The Financial Riddler - 12/15/22

Financial knowledge is financial empowerment

Welcome to The Financial Riddler, where losing is winning. Either way, you’ll learn new things about the global, our domestic, and your personal economy. Answers appear after each riddle. To not peek, scroll slowly to the “answer” right below “or.”

The Financial Riddler – 12/15/22

1. Wall Street is constantly telling us stocks are safe over the long run, specifically over 30 years. But the U.S. market has only three independent 30-year periods with which to measure 30-year returns. I.e., there are only three samples of 30 years of returns that don’t include the same annual return in more than one interval. A sample of three is precious little to draw any conclusion. This is true despite the fact that the U.S. cumulative stock return over the three non-overlapping 30-year periods has been excellent. A fourth sample point comes from Japan’s Nikkei stock market index. Consider its performance between February 5, 1990 and today. Over this longer than 30 years, the Nikkei 225 has

   a) Risen by 62 percent?

   b) Risen by 43 percent?

   c) Risen by 15 percent?

   or

   d) Fallen by 24 percent?

The answer is d as confirmed here. In real terms, the decline is close to 35 percent given the roughly 10 percent rise in Japan’s consumer prices since 1990. In short, those who think stocks are safe in the long run should think again.

2. Tesla stock peaked at $407 per share on November 2021 when the value of the company exceed that of Ford by 10x. By how much has Tesla’s stock price changed since November 2021?

   a) Risen by 40 percent?

   b) Risen by 12 percent?

   c) Fallen by 38 percent?

   or

   d) Fallen by 61 percent?

The answer is d as confirmed here. In real terms, the decline is close to 70 percent given the inflation we’ve experienced since last November.

3. How much money did China invest in African infrastructure between 2007 and 2020?

   a) $330 billion

   b) $199 billion

   c) $23 billion

   or

   d) $3 billion

The answer is c. This is a larger sum than the next largest eight investors combined. Those eight investors include the World Bank, the African Development Bank, and U.S. and European development banks. Still, this is a pittance compared to the amount of infrastructure investment Africa really needs.

4. What is the world’s busiest airport?

   a) Los Angeles

   b) Chicago

   c) Deli

   d) Atlanta

   e) Dubai

   f) Heathrow

The answer is d). Almost 5 million people flew from or to Atlanta last month.

5. Over the past two years, the price of lithium, which is used in batteries, including those of electric cars, has risen by

   a) 5x

   b) 4x

   c) 3x

   d) 2x

   or

   e) 1x

The answer is a). Lithium has become very expensive. Once EVs take over, we’ll likely run out of lithium in 70 years.

The Financial Riddler – 12/11/22

1.     Jerry is single and a 63 year-old retired Pennsylvanian with two assets — $1 million in regular assets (non-retirement accounts) and $29,253 in annual Social Security benefits. Assume Jerry permanently earns zero percent on his investments and also permanently faces a zero percent inflation. I.e., his real, after-inflation return, is zero. How much can Jerry spend on this living standard and continue spending it right through age 100, his maximum age of life? Bear in mind, Jerry’s planning horizon is 37 years, Pennsylvania has a state income tax, and Jerry faces Medicare Part B premiums starting at 65. Till then his healthcare costs are covered by his employer. After 65, his employer plan picks up his out-of-pocket healthcare expenses. (I.e., I’m leaving healthcare spending out of the store to keep things simple.)

a) $43,218

b) $52,735

c) $37,778

or

d) 68,812

The answer, calculated in 0.3 seconds by MaxiFi Planner, is b).

2. What can Jerry (from the above question) spend in today’s real dollars if inflation is not zero, going forward, but 10 percent and Jerry can earn 10 percent annually each year investing in one year Treasuries. I.e., the real return remains at zero since Jerry’s higher annual interest income is watered, dollar for dollar, down by annual inflation. Since Jerry’s Social Security benefit adjusts annually for inflation, it remains at $29,253 in today’s dollars. And, to repeat, Jerry’s $1 million in wealth generates the same income in today’s dollars.

