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The Retired Investor: The Billionaire Lottery
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On the surface, you would think that inflation has hit the lottery. Billionaire-dollar jackpots were infrequent until recently. But lately, the total winnings in the Mega Millions lottery have hit close to or over that magical mark several times. Is it inflation, or something else that has moved these jackpots to a whole new level?
There was a time when winning a million dollars in one of the nation's weekly lotteries was a big deal. Today, million-dollar winnings are no more than consolation prizes for those who picked a couple of winning numbers, but not the whole enchilada. As of today, there have been only a few times that the U.S. lottery has surpassed $1 billion. I don't know about you, but I have played and lost every one of them.
For those who don't know, the lottery is played in 45 states. It is also available in the District of Columbia and the U.S. Virgin Islands. A breakdown of the proceeds of your $2 ticket is interesting. Seventy-five cents funds the jackpot, approximately 35 cents go to non-jackpot prizes and the rest (90 cents) goes to the government. It is much more than that, since winners are required to pay taxes on their gains.
As a rule of thumb, the after-tax lump sum of winning a $1 billion prize is somewhere north of $600 million, since the federal tax rate is about 40 percent. Oh, and don't forget the IRS withholds an extra 25 to 28 percent because the winnings came from gambling. Of course, there are also state taxes to worry about as well, unless you live in a state that doesn't charge a tax on your winnings. Add all of this up and the government's share of your ticket can easily top $1.30.
We all know that the chance of winning the lottery is low, like 300 million to one low. Statistically speaking, that's close to zero. But it is worse than you think. If you do win, there is a 50 percent chance that you will have to share the jackpot with at least one other winner who chose the same numbers. Back in 2016, there was a $1.6 billion Powerball jackpot that had to be split three ways.
But winning anything from the nation's lotteries has become harder and harder overall. Mega Millions and Powerball organizers have been gradually reducing the odds of winning for decades. The largest change was back in 2015 when the lottery added more number combinations, which nearly halved the odds of winning.
Before the change, the odds of winning Powerball, for example, were around 175 million to one. Today, those odds stand at 292.2 million to one. Mega Millions waited until 2017 before adding more number combinations to their game, while also increasing ticket prices. The results are the same. You are now paying more for a product that has reduced your chance of winning.
Nonetheless, we keep playing and losing. Another way organizers are luring more ticket sales from us is to direct more of their revenues toward winning the jackpot, and less on smaller prizes, which are easier to win. Many players do not realize that the advertised jackpot size is based on the amount a winner receives if they chose to be paid out in an annuity over 30 years.
This is where today's higher interest rates inflate the prize. The higher the interest rates are during a drawing will translate into a higher total payout from the life of the annuity fund. The lump-sum option, on the other hand, is directly fueled by ticket sales. In November 2022, when one Powerball jackpot stood at $1.2 billion, the lump sum option was worth less than $600 million.
Is it any wonder, given the reduced probabilities of winning, that there are fewer jackpot winners? That is just fine with the organizers because the jackpots just get bigger and bigger as they are rolled over. That in turn attracts more and more ticket sales, which means you are playing against a bigger and bigger crowd. That in turn reduces the odds of winning even lower, and so goes the vicious circle.
Most people are aware that the odds are stacked against them, so why do we play? Assuming you are not addicted to gambling, I am guessing that like me there is always the hope that for $2 all my wishes will come true. Purchasing a ticket, I usually have at least two days' worth of daydreaming about what I would do with all that money before the next drawing. Come to think about it, that's a cheap dopamine high for my two bucks.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
The Retired Investor: Beware Political Pollsters
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The pollsters were wrong in 2016, 2020, and now 2022. The recent "Red Wave" of GOP wins, so confidently predicted in the final days of the mid-term elections, failed to be no more than a red ripple. Is this a question of "three times you're out?"
Heading into November 2022, Republicans were shown to have a clear edge in battleground states, as well as throughout the nation generally, according to the average of most polls. A minority of polls, mostly those of traditional pollsters, seem to dispute those results but were drowned out by the red wave forecasters.
Some argue that the traditional pollsters got it right, especially in the final weeks of the mid-term elections. Those surveys indicated that the Democrats were running neck and neck with Republicans, even in those races where opinion seemed to favor Republicans hands down. What happened to skewing the averages the other way?
