THIS IS MY 66TH BLOG ON UNDERSTANDING MONEY TOOLS
It is now mid-April and some time since I wrote a blog.
Recently, I have had many conversations with people discussing various
financial and economic topics that concern the US as well as the world. Because
of this, and may I subjectively say my frustrations with the mess at hand, I
thought I would write this blog. Perhaps some of this information will help
you, or at least inform you of certain facts. Little can we do to change
anything, but here in the States we will be having political elections again in
about a year and a half. Study up
on each candidate running for office before voting. I’ve always believed that
voting party line is not wise.
Let’s start at home with the USA. How is our economy, has there
been any effect from the QE’s 1, 2 and 3; financially where are we heading?
First, let me say, as I many times do, that I am not an economist or the
smartest person. I gather information from many sources, and my friends and I
share this information with one another. It peaks our interest.
US debt. Everyone feels so strongly against debt in any
form, and the private sector certainly is reducing debt obligation. Now here is
reality, there is good debt and bad debt. Without debt we never would have grown
the way we have corporately and many of our richest people would not be wealthy
without debt at one time or another. It sometimes is referred to as “leverage”.
Is it a great time to borrow, perhaps yes as interest rates are next to
nothing. Can you borrow to do something constructive with the money like start
a new business, and the answer you know already, “no”. By good debt I mean the
transference of an “I owe you” for money or another form of asset that may go
up in value. All you should be doing is taking on an asset equal to or greater
than in value of the debt. This is good debt. Let’s say a high tech company can
borrow money at 8%, and they have a history of selling their product with a 35%
pre-tax profit/earnings, which is not uncommon for high tech products today, an
example is Apple. This is favorable. The bigger public companies sell corporate
bonds, and that interest rate would be much lower than 8%.
In past years your home was a great example of smart debt
until 2007 came along. You typically gave the bank a form of “I owe you” as a
Mortgage or Deed of Trust and they permitted you to buy and close on the home.
The home historically moved up in value and appreciated equal to or greater
than inflation; great form of good debt.
Let’s talk bad debt. This is what is mind-boggling. You
can’t borrow money to leverage your company unless you are one of the big
companies favored by Wall Street, and then money is abundant, however you can
go to any bank and get a new car loan. Now, this is bad debt. A car
automatically declines in value the moment you drive it off the auto lot. You
then have an asset of less value backing the I owe you “Mr. Bank”. Other forms
of bad debt would be household furniture sold on terms, and most mechanical
hobby items like four wheel or terrain vehicles, motorcycles, etc. Bad debt
could also refer to credit card debt that is carried forward from month to
month; interest rates from your nice bank are sky high. It used to be
“usurious” years ago for companies and banks to charge interest rates as high
as common today. Ah let’s see, did the politicians favor big banks or the
middle class borrowers?
Let’s talk government debt. Wow, $18 trillion in debt. What caused a lot of this? We had
a nice balanced budget and even a surplus of money coming in the late 1990’s.
Our politicians favor money, and one of the biggest lobby groups is the defense
industry. We love war. Now, it doesn’t seem that politicians ever read history,
but after almost every war since the Revolutionary War with England, war has
caused this country great financial suffering. Okay, on this topic what did we
do in error? Most of us know. We started wars on two fronts, Afghanistan at
first and then Iraq. Iraq is very interesting. First, it had nothing to do with
9/11; all the terrorists were from Syria and Saudi Arabia, the money mainly
coming from Saudi Arabia. Sadam
Hussein contained his country, (not the nicest guy in the world, read the book
“Sadam”), and we contained Sadam at his borders and in the air. He wasn’t going
anywhere. At the height of that war we were spending over $3 billion a week.
Now, this is a perfect example of bad debt. Except for the profits going to
defense companies and let’s add in Haliburton as a service contractor, our
dollars never came back to this country and therefore never circulated here.
Good debt; how about if we spent government money for infrastructure repairs
like roads, bridges, sewer and water systems. How about education? We rank a
dismal 14th in the world in education and 24th in
literacy. Try to name 24 countries better than us! These jobs are completed
mainly by hard working middle-class Americans and the dollar circulates many
times here in this country. With each exchange of that dollar changing hands a
bit of taxation is extracted for our city, county, state and federal
government. The money needs to remain in the USA and help what is left of the
middle class. The middle class is the buyers/consumers. At some point people
don’t have money to purchase goods and services and the big companies will
fail. We see that already with our tepid GDP at 2%. Oops, the government said we had a robust 3rd
quarter revised up to 5% in 2014. Well the government didn’t say that 1/3 of
that revision was government spending mainly on health care including
Obamacare.
I recently looked at comparisons between the years 2000-2007
and then 2007-2014. Here’s how it stacked up, which shouldn’t surprise many.
Private sector spending dropped significantly as well as financial
lending. We can’t borrow money
from banks, earned income has been flat over the past 14 years and purchasing
power of families has dropped 40% because of inflation during those years;
savings has been encouraged reducing individual debt. On the other hand,
government spending has increased substantially, about 75%, thus keeping us out
of recession (recession typically defined as two consecutive negative quarters,
but this depends on how you “cook the books” and change accounting practices).
Our media reports what our government wants them to report.
I have always loved it when we report unemployment numbers. The USA calculates
unemployment differently from Europe and many other countries in the world. If
you have given up looking for work you aren’t included, if you can’t find a job
after a certain number of months you aren’t included, if you are underemployed
you are included, if you are only working part time, but get a W-2 or 1099 you
are included, etc. Bottom line, not a real number to go by.
Now, all the above statistics on employment is almost
immaterial. What counts are the number of people working “and” the amount of
increase in wages. Increase of wages and discretionary income produces GDP, and
that is all-important.
Let’s cover a couple other topics quickly and then leave this
blog behind. US stock markets. I keep saying it, and that is don’t trust Wall
Street and the banks. They can’t say no to money. Our stock market growth has
been about 200% above GDP growth, a bit abnormal? In rational times these two
should be somewhat aligned. We’ve
covered some stock market hedges in the past. Here are some volatility indexes
from the Chicago Board of Options Exchange, but you are going to have to seek
the advice of brokers and experts. The “VIX” was created in about 1993. Since
then, the “VXN” is used to track the NASDAQ and the “VXD” to track the DOW
Jones Industrial Average. We have a lot of complacency when it comes to
investment and very high market prices, a formula for disaster.
Trouble in world financing? I would say so, and not just
Greece. No matter what happens to Greece, stay in the European Union or leave,
there is not much future, as it produces little except for tourism.
Several countries don’t like our political attitude when it
comes to the world policy so many countries are trying to skirt the power of
the dollar. We have discussed “BRICS” strength in the past, that being the
countries of Brazil, Russia, India, China and South Africa bonding together. We
have put constraints on Russia but before selling them short remember they are
the number one exporter of energy in the world, ahead of Saudi Arabia. Russia is a mineral rich country.
Our US debt continues to grow along with our long-term
obligations such as Medicare, Medicaid, Social Security and long-term interest
on bonds. If you look at our US balance sheet it is break-even at best, perhaps
$100 trillion in assets, however $100 trillion in debt. Our Federal Reserve
Bank is now leveraged 70:1, that isn’t good.
Central Banks around the world hold currency reserves in US
Bonds. They have lent emerging countries billions, and will want to be paid
back in US dollars, many small countries will be stretched to do so, or
default. Even as we monetized the dollar the strength of the dollar increased.
As Japan and the European Union print money it will be interesting to see how
much it helps their economies. Interest rates are lower than our rates, even
reaching negative interest so will that push money into their stock markets?
The lowering of their currencies should help exportation of goods.
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