MONEY 89 - ECONOMIES/STOCKS

THIS IS MY 89^TH BLOG ON UNDERSTANDING MONEY TOOLS

In this blog we will cover current happenings in world economics and touch upon the stock market, as much has happened.  As usual this is meant to keep a person up to date (February 12, 2016) and hopefully help you in decision-making.

I guess we are in a “new world order” as little makes much sense to me.  A younger generation has a different baseline to reality when it comes to what is happening.  I won’t even get into the topic of politics in the US and the run for president!  What is happening internationally that I know about?  Well, most of it is a mess, however I will touch upon key issues.  Much of this accurate reporting we don’t get from the media on the evening news. Japan has started printing money again trying to turn around a dismal economy.  They have been with no real growth or in periods of recession since 1988.  Japan, and many of the countries around the world, should have learned from the US that printing a lot of money to stimulate an economy doesn’t work well.  Japan, in conjunction with the printing of money, has gone negative on interest rates to force money from banks and institutions to flow into the general economy.  Many European countries part of the Union have done exactly the same. I think most intelligent people realize that this won’t help, and if everyone is doing it, it only brings you up to par.

Employment numbers just out showed good job growth of 151,00 jobs. Election year, watch out.  What is not reported are the three essential ingredients of job quality, hours worked each week and pay level.

What will be very interesting to watch is how the US dollar plays out.  It has gained strength the past couple of years as economies have weakened to the USA.  As the Feds raise interest rates the dollar strengthens. With a strong dollar our exports have been hurt. US Census Bureau Reports that we hit a high of trade imbalance in 2015 with China equating to $365 billion. These are US dollars leaving the country, most likely not to return. Overall our exports are down 4.8%.  Apparently, Janet Yellen (Head of the Federal Reserve) has been discussing the possibilities of dropping interest rates with various heads of the Federal Reserve Banks. Other reports tend to believe the Feds will maintain raising rates no matter what the world situation.  Time will tell.

On a similar note and the US dollar, countries trading in oil have normally used the US dollar in terms of favored currency, the “Petro-dollar”.  Now, Iran is going to trade with the Chinese currency, the Renminbi/Yuan.  (Renminbi is the official name for the currency.)  Other countries have decided to lessen trading in US dollars and go to “baskets of currencies”.  This will weaken the dollar. As previously discussed several times this is not new, however finally taking place. “BRICS” plus Iran have been moving in this direction for oil and as an alternative for lending to other countries.  The past standard has been the International Monetary Fund and World Bank that trade in US dollars. (BRICS stands for Brazil, Russia, India, China and South Africa.)

This overall will have a weakening effect on the dollar, to what degree no one is certain.  Our currency is referred to as a “Fiat” currency. If countries start to lose faith in our US dollar and the United States, or if they prefer to trade in other currencies they will be selling dollars dropping the value.

Here is another interesting fact. Oil has dropped significantly in price helping Americans at the gas pump.  What has it done to the world?  If you are a country, as many are, producing oil and expecting the exports to pay off debt this picture has turned upside down. As an analogy this equates to our real estate bubble busting in 2007-9.  Permit me to explain. In our real estate market the price of homes (a commodity) went sky high in 2003-2006. With this rise in pricing people could borrow more money with new appraisals on their homes, banks could justify the loans and all was good. Then, the real estate bust occurred, banks needed to mark to market and adjust their balance sheets accordingly; not good. The banks were upside down, loans (especially home equity loans) were called due and payable immediately, people lost jobs and therefore people lost their homes.

Now, let’s look at the above scenario with similarities to the world oil market. Oil producing countries have borrowed money based upon the price of oil well over $100/barrel. These loans were based upon oil wells in production and reports of oil reserves in the ground; which is an asset.  Oil now has dropped over 70% from the high.   From recent reports I have seen this is a drop in world assets of over $100 trillion; that is a lot of value lost!  Here is what it means for countries. Countries have borrowed money based on oil over $100/barrel. They owe a lot of entities/banks this money, and won’t be able to pay if oil remains low for a long time.  In the US we are seeing a ton of oil company bankruptcies, and employee layoffs, especially in North Dakota, Oklahoma and Texas.

Saudi Arabia started this oil price decline and not holding back on production.  The demand for oil has weakened with the world economy weakening.  Historically, the various members of OPEC have never agreed on production limits. Part of the reason from what I have read on this was to weed out oil producers here in the US.  We have a great amount of production capability and reserves using new technology and advanced fracking techniques.

