MONEY 70 - BANK CRIME

THIS IS MY 70^TH BLOG ON UNDERSTANDING MONEY TOOLS

Periodically, I like to go on tangents, and with this blog I’m going to hit on one of my favorite industries, the banking industry. Let’s toss in two sides of banking, commercial and investment banking as today after many mergers they are tied together.

Years ago it seemed as though bankers were held to some degree of esteem in the community. At least they tried to abide by the laws. In the last 35 years it has been one disaster after another reflecting how dirty and corrupt industries can become. Bankers just can’t maintain respectability. No one goes to jail for Federal Crimes committed and upper management sits in front of Congress denying they knew anything. That is impossible. If upper management was unknowing they were derelict in their management duties and should be released without their huge “golden parachute” retirements and stock options.

We’ll only touch the tip of the iceberg in this blog, but that is enough to get the reality across.  Going back to the mid-1980s mortgage derivatives were being created by Wall Street firms and then peddled to banks and Savings and Loans.  Bankers didn’t have a clue as to what these instruments were or how to analyze them.  They were sold as prime investments, parts of mortgages and American real estate. Then, came a downturn in real estate in the late 1980s and it took down the Savings and Loan Industry. The derivatives lost a good portion of their values and the government forced the Savings and Loans to sell their derivatives at significant discounts.

Apparently, Americans have short memories when it comes to investments and wars. In 1999 and 2000 we had the dot.com high flying stocks and the buying momentum that took our markets to highs just short of the highs of 1929; this resulting in a stock market crash. Investment bankers create much of this hype and the public is sold on it. As we have covered in other blogs, do you think Wall Street firms have no clue as to what is happening on the inside of companies? Do you think they will take a big loss, or will they peddle the stock of a company going down to the public? You better bet on the latter.

In 2003 Wall Street investment bankers started going crazy again pumping out all sorts of derivates based upon mortgages, defaults on collateralized instruments and more. Gambling at its best. Wall Street’s appetite grew wanting more and more mortgage packages. Most of these packages came from Fannie Mae and Freddie Mac. The investment bankers had Moody’s and the S&P falsely rate these packages and instruments, and then insurance companies, like AIG, insuring them. These were sold as A rated products through branch offices of Wall Street firms and US banks all around the world. (This history is known by most people, but I thought I would recap.)

Then, came the shocker of August, 2007, that our major banks were broke and had no capital reserves. The government bailed out certain institutions and left others to die, discrimination at it’s best. Old-line investment firms like Bear Stearns and Lehman Bros. went down. Goldman Sachs and others were bailed out. Again, discrimination. Goldman Sachs does a lot of trading for the US Government, and several of our Treasury Secretaries have come out of Goldman Sachs.  They are a protected icon in the industry.

Where am I going with all this? The same banks seem to be in the news over and over with billions of dollars in fines for Federal Crimes and yet no one goes to prison or held accountable. White collar crime I guess does pay! Very sad. The management and top employees know what is going on.

Most of the government tax dollars come from people like you and me, middle class. We bailed out these banks in 2008, their capital reserves were next to nothing.  It was reported a couple of weeks ago, (May, 2015), that now the capital reserves of these banks is $2.5 trillion. They invested the money we bailed them out with. They only loaned money to the wealthy who didn’t need loans, big companies and other banks, like Central Banks around the world, and the IMF (International Monetary Fund) that lends to countries.

Large banks will continue to gamble on investments as long as they think they are too big to fail. Title II of the Dodd-Frank Bill permits the Federal Deposit Insurance Corporation (the insurance behind banks’ deposits) to have a line of credit from our US Treasury, if in need of money. This is US taxpayer money, backing large banks where you and I can’t borrow money! We are just building on the storm that created the banking mess in 2007.

The latest corruption comes from the largest banks like Citigroup and JP Morgan/Chase. Management admitted to Federal Crimes related to manipulation of world currencies. Wow! Again, no one going to jail. Before this we had UBS Bank admitting to manipulating London Interbank Offered Rates (LIBOR), a benchmark interest rate that the very wealthy and institutions use as a low interest rate benchmark.

