THIS IS MY 150TH BLOG ON UNDERSTANDING MONEY
TOOLS
December, 2018
In this blog we will continue with finances from the
previous past two blogs. I feel it is important for most people and investors
to understand the basic concepts of economics and finance. Through past blogs we have covered
these topics from various perspectives.
Let’s start with the various basics of economics and finance
and the general meanings. I was
speaking with a friend recently and he interchanged the two words. I addressed that topic and separated
the two. Economics and finance are
inter-related. Economics includes
the social sciences, demographics and longer-term trends usually connected to
countries versus individuals.
Economics measures the growth or decline (inflation or deflation) of a
country. Again, we can further
separate micro-economics from macro-economics. “Micro” is more for the individual, group or perhaps a
company. “Macro”, meaning larger,
deals with countries or nations.
Finance on the other hand entails personal as well as a
country’s state of being from a financial standpoint, relating to prices of
products, markets, interest rates, cash flows and return on investments. Thus, finance could be a sub-category
of economics,
The government and media come out with figures from various
offices. Are they accurate? Who
knows? Can they be misleading to
the public? Yes. Let’s look at a couple that might have
an effect on your investment decisions.
The “median” family income right now is about $56,000. The “median” is the value in a group of
numbers, or the top of a “bell curve”.
Example: Lay forth 100 numbers with values low to high. What is the value placed on the number
in the middle, 50? That is your
medium value. You rarely see the median individual annual income advertised
because it doesn’t look so good.
That figure is only $31,000 per year, barely enough for an individual to
live on, let alone buy a house or condominium.
The “mean” family income in the US right now is about
$79,000. This is determined by all
incomes and brings into account the top 1% wealthiest skewing the numbers
upward.
You probably learned a third way of determining figures in
school and that is “mode”. This is
not really used in our calculations but does exist. The “mode” is the number that appears most frequently out of
a group of numbers. It definitely
takes into account various age brackets. For instance, 21-26 year olds will not
make as much as the 45-50 year old bracket. Ages 65 and older make less.
Are we heading into an economic downturn and a bear market
for investments? I am not sure,
but I will set forth facts and you decide:
- We
are now in the longest growth cycle in history without a significant
downturn. We should have had a
recession tracking our past history about 2-3 years ago. Of course, this has happened because of
low interest money, and borrowing has been unprecedented both from government
and the private sector.
- As
of this writing, December 19, 2018, the Federal Reserve raised interest rates
again. This should slow the
economy down as companies and individuals will not be able to borrow as much
money. Thus, expect a more likely
2% growth (GDP) in the economy in 2019 and perhaps a negative growth in 2020,
resulting in recession.
- Why
did the Federal Reserve raise interest rates when there is only a 2% inflation
rate? I believe it has more to do
with higher rates (yields) needed on our 10 and 30-year bonds, and being able
to sell the bonds to pay our debts. We need to compete worldwide. Mexican bonds currently pay about 9%,
although I wouldn’t buy any. A
second reason that comes to me for raising rates is that if we get into a
significant economic downturn the Federal Reserve has more to “play with” in
being able to lower interest rates without going negative as Switzerland has.
- I
believe we have hit the top of our business cycle of growth, stagnation and
then downturn. We’ve had growth
and several months of stagnation.
Now, downturn.
- Once
the stock and bond markets get scary, investors protect themselves. “Fear” is a stronger emotion than
“greed”, and the world is somewhat a scary place right now. It is reported foreign investors are
selling our stocks and bonds.
- As
the markets trend downward we should adjust to a more normal price to earnings
ratio of 15 to 1 versus 24 to 1.
With higher interest rates, and the expectation of two more interest
rate increases, this should adjust corporate earnings downward, and lowering
the purchasing power of consumers.
Of course, that should reflect downward on our stock markets.
- The
VIX (Volatility Index) went from a stagnant horizontal line to a lot of
activity. This is witnessed by the
gyrations in the stock market.
- The
bond markets have been leading up to an “inversion curve” for some time. This means that short-term bond yields
(10 year) have risen faster than long-term yields (30 year). Just recently, the
10-year bond came down to a yield of 2.8% versus the 30 year at 3.1%, which
means it backed off. This
inversion curve historically leads into economic downturn or recession.
- What
are “moving day averages”? These
are another way of analyzing market trends. These are typically 50, 100, 200 day averages for an
individual stock or the markets.
If the short-term daily average drops below the longer-term daily
average it indicates where the markets are going. In this instance, view the
DOW averages that went recently from above 25,000 to below 24,000, (23,300 as I
write). Very significant adjustment on the downside.
- The
lack of trust in Wall Street, and there should be. Wall Street and traders make a lot of money with
volatility. They trade the market
up with buying long and option calls, and trade the market down with short
selling and option puts.
- A
ton of debt throughout. This
includes governments as well as individuals with such things as credit cards,
auto loans and student loans; the latter three each over $1 trillion.
- If
we look at return on investments our US stock markets have gone up an average
of 330% since about 2009-2010, and that is a bit unusual. Competing with other investments the
markets should reflect a growth of about 6-8%. Using the quick Rule of 7 and 10 it takes an investment at
7% to double every 10 years, and an investment at 10% will double every 7 years
(actually 7.2 years). Even at 8-9%
annual returns our DOW should be at about 14,000, or so, not at 25,000! Somebody could get really hurt on this
one!
With all this said, you make the decisions. Are we in the beginning of a strong
bear market? I’ll stay quiet on
the issue.
Please remember what I have said many times before and that
is there is always “cause and effect”, and “debt kills”! We have caused our own issues and problems;
at some point we will need to correct the situation.
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