MONEY 58 - WORLD ECONOMIES AND MORE

THIS IS MY 58^TH BLOG ON UNDERSTANDING MONEY TOOLS

2 plus 2 should equal 4? I certainly hope so. We are going to look at the US and world economies in this blog and see much of what is happening. Many of the media reports are not adding up.

I am writing facts presented here from various economic advisory letters that I believe to be factual and true.

Let me start with recent news (12/22/14) that for the fourth straight week jobless claims are down in the US driving the stock markets even higher. Then, the government released a report that US Gross Domestic Product for third quarter was revised from a growth of 3.5% to 5%. Wow! Yellow flags go up around me. The word “revised” to me means “manipulated”. The government doesn’t miss facts by this percentage, but they most likely figured a way to “honestly” calculate stats in a different way to make the economy look far better than what it actually is, and much better than what is happening in other countries around the world.

Yes, the US and the US dollar is the safe haven of the world right now. We are in a world economy, so let’s take a look. China’s economy has weakened, low oil prices have devastated Iran, Venezuela, Russia, and certain African oil producers.  Japan started printing money a couple of months ago to attempt to halt deflation and the strengthening Yen.  Currencies of any of the world oil producing countries have dropped, including Norway, with the Ruble in Russia dropping 40% to the US dollar. Russia’s bonds and corporate stocks have followed suit hurting investment companies that hold these instruments, like well-known Pimco Investments. To strengthen the Ruble Russia significantly raised interest rates (about 7%), hoping that people would start buying their currency. To compound this the “cold war” is on with Russia against the West. Russia has a lot of money at hand, however with most sanctions it mostly hurts the common citizen of the country, not the top elite. Russia most likely will be in a strong recession in 2015. Behind the cold war scene perhaps the US and Saudis are binding together to financially place strains on the key Middle East oil producers, beyond hurting Russia, these would be Syria and Iran. These countries can produce oil at less than $50/barrel, however they rely on oil to pay down debt so they need oil above $100/barrel.

Let’s travel around the world to some of the well-known countries and take a look. This should have an affect on our economy. Of course, the largest economy is now China which took over that position from the USA in 2014. China has lowered growth projections about 3% going forward and has tons of empty real estate.  We are manufacturing a lot of goods including cars in China with expectations that their middle class will grow and be able to afford to buy our merchandise.  Japan is a country with one of the worst debt to GDP ratios. The Yen is down about 10-15% already since they started printing more money. The same is happening with the European Union, Germany being the strongest country in the EU. Greece, France, Italy, Spain and Portugal are all weak.  Switzerland recently took steps to make their Franc less desirable by going negative interest rates. This means that to hold Swiss Francs, or wanting Swiss banking relations it will cost you money. Previously in blogs we mentioned the troubled South American countries especially Argentina, Chile, Brazil and Venezuela. Brazil and Venezuela hurting now with low oil prices.

The current assets of emerging countries around the world have increased over the past few years because of Central Banks lending liberally. Here’s the catch for the future. These countries are highly leveraged and were lent money in US Dollars. Their debts are paid back to Central Banks in their respective currencies. As the dollar has reached new highs this means that it will be very difficult for many countries to meet their payment demands as they are paying back with a cheaper currency, thus a more expensive pay back.

It is ironic to me that since 2007-8 and the Great Recession we have forced  de-leveraging on individuals around the world aimed at the middle class through banks not lending and strict banking regulations. However, countries have greatly leveraged themselves, mainly through Central Banks liberal lending policies. The United States being the top country in this with Quantitative Easing 1, 2 and 3 equating to about $4.5 trillion.

A couple from Canada came to visit with me this week. I haven’t been keeping track of the Canadian Dollar. Up until about a year ago Canadians were big buyers of real estate and homes in the Phoenix area where I live. The Canadian Dollar had been in parity with the US Dollar and at times higher. Now, they indicated to me that their Dollar is $.85 to $1.00 US. This means that if we buy Canadian goods we are paying 15% less, or if they now buy US goods it will cost them 15% more than a couple years ago.

Countries are printing money, Central Banks buying in debt. This devalues their currencies, thus attempting to make their goods and services cheaper worldwide. Looks like parity in currencies to me. With our strong Dollar it certainly isn’t going to bode well for bringing jobs back to the US when we can employ inexpensive contract labor abroad. The US Dollar being sent higher is going to mean our goods manufactured here will be less appealing because of cost, exports will be hurt even though that currently only makes up about 12% of our GDP. As our economy should weaken somewhat commensurate with other world economies, we may start QE 4 thus weakening our Dollar.

With all the news reports on how great the economy is my thinking is contrary. We don’t have a strong economy here in this country with high paying jobs, and won’t for several years to come.  Unless oil comes back, oil producers here will finish work at hand, but cut future plans and hiring until there is more certainty of higher oil prices, and no one knows when, or if, OPEC will cut production of oil. Everything is supply and demand, assuming a free market, and right now with a weakening world economy we have an abundance of oil. As my last blog stated three fourths of the jobs created the past few years were in oil/gas and the energy industry.

How does this affect our US oil producers? The big oil companies are diversified these days and well financed. The small independent oil producer will be hurt as they are more leveraged and may have bank loans called, or not be able to make company payables. This will create an opportunity for the large oil companies to buy these small companies at a discount and take over their rigs, supplies and mineral rights.  Where is the Sherman Antitrust Act and Law when we need it? Gone like many important laws passed for a good reason.

New home building is probably the largest industry in the US as it affects so many businesses. Real estate isn’t only wood and nails, it is computers, carpet, cabinets, concrete, steel, furniture, lighting and the many trade groups. This industry is a tell-tail sign as to the future economy, and the industry is off. Most of the big homebuilders are predicting poor sales and letting Wall Street know. This morning’s news mentioned home sales down 1.6% for the month, which is 19% on an annualized basis, a lot of sales.

I keep mentioning the high stock market values. One measure of value is the P/E, price to ratio earnings. For some time now the markets are using PP/E’s, projected price to earnings ratios, or “cycling P/E’s” which means the average P/E’s from a historical standpoint projected to the future (sometimes referred to as CAPE. Senators Graham and Dodd brought this measurement up several years back). Because we hit about 6,800 on the Dow Averages in 2009 and now it is 18,000, it is ridiculous in my mind to project forward as that is almost a 300% increase.  Most of the friends I know who are sophisticated in investment are pretty heavy cash or have a hedge on the downturn of the market through put option shorts or shorting long call options.

There are many ways of analyzing where the stock markets are headed. Perhaps I will write a blog regarding this in the future.  One of America’s top investors uses one of common sense. He takes the capitalizations of stocks on the market and equates them to the United States Gross Domestic Product. (Capitalization, covered in previous blogs, is the number of shares of stock on the market of a company times the current price per share.) Capitalizations and GDP should run about parallel. The past several years GDP has averaged about 2% growth with some quarters being negative growth. At the moment the stock market is approximately 27% higher than what they should be using this method. Please don’t forget that when it comes to investing about 50% of analysts are correct and 50% wrong. The objective should be to be able to determine approximate highs and lows to markets, thus being able to go more to a cash or bond position near market highs and investing more in stocks at lows. Timing the markets has proven to be next to impossible.

Reaching forward I have other reasons that the strong American economy is bogus. Here are some reasons:

-       People over 50 are being forced out of corporate America. These people are tapping their retirement savings, IRA’s, and pensions to live.

-       Most Americans can’t retire on what they have saved.

-       Older people are not spenders, at least not enough for a buoyant economy.

-       Younger people are not marrying and having children. There goes the buying of goods and services that children require.

