MONEY 86 - THINGS

THIS IS MY 86^TH BLOG ON UNDERSTANDING MONEY TOOLS

Let me start out with an explanation. I call my blog Understanding Money “Tools”,  it could have been Understanding Money “Things”.  I thought that “tools” was a practical application for topics discussed where “things” is pretty broad, and also mundane.

We’ll hit two topics in this blog. The first has application in today’s world; where we are headed, the second is more from a historical, interesting note.

In the latest blogs we looked at tremendous private and public sector world debt, and how this has happened with the World Central Banks and our Federal Reserve printing unheard of amounts of money.  Because of this situation we’ve looked at the possibilities that should occur down the road, these being inflation, and a tightening of money with a liquidity problem, thus the inabilities to pay debts.  Now, let’s look at the world in terms of how we obtain our world gross domestic products in relationship to exports.  No conclusions will be handed out as I am wrong more than right these days! (A good example of that statement is the day the Feds raised interest rates on December 16, 2015. The stock market should have reacted with a downward trend, the DOW closed up 245 points, go figure.)

If the G-20 countries are going to continue with economic strength the strongest being the US, China, Germany and a couple others, we need to see where the money for goods comes from and what percentage is from exported goods. It is no hidden news that almost every country has weakened in the past few years and many in downright financial trouble. If a country can “self-sustain” there are fewer variables. If a country relies on selling product around the world, the variables increase….makes sense?  Even though the USA is not in great shape with the weakened middle class and so little savings by the average person, we are in better condition than many.  Exports account for 13% of our Gross Domestic Product.   The strongest country in the European Union, Germany, has two opened ended variables, these being the estimation of costs with current immigration, and secondly their exports make up about 45% of their GDP.  If the world doesn’t buy their premium goods, they could be in trouble. I thought China would have been comparable or above Germany, but it is not close at about 23%.  China has such a growing middle class absorbing goods and services they are way behind Germany in this respect.

There are a whole “slew” of countries in the 30% range on exported goods, some being Russia, Italy, Britain, and France.  I would have thought Japan was quite high, but it isn’t at about 15% along with Brazil at 12%.

I recently noticed Germany has hired 8500 teachers to teach their immigrants German. I surmise that part of the immigration intent is to create a false internal economy supported by taxpayers. This will help absorb a tremendous amount of goods and services, lowering the economic need to export as much; it is estimated that Germany’s commitment to the immigrants will cost $1 trillion US over time.  Also, this will keep their Euro circulating within Germany. To a lesser degree perhaps the same may be true for the immigration to the USA. It is good for basic business essentials; everyone needs housing, clothing, food and medical/pharmaceuticals.

Except for nationalism many traits of Fascism have developed here and around the world. Fascism was started by Mussolini in Italy, then adopted by Hitler in Germany and Franco in Spain in 1947. In the US with the economic collapse in 2007-8 the government selected which commercial banks and Wall Street investment banks would survive and which would not be “bailed out”. Certain large companies were given government “hand outs” including money for expansion in foreign countries. Down goes Democracy and the rights of the middle class, and the financial burden lies with the middle working class.

The next topic concerns our Constitution and taxation. This came to me via a book I recently read, but thought it so interesting that I would relate the highlights to you.

Up until 1913 there were no Federal Income Taxes. Two important dates here are 1909 and 1913. 1909 was the writing of the 16^th Amendment to the Constitution permitting the Government to have the ability to Federally tax the people of this country. It took until February, 1913, for the states to ratify the Amendment (Ratify: to sign or formally consent).  Many of the politicians at the time were Republicans and didn’t think the required number of states, 36, would make it law. President Taft, a Republican, was president when written. The tax would have been very low at about 5% and only affect a few very rich.  Thomas Woodrow Wilson, a Democrat, won the presidential election in 1912 and a more liberal point of view was taking shape. (Don’t forget that 1913 was also the year we started the Federal Reserve Bank and system.)

Here is the kicker.  Was the ratification legally binding, and is the 16^th Amendment law?  Many people have contested the legitimacy of the Amendment and lost.  There were a few things that happened with the ratification process bringing question; one was the number of states needed and secondly a couple states changed the writing and format of the ratification.  Any changes were against the law; two states in question here were Kentucky and Tennessee.

People and companies have lost in court over contesting federal taxation. The court/judicial system right to the top is caught, and can’t do anything but stand behind the ratification. Can you imagine if it was overturned the amount of tax dollars, plus interest, that would need to be returned to all the people and companies; trillions!

In regard to this topic you might find it interesting to look into Haym Salomon who was a broker and helped finance the Revolutionary War converting French loans to cash, and supposedly lending to the War efforts, including some personal money.  You will find a memorial to him in Philadelphia, Pennsylvania.  He stands out with the next person I address.

One individual who contested that he owed taxes was Andrew Mellon, Treasury Secretary from 1921 until 1931. He was very wealthy and an advocate of low or no taxes, questioning the validity of the 16^th Amendment.  A grand jury declined to indict, although a fight over personally owed taxes with the US Government and his adversary President Roosevelt continued until after his death in 1937.  His lawyers and heirs won all legal actions. Andrew Mellon believed that we might also owe Mr. Salomon money all the way back to the Revolutionary War.

I hope this blog including a brief bit of history was of interest.

MONEY 85 - FEDERAL RESERVE

THIS IS MY 85^TH BLOG ON UNDERSTANDING MONEY TOOLS

This past Wednesday, December 16^th, 2015, the Federal Reserve Bank raised the interest rates 25 basis points (1/4 of 1%).  Let’s have some fun discussing the Federal Reserve with some basic understanding.  The Feds have not raised interest rates in almost a decade, last time being in June, 2006. We’ve been in an economic downturn (recession), a banking collapse (2007-2010) and then, I love the word spun these days, “tepid” growth ever since.

Who is Chairman of the Federal Reserve Bank?  Janet Yellen. The person heading up the Federal Reserve is always referred to as Chairman whether a woman or man. Please forgive me if some of this information is repetitive of prior blogs, but I am getting older and can’t remember what exactly I wrote in the past.