One misconception is that polls are meant to predict the future. The value of polls is to explain the how and why of voters and their feelings, attitudes, and behaviors. It is a snapshot of time and not a prediction of future outcomes. Anyone can conduct a poll, you see, regardless of experience, political agenda, and in some cases, even honesty.
But beyond the right questions to ask, interpreting those answers, and extrapolating that data to form generalities with a high level of confidence is just as important. Strong poll results for a candidate or political party, or even a company, can bring several advantages. Companies, for example, that consumers consider a number one brand or a great place to work, or to have a social conscience can increase sales, profits, morale, and even the caliber of new hires. The fact that traditional polling organizations do not claim to predict the future is largely ignored.
In the political arena, strong poll numbers can mean more contributions in campaign financing, a boost to morale for volunteers, a shot in the arm for the political party overall, and in the final days and weeks of an election greater turnout at the polls. The Republican Party figured this out early on.
During Donald Trump's upset election in 2016, few pollsters got it right. Four years later, it happened again, only this time the opposite occurred, and Democrats took control. By November of last year, the polling industry was a free-for-all with partisan-aligned pollsters springing up virtually overnight to try their hand at polling.
After all, if the traditional pollsters couldn't get it right, maybe new blood with a new outlook might do better. Polling organizations, many backed by political PACs, with a great deal of enthusiasm, but little experience jumped into the fray. Even some high school students tried their hand at polling and found their results were taken as seriously as any others.
As I mentioned, traditional nonpartisan pollsters did a pretty good job of reflecting reality during the run-up to the November 2022 elections, but at the same time, they conducted far fewer polls than in the past. This left open a vacuum that fledgling newcomers in the polling business were happy to fill. And that is where the "average" poll comes in.
In this day of internet streaming, social media, and partisan news shows, political polling results can be a big business. The news media, always in pursuit of higher clicks and ratings, were eager to promote and broadcast these new poll results (even high school results), especially in key battleground states. Few questioned the ability of these pollsters to conduct surveys, or their skill and experience in what questions to ask, what groups to target, and how to analyze the outcomes of their results. Those that should but didn't pay attention to this deliberate flooding of polls were the aggregators. These are organizations that average several polls conducted by different organizations and come up with a leading candidate overall.
As more and more polls were generated, many by partisan groups showed Republicans widening their leads, the "average" poll results leaned more and more into the red column.
This had profound effects on campaign strategies for both parties. Despite internal polls conducted by veteran polling organizations that continued to call the election a toss-up, both parties began to doubt those findings in the face of the average poll results. They too began to operate as if a red wave was coming.
Some candidates that were in little danger of losing their seats found that political action committees and other organizations funneled more money than necessary into campaigns where candidates were leading. In comparison, these candidates who were fighting for their political lives, but were assumed to win in a red wave, were ignored.
The bottom line is that a "three times you're out" attitude toward political polling results may be a bit extreme. However, if partisan polls, no matter what the subject matter, continues to gain traction and the media accept those results carte blanche, the value of polls overall will surely continue to diminish.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
The Retired Investor: U.S. Income Inequality
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In 2022, 68 percent of the total wealth in the United States was owned by the top 10 percent of wage earners while the lowest 50 percent of workers accounted for just 3.2 percent of that wealth. The gap between the haves and the have-nots continues to widen.
I was brought up believing that hard work, determination, and pulling oneself up by your bootstraps could guarantee success in America. In my case, as the son of lower-middle-class parents, I have moved up a rung to solidly middle-class. Unfortunately, most Americans have not been able to even do that.
As most readers probably know, income and wealth inequality in the U.S. is wider than in almost every other developed country. There are many reasons for this and depending on your political persuasion you may agree or disagree with many of the causes. For example, the facts are that a large wealth and income gap exist across racial groups. Many economic experts explain this as a result of the nation's legacy of slavery and racist economic policies.
In addition, the globalization of trade over several decades resulted in shifting jobs and wages out of America and into counties such as China, India, and elsewhere. The failure of the U.S. public and private sectors to adapt to this sea change, as well as to accommodate a technological explosion that left many workers in the dust worsened these trends.
