THIS IS MY 128TH BLOG ON UNDERSTANDING MONEY
TOOLS
February, 2018
These blogs were initiated for the purpose of being an
educational tool written to the average person wanting a better understanding
on various industries, topics and the pros and cons.
In this blog I am going to explore facts that are from the
past and currently at hand to draw logical/realistic conclusions as to what is
likely to happen in the future.
Macro-Economics enters in big time. The first thing to realize is that
analyzing the past is not going to be indicative of the future outcome. It helps to understand history, but the
future is up for grabs. Things are
happening exponentially fast. AI
technology being part of the picture and its capabilities for the future. The terms “New World Order” and “The
Wild West” are now being bantered around and for good reason. I am not sure if the USA has ever been
involved in as many scandals, lies and cheating as we see today. And, no one goes to jail.
- This
was very evident with the financial recession in 2008-2010. Bond rating companies that work closely
with Wall Street mis-rated the quality of bonds. (Moody’s and Standard and Poor’s)
- It
has been stated that about 70% of all big companies in the market are using
“creative” accounting to their benefit rather than following government
accounting practices (GAP).
Let’s start with this country and empire building. I think just like athletes who stay in
the game far too long, we are a nation that will continue to slide. First, every empire on earth has failed
for the same reasons and we fit the mold.
This includes the Greek Empire followed by the Roman Empire, and then
leading to the English, Spanish, Dutch as well as the Germans and Japanese in
World War II. With our hegemony
and imperialistic views trying to governmentally clone ourselves around the
world we have gotten in over our heads.
The commonality we have with all the empires I mentioned above is
increased manpower abroad (including troops, not necessarily protecting our
borders) and the unbelievable amount of debt that is being incurred. Take a look at the condition of the
countries we have invaded over the past 18 years, and look to see if they are
better off. Now, we have not been
able to extricate ourselves from these areas. Amongst these countries are:
Afghanistan, Iraq, Libya, Syria and many more. Most of the countries
are solid with natural resources and assets we hope to control. Our recent mess is shaping up as we
enjoin the Kurds on the boarder with Turkey, while Russia and Turkey are trying
to eradicate them. Empires
fail from expansionism, greed, control and ethics. Debt has a significant and deleterious effect on growth!
Politics: Our
politicians vote for this. Our
country is very devoted to war and the defense business. It is a huge part of
our gross domestic product.
Without unification and a plan as to where we are headed we will
continue running in circles and stagnation. When a country like ours tries to expand and take over other
countries we are fighting on foreign soil, and thus the invader. Hard to win against the indigenous
population. We have spent
approximately $4.5 trillion in Iraq alone. How did we stay financially alive during this war? We were permitted to print money in
conjunction with our Central Bank, the Federal Reserve. The Federal Reserve bought our
bonds, as they did with the banking crisis of 2008. The 10 year bond is the most popular and now it is 2018 and
many of these bonds are maturing. A big problem I see, which is quite apparent,
is that although tax dollars coming in have been at all time highs, we still
run deficits. I do commend
Mr. Trump in lowering taxes on corporations from 35% to 21%, but it will take
more incentives to bring money back as many of the big companies pay less than
21% in taxes. Some of our biggest
companies have located in foreign areas where they pay nothing in taxes. In my view of things Mr. Trump is taking
far too much credit for positive economic news.
Our GDP (Gross Domestic Product) is currently at 2.6%. GDP is normally a measurement of goods
and services in the USA over a given amount of time. Let me be a bit more precise. GDP is: consumer and government spending plus private
investment and net exports/imports.
Our trade deficit is enormous.
I have seen figures around $600 billion/year. These are dollars leaving this country. If you analyzed our GDP this past year
in the government and private sectors growth came from easy money lending, thus
artificial. (This tactic is very
redundant of what President Roosevelt did in the early 1930’s with work
programs. Mr. Trump wants to
repair our badly needed infrastructure, and that will lead to more jobs and
government spending.)
People are receiving loans with easy credit or no
credit. These people go out and
spend money boosting the economy like this Holiday Season, sadly most of it on
depreciating assets. Continuation
of this, as we know, leads to defaults.
It is already happening on a fairly large scale with auto and student
loans. People who rent homes and
condos are now currently 20% behind on late payments and defaults. The world banks continue to float bonds
for everything around the world. A
big “bubble” is forming. Many
investors are buying these higher risk bonds for high yields, but they may be
sorry when the ability to pay on the bonds dries up.
Rise in incomes:
A lot of this wage increase
is from the minimum wage increases to around $10/hour, or slightly higher. Sounds great but many jobs are part
time and you can’t support yourself on $10-12/hour wages.
Stocks and bonds:
Big bubbles happening. Mr.
