THIS IS MY 58TH 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.
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