One thing for sure is don’t feel sorry for the Saudis in a financial sense. Recently, I read that the Royal Family including all members might be worth an estimated $6 trillion, and own about 40% of their country’s oil company, Aramco.  For a bit of history here, Aramco was started in 1933 by our Standard Oil Company of California. Aramco stands for Arabian American Oil Company and is considered the most valuable company in the world.

Lately, the Saudis have been dealing a lot with Goldman Sachs on currency trading and there have been rumors to the extent of Goldman Sachs doing an IPO of public stock with Aramco.  I doubt if this is likely with current oil prices being low, thus the Royal Family having to give up too much value.

Switzerland may take an approach which might be the smartest to bring about a false economy and that is to pay every citizen the equivalency of $2,500 per month.  In my estimation it would have been better, and much more fair to all, if the US gave each working citizen a portion of the $4.5 trillion we printed in Quantitative Easing money in 2009. That would have come to about $40,000 per person.  The benefit would have been that people could have paid their mortgages and remained as owners of their homes; real estate values would have held more stable (we lost trillions in US wealth with the decline in commodity values, mostly in real estate), people would have spent the money on clothing, food, entertainment, cars, computers, etc. and that would have done more to stimulate the economy.  Nothing could have been less stimulating to our economy than bail out the banks, which now sit with $2.5 trillion in cash, and not require them to lend money.  We placed overly restrictive, intensive paper work obligations on lending, and gave only the biggest companies, including Wall Street banks, favored treatment, thus having the money flow through to the wealthiest and prop up the stock market that is controlled by the wealthiest.

Countries around the world are all having similar issues, growth in economy. This is all-inclusive not just South America, Europe or China.  China, only looking at numbers of upwardly mobile population, should work it’s was out just through mass numbers of people, going from an export country to a country internally absorbing goods and services.  They may have a projected growth (GDP) of 3.5%, and although significantly down it is twice what ours most likely will be.

With the stock market I, and some pretty sophisticated advisors, are pretty confused. It makes no financial sense and yet people keep pouring money in. First, the growth of some of these exponentially fast growing companies can’t be sustained. Let’s take Apple that I highly respect. Their last earnings came in above projections, revenues down off the mark.  This indicates that management is on top of things as they produced more earnings with less revenue….efficiency.  However, it did speak of the future. These companies cannot be producing and selling commodity items, that change quickly, into an economically down-trending world and expect year after year high percentage growth.

If you took a bit of crazy money and picked up some gold coins or gold stock over the past few months when it was just above $1,000/ounce you should be pretty happy as it is over $1,200/ounce today.

Investment insanity bleeds over into the crazy valuations placed on Amazon, Facebook, Twitter, Uber and other companies. All the ones I mention here produce nothing and are priced at valuations that are totally out of the norm. It blows my mind that Mark Zuckerberg can become the 4^th wealthiest American in just a few years with a company based on producing nothing of material value and having relatively few employees.

Some money managers think similarly, and it will be only be time before the bubble really bursts.   These managers have gone heavily to cash to protect their client’s assets. “Heavy on cash” to a money management company may mean about 50-60%.  The reason they don’t sell more of their portfolios is that it is tough to justify a management fee if they are sitting with all your money in a money-market account that requires no management and has little risk.

While sitting on the sidelines you might look at other investment possibilities such as Guaranteed Investment Certificates issued by banks in other countries, such as Canada. The governments normally stand behind the banks selling these certificates.

Hopefully, by now you have hedged your stock portfolio for a downturn in the market or gone more to cash.  I covered various suggestions for doing this many blogs back. When you hedge your portfolio with options such as “puts” or funds that short the market it should neutralize your returns and losses.  It will give you the advantage of holding good stocks where you have nice gains, so that you don’t have to sell and pay capital gains tax.

These are the things in question that right now have no answer:

-       Will the stock market seek historical values placing the DOW at about 13,000?

-       Will Janet Yellen dismiss world problems and raise interest rates, just so they can be lowered again when our GDP declines to possibly recession?

-       With more economic risk will bonds dictate higher yields?

-       Even though our exports only account for about 13% of GDP, the stronger dollar will hurt our international companies, even the big companies like Proctor and Gamble.

-       Can the influx of wealthy foreigners maintain the buying needed to hold the real estate industry at a healthy level?

I hope this blog gives you things to think about. As you can see no one knows what the future will bring, some will be right others wrong. Too many variables.