Interest rates can increase if they are a variable rate. This is why credit card companies changed from fixed rate cards to variable rates. This should end up being a big profit maker for them considering that the benchmark that is responsible for decreasing or increasing rates has nowhere to go but up.
• 60 days late – If they are more than 60 days late, interest rates can increase.
• The end of a promotional period – Obviously when a promotional period ends, rates are allowed to be increased.

(6) You are at their mercy for credit card companies to lower your interest rates – The act leaves it up to the credit card companies to determine whether or not they should lower your high interest rates. Any interest rate increases that have occurred since January 9, 2009, are to be reviewed every 6 months. If payments are made in a timely manner during that time and the credit card company determines that the consumer or market conditions or other factors are no longer a risk, then they can elect to lower the penalty rates. In other words, they have many reasons in their back pocket that allow them to justify keeping your interest rates high.
(7) You can opt out of an increased interest rate by closing the account – This is actually a pretty good feature. You can close the account and keep the old interest rate rather than getting charged the higher interest rate. Of course, you run the risk of hurting your credit score as well as removing a potential line of credit.
(8) If you are under age 21, you are out of luck – Individuals under the age of 21 cannot get a credit card unless 1 of 2 conditions is met. First, you have a parent co-signed. Two, you prove through the use of an income that the under 21 aged individual has the means to pay the debt back.
(9) Other misc. rules – I won’t insult your intelligence and tell you how they are now required by law to be clearer in their contracts and communications to you. That should be a no brainer.
(10) Finally, my favorite provision of the credit card act that has nothing to do with credit card companies unless a credit card company official attacks you in a National Park…

An individual now has the right to bear arms in Units of the National Park System and the National Wildlife Refuge System. As if this act was not a big enough joke in the first place, the right to bear arms within an act that is intended to regulate the credit act definitely lowers what little credibility that this act has. I guess someone had to be bribed with some gun legislation to go along with this new credit card act.

The bottom line: Read the fine print and understand the changes that each credit card company sends you. Most importantly, don’t be fooled into thinking that the politicians have done something to protect you from the abuse of the credit card industry. They have just given credit card companies different and innovative ways to make money.

Tags: Bob Brooks, business credit cards, Credit Card Accountability Act, Fees, grace period, hardship, interest rates, Universal Default Clause

I know what you are thinking. He has totally lost it by suggesting that Toyota could go out of business due to all of these recalls. If you take a hard look at the facts, assumptions, and a little speculation, a question mark might exist for the world’s biggest car company. The problem stems from the 9 million plus cars worldwide that they have had to recall for mechanical problems.

Thus far here is a list of the recalls:

2005-2010 Avalon
2010 Prius
2007-2010 Camry
2009-2010 RAV4
2009-2010 Corolla
2008-2010 Sequoia
2008-2010 Highlander
2005-2010 Tacoma
2009-2010 Matrix
2007-2010 Tundra
2004-2009 Prius
2009-2010 VENZA

So just a bad spell for Toyota or the revelation of a bigger problem? Tony Joe, who co-hosts the special car corner edition of Prudent Money, shed some light on the problems Toyota is having with a sticking accelerator. Tony Joe told the Prudent Money listening audience last Friday that Toyota’s biggest problem is that they don’t know why this problem is happening and he suspects that it is a software issue and that the “solution” is not going to ultimately fix the problem. He went on further to suggest that this problem has been going on for a very long time with Toyota not really addressing it. Car companies don’t want to go through the recall problem if it can be avoided.

Meanwhile, guess who would love to see Toyota go out of business or at the least lose significant market share? The American car companies of course. That would be a big boost for sales if the largest competitor went down. Who has the most influence over the American car companies? As long as the politicians are bankrolling things with our money, they have a lot of power and influence in this fight for market share and they are starting to take this issue and blow it out of proportion. They have started all types of investigations into Toyota and the problems that have occurred with their brand. As White House Chief of Staff Ron Emanuel once said, “You never want a serious crisis to go to waste.” Well they certainly are not going to let Toyota’s crisis go to waste. I suspect they will use as much as fire power as possible to make it very rough on Toyota. Could they have enough or create enough ammo to run them out of business? Some real bad evidence would have to come to light probably to shut them down. However, I think that at the very least Toyota loses a very large percentage of market share. As you have seen over the past 2 years, anything with this group of politicians is possible.