I realize I’ve covered this before.  The Federal Reserve Bank has 12 regional districts in the US.  The “Fed” acts similar to world Central Banks for other countries. The Fed is a depository for money, non-profit, money is borrowed inexpensively, it transfers money to the US Treasury as needed, provides liquidity, buys and sells securities (bonds), and attempts to balance financial markets, thus hopefully avoiding financial disruptions including recessions and high inflation.

Is this need for a bank new in this country, no.  After the Revolutionary War  we were starting a new country with a new currency; we had banking needs and discussed a “central bank” concept.  Every war ends with costs/debt that puts a country in dire straights. The Revolutionary War no exception, and every war since.  The Federal Reserve Act was passed when President Wilson was in office on December 23, 1913.

Let’s look at the possible reasoning the Feds raised interest rates (besides throwing darts at a target, or perhaps a ouija board).

-       The Feds say the economy is “robust”. One of the longest periods of growth, however there is almost no growth to speak of being below 2%, and that is not ideal. If we look at growth cycles and recession cycles we are ready for a recession. If the Fed raises interest rates quarterly in 2016, they can lower rates in the future to help the economy; supposedly.  ( Low interest rates haven’t helped over the past 7 years so why now? Our good economy from the oil and gas business in Texas and North Dakota is now “bust”.  75% of rigs are idle and unemployment sky high in that industry. That is why the government is not including farming and oil/gas in their new economic numbers.)

-       Concerns about high inflation down the road. Reality check: to have inflation in a country there needs to be more money (M1) which there has been to the tune of about $4.5 trillion.  Then, there needs to be availability of money to the masses of people, which there hasn’t been. Then, money needs to circulate “V”, standing for velocity, and there hasn’t been any. Money needs to circulate through a society one to six times a year, each time it is taxed for goods and services by the US Gov’t, State Gov’t, County Gov’t and finally City Gov’t. The dollars also need to remain within the country not be given to other countries and used on wars outside the US.

-       Even though the Feds sold $21 billion in bonds in October at zero      interest rate yield showing the perception of US strength, if the US weakens or if there is an alternative strong currency to the US Dollar we may not be able to sell bonds at low rates. The Feds would like to sell off up to $2 trillion in bonds over the next couple of years and get that amount off the balance sheet. Up until the need for the Treasury to print huge amounts of money in 2008 (Quantitative Easing) the Fed never had such exposure to debt as they do today.

-       A token higher interest rate should help older people on fixed incomes in the hopes that banks will pay something better on savings accounts and certificates of deposit.

-       Unemployment dropped to 5%, close to “full employment”. (Truth of the matter is that there are now over 94 million worker age people, many desiring work, but no jobs except the lowest paying, thus a total of 144 million Americans on some sort of government benefits. Average worker week dropped from about 34.7 hours to about 34 hours, meaning new job reports reflected part time, low wage jobs and employers avoiding paying benefits and pensions.)

What are some of the negative issues with the rise in interest rates?

-       It will strengthen the already strong US dollar.

-       A stronger dollar will make exports more expensive and less attractive. Our trade imbalance with foreign countries will increase especially with the new Pacific Trade Agreement.

-       Companies will need to pay more for everything, thus cut back on spending and improving equipment such as computers and machinery. With less spending inflation will be brought down to nothing and perhaps go negative.

-       More likely the rise in rates will precipitate a recession.

-       Less employment, not more.

-       Emerging countries borrowed money with bonds getting paid mostly in US dollars, thus they will need to pay back more money as their currency has weakened.  This eventually will make them less likely to be able to pay their debts permitting large companies and the wealthy to “cherry pick” their assets.

-       The US debt will increase. Newly issued bonds and sold will carry higher interest rates.  Current interest on our debt is about $500 billion/year.  The newly passed budget doesn’t reflect anything toward interest payments. The US debt is reaching $19 trillion, and when future US obligations are placed on top the total comes to around $100 trillion. No way out except if you are a magician.  The other options are ugly, default on bonds, restructure debt, or keep printing more money eventually being very inflationary.  Raising taxes only diminishes growth, GDP.

Higher interest rates will affect you and me in these areas:

-       Adjustable Rate Mortgages “ARMS” will go up.

-       Auto loans will be more expensive.

-       Credit card interest will go up.

-       Financing computers and office equipment will go up.  All short term financing!

Long term mortgages (30 year mortgages) and debt have already built the rise in interest rates in quotes.

There is a big liquidity bubble happening. Private equity money is diminishing, and that includes private venture capital for new companies. The “big boys” are getting very concerned. In countries around the world including the USA both private and public debt has reached phenomenal highs, this being measured as debt to Gross Domestic Product.  The highest being in Japan right now.

Let’s hit upon a couple more things while on this blog. Economically we can’t get our rears in gear. There are some reasons obvious to me.

-       Much of the world is in recession, why should we be an exception when we are in a world economy?

-       We killed a couple of the most purposeful Acts in our history in my eyes, these being the 1894 Sherman Anti-trust Act to prevent the “big boys” meaning the wealthy and large corporations from killing middle class small companies and consolidating, and the very important Glass Steagall Act of 1933. The Glass Steagall separated financial industries to keep specialization in and collusion out.

-       Paul Voelker meant well as Fed Chairman under President Carter and controlling hyper-inflation brought on mainly from oil pricing in the late 1970’s (for those of you who remember 20% interest rates). Voelker re-entered the scene after the banking crisis of 2007 and helped design and pass the Dodd-Frank Wall Street Reform and Consumer Act of December, 2013.  (Wow, exactly 100 years after the passing of the Federal Reserve Act.) The Act meant well but has impeded growth and logical bank lending. It was written to prevent banks from speculative loans, and proprietary investing by Wall Street Banks. What happened, tons of paper work, the need to document everything, banks deciding not to loan at all, and the shrewd managers with the Wall Street firms leaving and forming hedge funds which are not controlled by banking laws….reminds me of the great movie, “Dumb and Dumber”!

Here is an example of bonds gone bad/a country needing money/banks not lending. I am sure you have heard that Puerto Rico couldn’t make payment on bonds. They are now going to hedge funds in NYC and elsewhere and these hedge funds want 20% interest. Like sharks whether it is Puerto Rico, Greece or someplace else, there is always money to rape and pillage!

Viva the Federal Reserve, hope they made the right decision raising rates!

