THIS IS MY 94TH BLOG ON UNDERSTANDING MONEY TOOLS
In this blog let’s explore two things. One, that the undeniable effect low,
zero and negative interest rates will have a profound effect on retiring baby
boomers, pensions and life insurance/annuities where these people expect to be
solid and financially fit in retirement.
The second item to explore is again how corporations
manipulate financing to make numbers appear to be better than they may actually
be, thus pushing the stock market upward.
On the first point, more and more of the world economies
have gone to zero or negative interest rates in the hopes of halting deflation
and trying to encourage investment and appreciation of hard goods thus adding
to some inflation. If this remains
the status quo for several years the side effect is going to be very
detrimental to financial institutions, pensions and retirement programs. We have discussed this before, however
it seems that the media does not touch upon this to any degree with public
news. It does not take many years
of no growth or zero interest/yield to drastically throw off the investment
paradigms. Whether it be a bank,
insurance company or investment company they base their future returns on past history,
or about a 6% or more return. We have not seen these times since the mid-1930’s
on a worldwide basis.
Most Americans are counting on some form of social security
as most of us have paid into the program for years. The government periodically sends out a statement informing
you of what the amount should be once you qualify for social security. Prepare yourself; these numbers may not
be real. You may have noticed that social security did not have an increase in
benefits, even though inflation was felt especially through food/produce items
and drug/medical care. If we have
a sustained period of very low interest rates and growth for a decade or so,
watch out.
Let’s move to the second topic of discussion, stock
valuations. I try to point out caveats in analyzing stocks and bonds. Here is one you may have already picked
up on, but I thought I would cover it.
If you read my blogs you have realized I am not big on the manipulated
information handed out by Wall Street.
In BLOG 92 we talked about the magical accounting going on to favor
earnings per share ratios. Since
the government started quantitative easing money, much of it went to help big
business and banks. As the interest rates for this money was very low big
companies went to banks to refinance loans. They also used this opportunity to issue new corporate bonds
and use the money to re-purchase (buy-back) stock from the public. Yes, this
does raise the price of the stock, however it does something besides. Let’s look at price to earnings ratios
(P/E’s). I think we can all agree
business is quite flat or we would be raising interest rates. This also means earnings are flat. However, if a company re-purchases
stock their earnings per share should be greater. (This figure can be obtained
by dividing earnings by shares outstanding.) The fewer shares outstanding the greater the earnings per
share. If you essentially borrow free money from the government, great deal,
your net earnings would not be significantly affected. This will give the
illusion that earnings have risen, although they may have been flat.
Bottom line (excuse the pun), P/E and PP/E are affected.
Price per share is a constant however the earnings per share have been tweaked
in favor of the company. It
demonstrates why it is so difficult to compare baselines against historical
baselines. No time in history has the government essentially given big banks, big business and the wealthy
the access to $4.5 trillion of essentially free money.
So much for this blog.
Hope you learned one or two things to get the brain stimulated.
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