U.S. tax policies during this era increased inequality while reducing bargaining power among employees, and both gender and racial discrimination widened the gap further. The 2008 onset of the Financial Crisis, the slow and painful subsequent recovery, followed by the economic trauma of the COVID-19 pandemic simply made a bad situation infinitely worse.
COVID-19 and the U.S. reaction to its spread caused the largest spike in unemployment in modern history. Those hardest hit were low-wage workers. At the same time, a boom in the stock market and housing prices benefited the top 10 percent of American earners most of all.
Over the years, there have been those who argue that inequality is the wrong target. If everyone is doing better, everyone wins, while entrepreneurship benefits everyone, even if some benefit more than others. The focus, they argue, should be on poverty instead.
However, gaining traction requires economic mobility. We know that the percentage of Americans earning more than their parents continues to shrink. Overall economic mobility in the U.S. continues to fall behind most developing nations including Japan, Australia, Germany, France, and Canada.
Recently, the Wall Street Journal reports that "wage inequality may be starting to reverse." Over the past two years, stalled technological innovation, the trend toward remote work, and deglobalization have begun to erode some of the advantages of the top earners in the U.S. — at least for now. Labor shortages, aided and abetted by the government's immigration policies, are increasing wages for many in the labor force. It has also contributed to the recent rise in union activity, which is further boosting wages and fringe benefits.
However, job and wage growth happen to be in the crosshairs of the Fed's attempt to reduce inflation and slow the growth of the economy. If they succeed, the wages gain of the recent past may go up in smoke and with it a resumption of the long-term trend in inequality.
Through the years, I have expressed my worries over growing inequality and its potential threat to our political system. As more and more Americans feel trapped and lose faith in a system that favors a smaller and smaller minority, democracy suffers. The rise of populism and the attraction of authoritarian leaders both here and abroad, I believe, is a direct result of economic inequality. The wider the inequality gap, the less chance this nation has in overcoming its present partisan divide.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
The Retired Investor: Are Christmas Trees Worth It?
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As Christmas arrives around the nation this weekend, tardy consumers are hitting the neighborhood Christmas tree lots and farms in droves. Late-coming artificial tree buyers are finding slim pickings at big-box stores as well. This is despite an average price increase this season of between 5 percent-15 percent.
Americans will spend nearly $6.6 billion on Christmas trees this season, according to the National Christmas Tree Association (NCTA). NCTA predicts consumers will pay an average of $86.59 for a live tree, and $122.60 for an artificial tree. Many shoppers could pay much more than that.
Last year, 75 percent of U.S. households, or 94 million homes, displayed a Christmas tree during the 2021 season, according to the American Christmas Tree Association (ACTA). This year, ACTA predicts Americans will purchase almost 21 million live trees, which is on par with last year's total. In addition, 6.5 million households displayed both live and artificial trees.
Supply chain issues had snarled artificial tree sales last year, so retailers ordered early this year and stocked up on inventory. It has turned out that they still sold out early in many locales.
As for living trees, there could be shortages of inventory depending on the region. In 2021, live tree farms were walloped by environmental conditions, which continued into this year. Wildfires, lack of irrigation, elevated temperatures, and drought were the main drivers of the loss of young Christmas trees in certain parts of the country. Experts expect climate change conditions will continue to bedevil farms in the future.
As a result, whether you choose a live or artificial tree this year expect to pay more. Nearly all of the 55 largest U.S. Christmas tree wholesalers are raising prices this year by as much as 5 percent-15 percent. Some wholesalers intend to raise prices even more. But don't blame the Grinch, blame inflation — rising prices for diesel, fertilizers, and chemicals. Supply chain issues and labor have contributed to higher prices, in addition to the weather problems for live trees.
Despite the prices, and lack of selection, 85 percent of consumers found that Christmas trees are worth it, according to the Real Christmas Tree Board, an industry marketing and research firm based in Michigan. Who can blame them, especially when buying a real tree?
For many in society who have become increasingly aware of the environment, Christmas trees can be guilt-free. Just one acre of trees provides enough oxygen for 18 people every day. One Christmas tree alone can absorb one ton of CO2 during its lifetime and with over 350 million trees growing at any one time, the environmental benefits are enormous.