MONEY 84 - PLANNING

THIS IS MY 84^TH BLOG ON UNDERSTANDING MONEY TOOLS

We have talked about planning in personal life as well as planning in the corporate world.  I thought I would address those two subjects in a different light. Recently, I had a discussion about this with a retired successful businessman.

We have referred to the “New World Order” in past blogs.  As many of my blogs are written relating to my history of common sense, analysis, and rational thinking I do agree times have changed.  Everything and everyone is moving so fast these days, next to impossible to keep up. Planning seems to be difficult, and I am starting to agree with that.

For the individual the best words of wisdom would be is to continue education and keep up with “cutting edge” technology.  Show loyalty to yourself first, and keep your eyes open for opportunities, move on the opportunities quickly, some will be successful others not.  Stay in motion and interact with people, don’t get too absorbed into your own world staring at your computer at Starbucks!

On the corporate side of things we also talked about planning, basic structure, pro-formas, etc. The same applies here as with your personal life, hard to keep up.  There are so many mergers and acquisitions in today’s world, plans set forth three months ago may be out the window today; prices change, interest rates go up, world currencies change to the US dollar.  What was deemed to be an equitable return on investment may not apply.  Business presentations are all electronic received on cell phones and computers, no longer hard copy using paper products.  The business technical structure has brought with it expected huge returns on investment; gross profit margins especially technology products made in Asia can be huge. 

The allocation for technology running your company versus the human being may change very quickly. Dominance in an industry sector is all-important, or a nitch in that sector.  Younger people think of new ideas, get in, get out.   That is why the venture firms are also referring to “outs”.  Make money, get a good tax law firm to legally circumvent paying as much tax as possible and move on to the next idea.

As you need to get abreast of market needs when being a consultant or possible employee of a company, let’s approach two subjects from a learning standpoint.

In our first example, you have probably heard of Anders Ericsson’s 10,000 Hour Rule?  If not it basically states that it takes 10,000 hours to really learn a new subject, complex situation or to be a great athlete in a given sport. That is a lot of years! You don’t have that much time, and as stated things change. In Ericsson’s Rule, know that the Rule is to be the “best of the best”.  The learning curve is exponentially upward at first in almost everything, and then starts tapering off. Bottom line here is get good at what new endeavor is necessary, but you don’t need to be the very best. Many times you can finish that final learning on the job.  If this is to make money, knowledge has to serve a purpose.

The next learning subject is how and when we learn.  I’ll revert to Piaget’s Theory of Development; at what ages you mentally and physically change and learn.  Hate to tell you this, but your greatest learning, about 80%, comes in the first 8 years or so of life.  In ages 4-7 curiosity takes over and a person really learns.  I realize you are older than that if you are reading this boring blog, however you can take a look at your current environment and with whom who you socialize and hang out with. Look out for yourself.  Are you “hanging” with the types of people and in the environment where you want go?

Good luck!

MONEY 83 - STOCKS/WORLD THINGS

THIS IS MY 83^RD BLOG ON UNDERSTANDING MONEY TOOLS

As I am in one of those moods to write, I thought I should grab the opportunity and write about two things, the current stock market again and world thoughts.

First, this morning (12/7/15) while in conversation with an astute business friend he reminded me that we are in a “New World Order” when it comes to investment models and paradigms of value. There has been so much money printed worldwide, that the old no longer holds true.  In venture capital it is called “outs”, with many stock investments it is last sucker out takes the fall.  We used to invest in stocks, now we gamble.

Let me cover a synopsis of some of the economic letters I receive. The stock market values have stabilized at such highs something needs to break.  Perhaps Silicon Valley has reached highs with the stocks we have mentioned before. One stock I didn’t touch upon is Uber, $50 billion capitalization and wanting to borrow more money, and no profits.  It is a great concept in a very socialized environment, however in the USA is it real? Many people who sign up to be Uber drivers don’t realize they should contact their auto insurance agent for extra coverage.  They are now a “commercial driver”.  I spoke with my insurance agent in regard to Uber and Lift. Here is the scoop.  When you as a driver pick up an Uber passenger the app connect to Uber then insures for liability, but only for that drive. If you had an accident while in service, your auto insurance company would most likely deny collision insurance coverage on your car, and an injured passenger could sue you and Uber or Lift up and above their liability policy.  The business model is “nice” but should it have much value, realistically no, it is just another service business with no real assets.  The other note here is that the US is the most litigious country in the world. Don’t have any doubts that a lawyer would go after you in an accident.

Some of these over-valued companies are taking their stock to banks around San Francisco and pledging it for hard money debt. With this money they are entering into building real estate.  These stocks have no value except when there are buyers who will pay a certain high price.  If that goes away there is no value, and I don’t want to see the middle class, including myself, having to bail the banks out again. Bottom line Silicon Valley in most senses has reached bizarre highs.  We are entering a presidential election year so be very wary of what the media and government puts out; same goes for Wall Street. What should happen?  Weakening, unfortunately and perhaps recession in 2016.  If the Federal Reserve raises rates, a stronger dollar increases the likelihood of recession.  A lot of pressure is being placed on the Feds to raise interest rates to help the elderly with bank savings accounts, and because we haven’t raised rates in many years.  The US sold about $20 billion in short term, 3 month, bonds at a zero interest rate in October, however the longer-term rates are higher expecting an interest rate hike or inflation. The 30 year mortgage rates went up about 15 basis points some time back expecting the Fed to raise rates, however whatever happens the rates may come down slightly again. Higher rates hurt home sales and the economy.

China is printing more money, same with the European Union while dropping interest rates.  That alone could push us into recession. What compounds this being very real is many countries are going to negative interest rates for investors to warehouse money.  If the Federal Reserve raises interest rates, I believe it is only a matter of time and it will be forced to lower rates; perhaps start printing money again.

We should see money in the stock market seeking stable quality blue chip companies, thus large cap stocks with solid assets should outperform smaller capitalized stocks.  Risky bonds and emerging country bonds should be hit hard.

Employment numbers were pretty good, unemployment stated at 5%. October manufacturing also looked pretty good. A closer look tells us employment may be part time with the average work week at 34 hours, a long ways from a normal 40 hours, and no benefits.  October’s build up of inventories most likely is attributable to the expected Christmas and Holiday buying. We will see if manufacturers can unload product. Higher paying jobs accounted for very little.  Again, look at the entire economic picture, not what the government presents.

