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.

MONEY 77 - WORLD ECONOMICS

THIS IS MY 77^TH BLOG ON UNDERSTANDING MONEY TOOLS

In this blog we are discussing economics from geopolitics to world and national issues that are current as of the first part of September, 2015.  This blog will be very subjective in terms of my interpretation of things, and a summary from interactions/discussions that I have with some pretty astute friends.  Two of these friends I meet with once a week, both have master’s degrees, highly intelligent and are octogenarians (that is different than octane you put in your gas!).

If you keep up with the news most of this will not be new, perhaps a re-cap or summary of current events. If you don’t read or watch the news, you might learn something. I view almost all the news we, the government, “puts out” as “smoke and mirrors”, with little relativity to what is happening and what may occur down the road. There is a valid old expression that goes, “to understand how anything works, you must take it apart”. That is what I try to do with economics, and government decision-making.

Let’s start out with China. Oh wow, Wall Street and the government says that China’s weakening economy is dragging on the stock markets and world. China’s GDP has weakened from about 7% down to estimated 3.5% or so, if we can believe the news. 3.5% growth is still very healthy compared to other countries in the world. They have a population of 1.4 billion, and many rising into middle class and wanting of goods, services and new homes. So, China wants to weaken their currency, the Yuan, and we go crazy. How absurd. They have an ever-increasing middle class. Yes, it will have some effect on our companies producing goods there like GE and the auto companies.  It will make their exports more attractive/cheaper.  On the other hand, we printed $4.5 trillion US dollars (QE 1, 2 and 3) to weaken our dollar and make our exports more favorable and you didn’t hear many complaints out of China and other nations.  Now Central Banks around the world have copied our economic moves printing money, especially Japan. As the expression goes, “you can’t have your cake and eat it too”. China in the long run will be fine. We have more important world issues right now.

The world economies have weakened, we need to wake up. Everyone is concerned about deflation, depreciation of assets. It’s here. There is little inflation.  Preceding every recession is deflation, especially the downturn in commodities.  Look at the bushel of corn selling for $3.50 while production costs averages $4.25 in the US, look at copper prices - down, real estate already dropping except for some key major cities around the world, oil and gas - down, oil right now about $45/barrel.

Several months ago I addressed many of these facts in blogs and now the effects are unfolding. The IMF and Central Banks have lent money in US dollars over the past years in a crazy manner to emerging countries.  Instead of the dollar going down that was expected with the dilution of the currency it went up. I don’t know if the US anticipated all the turmoil and wars creating a strong demand for our currency from the wealthy all over the world.  We became the financial “safe haven”. What this has done is prevent many countries from being able to repay debt, as they now have to pay back in a stronger dollar than when they borrowed the money. Puerto Rico is an example of default.

Relative to the above is the question, will the Federal Reserve raise interest rates in September?  These are some of the concerns: 1) The stock market probably will go down as money will seek the safer, higher interest yield bonds. 2) Our economy is tepid at best, what will higher rates do to it? 3) The IMF has lent money to emerging countries in US dollars. Two things will happen; big money will pull out and seek US bonds and any repayment of debt that floats to our dollar will be more expensive (as mentioned above).

Okay the world is stuck and no one has the vision to get us out of this. Half the countries in South America are in financial trouble, the EU is in trouble and now we have the immigration of millions of people out of the Middle East and Northern Africa coming up into Europe. What do we do?  I have no answers but see the long-term effects that are not good. Let’s assume that most of these people are good, well-meaning people, with a few ISIS terrorists intermingled, I am sure. Look at the problems. This is a moral versus practical dilemma. First, no country has the money to support all these immigrants. The individual immigrant has left his/her country for good reason, however they immigrated with no money, and no means of support. Many do not speak the language of the country, they have a different culture and religion, and most have little education and training for the Western World. Their culture and religion do not permit intermingling.  Countries will need to set up housing, clothing/food centers and support. I have no idea where the money will come from, but all countries are printing money like crazy right now trying to keep up a good face that in the long run will fade. This is a prime example of cause and effect.

100 years ago immigrants from Europe came to New York City and Ellis Island. Times were different. For one, we needed workers in our factories that were expanding. Another point is that these people came from Europe where most of our ancestors came from; we had commonality from the start.  Today, we need less manpower as the factories of the future will be robotic. We have covered the make-up of the best countries in the world and these commonalities are: smaller populations, strong nationalism, politically socialistic providing free education, health and dental care, common culture, educated people, and a generally common race.

