I was going to open with an apologetic aside explaining why it had been so long in between entries. Only problem is that is exactly how I began my last four entries!! My blogging seems to suffer from the same malady that plagues my golf game; inconsistency. On a personal note, I have been consulting for a few really exciting start up companies and we are expecting our second child. So, I do have some good excuses for my prolonged absence!
Well, these markets seem bulletproof. I continue to have the vast majority of my clients sitting in cash or short term bonds. We made that move when the DOW was around 12,000. Do I wish we would have held on longer and stayed in stocks? Absolutely. Do I regret the move? Absolutely not. I would be crazy, as well as pretty bad at my job, if I didn't regret missing out on sizable gains. That disappointment is tempered by the fact that we did a lot of buying at the height of the summer downswing. The positions we acquired were up, on average, 20%. In times such as these, you have to take the money and run. We are currently waiting for a pull back of more than 10% on the S&P 500 index before we will even consider putting any of our cash in play. Why not get in now as markets and economic data seem to be improving? Let me explain
In past entries I detailed the problems in Europe. As I stated then, Greece is in the process of default. I continue to maintain my assertion that Italy, Spain, Portugal and possibly even France will follow suit. Many "market experts" dismiss my position as overly pessimistic. I, as well as the FEW others that share my opinion, have been labeled as apocalyptic an uninformed, leaning on our ideology and ignoring the raw data. Well, let me address that by stating simply that I am not an ideologue. I am an optimist by nature. Furthermore, the vast majority of my clients have fee based accounts which means that the only way I make more money is by growing their investments. I probably spend more time back testing my theory, trying to prove myself wrong, than I spend doing anything else. I have yet to find any significant data that conflicts with my position. The improving jobs data and unemployment numbers have served as a major impetus in driving these markets higher. Yet, when you look past the headlines and examine the underlying data you will see plainly that things continue to deteriorate. The recent improvement in the unemployment number is ENTIRELY due to the way the number is calculated and not because of a surge in new highers. As more people are laid off, the job pool shrinks. The unemployment number is a statistic that gauges the current job pool, not the economy. What I mean by this is that if a given economy continues to loose 400,000 jobs a month, the rate of loss would continue to grow even if the number of jobs lost stays static. Every week, especially now that we are 3 years into the recession, an increasing number of people are running out of available unemployment insurance. These people are no longer counted as unemployed. Essentially, market bulls are celebrating that new unemployment claims are down to 400,000 from the previous high of 800,000 in 2009. What they fail to mention is that the labor pool is nearly 20% smaller. Mathematically speaking, the number is a charade that measures only current rates of job loss or gain. It is a completely meaningless number when it comes to indicating the state of our economy.
Another "bullish indicator" that optimistic market analysts love to refer to while expressing their bullish sentiments are corporate earnings. There is no question that companies have unloaded a lot of debt or refinanced outstanding debt at the artificially low rates of today. Additionally, we all know that most corporations have rid themselves with massive amounts of those pesky and profit absorbing things we refer to as jobs, which are the single most significant cost for the vast majority of corporations. In order to figure out the health of our economy, we need to be looking at corporate revenues. Revenue is currently down, on average, 15%-20% since 2008 for the companies that make up the S&P 500. Furthermore, the revenue is skewed toward the largest corporations to a much more disproportionate level than it was prior to 2008. This doesn't bode well for our economy when you consider that small businesses are responsible for nearly 70% of our job growth.
So, why does this market continue to go up? Well, why didn't anyone, including the Fed, realize that housing was in a massive bubble that could jeopardize our whole economy? Honestly, I just don't know. I don't get it. I didn't get how in the world people possibly expected the housing market to keep appreciating at 8%-10% a year. I didn't understand how market experts thought that housing could pull back and the economy would keep roaring ahead. I am currently unable to grasp how experts so confidently suggest that this market is undervalued when considering the last time markets were at this level was when we were in the midst of a housing boom, the government had nearly $5 trillion less debt on the balance sheet, unemployment was almost half of its current level, and emerging markets like China were growing at a pace that was nearly double the current rate of growth. It's really amazing if you think about it. So, back to my original question: Why is this market going up? The only thing it can be attributed to is the unprecedented level of money printing and central back intervention. How long can this continue? That reminds me of the old stock traders saying that "the markets can stay irrational longer than you can stay solvent". I personally believe that central banks will keep printing as long as someone will buy their debt. Rather than a housing bubble, we are currently dealing with a sovereign debt and currency bubble. WHEN, not if, that bubble bursts, it will be exponentially worse than the housing collapse.This won't be the end of the world or the end of modern civilization. Rather, a lot of people will loose a lot of money and it will take a considerable amount of time to dig ourselves out. It will also bring about a considerable amount of global conflict and quite possibly another world war. I come to that conclusion not because I have a crystal ball. I look to history as a guide as we are helplessly bound to repeat past mistakes.