a) $52,735

b) $57,390

c) $38,681

or

d) $47,113

Remarkably, the answer is c). I.e., Jerry’s living standard — his real sustainable discretionary spending — falls by a humongous 26.7 percent! Neither the federal income tax, the Pennsylvania state income tax, or Medicare Part B premiums are inflation neutral. In the case of taxes, Jerry is being taxed on his nominal asset income, not his real asset income, which is zero. Also, since the thresholds beyond which first 50 percent and then 85 percent of Jerry’s Social Security benefits are subject to federal income taxation, Jerry pays more taxes over time on his benefits. Fortunately, Pennsylvania doesn’t tax Social Security. Finally, the top Medicare Part B premium bracket is not indexed to inflation. Consequently, Jerry and everyone else find, over time, that they are paying the maximum Part B premium when measured in real (our original zero inflation-case) dollars. Due to the taxation of nominal, not real asset income, by the feds and PA, the present value of Jerry’s taxes rise by close to $380,000. The present value of Jerry’s Medicare Part B premiums rise by roughly $50,000. We can’t make these calcs in our heads. They are far beyond our neural capacity. But it took MaxiFi Planner just 0.35 seconds to compare the 10 percent inflation and zero percent inflation cases. This conveys the point I keep pressing — we can’t answer most financial questions — like what the impact on our proper spending target of higher inflation — without advanced technology. Also, by the way, with a 3 percent inflation and a 3 percent nominal return, Jerry’s living standard falls to $48,575. That’s a 7.9 percent hit. Thus, even moderate inflation can hurt the elderly. It’s time for Congress to fully index the tax system against inflation!

3.     What fraction of Europe’s demand for natural gas could eventually be fulfilled by Israel?

a)     50 percent

b)    25 percent

c)     10 percent

or

d)    0 percent

The answer, provided in this podcast, is c). Israel discovered 7-15 billion cubic feet of gas in its Mediterranean territorial waters. Its own annual consumption needs are a small fraction of this amount. Hence, Israel can supply Europe lots of gas. But doing so will require building a pipeline via Greece that will take several years to build.

4. Climate change is a classic negative economic externality. Current generations don’t face the full cost of using of dirty energy, which includes the damage to future generations. Confronting those alive with the true price of dirty energy is easy — just tax fossil fuels based on their carbon content. Such a carbon tax can be a win-win. We can cut other taxes to leave current generations, on balance, better off. Future generations will have to service more debt. But they’ll be better off too thanks to an improved climate. How large is the potential welfare gain that all mankind (current and future) could enjoy were we to combine carbon taxation with other fiscal steps to produce a universal, uniform win-win.

a)     4.3 percent

b)    7.2 percent

c)     1.0 percent

or

d)    0.3 percent

The answer, provided in this paper and column, is a). China’s adoption of carbon taxation is critical. The uniform win-win is only 1.6 percent if China doesn’t play.

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5.     Back on November 18, Goldman Sachs announced a forthcoming U.S. recession with a probability of precisely 35 percent probability. Not 22.7 percent, not 38.9 percent, but 35.0 percent. Meanwhile, the WSJ consensus recession forecast was 65.0 percent, on the nose. Goldman’s CEO, David Soloman, said on October 18th that there was “a reasonable chance of recession, but it’s not certain .” I take that to mean a roughly two-thirds chance. What led to Goldman’s change of heart? One thing was the 1.3 percent annual growth in sales in October. Now Goldman says GDP will rise precisely 1.90 percent this year, 1.0 percent in 2023, and 1.6 percent in 2024. Should anyone take Wall Street’s economic forecasts seriously?

a) Yes

or

b) No

I’m going with b). I view these brilliant prognosticators not as idiot savants, but as village idiots. Yes, they look at the numbers, but the stats underlying their forecasts are subject to major revisions. Hence, by definition, they are looking at dicey data and the future, even one month out, is highly uncertain. Wall Stree't’s biggest bumbler, when it comes to forecasting, may be JPMorgan’s, Jamie Diamond. JPMorgan is, of course, the world’s largest bank. So, Diamond’s role is not to conjure up economic doomsday to cover his tush — something JP would never have done. Hence, when Diamond claimed back in June 2nd, that “… (an economic) hurricane is right out there, down the road, coming our way, ” he was being supremely irresponsible as well as entirely wrong. GDP growth in the next three months averaged 2.9 percent. This was hardly the “Hurricane Sandy” that Diamond was threatening. Now JPM is singing a different tone for 2023 — not a hurricane, not a recession, but a growth slowdown. Yes, someday we’ll have another economic Hurricane Sandy, but claiming its coming, but who knows when simply leads to panic — lucrative panic if JPM was shorting the market when Diamond turned into a weather forecaster.