So are Christmas trees worth it? My answer is a resounding yes. Just sit back for a moment, close your eyes, and remember the scent of that blue spruce, Scotch pine, or Douglas fir in your living room or den. I can almost feel that sticky sap on the branch, as we hung that special ornament. How much is that worth?
And that's not all. Picking out the perfect tree, hauling it home in the car, or through the field, and then wrestling it through the front door has become one of those yearly family traditions most families cherish. The actual decoration of the tree, whether real or artificial, becomes a work of art that even the youngest of us gets to experience and create.
I would like to wish all my readers a happy holiday season, with or without a Christmas tree. Take some time off, cherish your family and friends and hug someone.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
The Retired Investor: Why the Stock Market Needs to Decline
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After a year where the stock averages have declined anywhere from 7 percent to 30 percent, the last thing investors want is to see further downside. The problem is that a surging stock market is the last thing the Fed wants to see in its battle to reduce inflation.
It is common knowledge that the Fed does not want to see a robust equity market. Fed Chairman Jerome Powell and his merry men have never said so explicitly, but they are monitoring the ups and downs of the market closely. When they perceive that price action is getting out of hand, one or more FOMC members step up and try to talk the markets down.
Several times this year when the animal spirits of traders and investors have pushed stocks up 10 percent or more, the Chairman has been able to squash the move effectively simply by jaw boning. These actions may be contrary to many investors' long-held belief that a stronger stock market is always good for the economy but that is not always the case.
The Fed has done a good job of explaining that inflation is their number one concern when it comes to the health of the economy. That sentiment has been echoed throughout the globe as central bankers everywhere are raising interest rates continuously. Readers should know that tightening monetary policy by raising interest rates and reducing liquidity in the credit markets by selling bonds are the main tools central bankers use to reduce demand.
The problem is that thus far, despite raising rates at a historical pace, the economy continues to grow. Employment remains stubbornly higher than expected as well. That combination continues to fuel consumer demand for goods and services. As a result, inflation remains substantially higher than the Fed's target of two percent.
But hasn't the stock market declined enough to warrant a more dovish Fed? Not really. Consider that the pre-pandemic low of the S&P 500 Index was 3,387 in February 2020. Since then, despite 2022 losses, the index is still 16 percent higher than that level. For the most part, meme stocks and other speculative assets are still alive and kicking. In every bear market rally thus far, investors have flocked back into these assets, despite the lack of earnings, profits, or even cash flow. In many of these companies.
It is only recently that highly speculative assets such as crypto have finally begun to fall substantially, but it took a major financial crisis and bankruptcy to trigger that event. None of this seems to have phased or altered the casino-like atmosphere of today's stock markets. In short, after years of buying the dip, it is taking much longer to convince traders that may not be the best investment strategy. It could require a recession to change that behavior.
Most financial professionals are expecting a recession in 2023 thanks to the Fed's tightening of monetary policy. A recession is one of the best ways to reduce economic demand and by doing so achieve the Fed's goal of lowering inflation. I'm hoping for a quick, couple of quarters of a moderate recession that will drive inflation lower without causing too much harm to the country's labor force.
So how would a substantial decline in the stock market help reduce inflation?
In the U.S., the stock market is normally the bailiwick of those considered well-off. They have enough money to both support their lifestyle and save for their eventual retirement.
When financial assets decline, there is less money in the system, so financial conditions automatically tighten.
At the same time, a sell-off in equities has a psychological effect on those who are invested. People feel poorer as their 401 (k) or IRA decline. Often, they tend to reduce spending on consumer goods and services, therefore reducing demand (and inflation). As prices decline substantially, savvy savers can also take advantage of fire sale prices. This is an especially good deal for younger retirement savers who can take advantage of a "buy low" period in order to beef up their retirement saving plans.
As for those living paycheck to paycheck, a plunge in the stock market means little to them, even if the selloff is caused by a recession. Hourly workers who are laid off will likely find another job quickly, especially if a recession is short and sharp in duration.
Overall, a moderate recession and a cheaper stock market would hurt investors in the short term but help just about everyone in the long term. It would wring out speculative fever among investors, help the Fed accomplish its inflation goals sooner than later, and have comparatively little impact on both the long-term performance of one's retirement account and the stock market.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
