THIS IS MY 129TH BLOG ON UNDERSTANDING MONEY
TOOLS
March, 2018
In this blog we will cover various topics of economics
meaningful for you and today’s world. We’ll cover employment, stocks and bonds,
big companies, and inflation to name a few.
Let’s start with the employment picture. We supposedly added 313,000 jobs last
month and about 242,000 jobs average per month over the past 3 months. On the surface it looks good, and Wall
Street certainly likes the numbers.
What it doesn’t take into account are the number of people leaving the
work world and those retiring. Unemployment is about the same at 4.1%. Now as Mr. Trump brags of these numbers
he also commented on the news that he realizes about 100 million Americans
between the ages of 18 and 63 aren’t working…..yes, some are sick and not
capable of work and others perhaps lucky enough to have retired. (I have noted in past blogs this number
to be closer to 95 million, but a significant number.) The government’s tax cuts will be of
benefit, perhaps take a while.
To me one important figure you don’t see is how much the
average increase in wage was for these newly employed. Fact is that wages have remained the
same over the past 40 years and inflation has eroded the purchasing power of
the dollar. White collar jobs like
accounting, legal, etc. are being outsourced to lower labor costs; automation
is diminishing the need for the human being and will continue to do so. An economist I read lately predicted
that we will have essentially no middle class remaining within the next 10
years. Two things that are
happening here; one is automation and the second is the blatant greed of top
managers of big companies and the wealthy. What these people and companies forget is that if there is
no growing middle class there will not be the capability to purchase goods and
services, thus diminishing Gross Domestic Product (GDP). If these people ever read about Henry
Ford they would realize this.
Henry Ford alienated his wealthy friends by paying his people
significantly more money. The
reason, he explained, was so they could afford to buy his cars.
It is interesting to note that we have only half the
publicly traded companies today as we had in 1980. One of our most important Governmental Acts was the Sherman
Antitrust Act, 1890. A lot of
trusts were set up in the late 1800’s with the industrial revolution. These
trusts bought businesses and started new businesses creating monopolies,
cutting off small business. What made this situation worse for the little guy
was that the government helped finance this. Sound familiar today?!
More competition should lead to a more healthy economy and lower prices
from competition. President Reagan
really killed Antitrust during his administration. He was all for his backers, the wealthy, big business and
very much in favor of the large defense contractors from his state of
California.
I am not sure if we can do much about this, but you will see
today’s structure of big business will end up killing the goose that laid the
golden eggs for years. The
inequalities today and less competition is going to change things, and not for
the better. In Japan top
management can only receive compensation approximately 4 times the average
workers pay. In the US top
management is making thousands times what the average worker makes. Mr. Bezos of Amazon is now worth over
$100 billion. Amazon as a company
pays nothing in taxes.
Let’s talk inflation.
The government states they are trying to get inflation up to 3% or
more. Give me a break, it is
probably closer to 10% if you measure correctly. The government measures inflation using two sets of
stats. One is from the Commerce
Department called the Personal Consumption Expenditure (PCE), the other more familiar, is the Labor
Department’s Consumer Price Index (CPI). This is to take in 4 regions and then
subdivided. The industries that
are far greater than average inflation are huge: medical, drug, college and
housing. The mainly import
industries like auto, clothing, cell phone, computers and software and
appliances have gone down in price.
Stocks and bonds.
Stocks continue into extreme levels only seen once or twice before in
history. A reckoning will come,
who knows when. Interest rates on
bonds have gone up, market prices come down (always inverse). Normally stock indexes come down when
interest rates go up but not right now.
The VIX Index, or volatility index, has been more active. Good, get the passivity
out of people. The government is
trying to keep things rolling so this administration is setting up new
regulations permitting banks more lenient lending policies. We now have the biggest private side
debt and governmental debt in the world and going to make it worse. A person carrying a lot of credit card
debt can’t escape and carries balances forward month to month. This sort of thing isn’t permitted in
many European countries. There you
may use a credit card, of course, but need to pay the balances off at the end
of each month. We will have
another crisis caused by debt, and it will last longer than the 2008
debacle. Then, the Feds dropped
interest rates by 5%. We can’t
drop interest rates nearly that much today to recover.
A sensible question, “What can I do to prevent a monetary
loss in the stock market?” You
should talk with your financial advisor about alternatives. Each person’s situation is
different. Here are some options
that immediately come to mind. You
can pull out some profit. Take a
look at your capital gains.
Long-term capital gains would be stocks held longer than 12 months. In that case your taxes would be either
15% or 20% depending on your income tax bracket. Stocks sold within 12 months of purchase are taxed at the
same rate as your individual income tax rate.
Another idea is to look at how much you have in funds and
how much in individual stocks. For
individual stocks you could look at the options markets. A hedge on a gain might be to buy a
“put” option on the stock or sell a “call” option. Consult your broker, some will not touch this. If you are mainly in funds, buy into a
fund that “shorts” stocks or the market.
Using these techniques creates a hedge protecting your profits while you
remain with your current portfolio.
Remember Wall Street is no longer a place to bring sensible
buyers and sellers of stocks together like it was in Benjamin Franklin’s
day. Today, Wall Street creates
and structures many instruments considered more like gambling than
investing. Also, the billions made
by these Wall Street firms is made from being a “middle-man”, therefore an
extractionist really adding little.
I am asked now and then about crypto-currencies and digital
funds. I really don’t know anything about it. Bitcoin went from nothing 8 years ago to $20,000, now back
to $10,000. To me it is for the
“big boys” to avoid taxes. I can’t
see why governments around the world would want to have this in play
circumventing their controlled currencies. I believe if you gamble in this arena try a fund.
Bottom line here is if you see an opportunity take it; they
may well come fewer and farther between.
I think down the road we will need to see countries place a
wealth tax on people and companies, and grant the general public a minimum
wage. Switzerland and Finland are
kicking the idea around, Finland actually experimenting. Income taxes don’t work. The wealthy use the best tax lawyers
and accountants to either pay little or no taxes. A wealth tax is needed. The wealthy can have fun making the money they could never
spend in several lifetimes, but should share with all as it came from us to
begin with! The country has gone
quite “right” and conservative, but eventually a more liberal “left” must
prevail before a revolution occurs.
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