The Financial Riddler – 12/7/22

1. Russia currently accounts for 3 percent of global GDP. What’s its projected share in 2100?

a) 6 percent

b) 5 percent

c) 4 percent

d) 3 percent

e) 2 percent

or

f) 1 percent

The answers is f). As described in The Future of Global Power, Russia’s global GDP share will fall for two reasons. First, it’s global population share will, according to the UN, fall from 2 percent today to 1 percent by century’s. Second, its productivity (output per worker) isn’t projected to keep up with the U.S. (It’s a quarter percent of the U.S. level) let alone grow as rapidly as China, whose productivity will match that of the U.S. well before the century’s end.

2. Sub-Saharan Africa’s current population of 750 million people will, according to the UN, grow by 1.7 current-day Chinas, i.e., by 2.4 billion, by 2100. At that point, it will account for 30 percent of the world’s population, up from 10 percent today. Africa’s global share of GDP is now 2 percent. What share will it represent in 2100?

g)     5 percent

h)    4 percent

i)      3 percent

j)      2 percent

or

k)     1 percent

The answer is h). Yes, Sub-Saharan Africa’s population will grow like crazy. But its productivity is projected to fall from 5 to 3 percent of the U.S. level. When it comes to global hegemony, worker productivity is the name of the game.

3. Between October 1, 2021 and October 1, 2022, prices rose by 7.7 percent. Federal debt held by the public on October 1, 2021 totaled $22.6 trillion – roughly a year’s GDP. How much, in dollars, did inflation water down, i.e., reduced the purchasing power of, government debt during this period?

a)     $231 billion

b)    $528 billion

c)     $711 billion

d)    $1.74 trillion

or

e)    $2.27 trillion

The answer is d), the product of .077 and $22.6 trillion. The point here is that inflation represents a real tax – it’s lowering the value of all our nominal (non-inflation indexed) assets and income streams.

4.     Since 1900, has the U.S. ever experienced inflation above 12 percent?

a)     No

or

b)    Yes

The answer is b). Uncle Sam lifted price controls right after WWII. In March of 1947, prices rose at an annual rate of 19 percent. Between 1946 and 1949, inflation wiped out over a third of the real value of government debt!

The Financial Riddler – 12/1/22

1. By how much will the S. Korean population change between now and 2100?

   a) Rise by 50 percent

   b) Stay roughly fixed

   c) Fall by 53 percent

   or

   d) Rise by 18 percent

   The answer is c). S. Korea has the lowest fertility rate of any country in the world. Its population is on track to fall from 51 million people now to 24 million by century’s end. At that point, roughly two in five S. Koreans will be 65 or older.

2. Social Security is scheduled to provide an 8.7 percent COLA (Cost of Living Adjustment). Does Social Security’s COLA protect retirees against a decline in the purchasing power of their benefits due to inflation? Assume that the price increases facing Social Security recipients are the same as that experienced in general.

   a) Yes

   or

   b) No

   The answer is b). The thresholds beyond which first half and then 85 percent of Social Security benefits are taxable under the federal income tax are not indexed against inflation. As prices rise, more retirees find they are paying taxes on their benefits and those already facing benefit taxation find more of their benefits are taxable. Plus, the COLA is annual, not monthly, indeed it arrives as much as 15 months in arrears. The failure to index benefits on a timely basis, e.g., every month, reduces retirees’ real benefits by more than half of each year’s inflation rate. Thus, over the past year, retirees have seen a greater than 4 percent real benefit cut.