-       The economy is supported greatly by people of ages 25-40, and those numbers can’t take care of everyone else.

-       Younger people under age 40 are part of the “New World Order”, and they want to rent urban apartments, stay flexible and not own homes like previous generations.

-       We don’t have corporations that value employees and are loyal, therefore employees are not loyal and team players to corporations.

-       The inequalities quickly growing between the very rich and the poor with a quickly shrinking middle class. No country in history has survived without a large, healthy middle class. There is no such thing as “trickle down of wealth”, as the propaganda machine periodically mentions.

-       We are ranked miserably low worldwide in health care and education. In reading, writing, arithmetic and science we are near the bottom in the world. We need to totally revamp our educational system.  Okay, okay, here is an exercise on this for impact. Take out a piece of paper and write down twenty to thirty countries in the world. Now, this is where American is placed in health care and education. Proud of that?

-       We lack a true, desired national focus on important matters. We are a very fragmented society.

-       We have let the quality of the American family slip.  Two parents working long hours is not maintaining a good family environment for children. People outside the home are raising our children.

These blogs are supposed to be aimed at understanding money tools, so permit me to touch on two subjects. For employment and advancing careers I might add international relations and business to technology and health care.  We are in a world economy. Also, a comment on investments. I would follow the advice of top economic people and be very careful adding stocks in a long position to a portfolio, but go 30-40% cash, pick up a bit of gold stock or bullion as the price of gold dips, and look at some index funds that short stocks. As you can imagine these funds have had a terrible record since 2009 because our market has screamed upward, but nothing goes up forever and a short fund might be a nice hedge. If you have the knowledge or software program to do so, you might buy a put option or sell a call option against a long stock position as a hedge. Unless you have experience in this, I would refer to experts. I liked certain currencies like the Norwegian Krone based upon high oil prices, but I’ve eaten my words recently on that advice.

It didn’t take “rocket science” to get the world into a messy economic situation, however it is going to take “rocket science” to get us out of our current situation.

Recently, someone asked me why I write these blogs. Well, it is therapeutic for me for one, and two is that at one time in my life I was on a lecture series for finances.  At that time I had a top position with a bank trust company. Those interests in finance still remain today and intrigue me.

MONEY 57 - EMPLOYMENT

THIS MY 57^TH BLOG ON UNDERSTANDING MONEY TOOLS

There was a media release from the government stats the week of December 15^th that propelled the stock markets higher. All it took was to announce “jobless claims were down”. This inferred that the economy was again set to take off.

Now once again, with my subjective and analytical thinking hat on, let’s take a look. A stand-alone figure like this has little relevance to our overall economic health. Immediately what goes through my head is:

1)    How many people have given up trying to get employment?

2)    How many underemployed people are working?

3)    How many people are not included now because corporations have paid employees to take early retirement?

4)    How many people have taken some sort of part time work for the Holiday Season?

5)    How many people does this include who have part time jobs so employers don’t have to pay any benefits?

6)    Any more questions that need answering?

You read facts about employment that the government has released; are they true or have they been slanted or accounted for in a different manner than was standard years ago? I look at a figure or statement and think is it “qualitative or quantitative, is it material or immaterial, is it relevant or irrelevant”.  One or two figures released by the government don’t paint a true picture of anything.

Shall we try this in another dimension? Let’s say someone offers to pay you 100% interest on a loan. I’m going to apply qualitative, material and relevant thinking, and ask the person “for what period of time and how much money”.  If it is only $1 for a year it isn’t worth the paper to create an IOU. In other words you need more facts to make decisions whether it is about the success of the economy, or about making a loan.

Let’s look at this and see if we can read anything in regard to future economic outcomes and employment. We’ve discussed this in previous blogs, but the most important thing for the economy is good, high paying jobs so that the majority of people (middle class) have discretionary income left over after every pay period so they can purchase “want” goods, e.g. a new car, a new home, and the latest computer and technology items.

It has been tough especially the last 8 years or so, and the last 15 years you have seen the average middle class family income dropping. Regarding jobless claims down, will that remain? Since the Great Recession the USA has created about 1.75 million jobs, great! Now, here is something not stated much and that is that 3/4 of these jobs are in the oil and gas/energy related industry. As we all welcome gas prices are down at the pump, about 50% from the highs, or more.  This helps most people around the world except if you are in the industry or live in a country that pays its bills/relies on oil or gas production for exportation. Certain industries are welcoming the lower prices, especially trucking/transportation, airlines, delivery companies and farmers and people in the agricultural business. These companies buy large quantities of fuel far in advance to lock in favorable pricing. There normally is a lag time before these industries lower the prices to the public and make extra profit.  It may take a long time for oil prices to rise, therefore look for jobs away from the industry, again technology and health care.

Bottom line for this blog is don’t get too excited about the economy and jobs until you get more supportive facts. I am not a pessimist, however a realist. The US and world economies are in a questionable situation, and I will write my thoughts in a future blog.

MONEY 56 - INFLATION/DEFLATION

THIS IS MY 56^TH BLOG ON UNDERSTANDING MONEY TOOLS

I recently read an article on inflation by a so-called economic expert, and that lead me to want to comment on inflation versus deflation. In the article the gentleman covered inflation fairly well and its destructive points, and touched very lightly on deflation, which I felt he favored over the two.

First to inflation. Currently, three countries come to mind that have higher than desired inflation, those being Venezuela, Iran and Argentina. Argentina has been up and down with its economy over the years. It reached a point of hyper-inflation around 1990 when inflation reached well over several thousand percent per year. I feel inflation of around 3% is healthy and beneficial; this encourages spending. Corporations will spend on capital improvements and expand if they know things will only cost more down the road. Some inflation makes people spend and buy now rather than wait and pay more for things in the future. If the US was not the world’s safe-haven for investment and the dollar as the safe haven for currency, the dollar would not be as strong as it is with the dilution that has taken place in our currency.

Inflation occurs with 1) more demand than supply 2) adding to a country's supply of money or 3) too much money in circulation. As previously covered, we now have printed about $4.5 trillion in our QE 1-3, however the circulation of the money never made it to main street therefore inflation has not been an issue.

Also to note is that there is a big difference between “moderate inflation” and “hyper-inflation”. Hyper-inflation normally occurs when there is an economic collapse of an economy or people have lost faith in the country’s currency. A prime example of that was Germany in the mid-1930s prior to WWII. When this occurs natural supply and demand is disrupted. People buy as much as possible because they will be paying much more at anytime in the future. When this happens supplies run dry.

I believe that deflation (negative to any inflation/lowering of costs) can be worse than moderate inflation. During deflationary times people buy things today if they “need” items, however they won’t buy “want” items today if they can be bought at a lower cost in the future. We experienced this on a major scale in 2007-8 when our US housing markets collapsed losing 50-60% of values in many parts of the country. What was supposed to be the best and most solid investment of our lifetime, the home, turned into a disaster; devaluations/deflation. This situation now is hurting the recovery of the single family home building industry. In so many ways Americans are uncertain of the future.

People won’t spend money in deflationary times, and hoard their currency.  This impedes growth and restrains Gross Domestic Product. Several countries are experiencing this, therefore they are printing money, Japan being one of the prime illustrations. The European Union is another example of this although not as concerning.

A word bantered around to day is “disinflation”.  This is the lowering of a base line inflation. For instance, if inflation is running at 3.4% and then it drops to 2% the result is disinflation. Once we drop below 0 inflation it is considered deflation.

Another influence on deflation around the world is age. People in many countries are not having the historical number of children and the average age is increasing, this is affecting our economic balances. Older people do not spend money like younger people with families.

Anyway, we will leave the topic with this.