Anyone that knows me understands that I am anything but a pessimist. I wish I could get behind this market and we could all make boat loads of money. However, I am married to the facts. Until the facts change, I will remain very bearish and concerned with the course that the global economy is on. For goodness sake, Italy, Ireland, Portugal, Spain, Greece (already defaulted) and Japan would currently be in default if central banks weren't printing trillions of dollars in order for them to make their interest payments. Somehow, we are whistling past the graveyard, ignoring the collapse that is already occurring. Hopefully, we all regain our sanity before it is too late.
Saturday, January 21, 2012
Wednesday, November 23, 2011
The Next Market Crash: Consider This Your Official Warning
First off, I'm sorry it has been so long since I last made an entry. Somehow, I figure you were able to manage. I have been completely occupied with navigating this insane market and trying to keep clients solvent. About four weeks ago, I began studying the European debt crisis at the microscopic level. After a week or so of being literally buried in balance sheets and mind numbing piles of economic data, I emerged more concerned than ever. I began contacting clients and setting up meetings in order to get them out of stocks and into safer investments. Since then, global markets have dropped nearly 10%. I am absolutely convinced this is only the beginning. Let me explain my reasoning.
The situation in Europe is only the beginning. Europe is basically suffering from the same problem we are. Their governments are spending far more than they are taking in. Governments were able to do this in the past due to the ever expanding economy and the tax revenues this expansion generated. As we all know, that expansion has come to a grinding halt. Government revenues have pulled back and governments' spending, due primarily to aging populations and ever-increasing social spending that accompanies it (pensions, medical expenses, prescriptions, etc.), has continued to rise. Now, nearly every Euro Zone country has significantly more debt than the total output of their respective economies. To cover the shortfall, Euro Zone governments must borrow money from investors, mostly in the form of government issued bonds. However, due to these budget issues, investors are growing increasingly concerned that these governments may not be able to pay them back. In return, bond purchasers are demanding higher interest payments to justify the increased risk, much like a bank charges us higher interest on a car loan if we have a lower credit score. As interest rates rise, the amount of money required to make the annual interest payments to bond holders rises as well. In order to pay the higher interest rates, the government must issue more bonds, at even higher interest rates, and the problem quickly begins to snowball. What makes this more worrisome is that all 17 Euro countries cannot print their own money as they all use the same currency: the Euro. Most in the financial industry didn't see this as a big deal and figured that the European Union would simply print more Euros in order to stabilize the situation. Somehow, and don't ask me how because I still don't understand, those same "financial professionals" overlooked the fact that the contract binding the Euro Zone countries together unequivocally denied the right of the European Central Bank (ECB) to print money in order to cover a budget shortfall for an individual member government. Additionally, why would Germany and France, the biggest economies in the Euro Zone, agree to have their currency diluted in order to cover the profligate spending in neighboring countries? Well, simply put, they aren't. Even if Greece, Spain, Italy, and Belgium were somehow bailed out, that wouldn't begin to cover the massive European banking system that is completely exposed to the floundering bonds issued by each country. Additionally, the real estate collapse that has plagued our economy has spread overseas and is now wreaking havoc in Europe. When you consider the fact that the economy of the European alliance is bigger than our own economy, you begin to realize the scope of the problems we are facing.
Now, the issue that no one is talking about is the fact that China is the largest owner of Euro Zone debt and their real estate market is beginning to wobble. It is also estimated that Chinese banks are now leveraged to a greater extent than our own banks were prior to the financial crisis. Additionally, after more research, I found that Japan's government is in worse shape than any Euro Zone country. I could literally spend a day going through each economy and each country, illustrating in real numbers how bad this situation is getting. If you would like that information, email me directly and I will be more than happy to lay it out for you.