3. If you have money in a brokerage account and the investment company uses your funds to cover withdrawals by other investors, is your money insured by the Federal Deposit Insurance Corporation?

   a) Yes

   or

   b) No

   The answer is b). No, the FDIC does not insure brokerage accounts. Here’s part of the story (taken from the web). “While bank balances are insured by the FDIC, investments in a brokerage account are covered by the Securities Investor Protection Corporation (SIPC). It protects investors in the unlikely event that their brokerage firm fails. However, certain rules and conditions apply—and investment earnings are not insured.” But SIPC insures against fraud, but only when it chooses to recognize fraud. As discussed here, SIPC declared the Madoff fraud a “bankruptcy” and failed to compensate its victims. Indeed, it used bankruptcy law to declare many of its victims co-conspirators.

4. Suppose you own a $1 million house and can earn 3 percent real on your investments. Inflation is zero. But your house’s price will rise by 5 percent. You have no mortgage, no property taxes, no homeowners insurance (It’s made out of cement.), and no maintenance costs. How much is the cost you face this year of living in your home?

   a) Zero

   b) $30,000

   or

   c) negative $20,000

   The answer is c). If you were to sell your house this year and invest the proceeds, you’d earn $30,000. But if you don’t sell the house this year and sell it next year, it will be worth $50,000 more. So, on balance, you’ll make $50,000 less $30,000, which equals negative $20,000. Hence, your imputed rent/implicit rent/housing holding cost/opportunity cost of holding your home and related expressions for your annual cost of living in your home is negative $20,000 this year.

The Financial Riddler – 11/27/22

1. As this new study shows, over 90 percent of those 45-62 should wait till 70 to collect their Social Security retirement benefits. How much could these households typically raise their lifetime benefits by optimizing benefit collection? The study assumes a 0.5 percent real (inflation-adjusted discount rate and a maximum age of life of 100.

   a) $182,370

   b) $93,233

   c) $25,791

   or

   d) $59,028

The answer is a). That’s more than three years of the typical US worker’s earnings after tax.

2. Homer and Marge are 63 and 62. They have not yet started collecting Social Security. Their maximum ages of life are 100. Homer has had high earnings. Marge devoted her career to raising four children. So her earnings history is low and sporadic. How many monthly Social Security collection options do Homer and Marge need to consider to determine the strategy that will maximize their combined lifetime benefits?

   a) Between 0 and 5,000

   b) Between 5,000 and 10,000

   c) Between 10,000 and 15,000

   d) Between 15,000 and 20,000

   or

   e) Between 20,000 and 30,000

   The answer is e). According to maximizemysocialsecurity.com, the couple has to consider 21,436 alternative collection strategies. Note, each spouse can start their retirement benefit collection in any month through age 70. In addition, what each spouse can collect with respect to spousal benefits depends on whether the other spouse is collecting their retirement benefit. This explains the massive number of combinations that need to be considered. It takes our software 1 minute to consider all these cases. Is this something you could do in your head were you Marge and Homer? Could their financial planner figure this out in their head? This is an example of learning how to know something you can’t know.

3. If you belong to gen X, Y, or Z, what’s your best investment move?

   a) Invest in Bitcoin now that the price is rock bottom?

   b) Invest in the stock market for the long term?

   c) Help your parents decide when to take their Social Security?

   or

   d) Buy Canadian dollars. Their energy-based economy should do well and their fiscal system is stable.

   The answer is c). There’s no downside risk. If your parents do what most parents are doing and royally screw up this decision, you will likely inherit less money if they die early because they’ve had to use up more of their assets due to collecting less than would otherwise be the case from Social Security. If they die late, you’ll likely need to provide them with more financial assistance when they realize at, say, 90, that they can’t cover their costs with their meager monthly Social Security check.

4. Which country produces the most wheat in the world?

   a) Russia

   b) Ukraine

   c) Chiina

   or

   d) The U.S.

   The answer is c). Interestingly, Ukraine is the 8th largest producer of wheat. This helps explain why the price of wheat has dropped after rising dramatically after Putin began his horrific war. Other suppliers are coming on board by planting more wheat.

The Financial Riddler – 11/24/22

1. By approximately how much have prices risen over the past 20 years?

   a) 20 percent

   b) 30 percent

   c) 40 percent

   d) 50 percent

   or

   e) 60 percent

The answer is e. You can confirm this here. And this site provides inflation’s year-by- year values back to 2014.