MONEY 55 - CURRENICIES

THIS IS MY 55^TH BLOG ON UNDERSTANDING MONEY TOOLS

I thought I would write a blog as a summary of my readings of economic reports on current world financial events.  (12/1/14)

As you might already realize there is a waning of economic stability and growth in the world.  Central banks have for several years been pumping money into emerging countries, that are now debt burdened. Let’s recap on the larger countries slowdowns. These countries in South America include Chile, which surprises me, Argentina, Brazil, and Venezuela. Venezuela relies a lot on oil production and current prices are down. In Europe Germany, the strongest by far holds that together, although the EU has almost no growth. Russia relies on commodities including oil and gas and those prices are down. As I write oil settled in at about $68/barrel. China has been producing goods and exporting sustaining economic growth in the 10% range. Now, it is predicted that they may be slightly over 7% growth, and with a lot of debt major financial decisions will need to be made. India is similar relying on exportation of goods, but the world buying market is soft.  Japan’s Yen, (currency) has strengthened, exports weakening and about a week ago announced that the country is now in recession.

With countries in the Middle East in turmoil a lot of money has come into the US stock markets and buying of our currency, the dollar. This has driven up the price of the dollar to recent highs compared to other world currencies. As oil is mainly bought and sold in US dollars this is one reason oil has dropped from the $100/barrel pricing. As the dollar strengthens oil will drop, at some point that will turn. The lower price for oil is hurting the profitability of oil companies here in the US, with possible layoffs in the industry occurring in the near future. Our break-even on a barrel of oil is currently about $57. The lower price of oil will benefit more people and countries than will be hurt by lower pricing. Saudi Arabia has a lot of cash available and can sustain low prices for a long time; I have heard this amount to be just under $1 trillion. Many believe it will be years before we see oil at $100/barrel or above. There currently is an oversupply of the commodity and more efficiencies in production have lowered costs. In the US the smaller, leveraged companies will find it difficult. Currencies of oil producing countries like Norway, Russia and the Middle Eastern countries have seen a significant drop in value.

Countries are trying to improve their exportation of goods, and building their weakened economies. Interest rates are at all time lows, so there is no room for manipulation of rates. The only option that these countries have, including the US, is to print money and weaken their currencies. The problem here lies with everyone following suit.  This will not help as currencies will be in parity with one another.

Many of the supposed “gurus” are predicting that the US will also start round 4 of Quantitative Easing, printing more money.  The reason here relates to all countries weakening economies and exports. Our recent rise in the dollar will have a negative effect on exports, thus corporate earnings will be lower, and the stock markets “should” trend lower. On the other hand, if we start QE 4 more money will go into the US stock markets, and possibly offset lower corporate earnings.  Another important note is that there are few safer havens for investments in the world than our stock market.

I just read an article by a well reputed person that adjusted for inflation the stock markets haven’t seen such highs since 1871 with the exception of about 3 years, 1998-2001, the “dot com” years.

Here’s some fun trivia. Ben Franklin was instrumental in starting one of the US’s first stock markets. The New York Stock Exchange began on March 8, 1817 at 11 Wall Street in Manhattan, NY.  The first governing/regulating of stock trading came about in 1792 with the Buttonwood Agreement. Ben Franklin, what a guy. Amongst many things he started the University of Pennsylvania in 1740. I went back to the University in 1990, with my now ex-wife who had a couple of degrees from there, to celebrate the 250^th anniversary.

Again, it is really “kick the can” down the road, trying to create good economies with leverage, but it is quite artificial. Interesting times ahead.

MONEY 54 - BANKING

THIS IS MY 54^TH BLOG ON UNDERSTANDING MONEY TOOLS

Let’s talk banking and a bit on the economy.  Banking involves a lot of things including money and the effect on the economy. 

First let’s go over employment again. Numbers came out that our unemployment has dropped considerably over the past few years, to below 6%. What good is this number? The importance is the number of people who have given up looking for employment, then under-employed, part time and full time jobs. Part time employment and under-underemployed make up a big percentage. Overall true unemployment most likely continues at about 20% of our workforce. A recent report showed that of the people working 34% are outsourced/contract workers.  This reflects that companies are trying to get around paying for benefits like health insurance and contributions to retirement plans. Employment and jobs are key to a good economy. The largest and most vital group to keep employed and pay a respectable wage is the middle class. A measure of unemployment “is important”, however wages are an equally important measure, and we are significantly lacking.

Secondly, important to the economy is money. Let us recap on this topic. Money has an all encompassing affect on the economy; the quantity of money in the market, the availability of this money, the supply and demand in relationship to interest rates of this money, and lastly the circulation of  money or as it expressed these days “V” or velocity of the money turning per year in the economy. As a baseline to a good economy we are far below the line of health.

Banking consists of three basic types, commercial, trust and investment banking. Credit unions, unique to certain groups, fall under this category.  We’ve described each in previous blogs so we will talk about commercial banking, especially how it has changed and employment for you inside the industry.

Commercial banking is what most people associate with a “bank”, savings accounts, loans, mortgages, money management and more.  Years ago bankers had a certain look and respect in communities. Many bankers dressed the part, men having three-piece suits, ties or bow ties, women with dresses. It was a people business as well as a relatively respected money business. The industry has changed as most businesses. The big banks have bought up or forced many small banks to close, consolidation.  Federal regulations after the industry collapse of 2007-8 forced major changes mostly with loans and mortgages. This has contracted the industry to about 6 major banks and holding companies.

If you are thinking of working in the banking industry it is not a bad place to learn the industry, and how it relates to business.  My mother worked for a small bank, and when the economy for oil/gas and real estate collapsed in the mid-1980s I spent 4 years with a trust company; trust companies being under state banking charters and regulations.

Employment has gone the same way as most industries paying low wages and hiring contract people on an hourly basis thus avoiding employee benefits.  Upward mobility in the industry is very difficult. Most banks hire younger people and train within to their standards. The large banks have investment departments, and normally will pay for your education and licensing. Licenses are issued to you, the bank as principal. If you leave their employment the license can be transferred to another brokerage firm.  Normally, you build a personal investment relationship with the bank’s customers. If you leave the bank to go with another firm many of the clients will want to move their money and stay with you rather than the bank, however note that the bank most likely will sue you for taking any clients. Such lawsuits typically can be settled or with considerable time go away.

There are many lower level jobs in the industry from tellers to backrooms for people with computer skills. Use the time employed to learn and advance your knowledge and skills.  Always keep your eyes open for another job. Companies many times like to hire people away from banks as they perceive honesty.

Some banks are offering only on-line services cutting costs. Year’s past you had a personal banker, and if needing a loan you sat down with a banker analyzing your needs. Those days are history. If you need a loan you are asked certain questions, your answers placed into their computers and an answer comes back quickly from their home base computer, not a human being with any of your concerns or special situations taken into account.

How else has banking significantly changed? Up until 2007 bankers were lending on asset based balance sheets. Now, banks do not care about assets but lend on earned income.  As there is earned and unearned income, this typically means you need a consistent paycheck every two weeks proving earned income.  Banks will want a three year history of income for a loan. Going from asset based to mainly income based lending to me makes little sense as a person can lose their job at any point these days. It does tell me that banks don’t trust asset values and liquidity in these tumultuous times.

Banks are making a lot of money off fees like credit cards. We have discussed that banks are not giving loans to middle class people starting small companies or retail stores. Not long ago a person could get an “operating line of credit” to help buy inventory and start a store, not today. This is a real problem for the US economy.