Here is some trivia to keep in mind.  We had strict statutory usury laws until 1978 when the Supreme Court decided that commercial bank’s credit card interest was exempt from usury laws. This opened the possibilities for more personal debt helping the economy yet trapping people with very high interest rates that many times are impossible to pay back to banks.  Some states are more lenient on usury laws. You will find states that are very hungry for business opening up for the servicing of commercial bank credit cards; these being mainly South Dakota, North Dakota, Nevada and Delaware.

I believe we have gone overboard on leniency and lack of prosecution of individuals committing Federal Crimes. Wall Street and commercial banks will continue with blatant corruption until there are penalties severe enough to deter such actions.

MONEY 69 - STOCKS/BONDS/ANNUITIES RISK

THIS IS MY 69^TH BLOG ON UNDERSTANDING MONEY TOOLS

Recently, I was in a conversation with a friend who was successful over the years in his expertise, however asked me questions I felt very basic on the risks associated with stocks, bonds and annuities. We have covered many topics in the past, but I will try to hit on a couple of risks that perhaps many people don’t think of when looking at investments.

Totally safe investments, there ain’t none! Let’s look at stocks first. Many people don’t know that companies can dilute their stock that is openly traded in the market, and this could very well lower prices. Let me give you an example using a well-known, old-line company like General Electric. G.E. became a publicly traded company in 1892 on the New York Stock Exchange. The company sold 1,000 shares of common stock at $100. per share. That has changed significantly today along with many other companies. G.E. currently has 10,075,929,000 shares of common stock issued and outstanding, with the G.E. Boards having authorized a total of 13,250,000,000 shares of common stock and 50,000,000 preferred shares with a par value of $1.00. A lot has changed, those figures are in the billions!

As previously discussed, when incorporating a company will file a charter, this will include the initial “authorized” shares of stock and subsequently to that the company will “issue” stock from the authorized shares. As with General Electric’s example above, the Board can change the stock formation from it’s original charter.

The other important matter is price to earnings ratios. Over history stocks have averaged around a 15:1 P/E ratio. Currently, the S&P is at a 21:1 ratio. Ratios can take many forms. One analysis may be a “trailing” P/E of actual earnings from the past 12 months. Another analysis may be a “forward” P/E predicting what the earnings “should be” moving forward based upon history. During war years and going back to around the 1900s P/E’s were lower, about 5-10 could be common. Then, you have the exuberance of investors feeling no market corrections were in site like 1929 and 2000. Before these crashes the average P/E’s reached 35:1 and higher.

I am not sure many investors realize how much they are paying for a stock or index fund. Could you sell a private company for 21 times earnings? Very doubtful. Some publicly traded, and well-known companies are trading for 50, 80 and more than 100 times earnings. What does this mean? Let’s bring people back to earth. This means that if you buy a stock with an 80:1 P/E it will take you 80 years to recoup your original investment, unless some really crazy things happen to improve the company in the future.

Let’s turn to bonds. As most people realize interest rates are close to zero, whether it is a savings account at the bank, or bonds. Many people turned toward safe investments over the past 15 years like bonds. Losing money in bonds can be just as easy as with stocks. Market value of a bond is immaterial if you are with a good company, municipality or the US Government and hold the bond until maturity. One risk is the type of bond; corporate, municipal or US Government and the ratings. If you had a high yield corporate bond it most likely was “called” as the company would have refinanced the debt. Another risk is the lowering of ratings of the entity that issued the bond, this will affect the market value or if you will ever see all your investment returned.  New York City bonds in the early 1970s was a prime example.

As we have discussed in other blogs, bonds are very interest rate sensitive. If interest rates go down, market value of bonds go up. If interest rates go up, market value of bonds go down. Interest rates are close to zero so they can’t go lower, even though some countries like Switzerland have gone negative interest. Here is a formula many use on bond risk. For every 1% rise in interest rates, the market value of a bond should go down equal to the duration remaining on the bond. As illustrations, if the government raises interest rates 1% and you have 15 years remaining on a 30 year government bond and need or want to sell, you most likely will lose about 15% in market value of your bond. If you have a 10 year bond with 8 years to maturity and interest rates go up 1/2% you will expect to lose 4% in market value. (This was determined by taking the 1% rule of thumb which would be an 8% loss and dividing by 2.)