As mentioned before, I communicate daily with some pretty healthy minded people on various topics. I thought I would relate some of it through this blog, although I am not sure how it pertains to Understanding Money Tools. Perhaps it can be used to think ahead with economies and industries that may be the best for jobs and more.  Much of this is my personal opinion, your thoughts may differ greatly.

We start with what is current and on so many minds, the worldwide immigration mess. We took out the “queen bees” in several Middle East countries and the bees have flown, long-range outcome not determined or well thought out. We all know some of these countries being Afghanistan, Iraq, Libya and Syria.  The long-term financial obligations are astronomical. These cultural changes especially in Europe, and to some degree here, will offer opportunities, such as in the health care and pharmaceutical industries. Those industries have to love this as many of the immigrants have diseases and are sick; this includes a high degree of mental illness and stress. Another employment opportunity will be in the education, training and teaching arenas including languages for these people. 

I don’t want this blog to go on too long, but I will comment further. We’ve made some poor decisions especially over the last 15 years that appear there is no recovery from. The four countries I mentioned above from the Middle East had dictators, but that has always been their custom. They were all contained countries in “no fly zones”.  To me it seems that no political figure in this county who makes decisions on foreign matters has ever been educated on history, prior to making monumental world decisions. Everything boils down to “cause and effect”. 

Permit me to explain.  There have been several “empires” during the past 2500 years, some being (according to Google):

-Greek Empire-800BC to 600AD

-Roman Empire-753BC to 27BC and then 64AD to 1453AD, the strongest being in 117AD

-Spanish Empire-1492-1800’s

-English Empire-1851-after WWI, by 1922 it controlled over 1/5 of the world’s population

-French Empire-1804-1815 and then 1852-after WWII

The commonalities for each Empire’s failure was the same, these being hegemony, power, greed, imperialism, expansionism, multi-cultural, lack of unity and nationalism, high taxation, and more negatives.  Apparently, and unfortunately, this is human nature.  Economically, there is normally an inverse relationship between taxation and growth and the welfare of a country (today we measure it in terms like gross domestic product). Most of these Empires, toward the end, taxed the hell out of the people.  All the money went to the kings, queens and royalty; no such thing as sharing for the betterment of the masses.  Not much has changed over the last 2500 years, has it!?

America has followed many of the same mistakes.  Major mistakes were made by politicians after two big wars, WWI and WWII.  Stupid decisions were made in the many of the Middle Eastern areas dividing countries the way “Western Powers” wanted them divided, but made no practical sense based upon tribal cultures, languages, and religions.  For instance, we divided out Iraq into one country when you had three distinct tribes that were basically at war for years. Iraq should have been divided into three areas or countries.

We see the power and greed in the Middle East over oil and gas. We watch the various controls and power plays in this area, one being the Syria–Iran-Iraq pipeline.  Another is a pipeline from Qatar to Turkey. Joe Biden’s son, Hunter, is on the board of directors of the Ukrainian gas company (Burisma Holdings) to help secure oil and gas rights for US companies. Trace a lot of Ukraine’s problems back to US major international companies like Monsanto, Dupont and Cargill well positioned in the 8^th largest agricultural country in the world. Our hegemony is played out all over the world.

I hope you find some of this information of interest.

MONEY 82 - JOBS/THINGS

THIS IS MY 82^ND BLOG ON UNDERSTANDING MONEY TOOLS

It seems that to arouse my interest to write one of two things has to happen, something peaks my interest, or irritates me. In this blog we’ll hit both.

Irritation.  A neighbor and friend of mine talked to me last week about their son, age 50, surprisingly being laid off from a very senior management position with a major company.  To help you on your employment quest and career I want to address this issue as it is all too familiar.  This “son” had been devoted to a major publicly traded company for years and believed job security existed, and that he someday would retire from the company with a beautiful pension and health benefits forever; wrong.

I believe we have covered most of this in prior blogs, but let’s cover it again so that it is fresh. Today, there is no such thing as job security.  When you reach the age 45 with the big companies, watch out. A few things are occurring: you’ve reached a high salary level, you are closer to vesting in your pension, you are getting older and health issues may start happening thus lost days at work, workman’s comp, liability and health insurances are higher with more aged employees, and more. Unless your talents fit a select position with another company, human resources is most likely not going to consider you for a position if you are over the age of 50. Discrimination, yes, against the law, yes, but that is the way life works.

The bigger the company the worse it gets. Everything is about stock price with public companies. Who usually owns a great deal of stock?  The wealthy and the Board members.  Who selects the Board of Directors? The stockholders. What does the Board do in hiring the very top management, favoritism. Right below the very top management are the “expendables”.

It is quite unfortunate that America has turned out to be this way. What happens many times with an “expendable” is at that age they can’t find employment equal to what they had, and many times not in the same capacity. Many of the big public companies own several hundred small or subsidiary companies and you are “blackballed”. If you don’t know the expression, it means untouchable. Why is that?  You carry so much information in your head and out the door, other companies are afraid to hire you. If you use similar information, design, marketing, business paradigms, etc. with a new employer you and that company could be sued.  Many times lawsuits are brought forth only to impede progress for another company, or that individual.

This same situation happened to my youngest brother who was the youngest employee ever to head up an international division of one of America’s biggest companies. The company had him downsize the division worldwide over a couple years, laid him off, and everyone was afraid to employ him as his former company owned over 300 other companies and his knowledge would be carried into a new company. He had to change careers later in life. Another prime example was a good friend and my financial planner working for one of the major US banks.  Around 40 years old he had an opportunity to buy into an investment group under a broker/dealer being a competitor of the investment side of his bank. He had a family with four children and needed to grab onto the opportunity. He left the bank, did not solicit any of his clients, however I, and many others, followed him out the door. As you can surmise the bank sued him and the broker/dealer for “stealing” clients. It was ludicrous, but took about a year to resolve with legal assistance. They impeded his progress in this profession and tried to starve him out.