The point of this entry is not to scare you. I am trying to warn as many people as possible. Get out of the markets. Or, make sure you are in safe assets that will appreciate in times of crisis. Don't listen to anyone who tells you that the prudent course of action is to take a disciplined approach and see this through. I work in this industry, and I am telling you point blank that brokers say that because they don't understand the reality of what's going on. We are looking at a situation that could dwarf the financial crisis of 2008 in terms of severity and length. As always, I am happy to help and consult anyone. Just email me at zkabraham1@gmail.com, and we can take it from there. Make no mistake, we are facing issues that will most likely destroy countries and economies for decades. If you don't bury your head in the sand, easy steps can be taken to insulate yourself from this chaos.
Good luck to all of you. I will be updating this situation as frequently as possible. Please be smart and make sure you are protected.
The situation in Europe is only the beginning. Europe is basically suffering from the same problem we are. Their governments are spending far more than they are taking in. Governments were able to do this in the past due to the ever expanding economy and the tax revenues this expansion generated. As we all know, that expansion has come to a grinding halt. Government revenues have pulled back and governments' spending, due primarily to aging populations and ever-increasing social spending that accompanies it (pensions, medical expenses, prescriptions, etc.), has continued to rise. Now, nearly every Euro Zone country has significantly more debt than the total output of their respective economies. To cover the shortfall, Euro Zone governments must borrow money from investors, mostly in the form of government issued bonds. However, due to these budget issues, investors are growing increasingly concerned that these governments may not be able to pay them back. In return, bond purchasers are demanding higher interest payments to justify the increased risk, much like a bank charges us higher interest on a car loan if we have a lower credit score. As interest rates rise, the amount of money required to make the annual interest payments to bond holders rises as well. In order to pay the higher interest rates, the government must issue more bonds, at even higher interest rates, and the problem quickly begins to snowball. What makes this more worrisome is that all 17 Euro countries cannot print their own money as they all use the same currency: the Euro. Most in the financial industry didn't see this as a big deal and figured that the European Union would simply print more Euros in order to stabilize the situation. Somehow, and don't ask me how because I still don't understand, those same "financial professionals" overlooked the fact that the contract binding the Euro Zone countries together unequivocally denied the right of the European Central Bank (ECB) to print money in order to cover a budget shortfall for an individual member government. Additionally, why would Germany and France, the biggest economies in the Euro Zone, agree to have their currency diluted in order to cover the profligate spending in neighboring countries? Well, simply put, they aren't. Even if Greece, Spain, Italy, and Belgium were somehow bailed out, that wouldn't begin to cover the massive European banking system that is completely exposed to the floundering bonds issued by each country. Additionally, the real estate collapse that has plagued our economy has spread overseas and is now wreaking havoc in Europe. When you consider the fact that the economy of the European alliance is bigger than our own economy, you begin to realize the scope of the problems we are facing.
Now, the issue that no one is talking about is the fact that China is the largest owner of Euro Zone debt and their real estate market is beginning to wobble. It is also estimated that Chinese banks are now leveraged to a greater extent than our own banks were prior to the financial crisis. Additionally, after more research, I found that Japan's government is in worse shape than any Euro Zone country. I could literally spend a day going through each economy and each country, illustrating in real numbers how bad this situation is getting. If you would like that information, email me directly and I will be more than happy to lay it out for you.
The point of this entry is not to scare you. I am trying to warn as many people as possible. Get out of the markets. Or, make sure you are in safe assets that will appreciate in times of crisis. Don't listen to anyone who tells you that the prudent course of action is to take a disciplined approach and see this through. I work in this industry, and I am telling you point blank that brokers say that because they don't understand the reality of what's going on. We are looking at a situation that could dwarf the financial crisis of 2008 in terms of severity and length. As always, I am happy to help and consult anyone. Just email me at zkabraham1@gmail.com, and we can take it from there. Make no mistake, we are facing issues that will most likely destroy countries and economies for decades. If you don't bury your head in the sand, easy steps can be taken to insulate yourself from this chaos.
Good luck to all of you. I will be updating this situation as frequently as possible. Please be smart and make sure you are protected.
