THIS IS MY 96TH BLOG ON UNDERSTANDING MONEY TOOLS
A friend of mine and I were discussing the national economy
recently. He is a great optimist,
I consider myself the realist. We
were both right on certain points based upon how a person sees the future evolve
with world politics.
We went on to our reasons for the opposing positions. I brought up our incredible government
and personal debt in this country (equated to GDP we don’t fall far behind
Japan which takes the honor, if you can call it that!). Once all debt in a
country goes above 300% of GDP, debt should significantly diminish future
growth and GDP. The USA is now
around 375% and growing quickly.
My friends contrast was California which has been debt burdened for
years and still has a strong, vibrant economy; nothing deters it, even high
taxes and many people live well.
He also brought up, which many do, the unforgettable comment in about
2004 by VP Dick Cheney that “debt does not matter”. And, that statement coming from a Republican!
This site will bring up various running US debt clocks, and
it is scary. As of this morning
our US debt was about $19.3 trillion.
I covered very similar topics in previous blogs, and again I will say
that this debt is unsustainable and will have a far reaching conclusion
especially in terms of demographics and our lifestyles.
My friend’s opinion was that most Americans don’t have a
clue and the rest don’t care. Sad.
America hasn’t realized yet, according to news reports I receive, that
we are not dissimilar from the rest of the world and should be very concerned
about our demographics, debt, deflation, depressed value of assets, education,
and funding for the things that mean a lot to us. And, significant future inflation.
My friend and I agree there are really only two industries
that account for much and that is medical/drug and technical. The population migration will move more
and more to bigger cities concentrating on close at hand conveniences. Cities see developers building smaller
apartments and condos supplying all the niceties. The millenials and older generation are migrating with the
same philosophies when it comes to lifestyles; close in to all….good
restaurants/bars, food stores, shops and all within walking distance. Cars not needed as better public
transportation is brought onto the scene as in Denver, Phoenix, and downtown
Los Angeles. Unfortunately, our
large builders are not watching trends as closely as they should. We are transitioning away from suburban
living. The younger and older generations don’t want the burden and cost of
maintaining large homes with huge lots.
Work wise we are changing. We went from an agricultural
society 150 years ago to an industrial society starting in the late 1800’s,
employee unions started after the Civil War uniting workers. Now, our industrial and manufacturing
is changing to technology. What manufacturing is remaining in this country will
become robotic to keep up with the world. As recently noted, Ford Motor Company
is starting another huge manufacturing plant in Mexico which is mainly robotic
with few employees.
What this means is that our once agricultural work force
changed to industrial/ manufacturing and now technological. Today, employees
remaining in this economy will need to learn new skills, let go of the old and
learn new technology if they want to work. By the time an employee reaches the age of 45-50 he needs to
have enough credibility and skills/training to be able to go out on his own as
companies will continue to layoff workers beginning in this age group. A driving force of this is the high
workman’s comp and health insurances that have risen exponentially. Companies
can’t afford the costs and unfortunately there are many loopholes in the
Federal and State laws that can’t prevent this from happening.
Looking at the debt clock, I am a firm believer that at some
point our government will need to restructure, including social security,
Medicare, Medicaid, pensions and more. By more, I include restructuring debt or
even defaulting on our debt (bonds). Sad picture for the long term, being the
realist, unless we can continue kicking the financial can down the road.
Let’s go on.
Inflation is perking up its head.
This is seen in short-term interest rates on car loans, produce at the
grocery stores, gasoline, clothing and more. The problem is we are not equalizing on the growth side,
growth is stagnant. First quarter
growth was downgraded.
What can we do to combat some of this from an investment
standpoint? I believe our stock
market is way overpriced, however if one looks abroad there are countries
including Asia where stocks in big growth companies are relatively undervalued
in comparison to our US markets; a few are Korea, Singapore and New Zealand.
These countries also offer exchange trade funds (ETF’s). Some of these offer fairly high
dividend yields. I would
definitely stay away from stocks in Europe. They are in a mess, and the future
is more uncertain than in the US.
The other way to hedge as we have discussed in prior blogs
are ETF’s that can balance a long portfolio. Bonds are another possibility if
you are willing to hold them to maturity and stay with the best rated. Many bonds worldwide and here are going
to be defaulted on, like municipal bonds. Some favorable suggestions have
symbols such as TIP, WIP, RISE, and more.
Consult your stockbroker.
Remember that market value of bonds work inversely to interest
rates. If interest rates go up,
the value of bonds go down and vice versa. Open-end bond funds are safer than closed-end funds because
of this, and the possibility of higher interest rates from the Feds in the
future. We have addressed the differences
in the past. Open-end funds mean
the fund continues to buy more bonds at varying interest rates. Closed-end bond funds are great if you
start with a high interest rate (which we don’t have) and expect interest rates
to drop, therefore the value of your fund will go up.
I also believe hard assets have hit a bottom and now are
starting to go up a bit with inflation, and that includes oil, if the Saudis
and other countries can constrain the flow. Even though gold is up 20% over the past year it still might
be a good buy. You can buy solid public stock companies that produce gold, and
their stock should respond similarly to the bullion price if the company is
well managed.
Why am I a bit pessimistic on the next couple of years for
economies:
- We
will see a lot of defaults on bond debt around the world, and especially
emerging countries, and let’s not leave out Italy, Greece, Brazil, Venezuela,
Puerto Rico and many more.
- Our
country printed $4.5 trillion in new money, and our economy is stagnant.
- The
IMF, World Bank and our Federal Reserve have few options left to stimulate
economies; negative interest rates and printing more money is one of the last
attempts.
- Here
in the US car loans are about $1 trillion and there has been ever-increasing
defaults, with a slowing trend in auto purchases.
- Abuse
and defaults on student loans that are now $1 trillion.
- An
out of control immigration problem in Europe and the USA, adding significantly
to already debt burdened situations.
- A
US debt that will continue to increase as our debt and interest on this debt is
greater than our Gross Domestic Product.
Inverse relationship between debt and growth potential.
- Politics
and politicians that are influenced by big corporations and the wealthy, and
therefore changes with the system will not occur.
- A
taxation system that is designed by the wealthy and big corporations to get
around taxes and therefore burdening the middle class with taxes. It is inequitable, and we have seen
many good countries around the world go down over the past 100 years because of
similar situations. (I could go
back to the Greek and Roman Empires!)
- No
real growth in the US, taking into consideration inflation, since 1980.
- Funny
to say, however we are “due” for a recession that historically happens every
6-8 years.
- Needless
and very expensive wars that have taken US dollars out of this country, and has
burdened us with tremendous debt.
- Simple
economics viewing M1 and M2 and velocity of money in decline.
- A
great future burden on many countries, and the USA, from aging populations.
- Government
and corporate pensions that will not be able to be sustained.
- Stock
markets and economies that are rigged and manipulated, far from free markets;
mostly out of greed.
So much for this blog. I hope you got one or two things of
benefit from it.