What can we learn form this?  Foremost in life, a very good education or training is necessary. Then, try to structure your life somehow on a “flowchart”.  Unless you are lucky, or unlucky, enough to have family money you need to work to make money.  I referred to “unlucky” because easy money may take away healthy stress and pressures that make you need and want to be successful on your own, and max out whom you are as a human being.  The two avenues you have are to be an employee or an independent contractor. These are in your earning and learning years.  On your “flowchart” you should have two other elements that cover your ass later in life around that 45-50 age bracket.  One is to start your own business to leverage your time and knowledge, and two is to have accumulated enough money that you can live from investments.  Sometimes easier said than done!

Savings for investments. Unless corporate America wakes up and pays employees more, people in America will not be able to purchase product.  There is an old story regarding something similar. Many of Henry Ford’s friends couldn’t understand why he paid his employees more than anyone else. His retort was simple, but truthful, “so they can buy my cars”!

As mentioned by me several times, two very important Acts of Congress have disappeared over past years, the 1890 Sherman Anti-trust Act and the 1933 Glass Steagall Act.  Both these Acts protected smaller companies, the welfare of the Middle Class and competition in business and pricing.  The Anti-trust Act prohibited monopolies in business and large companies getting so large they could destroy small businesses through pricing. The Glass Steagall Act was created after the financial crash of 1929 separating banking and commercial activities. Specialization in the financial arena, and the idea of too big to fail. (As we all saw and felt in 2008.)  Big business and the large banking/finance corporations lobbied until politicians and Presidents cratered and these Acts no longer exist.

Okay, so the above are my irritants, let’s get on to investments and something a bit more interesting.

Wall Street continues to amaze me with their dribble. The weakest world economy since the Great Depression and all seems to be fine at 11 Wall St, New York City.  The market’s strength is held up with basically fewer than 6 companies, those being the likes of Amazon, Facebook, Google, Netflix and let’s toss in Twitter.  Well over $1 trillion in market cap, and so little to show. 

Junk bonds and bonds from emerging countries that borrowed far too much based on their commodity assets are coming to terms; the most bankruptcies since 2009, every company and country went out to borrow money. Emerging countries hard asset commodities like gold, silver, copper, and oil all through the floorboards. Many of these bonds will never get repaid. Some countries in order to maintain their interest payments have had to increase yields 200-300% and sell more bonds; Ponzi schemes at their best.

Here is what many don’t realize. Let’s take oil as the commodity of choice. Oil is hovering around $41 per barrel. Perhaps some countries can break even at that price for production, however many need the price to be $70 to over $100 per barrel to pay their debt and bonds. It doesn’t bode well for them.  The same goes for copper and precious minerals.

The next thing that is current and I find interesting is the expected increase of interest rates by the Federal Reserve and consequences to the economy, stock market and world trades.  Interest rates are normally raised if the economy is very strong. This time rates have not increased in years and it has hurt the elderly living on fixed incomes; no interest paid by banks on savings.  Even Ralph Nader has gotten into the mix on this issue.

Along with the expected increase in interest rates, the strength of the dollar should go up.  This will hurt our exports, and increase bond defaults if refinancing is necessary.  Also, it will be of interest to watch the International Monetary Fund to see if they admit another currency or two to their existing basket. With China being the supposed second largest economy in the world their currency, the Yuan, may be admitted joining the likes of the US Dollar, European Euro, Japanese Yen, and Britain’s Pound Sterling.

So much for this trivial pursuit.

MONEY 81 - ECONOMY

THIS IS MY 81^ST BLOG ON UNDERSTANDING MONEY TOOLS

In this blog we are going to look at various information that affects money and your employment. We mentioned in previous blogs that the government manipulates figures/statistics to reflect an image that they desire on the economy, however not totally the whole picture. This happens with both the Democrats and Republicans, so the party in office is inconsequential.  Also, we have mentioned that our government measures many statistics differently than other countries, so comparisons are impossible.

With that said, let’s face some issues, and contradict what the government has published. After the economic reports for October came out Chairman Yellen, of the Federal Reserve (yes, she is a woman and the position is not gender differentiated), may raise interest rates soon, because everything looks very favorable and job reports were excellent. There is reportedly extremely low inflation, so that is not a problem, and a healthy economy. Right?

As I have mentioned before, I farm some land in Wisconsin so I went to the Wisconsin Farm Bureau to see if food prices including dairy have gone up. Yup.  They report food prices are up 2.7% this year; that is inflation felt by everyone at the food store. Here is what the government has to play with. They use at least three measurements for inflation and only take measurements in larger urban centers. Two of the measurements are the “Consumer Price Index” used as an index for prices of consumer goods and services over a given time period and the “Personal Consumption Expenditure”.  PCE is the measurement of consumer spending on goods and services, thus directly related to GDP.  Most of the inflation and robust economy comes from the increase in drugs and the health care industry, although food has played a part as noted above. It is not an overall measure.

On the other hand here is a reality check. We are a world economy. Japan, even with printing tons of new Yen, announced today (11-16-2015) they are in a recession. Europe is a mess, along with other major countries. Are we different? The employment number looked great for October, but here is what you didn’t see. Older people, ages 55 and up accounted for 380,000 new jobs, men ages 25 to 54 lost approximately 120,000 jobs. I know this doesn’t equate to what the government announced at 271,000 new jobs, but it came to me from a reliable economic report; close enough.  The latter age bracket is the higher wage-earners who have families, and are the spenders. What does this mean? I am going to assume that older people don’t have the means to retire so they continue working at lower paying jobs, especially with the Holidays around the corner for seasonal retail.

The new word being bantered around is the “Financialization” of the USA and world. What is this?  It means that we are no longer an economic measurement of supply and demand, however a governmentally manipulated instrument as an outcome from our over zealous Keynesian Policies. Two distinct areas come to mind, one the printing of a country’s money and two the holding down of interest rates not associated to a free market policy. This doesn’t relate to goods, services and employment.  Goodbye middle class. In history, every time the government tightened money supply or raised interest rates the DOW Jones Industrial Averages went down. Will it be consistent in the future?

This Financialization has forced a ton of money into world stock markets. It has helped the wealthiest as 85% of all assets in the stock markets are held by that group.  What has this done to our middle class worker and earnings here in the USA? I looked up wages over the past 15 years and it is startling. All income brackets except for the top 1% are down.  These are approximate, but here is what I came up with. The lower 20% was hurt the most dropping 17%.  As you go up the income level the drop was less significant, but still existed.  Even the top 5% had a drop in income, only the top 1% had incomes significantly rise. What shocked me was that 72% of all US workers make less than $50,000 a year. How do you support a family of four and have any money left over, or try to buy a home, or have any savings for retirement?