2. Approximately what fraction of workers age 45 to 62 should wait till 70 to take their Social Security retirement benefit if they seek to maximize their lifetime benefits?

   a) 30 percent

   b) 50 percent

   c) 60 percent

   or

   d) 90 percent

The answer is d. But, as shown in this study, only about 10 percent do. This tool will show you what’s best in your case.

3. In 1960, a gallon of gas cost 31 cents. Today, a gallon cost $3.90. The are the costs in dollars. If you adjust the 31 cents for inflation and express the 1960 cost in today’s dollars, the cost is

   a) $5.82

   b) $2.58

   c) $3.10

   or

   d) $4.57

The answer is d. Prices throughout all sectors of the economy have risen by a factor of ten since 1960. Hence, gas is more expensive now, but not that much more.

4. Does Washington State have a state income tax?

   a) yes

   or

   b) no

The answer is no. A total of 42 states, including Washington D.C., tax income. Washington State does not.

The Financial Riddler – 11/23/22

1. Compared with Albany, New York, the median hourly wage of occupational therapists in Tallahassee, Florida is

   a) 21 percent higher

   b) 30 percent lower

   c) 16 percent higher

   or

   d) 7 percent lower

The answer is c. To check, consult the Bureau of Labor Statistics Occupational Data Base.

1. The bond market currently predicts inflation over the next 10 years to run at

   a) 7.2 percent

   c) 5.8 percent

   d) 2.5 percent

   or

   e) 11.3 percent

The answer is d. This is the difference between 10-year nominal and real (Inflation-Protected) Treasury bond yields.

1. By the end of the Century, the United Nations project that the world’s population will

   a) fall by 0.3 Chinas

   b) rise by 4.1 Chinas

   c) rise by 1.7 Chinas

   or

   d) fall by 1.3 Chinas

The answer is c. Here’s the link.

1. A 67 year-old married divorced widow, who was married to her ex for 20 years can’t collect divorcee widows benefit unless she

   a) is unmarried

   b) remarried after age 60

   c) is disabled

   d) dumb question. Divorced widows can never collect widows benefits off their ex’s records.

The answer is b. As described here, Social Security is incredibly sexist in practice, although its provisions are nominally gender-neutral.

The Financial Riddler – 11/22/22

1. Compared to taking your Social Security retirement benefit at 62, waiting till 70 will raise its starting value, adjusted for inflation, by

   a) 33 percent

   b) 47 percent

   c) 76 percent

   or

   d) 100 percent

The Answer is c. In starting retirement benefits at 70, not 62, a worker experiences no reduction in benefits due to taking them early. The worker also raises their benefits via the accrual of Delayed Retirement Credits. Here, by the way, is a NY Times Best Seller that covers all of Social Security’s often bizarre, outdated, and sexist provisions.

2. If interest rates fall, Uncle Sam will let you refinance your student loan at a lower rate.

   a) True

   b) True, but only if the interest rate falls by more than half of its initial value

   c) True, but only if you switch to a 10-year standard loan

   or

   d) False

   The Answer is d. Uncle Sam will let you change how you will repay your loan. But he won’t let you repay at a lower interest rate. Read Don’t Borrow for College in Money Magic for the rules on restructuring student loans.

3. Sue is 30 and lives in Kansas. She has no assets apart from $10,000 is her checking account. But Sue is now contributing $2,500 a year to an IRA. Sue expects to earn 1.0 percent above inflation on her savings. She also expects her $60,000 salary to keep even with inflation. Sue has decided to retire at 62 and immediately take her Social Security retirement benefit. Finally, Sue’s maximum age of life is 100. How much can Sue spend in today’s dollars each year through age 100 if she lives that long? I.e., what is Sue’s sustainable annual real spending?

   a) $20,000-$30000

   b) $30,000-$40,000

   c) $40,000-$50,000

   d) $50,000-$60,000

   e) $60,000-$70,000

   or

   f) $70,000-$80,000

The Answer is b. Sue can spend $35,849 on a sustainable basis. Sue has 70 years to finance spending through age 100. She also has to pay federal income taxes, payroll taxes, Kansas state income taxes, and Medicare Part B premium. Plus, she’ll be paying taxes on 85 percent of her Social Security benefits. This is an incredibly complex calculation — far beyond human capacity. But MaxiFi Planner can calculate the answer in less than a second. This is how you can know what you can’t know.