Instead of a low interest rate, logical line of credit for a store starting up, a bank may issue a credit card, non-secured line. Here is what all to often happens. Let’s assume that the bank gives “you” a credit limit of $40,000 at 10% interest, and you probably need much more than that to purchase inventory. This would be based on your personal very high credit score. Your store normally structured as a corporation cannot get a loan.  After a period of time the bank may drop the credit limit on your card, not what you are expecting assuming you are doing well and have paid the monthly statements. When the bank cuts your card limit, you have less available credit and rating companies lower your credit score. When your credit score is lowered, the bank will raise the amount of interest on your credit let’s say to 14% from 10%. Then, with the higher interest rate you can’t pay off as much of the principal carried month to month. Once this cycle starts people are seeing their credit card interest go up to 29% or more. It is very difficult to get out of debt, and banks know this and love it as a big profit center.

Try to stay away from carrying credit card balances over, even though it is difficult and sometimes impossible not to.

Commercial banks’ spread or gross profit lending margin. Years ago banks operated on approximately a 2% spread between what they took in from people’s savings accountants and what they lent money out for loans; not any more. (For instance, people would get a savings account at a bank and the rate was, let’s say, 2%. Then, people went to the bank for a real estate mortgage, car loan or business loan and the collateralized loan was at a rate of 4%.) Now, banks are borrowing at a discount rate and inter-bank loan rate of 25 to 50 basis points (this being 1/4 to 1/2 percent) and lending it out at 7 to 30%. I believe the old expression of “rape and pillage” is appropriate for this!

In past blogs we discussed two very important Act of Laws that would have prevented some of this, if they continued to exist, those being the Sherman Anti-trust Act/Law of 1890 and the Glass Steagall Act of 1933 which ended in 1999.

I recently heard, and believe it true, that the investment banks of Goldman Sachs owned coal mining interests in Columbia, and Morgan Stanley which today through mergers is J.P. Morgan/Chase Bank owned 100 oil tankers and millions of barrels of oil, both these situations of investment outside their normal regulated banking purview. With these large interests they could perhaps have an affect on commodity markets.

The current banking and financial/economic situation is a two edged sword. On the positive side there is such a massive spread between what banks pay on savings accounts (1% or less is normal), and the rate of interest banks are lending. This forces the American public to de-leverage by using discretionary income to pay off debt.  On the negative side, it takes discretionary income from the economy and Americans making purchases, thus inflation remains low as well as GDP.

Bottom line, no risk lending, no money for the middle class to start companies equates to no growth economy. If you are employed with a bank use the knowledge and experience to move ahead. Try not to get stuck in a slot with no future potential. Think outside the box!

I hope this is a good quick overview with some insight.

MONEY 53 - COMMENTS

THIS IS MY 53^RD POST ON UNDERSTANDING MONEY TOOLS

In this blog I thought I would comment on three areas that I feel are important these days; they are social interactions, the economy and today’s politics. (This primarily written before the November elections.)

I am going to let my subjective opinions flow. Although I read and study a lot I don’t have the academic qualifications or titles to stand behind my opinions.

First to social interactions.  It disheartens me every time we have an incidence where a troubled young person shoots and takes the lives of other students. This is not just a reflection on an individual but our society as a whole. We are all responsible individually and collectively, and need to be held accountable for a future resolve. Granted media coverage is so much faster these days with the internet, radio and television news brining us immediate details. This was not available 60 years ago or even 25 years ago. We know in a flash what has happened in any state or around the world.

I will date myself with some comments here. I think the USA had its best years after World War II. Men came back from war, but there was the unification in our country and a national spirit to get things moving again.  There was a need for goods, services and manufacturing was going strong, although we had built a lot of national debt just like with any war.

 In the 1950s the norm was that the father went to work, mother stayed at home and took care of household duties and raising the children. The father normally returned home from the workday around 5:30 and the family was united for dinner.  Then the kids did their school homework and played outside, they got exercise and were in better physical condition.

In the late 1960s things started changing with both men and women in the work place, more people immigrating to this country, and a definite divide on thoughts with the non-popular Viet Nam War.  Still people worked and socialized more closely. There was time in the day for quality of life, but life was changing.

In the mid-1990s came the individual computer with internet capabilities. Then came cell phones. Technology was really advancing; Microsoft, Dell, Apple….then, Google, Facebook Twitter and more.

Advance to today. There is little time for anything. The US workers have tons of work stress upon them.  It takes both husband and wife working hoping they can pay bills.  With this stress comes divorce, two households and more stress. You don’t see children playing outside after dinner.  America’s corporate workers have fewer vacation days than any of the top world countries. No one is really taking good care of the children, spending adequate time. What is adequate time? An old expression, however true, is that it takes the community to raise good children, meaning a unification of family (grandparents and relatives included), educators and schools, church, neighbors/mentors and more.

Go to a Starbucks or places where younger people migrate socially. They aren’t talking intimately to one another. They are sitting at tables on their cell phones or computers texting friends. We’ve lost human connection with one another.  Once we lose our human/natural connection to one another including verbal and non-verbal communication, emotions,  empathies, sympathies, laughter, etc. we have become robots, computers ourselves. With this comes intolerance, subjectivity, lack of objectivity, and some people go crazy. They can’t cope; shootings in the workplace, on the highways, and shootings in the schools.  The stresses to compete and place only number one. Number two is no good. Crazy. There can only be one number one. The rest aren’t losers, they are all participants and just as important. Combined participation is the important thing, you do your best.

I hope America and the world sees where we are heading with all of this, but I am afraid nothing will turn around. The desire to change does not exist with the masses. Many don’t care and many have given up.  The connection to the human race has been lost. Now, on to other topics, but they all tie in together.

What I talked about above regarding the 1950s was my baseline, or standard to work from. It is important for me to realize that each new generation has a new and different baseline to work from. An example of change can even be related to cars.  The Barrett Jackson Car Auction will again be coming to the Phoenix area. My father’s generation “hot car” collectables were the Model A and Model T Fords. They could relate to them. Now, the hot cars are the muscle cars of the 1960s and early 1970s, the Cobras, the Corvettes and the big engine Dodge’s like the Charger. People of my generation can relate to them. Is the next hot car for the younger generation to collect the Toyota Prius?

Second, let’s go to economics. We have discussed this topic in many previous blogs from different angles. Economics from a very basic standpoint is really quite fundamental that most people can grasp. GDP (Gross Domestic Product) and growth, or lack thereof, can only come from two places, the private sector or the public sector. Public sector being some sort of government job.

We have macro economics, the large picture, and micro economics, the closer range economics or the smaller picture.  We have supply side economics (supply and demand), and manipulated economics with interventions. A true market does not exist.

Let’s go back about 25 years when the first President George Bush wanted to vote NAFTA through as a trade agreement mainly between the US, Canada and Mexico. The Bill passed with President Clinton working well with both the Senate and Congress. Since then, more and more jobs have been lost with companies seeking lower wages and bigger markets abroad. This is not new to anyone. What it has done is make people more competitive individually and less a team player because there is so much competition for few jobs.

The sad lesson to be learned here is money buys. Big corporations don’t have your interests at heart as they have moved jobs overseas, and wages in this country are low and haven’t moved upward in 18 years. Companies are all about bottom line and “upping” the price of their stock. Behind the scenes few Americans know what is going on. A for instance, many doctors and veterinarians receive a dollar percentage of the drugs they prescribe. A person needs to look at special or unique situations to find good paying work.

Don’t forget Board members answer to stockholders. They also select top management. In “Understanding Money Tools” a great reminder is not your actual knowledge or ability to perform, it is your perceived value by others. Without mention of a name, I remember years ago a top airline CEO who managed to bankrupt 4 airlines. I always wondered how this good-looking man could get away with such a feat. He was perceived to be good. One thing he did accomplish, good or bad, was breaking apart union strength, and with that wages and benefits were lowered.

