MONEY 38 - ECONOMY

THIS IS MY 38^TH POST ON UNDERSTANDING MONEY TOOLS

It has been quite some time since I have posted a blog on this site. If the mood sets me in the direction of writing I write, if not I don’t.

I have watched the economic reports over the past few months so thought I would express my opinions.

Let me start by addressing “Quantitative Easing” which is actually the printing of money since the bank crisis starting in about August, 2007.  The banks were failing and Mr. Bernanke had to step in and do something with Federal Reserve controls over monetary rates and disciplines.  Just like trying to take a weekly allowance away from your children, I don’t think we will cut off Quantitative Easing, which has reached close to $4 trillion.  If we did, it would most likely throw our economy into a recession.  Wall Street, the banks and big business are living off essentially free interest rate money. It hasn’t reached you, me, or the middle class. It has bolstered the stock markets. Can this be sustained, who knows? Right now, cycling price to earnings ratios are about 25 to 1 or approximately 10 points above the average of 15 to 1.  The capitalization of companies is at absurd levels, and that right now is about 60% above the norms. Many of these companies don’t produce any bottom line earnings, nor have large employee bases that would help our economy. In light of this, I would estimate our DOW Jones Industrial Average to be about 4,000 points higher than it should be, and in the range of 11,500 to 12,500. Interest rates should increase slightly, and the markets are quite manipulated so who knows, up or down? Many stock traders believe stock market up, bonds down for 2014.

With a contrary opinion, the rapid rise of the stock market from a low of about 6,800 in 2008-9 has reached ridiculous proportions; almost doubling in value since then.  With our economy all investments should parallel in performance to some degree and that would be approximately 3%. This applies to real estate, bonds, stocks, etc. Bonds being the most conservative of these three, so perhaps a little lower in returns. As our growth, GDP, has been tepid at best, why should the stock market dictate these high prices? It reflects too much money chasing stocks, and you all know what happened in 2007-8 with the real estate market. The nice thing about stocks is you do have liquidity. With higher interest rates you will see weakening bond prices.

Is there going to be significant inflation like so many thought there would be back in 2008 when this printing of money began?  I don’t think so for a couple of reasons. First, banks are not lending money out to the middle class and certainly not the poor.  Instead of raising interest rates like Mr. Voelker, head of the Federal Reserve, did in about 1979-1980 to curb inflation, the banks are not lending.  Therefore, very little of this newly printed money is circulating. Without circulation of money there is no significant inflation. Although Mr. Voelker is credited with proper decision making when the interest rates went sky high, 18-20%, he didn’t realize that these high interest rates would need to be a pass through on essential goods to the people, thus adding fuel to the fire of inflation.  Secondly, our population is aging. We need to have 2.2 children per family to stay constant with population attrition. The average family is now producing about 1.2 children. The USA population increase is because of people migrating to this country. Unless the new immigrants come in with significant money, they don’t have money to inflate our prices. Older populations are deflationary. Older people are more conservative, don’t spend as much money on consumer goods and therefore non-inflationary.

The International Monetary Fund and world banks are in a de-leveraging mode. They want less world debt, country debt and individual debt. They are accomplishing this, but it reduces optimal GDP.  Such countries like Japan have been in stagnation since about 1988.  Projected GDP for Japan is only approximately 1.2% growth in 2014. The US, England, Japan and other major countries are not only in a de-leveraging strategy, but a devaluing of currency strategy to make their goods produced more attractive on the world market.  We, the USA, then pays back our debt on bonds with a cheaper dollar.  Emerging countries continue to extend credit as their economies grow with new and successful companies.

Education is a must, however we must have jobs for the educated coming out of school.  Right now our job creation for higher paying jobs is very poor.  For any country to be strong it needs a vibrant middle class, which is waning as I write.

A healthy economy is somewhat inflationary, (3-4%), however not just here in the USA but much of the world is deflating.  The significant growth in India and Asia might be the exceptions. Deflation keeps people from purchasing hard assets because they decline in value over time.

The stock market is bolstered by companies being able to book their profit and losses here in the USA, but don’t need to bring their profits back into the country. Today, there is over $1 trillion in corporate money sitting outside this country, and not doing our economy any good. Yes, the excuse is that our high corporate tax is 35%, but if you look at what the big companies pay in tax rate it is far below that rate, or next to nothing. They just don’t want to pay any taxes, and this really places the tax burden on the dwindling middle class.

The family dream of buying a home has changed. Young people want different things these days, they are not getting married, they are renting instead of buying, they are staying flexible so if a job opportunity came up some other place they can move in a second.

It will be interesting to see if Janet Yellen, taking over as head of the Federal Reserve on February 1^st , will institute different money policies or follow similarly to Ben Bernanke.

Subjectively speaking, it would be wise for the Federal Reserve and Government to ease up on borrowing restrictions for the middle class so that we can start new small businesses in the USA, and keep jobs here. Small businesses don’t move jobs overseas, big companies do. Inflation would be healthy at a level of 3-4%, excluding farm and oil prices for two or three years. Try to move away from the deflationary trending we have had, it is very destructive for consumption and moral in this country.

Try to locate in vibrant areas where there are high paying wages, a younger population, plenty of opportunities available and where people are moving into the area, not from the area.