THIS IS MY 148TH BLOG ON UNDERSTANDING MONEY
TOOLS
December, 2018
Once again, in this blog we are going to go over
finances. Yes, I have a fancy, fetish
with finances (a great alliteration) as I spent 20 plus years dealing in that
industry. We will touch upon
various aspects so that you can have a clearer understanding of the “here and
now”. You one day may need this
information to help you make money so please take heed.
I started writing this blog December 3rd, and so
appropriate as the DOW Jones Industrial average went down almost 800 points on
December 4th. The
morning of December 5th the DOW down 500 points. As I have written for 3 years now that
a normal period for recession or downturn is greatly overdue. It is much healthier to have markets
correct periodically than go up, as now, with the longest growth in history
without significant corrections.
This may be a bit redundant if you read my blogs, however it is
important information for making money or hedging your bets on markets.
We will stick to stock markets and relate to other market
options you have. First, all
markets go through cycles, growth, stagnation and downturn. They may act in unison and may
not. For over the last 100 years
or so the stock markets have established a baseline of a 15 to 1 price to
earnings ratio (P/E). This means
that unlike a private company (where you might run a 3:1ratio) it will take you
15 years to return your investment.
Over a long period of time money managers and insurance companies view a
6-7% return on investment as a norm.
How is this related to a 15:1 P/E?
Divide 15 into 100 and you get approximately 6.5%! Not rocket
science. Where are the markets
today? Way ahead of themselves.
The NASDAQ is over 50:1P/E and the DOW 24:1P/E or in that vicinity. Let’s stay with this thought. What
should the DOW be at to get to a norm, and how do I get to that norm for the
market average or a particular company?
Take 15 times the market price, or a stock price, and divide by the
first digit of the price to earnings ratio. Let’s do this with the DOW as an example. Let’s say for our use that the DOW is
at 25,000. Multiply that figure by
15 (the historical norm for the P/E) and divide by 24 the current P/E. This results in 15,625. This is more the historical norm for
where the DOW should be priced.
Why is it so high when other markets are lower? Too much money chasing investments like
this. Let’s look at real estate as
an alternative. I’ve owned several
investment properties in my life. On a “cash on cash” basis without considering
depreciation for taxes I would only make 6 to 7%. (Depreciation is taken on investment real estate; most
typically over a 30- year straight-line basis. However, this lowers your basis in the property and
therefore when it comes to selling you need to recapture that money and pay
taxes. If I decide not to take depreciation, the government states you need to.
Therefore, if audited you will pay the taxes on the difference between sales
price and decreased basis anyway.)
Bonds with little risk like government bonds yield 2-3% interest,
because of lower risk. Junk bonds
of B minus quality you raise the yield rate, however assume greater risk
including default. This yield will
closer relate to real estate, a commodity and normal stock markets.
Another reason for about a 7,000 point increase in the DOW
average since 2016 is the “Trump Bump”.
President Trump is a great promoter. You don’t get half the accurate news from the media, and
this is where I am trying to educate you.
There really was no reason for this rise other than the markets looking
a long way ahead with speculation.
One, Donald Trump is a good businessman, although he inherited much of
his money, and two the tax reductions mainly for the wealthy and large
corporations won’t help Mr./Mrs. Average Citizen. The United States GDP is currently over 4% according to
government figures but things are slowing quickly in many industries so 2019
may look closer to 2% growth and perhaps recession in 2020.
Many say I am a pessimist, I am not. I am a realist and like facts. Why not be an optimist? Actually, people who are optimists,
right brained thinkers, and see the big picture (macro economics) are usually
the most successful at something, although many give the money back or go broke
at some point. It is no news we
have become a rapacious society.
History has shown us it has taken down civilizations prior to like the Greeks,
Romans and others. To put monied
people on a pedestal is ridiculous, the likes of Jeff Bezos, Bill Gates and
others. Money is merely a “tool”,
and should not be revered.
Where are we going as a country? Doesn’t look good. Perhaps we will remain the strongest of
the world’s weak? Mr. Trump is
slugging it out with President Xi from China on tariffs. We used to have tarrifs, nothing new. I
predict it will be a stalemate, and nothing good coming from it. Because of
this conflict, Beijing is selling $1 billion of real estate here in the
USA. Ford Motor and General Motors
have already given up manufacturing sedan automobiles here in this country
keeping SUV’s and trucks. The world is addicted to inexpensive products from
China and computer software from India.
Here is where it is dangerous for our country. In July of this year our trade “deficit” hit a high up 9.5%
or $50.1 billion. China represented $36.8 billion. In October the trade deficit hit a 10 year high at $55.5
billion. Here China represented
$43.1 billion of this deficit.
These are dollars leaving this country and not returning, or circulating
here.
We have run a Ponzi schemed/uber Keynesian growth since 2008
and the Great recession, going from a US debt of about $10.5 trillion to our
current $21.89 trillion as of December 5th. This doesn’t include “off balance sheet
debt”, nor under-funded government pensions totaling about $6 trillion owed to
various government employees. To consolidate some of this, our average
household debt is now about $55,000, a total of $13.5 trillion (we do not have
individual savings to match).
Student loan debt about $1.4 trillion, auto debt and credit card debt
both over $1 trillion. We have
grown our country through debt without the foreseeable ability to pay it down,
let alone completely off.
To keep this more consolidated let me continue but in a
punctuated manner:
- Short
term interest rates rising faster than long term. This is known as an “inverted curve” or “inversion curve”, a
time when things go wrong and precede a recession or economic downturn.
- The
USA is having a tough time selling bonds to raise money. As we sanctioned Russia they now have
sold off almost $1 trillion of our bonds. Not sure who bought that amount as
the biggest buyers with money are China, Saudi Arabia and Japan.
- The
VIX Index has finally become more volatile. It had been stagnant for several
years. People are wary of things
to come.
- We
are a service-based economy, and can’t break the mold. I watch television at
night in Arizona. There are only four industries represented in the TV ads;
drug companies, followed by law firms that want to sue for side effects from
the drugs, the big auto companies and the financial industry. Can’t grow a
healthy country on that!
- I
am speculating that recent increases in interest rates are more due to being
able to sell our bonds than a concern about inflation that holds around
2%. The other thought here is that
a higher interest rate may dampen the economy, but gives the Federal Reserve
room to lower interest rates and not go negative in an upcoming recession or
downturn. As aforementioned,
smaller economic downturns throughout a growth cycle is better than a long
growth period with no downturns. This reminds me of gravity, if you drop an
object from a few feet above ground it isn’t moving quickly. If you take an
object up a considerable height it will drop fast….122 miles per hour to be
exact. The uptrend I refer to is
related to the stock market, the downward correction might be quite fast.
- We
spend just under $1 trillion on defense budgets. Sad. We are at war constantly
as it is good business. Think
about this in regard to countries we are concerned about invading us like China
and Russia; who would want us and our problems they would inherit! China stays out of wars and uses it’s
money to grow their middle class sector. Our middle class as slipped ending up
in the lower class.
To end this blog.
I hope you get the drift, be careful with investments. Get rid of the junk in your investment
portfolios and re-balance your positions, go considerable cash to wait for the
next downturn to buy in. Perhaps look at investment grade bonds in such areas
as nursing homes in the conservative Midwest states where occupancy is high
with an aging population with money.
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