In the United States our propaganda machine is working as well or better than it ever has.  The stock markets are still at ludicrous levels. The US stating that the weakening of the world economies will have little affect here. We are a wealthy nation. Let’s look at facts. The total assets of the United States are at best equal to what we owe today and in the future (entitlements) called liabilities. This is a 1:1 ratio of assets to liabilities. Not good. No way out of our total debts unless we default down the road or re-structure obligations. Feel sorry for China’s problems?  They have bought $1 trillion worth of our bonds to help support the USA and our dollar.

Let’s beat up Wall Street a bit. The banks and Wall Street bankers have never been honest, but I don’t think I have ever seen so much BS come out, and no one goes to jail. Unbelievable. It was disclosed several months ago that Greece would never have been permitted into the European Union with actual/honest financial numbers presented to the EU. How did this happen?  Yup, Goldman Sachs, the favored one on Wall Street worked the numbers until they were fraudulent and those numbers got Greece into the EU. No one with jail time! Wall Street hitting highs and everything in La, La land.  Take a look at reality. Companies have amassed huge capitalizations with relatively nothing in assets and employ few people. Want a look?

-       Facebook capitalization: $248 billion

-       Netflix capitalization: $43 billion

-       Twitter capitalization: $19 billion

-       Google capitalization: $425 billion

Wow! About $1 trillion in magic, smoke and mirrors.  These companies living off advertising dollars. How do companies paying for this advertising measure results related to dollars spent?  They don’t and can’t, but someday may wake up to this insanity. Remember that stock prices have more to do with “perceived value” than “true value”.  The markets are similar. The stock markets are manipulated by traders. Traders and Wall Street can make a lot of money with the market going up (buying stocks long) or down (selling stocks short), however not so much in a stagnant market. Right now there is a lot of volatility in the markets. Wall Street firms also make money especially with high volume days as they make money from commissions on trades.

All in all, we might see a more realistic Dow of around 12,000-13, 500. Next, watch out for bonds. More and more municipal bonds can’t be paid; again Puerto Rico as far as one country and cities like Chicago are following in the footsteps of Detroit.  (But a judge said Chicago will not be permitted to go bankrupt…want to buy some real estate in the City of Chicago?!)

Let’s look at the wonderful unemployment news that helps boost our stock markets and new reporting. Our unemployment figure was lowered to 5.1%. I hate to say that Americans don’t have a clue, but if they buy these numbers as good news, they don’t have a clue. Job’s gained was 170,000 + - and that was weak. Did anyone notice that people working age, mostly desiring of employment went up from 93.3 million to 94 million? We calculate our numbers for unemployment to satisfy reporting, not real numbers. We count people unemployed if they were actual W2 employees that were laid off. After 6 months they no longer are included. As everyone knows years ago companies started outsourcing work, supplying these contract people with 1099 Forms for IRS reporting and no benefits. These people are not included in employment or unemployment numbers. All bogus numbers. What is important is people working at their desired maximum and not under-employed or under paid. Wages and salaries have not risen much in 15 years.  Bottom line, we can’ have a good economy and GDP without changes, and I don’t see those changes happening.

The Iran Deal.  No one really knows much about it except probably Secretary of State Kerry. If the deal is passed it will include the US releasing about $100 billion of frozen Iranian assets. Does Iran like the US, no. Is Iran a big supporter of Western terrorism, yes.  Does Iran want to destroy Israel, yes. Is Iran against many Middle Eastern countries like Saudi Arabia, yes.  There could be three obvious reasons for this proposal passing. The first reason is the old adage of “keep your friends close and your enemies even closer”, thus keep an eye on nuclear advancements. Second, turmoil in the Middle East is great for our defense industry and the sales of fighter planes and weapons, same goes for the Russian manufacturers. The third reason I see is that the European Union and other countries need and want the oil and gas that Iran has an abundance of and will trade with them, with or without the Deal.

Turmoil, unrest equals havoc. Unfortunately, one very negative out to all of this may be war.  War has always benefited the wealthy and large corporations including defense contractors. Take a simplistic look here. We have given many Middle East countries money each year including Israel and Egypt. Then, part of that money comes back to our defense contractors with sales of military weapons, planes and helicopters.

Sorry for the pessimistic blog, however it is a dose of reality.