Before people jump for joy over employment numbers they should consider some of the variables such as part or full time employment, W-2’d workers or 1099’d, wage level, seasonal employment, average age hiring, benefits/no benefits and so much more.  With the October job numbers we added to a negative number; we went from 93 plus million Americans working age not in the work force to over 94 million. These people are not contributing to the re-building of a better America or are being shut out.

As so many people know, over 50% of young people under the age of 25 are still living at home with their parents. They have tons of student debt, putting off starting families, staying single, and trying to find respectable employment.  Even “children” (excuse the pun) ages 18-34 represent 40% still living with parents.

Certain areas of the country continue to do well. One of the best is Los Angeles. Wow, over $7 billion in new real estate development in downtown, what is with that? $6 billion out of $7 billion is with Chinese money, not the USA, and a lot of the profits will go back to China.

If you are looking at retail for employment it is industry sensitive. Some of the biggest retailers are closing up stores; these including Macy’s and Target.

Americans need to be more concerned about the quality of life, long term, not short term.  The figures above don’t bode well for the long term.

MONEY 80 - RULE 72

THIS IS MY 80^TH BLOG ON UNDERSTANDING MONEY TOOLS

This is going to be one of my shorter blogs on Understanding Money Tools, however if you don’t know this information already, I think you will find it quite useful.

A friend asked me how to quickly approximate returns on investment so that he could do this in the “field” without having to revert to his cell phone calculator. This is especially handy when discussing numbers with potential investors.

There are two common methods.  One is really broad in scope and that is the Rule of 7 and 10, the other is the Rule of 72.

The Rule of 7 and 10 can be worked two ways.  If you use 7 as the number of years it takes to double your money on a compounded basis your interest rate is 10%. If you use 10 years to double your money your investment is being compounded at 7%.

The Rule of 72 is more accurate and will apply to more varied interest rates and time lines. 72 is commonly used as the number is very divisible by many numbers.  The same application applies as the Rule of 7 and 10. As an example, let’s say we are offered a 4% return on an investment. How many years will it take to double my money on a compounded interest basis? 18 years. Simply divide 4 into 72 and the result is 18.  Conversely, if you know your money will double in 18 years, divide 18 years into 72, your resultant interest rate is 4%.

If you want to be more exacting with the time frame or the interest rate, use 69.3, or round up to 70.  This will give you a closer number, however you most likely will need to reach for your calculator!

MONEY 79 - WORLD ISSUES

THIS IS MY 79^TH BLOG ON UNDERSTANDING MONEY TOOLS

Many issues are happening in the world today beyond money tools that are going to have an everlasting impact on all of us.  In this blog I am going to hit upon various topics and try to make an understanding of what and why things are occurring. With this I will make some personal guesses as to outcomes.

Let’s start with the US. The world economic downturn is having a profound effect on US companies, it has to.  Our media is given statistics from the government that is very manipulated to the point of being not accurate and untrue. Let me point out a couple examples. In regard to Gross Domestic Product (GDP) the government is now eliminating two industries to provide a rosy picture, these being the agriculture and oil/gas industry. When oil was above $100/barrel and we were creating numerous jobs the government loved adding the good numbers into GDP and employment, however now eliminating that industry. The other is agriculture, sometimes it is added in, sometimes not, currently not. The reason for this I know all too well as I farm 55 acres of land in corn. Currently, all costs amortized into a bushel of corn is $4.25. The current market sales price for a bushel of corn is about $3.50, which is a loss of $.75 for every bushel of corn produced. Either the government will need to subsidize this loss or farmers will go out of business.

Every time we have an election year statistics will be slanted to favor the party in office, and attempts will be made to avoid recession. A recession during an election year will kill the party in office, and that party running for election.  Take a look at 2007 as an example. In August, 2007, our banks were broke and our economy near collapsing. George W. Bush tried to keep this news a secret, and even Senator John McCain running for president said our economy was in great shape that September. Many things lead up to that disaster, and starting in 2006 the decline had already begun.

Right now our government is trying it’s best to keep the negative news from the media and reaching the American public. We have a ton of “bubbles” happening once again. The government along with the Federal Reserve is caught, and has no answers. The loose big money from the Quantitative Easings ($4.5 trillion) reached big banks, including Wall Street investment banks, big corporations and the wealthy. As mentioned many times before, the money never got to middle-America and small businesses that make up this country.  70% of the US economy is based upon consumer spending.  If the discretionary and available money doesn’t reach the middle class economically we trend downward.  With this we’ve created a mess. Let me explain. If we go into a slowdown or recession the Federal Reserve cannot lower interest rates further, but will need to print more money as Japan, China and the European Union are doing. For the past 6 years big US corporations have refinanced and increased their debt with low interest rate bonds. The world is now flowing with bonds, especially junk bonds from emerging countries that will not be able to pay off debt. Government debt, municipal debt and personal debt have all increased. The reason that this is so disastrous is that county, city and personal incomes have either stagnated or gone down. Bottom line, defaults.

Wall Street and the stock markets are interesting these days. Wall Street and the stock market is manipulated, not a true market. Remember that Wall Street members are “extractionists”, they add little value and make their money extracting money from investors on each trade. Big money is made from their merger and acquisition departments and the law firms representing all parties concerned.

The values of the markets are very inflated especially with only two sectors doing quite well, those being the drug/health care industry and staples (necessary items like food).  Costs in the health care industry have risen 320% from 1999 until 2015. This cannot be sustained.  Today, a family of 4 is paying over 20% of their income on health care costs. The rest of the industries like transportations, even finance, are down with the energy sector falling the most. Why is the stock market falsely high? It is because of all the money we printed headed into it, and foreign money seeking American stability. The banks and wealthy individuals control about 85% of the total value of the markets.

Here is another manipulation by the government to keep costs down. For 2016 the government has decided not to raise social security payments that are indexed to inflation.  The justification is that lower gas prices have been passed on to the social security recipients, and therefore balances out inflation. Not all retirees drive, although transportation costs for merchandise would be affected.  While we are on this topic let’s point out that because of the lack of restraints on the pricing of US drugs, the government is raising the price on Medicare Part B between $50 and $250 per month (this amount varies as to each individual’s adjusted gross income). This is going to have a profound effect on retired, fixed income people.