Trump’s hype has been great for the stock markets, up 31%. He is a great promoter. As we mentioned above GDP was up 2.6%
on an annualized basis. How can a
rational stock market go up 31%, or about 12 times GDP? Got me! Perceived value versus real value. The VIX Index of stock market volatility showed stagnation
through January. In the first week
in February volatility rose by 50%.
The bubble started bursting February 7th. People are lulled into thinking the
markets will rally forever; they won’t.
We are about 2 years behind the normal market corrections being every
6-7 years. Many stocks will not
fluctuate as greatly as others.
Institutions buy the same stocks.
These are not day traders.
As a for instance,
institutions around the world including banks all hold stock in Amazon, Apple,
and Facebook. 60% of Amazon’s stock is held
institutionally. I gave Facebook
as much chance to survive as the “Pet Rock”, but it is successful for now. Amazon’s price to earnings ratio is
about 300 to 1. That means in
simple terms that if you were a person buying this company on pre-tax earnings
it would take you 300 years to break even on your investment. How much sense does this make? This can equate to our DOW average of
over 26,000. Somewhere between 83
and 87% of all stock is held by institutions and the wealthy. This means there is little daily float
(stock in circulation) to be freely traded, and manipulation occurs. Another problem is that stock and bond
managers are buying risky investments similar to 2008 all over again.
Many people aren’t familiar with this. After the big correction of the markets
in October, 1987. President Reagan
along with the Feds set up a protection system to halt mass selling. This team is ironically referred to as
the “Plunge Protection Team”,
PPT. If mass selling occurs
this team will come in and purchase S&P futures. This artificially controls the sell off and props up the
market. The S&P 500 is a broad
base of stocks, and the index actually holds 505 stocks.
There is a current bubble in both stocks and bonds. Corrections are at hand:
1)
Corrections in markets should occur soon as money managers
need to be rebalancing their portfolios to required asset allocations with
stocks and bonds.
2)
We have had an unusually long period of stocks running up in
value over an 8 year period, normal corrections are about every 6 years for a
correction.
3)
The DOW Jones Industrial Average of 30 stocks is one
benchmark, It has averaged around 15:1 since inception in 1896. We are now much higher and
overpriced. In the past if we
averaged under 15:1 the market would eventually rise. Conversely if we were over that figure, like we are now, the
markets should adjust downward.
The DOW is around 26:1 P/E.
4)
The Federal Reserve has stated we might have as many as 4
upward adjustments in interest rates in 2018. This hurts both the bond and stock markets. (When this occurs people tend to sell
stock and purchase new bonds.
Existing bonds will go down in market value to meet new interest
rates.) Economically I don’t think
our country will be able to afford 4 adjustments without very adverse
consequences; perhaps 2 raises more likely.
It was announced recently that the US Government brought in
a historical amount of tax money, and yet we were still negative (deficit) in
the amount of $201 billion dollars for only a 2 month period. Most can figure
out that this equates to about a $1.2 trillion loss over a year. (The government’s fiscal year starts
October 1st each year.) The government is asking for permission to
raise the US debt ceiling another $1.5 trillion; we will most likely run out of
money again within a year or two.
Taxes and interest on debt work inversely to growth.
Currencies: The
US dollar is still very strong to other currencies, this is not helping our
trade imbalance nor for our companies selling product abroad.
Cryptocurrencies?
Currencies like Bitcoin; stay away from them. Bitcoin hit a high of about $20,000 from nothing 8 years
ago, but now down significantly, about 60%. A total gamble.
I don’t have the answers on how to resolve debt, and most
Americans don’t care as long as they can live well. Think of the ways we can resolve our debt situation. In my eyes we can never produce
enough in goods and services to halt our increasing debt and start paying it
off. Perhaps just continue
increasing debt until our Fiat currency is worth little.
Now, China and Russia are buying considerable amounts of
gold to back up their currencies to the tune of 3600 tons. Bottom line on this topic is that many
countries will start trading using other currencies or baskets of currencies as
a market hedge to our once esteemed dollar.
In summary, what have we learned in this blog?
- We
are no better than previous world empires, and have not learned lessons.
- Viewing
us from a Macro-Economic standpoint we will never return to a financially
stabilized economy as debt has reached a point of no return.
- Companies
are not standardizing financial reports in line with old school accounting.
- Politically
no one is uniting to try to resolve our major concerns.
- A
president cannot turn these negative situations around as we are too large and
have too many obstacles and variables in the way.
- The
stock market is a very rigged institution and manipulated daily.
- The
government can mitigate major downturns and quick corrections to stock markets
with PPT.
- We
need to get back to a free market society and raise interest rates, but this is
going to further hurt expansion as costs will go up.
- This
all should lead to countries using other currencies besides the US Dollar.