The sad thing about today’s economics is that we receive so much bogus information from the government and private reports that no one knows exactly where we stand. The government learned long ago how to measure things differently, manipulation of facts. To move the country ahead the government needs to ease up on regulations. The next step is to make money available to the private sector, middle class and small companies. Many politicians and corporations look at only cutting expenses. Yes, this is important, but more importantly is how to increase revenues and GDP. Right now we could use growth of 4-6% for a couple of years to make up for the past 7 years of essentially no growth.  I want to equate this to the corporate sector. Too many times companies are run by accountants or engineers who cut marketing budgets that include advertising and sales departments. Sales deliver revenues.

I have predicted a stock market correction for some time, but now it doesn’t look like we will have a major one. Historically, we have never gone over 1000 days without a strong correction of the market, but now we are well past 1000 days and the market continues upward or level. We have “engineered” a very artificial manipulated market. The investment community in general has only one outlet right now and it is the stock market. The Central Banks and our government including politicians will protect this market.  If the economy staggers too much, or if the stock market falls significantly “Quantitative Easing 4” will start and the Federal Reserve will authorize the printing of more US dollars. This money goes to the big banks and wealthy in the form of very low interest loans, and that money goes back into the stock market propping it up.

The dollar has reached new highs in recent months compared to the past few years. This has pushed the price of commodities including oil and gold down. This will help the American public with lower gas and fuel prices, however the high dollar will have an effect on large companies and exports. As many international companies are leveraged 2:1 or more on debt, for every one percent the dollar goes up, large corporate earnings should drop 2 or more percent, thus corporate earnings will be off.

OPEC nations could continue with strong oil production until we have a very significant over-supply and drop prices further. Most Middle Eastern oil producing countries have a very low cost per barrel for production, much lower than the US.  The dramatic price cuts of oil will hurt small US oil companies most as they normally carry more debt.  Russia just signed a 30 year agreement to supply oil to China. Russia intends to be a super power in the energy arena. A new book coming out mid-November is “Colder War” about Russia and energy, and will be an interesting read. (The author is Marin Katusa.)

While we are on economics, let’s talk briefly about international markets.  A current measure of countries strength these days has been debt to GDP (Gross Domestic Product). Some of the emerging countries have been getting a lot of free or low interest rate money the past few years from Central Banks and the International Monetary Fund. If the world economies continue to weaken this is going to be a problem.  In South America three countries stand out that could have big financial problems, these being Brazil, Argentina and Chile. Japan has had economic issues since the late 1980s. Even China may not be able to keep up with unprecedented growth and growing debt that has enabled its exports to be number one in the world. The Chinese may be forced to sell off more government owned assets including real estate to foreign or private parties to pay debt obligations.  Included in the list of debt-burdened countries are India, France and Italy.  I am a suspect person, so I will make this statement that perhaps the reason Central Banks have lent money so liberally to poor emerging countries is that if these countries cannot pay back debt big business and the wealthy can move in, take over assets and gain control.

A point I am making is that we are building tremendous stress personally, corporately and nationally. The world “kicks the can” of debt down the road, but at some point it cannot be maintained; a worldwide bubble will/should occur. Few care about people collectively or individually.

I will mention again that one of the sad things happening to the middle class is jobs and incomes not rising. We haven’t had an increase in middle class income since about 1996, yet there has been inflation. Even though inflation has remained low, if you compound it over this period of time it becomes significant, over 40%. (Inflation/deflation manipulation. Is it asset based or price based for a number? Calculations over what period of time? Does it include oil and gas or agricultural product?)

I work for new home-builders and they are now feeling a financial bind and lowering expectations. Nationally this is happening although some markets remain strong. (35% of new home sales are created by the big public home-builders almost doubling in the last year.) The small home-builder can’t get money. They have gone out of business or sold out to the big builders.) Here are recent facts: home ownership will slip to about 50% down from the highs of 68%, currently about 59%. The younger generation learned that home ownership may not be a good investment because of the devaluations from 2007 on. As of October, first time home buyers hit a low, the fewest first time buyers since 1987.  63% of baby boomers now intend to keep their homes versus sell and retire to warmer climates. People can’t sell and pull equity out of their homes they once thought was available.  Instead, baby boomers will renovate their homes to a significant degree,

The auto industry has done well the past few years but manufacturers are building financing into the sales of autos. Many people can’t qualify for bank loans to buy cars, but auto manufacturers will qualify these people for loans. This could result in a big problem down the road if people default on the loans because they lost their employment.

The US dollar itself is interesting. The Feds stopped Quantitative Easing (end of October 2014) and will wait to see the outcome on the economy. If necessary they will again start printing money. Here comes the interesting aspect in all of this. We have printed trillions of dollars of new money, yet the dollar has increased in relation to world currencies and we have very low inflation. Normally, if you dilute any currency the value should go down.  Also, inflation was predicted to sky-rocket and it has not.

In prior blogs we have discussed these reasons, but I will briefly hit upon them. We are in a state of total governmental manipulation, beyond Keynesian Economics. You can print all the money in the world, but if it only reaches a few sources, these being the wealthy who have the ability to borrow, and large corporations, you “ain’t” going to have inflation.  Measurements that are necessary here are the quantity of new money printed, availability to reach this money, “V” or velocity of the money to circulate through a given economy and Federal regulations.  Inflation is not a threat for now, but should be some time in the long term.

Regarding big business, what have they done with all these new dollars made available. For one, they have been buying back their own stock, assessing that it is relatively inexpensive compared to future projections. Corporations are borrowing money for next to nothing and issuing bonds at low rates. Then, with the money they buy their own stock and make the stock go higher. This is one reason you have had an incredibly strong stock market and many are expecting it to go higher and ignore fundamentals. Smells to me of a Ponzi scheme. (If you don’t know who Ponzi was, Google him.)

Elections and early voting are over. You saw political signs everywhere and advertisements on every TV channel. All the negative ads against the opponent rather than what someone could actually accomplish. Few details, positive or negative, are made public. Sad, but true, it has been found that negative ads are more influencing on the vote than positive ads. It’s foremost all about getting elected, there is no such thing as a righteous, honest approach to politics.

Locally and nationally what is wrong with public officials; they are voted in to serve the public.  Nothing has been accomplished in the past 6-7 years except to try to bail us out of a big financial jam. Politicians need to work together and attempt to guide the country for the betterment of all people, not just specializing on self interest groups. Term limits are constantly talked about, but nothing is done as no politician will vote for a limited term and put himself/herself out of business. This would help keep politics cleaner and get away from some of the long established conflicts of interest.

Another example of our growing lack of working together and intolerance comes along personal attitudes and party lines.

Tea Party members and right wing Republicans won’t debate topics, even over coffee and are very dogmatic. They are fixed on beliefs and non-flexible. As you get into more liberal thinking people they are willing to debate and seem to be less argumentative.

I don’t know if one is better than the other. I do know it takes working together to get things done whether in the corporate world or in politics. Perhaps a good oligarch, an autocrat would be good for this country. We’d have more change without a lot of debate. Could we actually find an honest one?

Are elections in this country more honest and above board than other countries?  My answer is no, we just approach elections and manipulate differently. Granted, we do not have armed guards at voting offices.  The people running for offices here spend more money than any other country on earth. Money buys votes. These are the special interest groups.  Special interest groups and lobbyists spend millions to push their candidates into office for special considerations. Once an individual is elected they are going to watch out for themselves, not you and me.