Then you have all of the lawsuits, both individual and class action, that Toyota will be facing. These could be worth billions of dollars and drag out in the court system for a long time, keeping this story in the news.

If the problem doesn’t get fixed following the recall and the US government plays hardball bringing all types of evidence to light, consumer confidence for the Toyota brand will be shot. It does not matter whether you are the biggest or middle of the pack, a crisis of confidence will destroy the company. If there is no confidence, no one will buy the brand. It is tough when you build your company on reliability. Watch this story closely because it is something that could easily spiral out of control.

Tags: Bob Brooks, consumer confidence, lawsuits, Prudent Money, recall, Tony Joe, Toyota

The latest Javelin Research identity theft survey just came out and shows that the identity theft cases jumped 12% over the preceding year affecting 11.1 million adults. They will refer to it as the biggest on record (a record that only dates back to 2003). The Federal Trade Commission will declare it the fastest growing crime in America.

Then you have all of the identity theft “solutions” companies running ads to scare the pants off of you in hopes that you will take their bait and sign up for their programs. Let’s take a step back and look at the stats.

This enormous problem affected only 4.8% of the population of America in 2009. This is hardly an epidemic. Plus in 2008, there was a 22% jump in identity thefts reported with only a 12% jump last year. There are two dynamics to consider. I think that you are seeing more cases because more people are reporting them compared to years prior. There is a greater awareness and people have a better understanding of the steps to take. Second, I think that the one positive byproduct of the credit/financial crisis is that it is much tougher to open up new lines of credit…especially in another’s name.

In fact, it wouldn’t shock me to see the jumps in numbers of cases filed start to drop.

Now, I am not saying that it is not a problem. I just think that companies like Life Lock scare people into signing up for a service that is intended to solve the problem. Here is all you need to know about protecting yourself against identity theft.

1) Never give personal information to anyone who approaches you – If you receive an e-mail, phone call, personal visit which you did not initiate, don’t give out information. This alone will save you a great deal of problems.

2) Be discreet when giving out a social security number.

3) Don’t carry personal information in your wallets or purses – I am always surprised by how many people carry their social security cards with them.

4) Sign up for credit monitoring – The most common and most costly types of identity theft starts with a check on your credit reports. If you know that is occurring, you can stop it dead in its tracks.

5) Be mindful of where your personal information is in your home and make sure it is well hidden – throughout a years time, you can have many different people going through house for various reasons. We want to assume they are all honest. It is a prime target for stealing personal information.

6) Don’t leave computers or wallets or purses in your car – Your car is not a locker.

Tags: Bob Brooks, credit monitoring, Identity Theft, LifeLock, social security number

All eyes are on the small countries in the EU that could cause big problems in the credit markets. First of all, what is sovereign debt? Sovereign debt is created by the issuance of bonds by a country’s government. During the meltdown, countries all over the world issue debt in order to fund their stimulus programs. Now the reality is facing the globe. You cannot fix a credit and debt crisis by issuing more debt.

This potential debt crisis round 2 could play out much like round 1 did as corporation after corporation had to be bailed out. The difference between now and then has to do with the lender of last resort. This is the government that steps in and bails out the country or the corporation that is on the verge of collapse. We are all bailed out. This is evidenced in the fact that the EU is slow to respond to Greece’s credit crisis.

Think of it like this – In financial crisis round 1, it started with Bear Sterns needing to be bailed out. Corporation after corporation had to be bailed out and then Lehman was allowed to fail, causing a huge meltdown in the credit markets. There are more countries than Greece that are in trouble in the EU. Thus if Greece gets into trouble and then Portugal and then Spain which would create a contagion, then we have a real problem on our hands. The probability of that happening is unfortunately higher than most on Wall Street want to admit to.

There is just that much debt hanging over the world. This is a world that will not face the reality of the situation. Not only as a country but as a global economy we are going to have to face the piper and face some hard times to allow the detox process to begin. Credit, the drug of choice, can no longer be the remedy.

Tags: Bear Sterns, Bob Brooks, Debt, EU, financial crisis, Greece, Lehman Brothers, sovereign debt