Annuities are an insurance product based on actuarial statistics and interest rates. There are downsides to annuities.  They have relatively high management fees and sales commissions, and not all companies are rated the same. See a financial advisor and select an A rated company that has been in business for many years and should be around in the future so that you will see a continuance of payouts.

Before you see an advisor it would be wise to Google types of annuities to familiarize yourself with various types. Here are a few examples:

-       Length of term?  Life annuity, or a specific number of years. Your monthly or quarterly payout will be higher with shorter terms.

-       If you are married you may want your spouse to continue receiving benefits from the annuity. This could also be for his/her lifetime or for a given number of years.

-       The amount of payout, of course, depends on the amount of initial funding and when you start to take payouts.

I hope this blog brings some value to you, and gets your mind working on finances.

MONEY 68 - WORLD ECONOMY

THIS IS MY 68^th BLOG ON UNDERSTANDING MONEY TOOLS

My blogs are to be directed mainly at understanding money so I thought we should take a look at the national and international scenes as so much is happening.  I am writing this as a consolidation of various economic reports, from the positive to the negative, and trying to form my own opinion of reality.

Let’s start with our own country, and try to be very objective. We’ll start with the big economic picture, long term.  First, let’s look at assets versus debt. We, as a country, have total assets of approximately $100 trillion dollars. On the debt and liability side of the balance sheet we have current debt and future obligations of somewhere between $85 and $200 trillion. Why the great range? It depends on what is figured into the equation. So much or our reporting has not included “off balance sheet” items. What is the term? An example being the Iraq and Afghanistan wars. When the government saw all the wounded war casualties and medical treatment as long term they decided to not include that in the war expense but re-appropriate it to some other budget. Long term debt projected forward does include Social Security, Medicare, Medicaid, government pensions and other obligations.

To take a look at shorter term, let’s look at our current economic situation. We have about $18 trillion in current debt with a gross domestic product of about $16 trillion. This ratio is very popular as a comparison to other countries. In terms of this it is well known that Japan is one of the worst at 200% or more debt to GDP. In October, 2014, Japan started their own quantitative easing program lowering interest rates and weakening the Yen, their currency.

Wow, how did we get in such a mess here? We had a balanced budget in 1999 and even a surplus of money coming in.   We had a debt of about $5.5 trillion, and that amount was being reduced.  September 11, 2001, and the terrorist attacks on the NYC Twin Towers created a lot of decisions to be made. We attacked Afghanistan and then Iraq. War is expensive and can break a country financially. Reading books on Napoleon Bonaparte I always remember one comment he made; the best way to unify a country is a war, the best way to destroy a country and the support of the people is a long war. I wish our leaders took advise from history.

Are you familiar with the word “hegemony”? The word concisely means the power or dominance of one country over another militarily, politically or financially. We have seen empires go under because of this, expansionism and loss of control; the Greek Empire, the Roman Empire, the English Empire, the French Empire, the Spanish Empire, and now over the past 85 years America is following suit.

US interventions like Viet Nam, Southeast Asia, and throughout the Middle East cause extreme expenditures with little return. We have done this in the name of democracy and for financial reasons around the world. After WW
II we had a lot of war debt to pay off, US savings bonds. Instead of watching finances we backed the French in Viet Nam as early as 1947 and kept financing war efforts there for 25 years with the approval of Presidents Truman, Eisenhower, Kennedy, Johnson and Nixon. In retrospect we didn’t belong there.

Besides wars greatly contributing to our national debt and financial problems what else adds to this?  Import and export imbalance is another. We have been importing manufactured goods, especially from China, for years adding to huge trade deficits. This means our US dollars are leaving the country.  We have become a service country, this includes financial services especially Wall Street in NYC. No country can grow on this. Our greatest export now has become cardboard being shipped back to Asia to be recycled and filled with more products returning to the USA.