Bottom line, we have become a very individualized society, is that an oxymoron? Drawing the point of this blog together, we don’t socialize as we once did, we work individually, and our politics end up with our elected official serving themselves or small private sectors rather than for the long term betterment of America.

Periodically, it is good to remember that we are all made up of atoms and molecules, all the same, unique to ourselves, however no better or less than any other person on the planet.

Believe in yourself, don’t rely heavily on team effort, have faith, visualize your positive future and go for it!

MONEY 52 - SALES

THIS IS MY 52^ND POST ON UNDERSTANDING MONEY TOOLS

In this Blog let’s talk about selling as it’s importance in today’s world to get a job, or to do better in the job we currently have. Everyday selling is very important whether it is selling yourself, a product or service.

What brought my attention to this topic?  A week ago one of the large homebuilders told me they adopted a certain book on selling homes and wanted all the people in their national company to read it, which I also did. In my opinion it left 95% of true selling out of the picture. I won’t mention the name of the book or author, in respect for him and his theories.

In light of my finding the book incomplete, I thought I would hit upon some key points on selling that I have learned over the past 45 years.  Sales are sales so it really doesn’t get outdated much.

There are two types of sales people, one with the born, innate ability to sell and the trained salesperson. I guess I am of the trained ilk. I have attended sale’s seminars, been sent to national sale’s seminars, been forced into sale’s seminars, so you can imagine how dear I am to them. Each sale’s guru has a gimmick. Many put on costly sale’s seminars because they can’t make a living in the real world.

Okay, let’s jump into this. I am going to hit on several basics, some may seem too obvious, but I’ll cover them anyway. First we start with “you” and selling yourself. Let’s look at the company interview. Take a look in the mirror, do you like what you see, as the person you are selling to is going to see you the same way. The competition in the work place is incredibly tough so a person needs to be one step better.

-       Are you overweight and frumpy, get on a diet. It is proven the leaner      more attractive person makes more money.

-       How is your personal hygiene?

-       Women, are your gray roots showing, have your hair dyed. Men, you might try a little hair touch-up also. I am not kidding. It is against the law to discriminate about age, however many companies won’t hire over 50. Companies know exactly how old you are from resumes and social security numbers.

-       Is your hair clean or brushed?

-       If you are a woman put some make-up on, but not too much.

-       Men, a bit of after-shave is okay, but most people are turned off by too much perfume or cologne.

-       If you have tattoos cover them up, corporate America is very conservative.

-       Dress appropriately for the interview or the job. You can over dress and under dress. Dress to your market so they relate. If you are going to an interview and in the past have done well, it is still best to leave the Gucci purse, or Rolex at home. You are being interviewed, you want the job, you want the money, you don’t want the interviewer to be jealous of you, but relate to you. A friend’s son was recently hired by a large tech company. Once he had the job and inside his working environment I was surprised to find that he and others could wear shorts, T-shirts and sandals to his work place. Tech today has come a long way. They realize the most important thing for many employees is freedom, once the basics of money is covered.

-       Do your homework ahead of time. The company has an opening because they have a need or problem. You want to know what the problem is ahead of time, and you can solve the problem.

-       Do not bring up salary, but talk about  the position and the company. When appropriate the human resource person or interviewer will address compensation and then it is okay to discuss the topic.

A common thread to all good salesmanship is that you maintain control of the sale’s process without your customer feeling the least bit uncomfortable.

We are going to relate a lot of selling to new home sales because of the book I mentioned above, but it is the same for most sales.  The customer needs to be able to trust you and relate to you; want to have you over for dinner type of relationship. First, back to basics, dress to your market. Are you selling $200,000 homes to families, $2 million dollar homes, resort homes, or perhaps time-shares. Let’s leave time-share selling out of this, as it normally is very high pressure selling and unique. One shot at the market and you better sell them something.

Before the sales process begins we need product knowledge. You need to know every aspect of the product. You need to like your product or service and respect it. If you don’t have this attitude go on to another product, company or service.

The selling technique of “product features”, “benefits for you” lacks an emotional sale and can be used for selling such items as hardware, insurance, and other products normally less expensive and utilitarian in nature.  Interestingly, insurance is sold more out of fear. What will happen to you and your family if you die or are hurt in an accident? We are going to stick to the emotional type of sale, so we need to “paint the pictures”.

The term salesman, even though it shouldn’t, has a negative connotation as far as a profession with the buying public.  I try to get my customers to know that I am a knowledgeable “guide” through “the process of purchasing a home”. You do not want buyer’s remorse in the end. One negative comment will negate a hundred positives remarks. Referral business is very important. I knew a very successful salesman of insurance products, who won tons of sales awards and made a lot of money, but on the other hand he had the most cancelled policies in the agency; he over sold to his customer and when they found out, they cancelled their policies. To me this is not success, but immediate gratification.

There are several types of home sales. Let’s stick to new home sales and a new customer. The book I read defined a customer as one currently “dissatisfied” with their home or living situation. Right there I disagreed and would say it was one small part of the whole market place. I started in real estate in 1970 in Vail, Colorado, and have been in high end sales, land development or consulting.  My “clients” weren’t dissatisfied with their current homes, many had several, they just desired another home, or something new/different. Take for instance, the person who has a Rolex and Cartier watch. They may want an Omega, but are they dissatisfied with their other watches, no. I have friends who buy the latest high tech thing as soon as it comes out. Are they dissatisfied with their one month old I Pad, no, they just want more or something different and still keep the others.

Let’s relate it to an actual customer. The customer walks through the door. First, if you have an office, don’t approach too quickly or too soon, meet them half way.  This is one problem I have with car salesmen. They all stand around like vultures with nothing to do, except lunge when a customer drives into the lot.

Next, look the customer in the eyes, welcome them and introduce yourself shaking hands, be sincere, don’t be too rushed. If it is a couple you shake the hand of the man and woman, not just one. After that back off slightly from your position as you’ve entered their “space”. Leave your hands down to your side, or behind your back, this opens you up. Rarely should you fold your arms across your chest unless you want to end it with your customer, this will close off the relationship. Stand straight, don’t lean against walls. Through dialogue and comfort you will then come closer to one another and feel comfortable with that situation.

The next step is to talk about something other than business, small talk like nice day, you drive a car I admire, you have a very nice family with you, etc.

Here’s the scoop. The people who just walked in, walked in for a reason or purpose. You need to find out “why”.  Remember when you were 5 years old and you kept asking the question “why”?  After some small talk you need to ask important questions,  the first step I take is to ask the customer if I may ask questions, I am entering their “space”. This is polite and also gains access to them. This is necessary for effective selling. For instance, “why are you looking at gated communities”? Oh, you want quiet streets and safety for your children.  “Why do you want a large lot”? Oh, you want a swimming pool and have two dogs”.  “Why did you select this area of the city”? Oh, you want your children in this A rated school system.  Etc.  Why, why, why!

Many people are professional lookers at real estate, some people are redecorating and just want ideas, however some really have a want or need to buy. I am trying to find out three things about them. These three important things are, “are they ready, willing and able” buyers.  If any of these are missing you need to have a strategy. Most buyers are not ready, at least for that day, so you need for them to sign a “guest card” or sign in so that you know how to contact them in the future; who they are, how they came by the project, etc. This also monitors your marketing effectiveness. To some people this is an intrusion of privacy, but if you’ve gained their trust to this point they most likely will sign in.

Here is where we go with “ready, willing and able”.  Is the person able, by this I mean can they afford to buy or have they been pre-qualified by a bank to afford the home. This is a major obstacle in today’s financial world. Most people are not ready and willing today, so that is why you have them sign in so that you have their email address, mailing address and phone contact. You are going to wait a few days and send them a nice thank you for coming in letter with more information on the development.