Okay, back to basics. 2 plus 2 should equal 4.  Cause should have a relationship to effect. To keep interest rates artificially low what have we done?  The Federal Reserve has bought in our debt, China and Japan have bought about $1 trillion each of our bonds to keep our trading relationships. Saudi Arabia has also bought a lot of US debt; favors for the USA.  

Let’s look at the pros and cons of keeping interest rates at a near zero level:

Pros:

-       Higher stock market values.

-       Lower interest rates for consumers on most products and mortgages for buying homes.

-       Less of a deficit each year as interest on US bonds is low. The US still runs about a $500 billion          and growing deficit each year.

-       Fewer defaults on bonds from emerging countries.

Cons:

-       Tough on consumer savings and retirement accounts.

-       Artificial Keynesian theories employed too long.

-       Pension plans, many under-funded and not meeting projected returns.

Currently, here in the US as well as most of the world, we have a deflationary trend. Some countries have gone to negative interest rates, we may also. What this means is that banks will charge their customers a rate to hold dollars and savings.  Electronic banking and credit cards usage will increase.

This negative deflationary trend will only last so long and then we will have a good deal of inflation from all the money printed, and waiting too long to raise rates permitting the real free market to prevail.  Unfortunately, bubbles will burst and the stock market and real estate markets will go down in value, or should go down.  Everything cycles.

Let’s take a look at the new Pacific Rim Trade deal, is it good?  I don’t know, but from the basics I don’t think it will be good for small business owners in America or the middle class worker. Why?  What we are doing is permitting many more emerging countries into our trading agreements.  As the hourly rates in India and China have gone up for workers and an increased middle-class appears we are seeking new countries where labor is even less expensive.  The big American companies will use this in their favor, so it is not bringing jobs back to the USA.  In retrospect the NAFTA deal was not good for the US labor market either. The government states that it will benefit the American products to be sold abroad, but I don’t think that is the case as our goods are expensive.  We only export about 12% of our goods as we are net importers and this will only increase our trade deficit.

One last comment on what is happening worldwide and the long-term effect it most likely will have on us here. In the last 6 months the hot topic has been immigration from the war in Syria. Yes, Syria is a mess. The war and disaster in Syria has only given reason for mass exodus out of the Middle East and Northern Africa. Only 20% of the refugees going into Europe and being implanted into the US are from Syria, the rest from Afghanistan, Iraq, and northern Africa.  These people have a totally different culture, religion and value system than Westerners, and they will change the countries and areas that they migrate into.  It has been stated that countries like Germany need workers. It has been estimated that the German integration of immigrants with their vast needs including education, language training, housing, clothing and feeding will cost approximately $1 trillion and take years; assuming these immigrants will agree to being trained and want to work.  I don’t see where there is any return on investment for the German people in any respect, even though this is a humanitarian endeavor.

Before we leave this blog let’s think through some material issues that are going to impact you, me and jobs.  I will hit these quickly.  Recently released news was that the US ranks 18^th in the world below China and Viet Nam for quality of life, we certainly rank very low on happiness.  We must face the truth as far as a nation that we are all in this bed together. To be a highly ranking country we need to be more socialistic providing free education and health care.

Next, there are many Republican candidates (I am an independent voter, by the way) that want to do away with the unification of workers such as unions and cut back on public sector jobs. Here is where they haven’t thought through the issue. There are currently 1.8 public sector jobs for every private sector job. The average public sector job pays considerably more than the private sector job. We cannot lessen the public sector employment until we have private sector jobs paying equal to or greater than public sector jobs or we will be in a depression.  In the 1920s one out of every three people worked for a wealthy family, then came the Great Depression, then came FDR’s public works programs, then we were coming out of the Depression, then the Republican Congress voted against the money spent on the public sector and we sank back into recession. And then, unfortunately the Japanese bombed Pearl Harbor and that regained our focus and spending of government money again.  That public sector job program lasted until about 1957.

If we cut public sector jobs and union jobs you also include fire and police protection. As I come from Milwaukee let’s use that as an example. After WWII it was a successful union blue color city and safe, good place to raise kids.  Then, jobs were cut because the auto business and other industries went abroad to Mexico and Asia.  Detroit’s collapsed economy flowed over to Milwaukee jobs. The current governor, Walker, first broke the teacher’s union, and then worked on eliminating public sector jobs and cut budgets. The outcome has been on the news the past two months; Milwaukee now is the second most violent city in the USA.  Cause and effect!

Let me lay forth some basic economic principles and statements to embellish your understanding of money and money tools.

-       First to the US income statement. Even though the US government is 

borrowing at close to zero interest when selling US bonds total revenue is expected to be at approximately $6 trillion and expenditures expected to be $6.5 trillion, leaving another growing annual deficit of $500 billion. There is no answer to turn this trend except raise taxes. (We derived this income from $3.7 trillion in income and payroll taxes, $1.6 revenue from Social Security, $1.4 trillion in Ad Valorem taxes and $500 billion from fees.)

-       There is an inverse relationship between taxes and GDP. In the

USA the average growth rate from 1790 to 1999 was 1.9%. Because of wars and deficits and the need for higher taxes, GDP averaged 1% between 1999 and 2015.

-       Keynesian economic policies work well for a short term, however not long term. At some point in the near future we need to get back to a free market of supply and demand, and the Federal Reserve will need to raise interest rates. (These being the economic policies of Friedman and Hayek.)

-       There is also an inverse relationship between interest rates and the world bond markets.  When interest rates go up, the market value of bonds go down. Emerging countries will be struggling to pay interest.

-       As interest rates go up the stock market will go down. Investors will tend to go back into bonds and fixed income instruments.

-       The printing of money by a government is not inflationary by itself, as we have seen. Money needs to circulate into society, especially the middle class and to small businesses to have any bearing. The other variable is “velocity” (V). Velocity is the speed at which money circulates annually through society. If cash is hoarded and not spent there is no inflation.

-       Public and private debt is out of control in the USA, similar to most countries. Currently, the combination of this debt is 370% of GDP.