The US debt now has reached a point where a free market place no longer can exist. We have tried to monetize our debt printing an extra $4.5 trillion in money and lowering our interest paid on debt to about zero, all governmentally controlled. This still hasn’t helped us prosper economically. Other countries are stuck with deflation and no growth and are willing to copy our standard, Japan and the European Union being two places.

We have discussed the reduction of the middle class in America over and over. Here is a statistic that I came across the week of April 27, 2015.  In the last 35 years middle class wages, adjusted for inflation, have only risen 6% where top management wages have risen 125%. Again, no country can be successful without a strong and varied middle class population. Small businesses were the backbone of this country, and we need that again. Unfortunately, the “golden rule” is prevalent, “he who has the gold rules”. This accounts for the controls of big business, as well as our top wealthiest controlling politicians. Many Senators are millionaires helped into office by the wealthy. They don’t forget favors and aren’t going to vote for bills that would increase taxes or endanger their wellbeing. Again, over 50% of our country’s assets are controlled by the top 1%, and about 85-90% of all the stock owned in the exchanges is held by the wealthiest.

Let’s take a moment to look at what comprises a successful country:

-       Unification and focus. An example, even though it is war, was

          World War II.  Nationalism.

-       Common culture.

-       Manufacturing economy versus a service economy.

-       Common religions or respect for each other’s beliefs; Israel with Judaism.

-       In many Scandinavian countries socialism with medical paid, good education, and low unemployment resulting in happy, low stressed life.

-       Population size. The larger the population the harder for conformity, and lack of focus on solving national issues.

-       Similar culture of the population.

-       Sensible banking regulations favoring business both small and large.

Now, let’s point out some obvious problems that face us now and will become more apparent and burdensome in the future:

-       Our population is aging, older people unfortunately are expensive.

-       Immigration from all fronts coming in without money to support themselves or jobs; e.g. housing, medical.  Some countries do not permit this as with New Zealand and British Columbia.

-       Low birth rate. The average family birthrate to sustain the US was always considered 2.2 children per family. Now it is below 1 child. Millenials are not having children, holding off on marriage or not marrying at all, and this will disrupt society.

-       Our educational system needs revamping. Our student debt in the US is now about $1 trillion. Everyone is going to college and has degrees with no place to enter the workplace with good paying jobs. Students are graduating with great debt loads and not being able to pay down the debt. This is one reason they are not likely to marry and add to their financial burden. Like Germany we need to encourage more students to enter skilled trades and starting at the high school level. The future is in robot factories and skilled computerized work. We need to train directly for this, and provide well paying jobs.

-       Business has gone to the big companies. We had Anti-trust at one time and that has disappeared. America was built on small diversified business and that needs to come back. Today, we have Walmart and Target for retailers. We have consolidated investment banking on Wall Street and those companies have merged with commercial banks so that a handful of companies control the money. Again, the “the golden rule”.

-       Too tight a reign on money and too regulated. We went from loose money for the private sector to almost no way to borrow money unless you don’t need money and are wealthy, or a big company. This suffocates business in America.

From here let’s talk briefly internationally. There isn’t a lot of good news out there. Greece may or may not stay in the European Union. With little industry except for tourism, olives and Ouzo they don’t have much. They can’t make debt payments.

Central banks and the International Monetary Fund (IMF) have been lending emerging countries money in the form of US dollars and expecting to be paid back in US dollars. With the strength of the dollar these countries can’t pay back the debt and thus become subservient to the debt. Control of the powerful over the weak, hegemony.

There are many countries in the world trying to circumvent the power of the United States and the US dollar. As I believe we’ve discussed in prior blogs, another entity entering the world to compete with the International Monetary Fund and World Bank is the Asian Infrastructure Investment Bank (AIIB). It has members outside Asia that include Britain, France, India, Italy, and now Iran has been accepted. China is the strongest member. At first they will finance in US dollars, however eventually switching to a basket of currencies or another currency.

With our first quarter 2015 gross domestic product numbers coming out at a tepid .1% we are looking at no growth. This has recently weakened the dollar, and should have positive effects on our exportation of goods. The expected escalation in interest rates by the Federal Reserve come September is looking weaker all the time. Even this .1% growth is mainly coming from the public sector spending, not private sector.

That is about it for this blog.