You have time to talk with people while you are putting a package of information together for them including floor plans/optional floor plans, exterior elevations, price sheets and a subdivision plat.  If multiple customers arrive at the same time have a few pre-made to hand out. Now, you have one on one time with the customer and it affords you more time. They are a captivated audience, use the time well.

True customers of any product are normally never a 1 nor a 10 on the scale ready to buy, they are in the 4 to 6 range. One class on selling I took year’s ago said people are somewhere between 48% “no”, to 52% “yes”. What you need to do is educate them to the product or solve their needs so they shift from the 48%; (I have the money) to the 52% (you can have my money for the product).

I always use the total respect approach and mean it. I will use  “sir” or ”miss” or their first or last names to reinforce the relationship. Honesty and sincerity is what creates sales and repeat business.

If you are not totally positive on an answer, tell the person you don’t know or are uncertain, and will find out and contact them.  Too many “I don’t knows” and you don’t know your product like you should and you will lose a sale.

Know the percentage of customers you need to meet to make a sale. The sale’s manager will know. On less expensive homes you may have more lookers and more people not qualified to buy so it could be a 1 to 2% closing ratio. I have found that on expensive homes, wealthy people don’t want to waste “their” time, they may waste yours, but not their own! This closure percentage might be about 5% of the people who look at new expensive homes.

I introduce the customer to the front door of a model and then back off telling them that I respect their time between themselves to discuss the home in private, however will be there when they finish the tour to talk about any questions they might have.

Before they leave I recommend they come back another time of day to see how different the lighting is in the house, they should sit down, spend time and feel comfortable in the home. You are starting to “paint the picture” of how great it would be to live there.

I hope you received some benefit from this Blog. There are zillions of books on selling, but these are a few ideas that I hope will help you.

MONEY 51 - ECONOMISTS

THIS IS MY 51^ST POST ON UNDERSTANDING MONEY TOOLS

In this Blog let’s select four well known economists and view their theories on the best way to run a government or country. These men I am quite familiar with, but unlike most of my Blogs I needed to resort to doing more fact finding to get my history correct.

With each of these men books and volumes of information have been written so we will only touch upon their basic beliefs to keep this brief, and yet transfer a bit of information to you.

Let’s start out with a bit of fun trivia. I had coffee this morning with a close friend and academic who I love to debate with. We discussed several topics including the distortions of truths in our media industry, both right wing and left wing.  I chose education and how much of the information we learned in school is not accurate. Two topics I immediately went to was the history behind General Custer/the American Indians and the original political formation of the United States.

Here is a fun question for you, and one that I lost on a bet several years ago. “Who was the first president of the United States?  ” Everyone answers as we were taught in school, George Washington. Perhaps wrong?  Yes, the Declaration of Independence was signed in 1776, however George Washington wasn’t elected president until 1789, 13 years later.  There were several presidents before George. Some say the true political organization started in 1781 with the Continental Congress under the Articles of Confederation. John Hanson was the first elected president of the United States under this organization. We had 8 presidents before George Washington, and could perhaps count as many as 14, depending on how you look at history.  George Washington was president of the “First Continental Congress” under our Constitution where we separated the executive branch of the presidency from Congress.  We signed the United States Declaration of Independence in 1776, Did we not have a Constitution in place until the 12 Bill of Rights were placed into it and then ratified by all states in March, 1789? Did we not have presidents? Oh well, there goes accurate history out the window in our school system, or let’s say incomplete history. (For the inquisitive minds go to Google.com and put in “Who were the US presidents before George Washington?”)

Let’s start this endeavor with the person best known as the father of modern economics, Adam Smith, a Scotsman. In 1776 he wrote “The Wealth of Nations” which was actually 5 books. Before this, we must understand that Europe had little growth from the year 1000 until the early 1700s. The period called “The Dark Ages” had nothing to do with light, by the way, but instead nothing substantial was accomplished. One of the first changes was patent protection for goods. This was a claim to a uniqueness and gave value to a product. The two countries that embellished patents were the Dutch in what is now the Netherlands and England. Adam Smith accounted for many things including, but not limited to, economics.  For instance, in those times people paid for goods and services with either gold or silver. Because of corruption and scales being inaccurate a person couldn’t be certain if they were getting consistent value. Mr. Smith placed a measured value on these metals to start holding a constant.

Adam Smith was the first to divide labor into various categories, and place a value on each. He was also noted for assembly line work and efficiencies. A product could be made quicker and better if a person worked with others and specialized in an aspect of the whole.

Was he a right-wing or left-wing individual, hard to tell as times have changed so much that these definitions can’t be related to today’s world. He did believe in a free market theory, and “laissez faire”.  This French term is still used today and roughly means, “let the buyer beware”, versus governmental intervention. I am certain the world is even more corrupt today than it was back 250 years ago….greed then, greed unfortunately now.

Adam Smith believed that monopolies can cause interventions on pricing. This we see today in the US as our Anti-trust Laws have gone out the window, especially from the early 1980s until 2000.  Mr. Smith believed in supply and demand for the creation of value.

We’ll move on to another notable economist, John Maynard Keynes. Mr. Keynes theories were last used big time by George W. Bush in 2007-8 when the banks were failing, and big businesses like in the auto industry were going down. Mr. Keynes was English and died after WWII in 1946. He believed in “macro-economics” in doing what is necessary including government intervention to save an economy and smooth things out. Mr. Keynes believed in a balance of savings and its relationship to inflation or recession. In previous Blogs we discussed the importance of monetary controls set in place after the Depression by FDR in the early 1930s including the Bretton Woods Agreement. Mr. Keynes was a key figure in creating the Agreement and also England’s social reforms. Bottom line, free market thinking with government intervention.

Our next move is to another economist of today who believes in government intervention, Mr. Paul Voelker.  Mr. Voelker held the position of Chairman of the Federal Reserve from 1979 during President Carter’s reign until 1987 through most of President Reagan’s presidency. Mr. Voelker is a Democrat and continues to act as an economic advisor today.

Mr. Voelker is a hero to many today with his monetary intervention to curb the high rate of inflation primarily brought on from escalating commodities in the late 1970s.  At the time, oil was reaching prices of about $39/barrel; gold, silver and diamonds were rapidly increasing in value. Inflation was running at 13.5%. Similar to Adam Smith’s and John Maynard Keynes’s on how to control economies, Mr. Voelker intervened from a monetary standpoint and started raising interest rates to slow down inflation. The Federal Funds Rate reached 20% in 1981. This pushed the bank lending prime rate to 21.5%. Looking at supply and demand, fewer people could afford this high rate of borrowing and banks would not lend money to individuals and small corporations because they didn’t meet lending requirements. Unemployment soared to 10% very similar to post 2008. My  business interests then moved from real estate to the oil and gas business with Energetics, Inc., and we were immune to the high prices because of our profitability until about 1984. (Please see previous Blogs on this.)

Even today, Mr. Voelker’s approach to fighting inflation is controversial. My personal opinion is that it was wrong. One reason is that it hurt middle Americans. Yes, it proved “supply and demand correct”, however the cost of necessities such as food, home buying and mortgages went through the roof. High interest rate costs were passed on as an expense item by large companies, so they and the wealthy were little effected. Commodity prices crashed.

