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.