-       The world’s economy is in the weakest state since the Great Depression in the 1930s.  If you are thinking of starting a new business think two or three times before proceeding. There are several TV shows covering new business start-ups. What they omit in saying is that 90% of these new start-ups fail.  There are reasons for failures, amongst these are:

-            No normal risk bank lending. 
-         Private money wants too much for the use of their money and if the venture is                                       successful these people would just as soon try to take it from you.

-            Big business and retailers will try to crush you on pricing and keep

          competition out of their market.

-            Business plans and proformas not well thought out.

-            Business start-ups under capitalized.

If we trace this mess back to year 2000, it becomes quite obvious what got us into it; wars and defense spending, too liberal lending policies, and wanting people to borrow expanding our economy and hegemony.

Life is not only knowing how you will become successful, but in what ways you can remove the variables and impediments on the path for becoming successful.

MONEY 78 - ECONOMIES

THIS IS MY 78^TH BLOG ON UNDERSTANDING MONEY TOOLS

For you to understand money tools I feel it is important to understand certain dynamics that go into governmental financial policies both in the USA and worldwide. Your employment and investment future will depend on your basic understanding of both micro and macro-economics.  Everything is “cause and effect”.  At the moment there is a ton of stuff happening and it will have an effect on all of us down the road.

Let’s start out with last week’s Federal Reserve’s decisions.   Fed Chairman, Janet Yellen,  (yes, from my understanding it doesn’t matter if the head of the Federal Reserve is a man or woman they are still known as Chairman) decided not to raise interest rates. More manipulation of money, more Keynesian philosophy and less reliance on free market policy. The odds were 50-50 that the Fed would raise interest rates at least 25 basis points, which is 1/4%. The decision not to raise interest rates was based upon the world’s financial turmoil and weakened nature of many countries; China’s uncertainty getting most of the blame.

China’s growth is still quite good because of mass and momentum, and should still result in a GDP of about 4%. They have been huge buyers of commodities in past years with their growth taking in about 50% of the world’s iron/steel, concrete and copper for building. Their future depends upon internal consumption and close monitoring of debt and diminishing production. China, unlike us, is very tight-lipped on finances, and very closed when it comes to sharing information outside the country.

I think larger problems exist. One is the worlds’ economies are weakening and deflation is a real problem, not inflation. If we had raised interest rates our already strong US dollar would get stronger, more people would desire our bonds, it would help retirees and people on fixed incomes with savings, but it would hurt our exported goods and international business. 

In a parallel note, the government needs to pass a new budget and with that borrow more money. If interest rates had risen the cost of money for the US Government and new budget would only be larger. We have major problems here in this country similar to countries around the world.  We are not unique nor isolated.

Let’s add a couple new numbers to the pie. These are from news reports, not from me. As reported the unemployment rate dropped to 5.1%.  On the other hand, numbers that you don’t hear often are that the unemployed who have given up looking for work, the underemployed, and non-accounted workers desiring to work rose to 94 million, while 46.7 million people in the USA live at the poverty level. We are getting near election time; we need to make numbers look favorable!

Here is another stumbling block for the Feds.  Preceding all recessions commodity prices drop; and they now have been dropping for some time. If the Feds had raised interest rates we could lower rates again when and if a recession hit.  That option is now off the table. There are only two other options in a future recession, one would be to start printing money again in the form of Quantitative Easing IV, the second option would be to ease lending policies for middle class Americans. As we have discussed in previous blogs the government printed about $4.5 trillion in new money, however it never made it’s way into “mainstream America” and the middle class. Part of this reason was the new banking regulations, being overly restrictive thanks to the Dodd–Frank Act that many people don’t understand. Did this act help or cripple the recovery in America? A bit of both, I am afraid.  With the “over regulation” of the banking industry and low rates, banks are not lending to small business or risk.  Therefore, more business and money goes to big business and the wealthy, not where it should go.

The world’s economies especially in Europe are going to have a tough time because of the unexpected amount of immigration going on from the Middle East turmoil. These are millions of people needing things. Most countries can’t afford the financial drain. Germany is accepting a great number as their own population recedes. For years the expected growth rate for a family was 2.2 children, it is now far less and even less than one child per family as in Germany.  For every death, they need a replacement worker. There are two variables here. One variable is the assumption that the immigrants they take into the country will want to work, the second variable is that the future demands for workers will lessen with more factories running on robotics and requiring fewer employees to work.

Several years ago Italy needed more labor workers and encouraged Polish people to migrate into their country. This was a more natural assimilation into a country because of race, color, cultures, religions all being very similar. With the current Middle East immigration of people into Europe none of these similarities are in place. In the long run European countries may be in for a culture change.  (If you are interested in further exploration on this topic Google “The Moors and Islam” and the effects on Spain and Portugal from about 800 to 1492AD.)

The majority of the millions of immigrants heading to Western nations are not from war struck Syria, but from other countries like Afghanistan and Iraq. What I don’t understand is why other very wealthy Middle Eastern countries like Saudi Arabia and Qatar are not offering asylum. Here the assimilation into their populations would be easier with the people speaking similar languages, similar cultures and similar religion.

Why have I addressed the above issues quite heavily?  This week Secretary of State, John Kerry, announced the US would take another 200,000 immigrants into this country. These people will compete for lower end jobs, and also be a burden on society until they can become independent; this means taxes will further increase.

Quickly, I will touch upon what reports I receive regarding the stock market. In general, the consensus is that we are in a bear market, not a quick correction. The world economy shrank the most since the Great Depression. There are too many negatives pulling on the markets. Two current negative issues are the possible Government shutdown again come October 1^st, and financing for Planned Parenthood in the budget.  Yes, there will be turmoil, but the overall trend should be down as we are due for a correction. The stock markets are very manipulated and not a true free market; it is controlled by the wealthy and the bankers. Wall Street is putting perfume on a pig!

We have discussed strategies to protect your gains in the market. Many times it is best to hedge your positions versus sell stocks and pay short or long term capital gains. Another hedge to the market is the precious metal gold. Definitely around $1,000 an ounce gold seems to be a recommended buy. Right now gold has taken off because of the world concerns and it is priced around $1,130/ounce.

I hope this has been a constructive, learning blog for you.