Next let’s discuss a couple free market theorists. Friedrich Heyek, an Austrian, later became a British and then an American economist. He was one of the great 20^th century economists. Mr. Heyek was a money supply theorist advising President Reagan and Margaret Thatcher. In 1950 he taught at the University of Chicago and met a man a bit younger by the name of Milton Friedman, “Uncle Milty” to many. They were friends but sometimes opposed in philosophy. A major difference between the two was that Mr. Hayek did not believe in manipulation of money supply to correct economies like Mr. Friedman did.  With a somewhat pessimistic nature he believed in waiting before reacting too quickly, and to watch and see if the markets would naturally correct themselves.  Both believed in supply and demand and that free markets would adjust economies.  Mr. Heyek believed that all citizens of countries were entitled to unemployment insurance and universal healthcare. He further believed that a country should create a “safety net” for its people to provide a minimal standard in food, shelter, clothing, and necessities for life. He was an advocate for same sex marriage, legalizing drugs and prostitution which was pretty liberal. Maybe the guy wasn’t all bad!  He stated that the best form of capitalism was seen in Hong Kong, China. I have traveled to Hong Kong and it is an inspiration to any capitalist reflecting beautiful architecture and an abundance of money.

He, like Milton Friedman, was invited down to Chile when President Pinochet took power as a dictator and inflation was running rampant. His advice to Mr. Pinochet was the same, control inflation through money supply. (Here is an offshoot to our topic. I went down to Chile in the mid-1990s and had studied the country well beforehand. Even though President Pinochet was brutal and a dictator, he brought many good things to bear for his people. Each citizen has his/her own retirement account and felt comfortable to be able to retire at retirement age. Pinochet set up the branches of defense after the world’s best; the navy being trained and patterned after England, the army after Germany, and the air force after the United States. When I was there President Frei held the office, a good German. I attended a celebration held in the city center of Santiago, and the army proudly paraded in Germans dress with helmets and high leather boots “goose stepping”. Great country to visit and very nice people.)

Lastly, let’s take a look at Milton Friedman, one of the “Chicago Boys”. Mr. Friedman died only a few years ago in 2006 and had great influence over 20^th century economics. He taught at the University of Chicago’s School of Economics. As fore-mentioned he knew Friedrich Heyek well. He also went to Chile and Argentina and met with the dictators of those countries who had problems especially with inflation.  Milton was another supply and demand, free market economist. Sometimes free market can best be implemented an autocratic dictatorship.

Mr. Friedman had certain views. One was that every country has a certain degree of natural unemployment, this being around 4%, as many people just don’t want to work.

To synopsize here these are a few of his theories:

-       Opposition to a Federal Reserve System that has major controls.

-       An expansion to money supply that brings forth some reasonable inflation.

-       Minimal government interventions.

-       An actual negative income tax; putting as many incentives and money back into the system. If deflation exists, no incentives.

-       Money and supply system all-important for good values for a country, which can be traced back to the 1500s.

-       If price deflation exists there is no incentive for people or corporations to invest in the future.

-       He was a major advisor for President Reagan during his presidency terms.

Now, we will leave these economists behind and talk about one other topic that concerns economics, and that is “Fascism”.   Fascism began in Italy.  “Neo-fascism” gained its name after World War II. It is an economic theory/philosophy that believes in authoritarian views, especially between the government and private sector.  President Franco used Fascism in Spain after World War II until 1975, and President Peron, a dictator, used it in Argentina. The basis of the theory is that the “state is all important”.

With this philosophy in place one can see how Italy and Germany came together in World War II besides the natural geographical locations.  Hitler believed in nationalism and unification. There are parallels in many of the European countries and the United States that existed before and after World War I and today. This winter being somewhat bored, somewhat interested, I went to my local library and checked out “Mein Kampf” (In English My Struggle by Adolph Hitler).  Hitler wrote the two volume book in 1924 while imprisoned and then first published in 1925 and 1926. It is a rambling writing, but he was in jail, most likely bored with nothing else to do but write. The book could be consolidated to about 100 pages versus 900 pages, and a worthwhile read.

George W. Bush and the Federal Reserve Bank implemented Keynesian theories in 2007 after the destruction brought on by Wall Street, mis-rated mortgage derivatives and poor bank regulations. The strategy was so different from Paul Voelker’s actions. Government intervention this time lowered interest rates.  Lending money was, and is, only to the wealthy and large corporations, not to the middle class therefore there is no money circulating and no inflation, although money supply has significantly increased We, as a government of power, and control over the Federal Reserve Bank selected which companies survived and which did not. Lehman Bros and Bear Stearns of Wall Street went down, Goldman Sachs which does tons of business in alignment with the US government, including overnight trading, cannot be touched.  No corrupt white-collar worker who I have ever heard of has ever gone to jail. The tax payers took stock in General Motors.  AIG, Moody’s and others got a big bailout, Chrysler Corp, needed to go private. On and on, not ethical, not proper, not right but the way it was.  Fascism? Definitely government intervention, and beyond.

Let’s analyze how the US Government intervened in the pure free market and supply side economics over the past 80 years. In October, 1929 the stock market crashed and we began a worldwide depression that lasted about 10 years. President Franklin D. Roosevelt intervened with government money for a Works Progress Administration or later called Works Projects Administration (WPA). This program was designed to put unemployed people back to work on public infrastructure projects such as public buildings, roads, dams and bridges. Some of our great reservoirs came from this period such as Hoover Dam and Lake Meade in Nevada started in 1931. In this “government intervention” we employed people and it worked.

As previously discussed we had a real bout with inflation in the late 1970s caused by very high commodity prices and demand for products, goods and services.  In this case Mr.Voelker intervened and raised interest rates extremely high so that borrowers of money no longer had the desire to borrow at the rates banks were willing to lend. In this case there weren’t limitations on the supply of money, just the cost of money that brought down inflation.

Next case 20 years later and we move to 2007-8.  As most of us have witnessed this one first hand, banks were failing, there was little government regulations over lending practices and the world had was dipping into recession.  We have known this to be “The Great Recession”.  Even tough it is reported that we came out of the recession several years ago, growth has been minimal at best, jobs are part time at low wages and we periodically have quarters of negative growth like first quarter 2014, a negative 1.7%. 

George W. Bush followed Keynesian theories and intervened, in conjunction with the Federal Reserve Bank.  The government selected which companies were bailed out with government money and which were not and let them fail. Unlike Mr. Voelker, Mr. Ben Bernanke, who took over as Chairman of the Federal Reserve in 2006, decided to lower Fed Discount Rates to 25 basis points, or 1/4 of one percent. Along with this there was the need for more money to assist banks and big business, so the Federal Reserve started printing money in stages known as “Quantitative Easing”. To date the Federal Reserve has printed approximately $4.5 trillion. Also, this printing of money diluted the value of the dollar thus making our manufactured goods in the USA more appealing to other countries.

Very strict banking regulations went into effect for the average middle class person wanting, or needing, to borrow money. This “easy money lending” was and is only available to a select few, these being the US Government, big businesses and the wealthy. The average person has not enjoyed this ride to wealth as they don’t have the same income levels they did 14 years ago with little money, or none, to invest after paying for necessities. In fact many middle age and older people are taking money out of their retirement accounts to live.

Central Banks around the world have made “easy money” available now for several years. I watch as poor countries get into debt they most likely can’t pay back, thus leaving themselves vulnerable to big corporations and the wealthy. They move in to control assets, mainly commodities such as oil and natural gas.

This has been a fun Blog for me to write. When you write, it reinforces your thoughts.  We have seen that free markets really work best under autocratic governments. Without controls of some sort greedy and monopolistic corporations come into the picture.  Therefore, there is no possibility for free markets and supply side economics. We most recently saw what has happened since 2007 with similar tactics as Fascism and government interventions that diminish the middle class, only aiding the wealthy and big businesses.