Tuesday, September 27, 2011
Making Money In This Crazy Market
Are you motion sick? Well, you're not alone. We have recently experienced unparalleled market volatility (markets going up and down). Buckle up. I see absolutely no evidence that this trend will reverse itself in the near future. Everyone and their mother have a reason as to why these crazy swings have become common place. The plain truth is that there isn't one reason for the volatility. Markets move up and down on rumors, errors, lawsuits, activism, anger, greed, speculation, and nearly every other possible human influence. However, I would echo the sentiment that it indeed is different this time. The swings are more violent and sudden than ever. So, when tackling the cause for most anomalies, I find that it is most helpful to start with one very simple question: What has changed? The answer for this is simple and predictable. The government has injected itself, via capital infusions and new regulations, into the marketplace like never before. As predicted in this blog some time ago, it has not been effective. Despite the impotence of the stimulus and new regulation, the market has become absolutely enthralled and dependent on the infusion of free money. Without fail, the biggest market swings have occurred within hours of Fed meetings and presidential speeches. The market rallies huge on the speculation of new stimulus and collapses when government and fed officials elude to the monstrous debt being a limit as to what action they can take. This is illustrated simply by looking at the conclusion of QE 2 (quantitative easing 2; the fed pumping money into the market). Markets rallied violently when the program was announced and pushed up to 3 year highs. QE 2 ended on June 30th of this year and our markets have dipped 20% (give or take 5% depending on the day). In stark contrast to what many experts and pundits argue, the government can boost the economy and the markets. The problem is that it does not last and is fiscally unsustainable simply due to the fact that the amount of tax revenue generated by increased business activity that is a result of the stimulus doesn't even cover a quarter of the amount of the cost of said stimulus. As Winston Churchill stated so eloquently, "It's like standing in a five gallon bucket and attempting to pick yourself up by the handle."
Recently, I have been reminded of a lesson I learned sometime ago. The lesson is simple, and yet, I still find myself violating it from time to time. I might add, violating this lesson has NEVER failed to lose me money. At the behest of a client, I recently tried to trade in a few stocks that I believed could benefit from current events. I was simply trying to grab some short-term gains on stocks that I didn't necessarily believe in over the long term. As you may have guessed, we got hammered. Luckily, I insisted on modest bets so my actions didn't damage the long-term viability of our strategy. Regardless, it still stung. What made it so much worse is that I knew better. Now, in no way am I discouraging trading. Over the past few years, I have made quite a bit of dough for my clients through short-term trades. The difference is simply that the profitable trades were when we were opportunists and capitalized on what we saw as an imbalance in the market. A trade should be a short-term excercise with a pre-determined exit strategy that has been developed through months of observation. Simply buying a stock that has gone down in the hope of it having a Phoenix-like resurrection is nothing more than betting. With that being said, trading will be an integral part of generating returns in this crazy market. The age old "buy and hold" will not begin to work again until global economic growth gets back on track. Who knows how long that will take? So, I would advise using a "Tactical" and aggressive mutual fund to accomplish this as most individual investors, despite their ardent beliefs, are not conducting enough active research to trade competently on their own. I would also suggest talking with a professional trader and perhaps hiring them to handle that portion of your portfolio (Warning: most financial advisors are mutual fund salesmen. Despite their rhetoric, most do not know anymore than you do).
Buckle up and prepare for this madness to continue for some time to come. When the markets go up, don't get caught getting complacent. No one ever went broke taking a profit. Also, DON'T EVER be afraid to carry large portions of cash in your portfolio. A good cash reserve will help you take advantage of trading opportunities and will protect you when markets plunge. Good luck, and don't ever to hesitate email questions. Also, as a reminder, feel free to email me directly at zkabraham1@gmail.com if you would like to talk off the record.
Recently, I have been reminded of a lesson I learned sometime ago. The lesson is simple, and yet, I still find myself violating it from time to time. I might add, violating this lesson has NEVER failed to lose me money. At the behest of a client, I recently tried to trade in a few stocks that I believed could benefit from current events. I was simply trying to grab some short-term gains on stocks that I didn't necessarily believe in over the long term. As you may have guessed, we got hammered. Luckily, I insisted on modest bets so my actions didn't damage the long-term viability of our strategy. Regardless, it still stung. What made it so much worse is that I knew better. Now, in no way am I discouraging trading. Over the past few years, I have made quite a bit of dough for my clients through short-term trades. The difference is simply that the profitable trades were when we were opportunists and capitalized on what we saw as an imbalance in the market. A trade should be a short-term excercise with a pre-determined exit strategy that has been developed through months of observation. Simply buying a stock that has gone down in the hope of it having a Phoenix-like resurrection is nothing more than betting. With that being said, trading will be an integral part of generating returns in this crazy market. The age old "buy and hold" will not begin to work again until global economic growth gets back on track. Who knows how long that will take? So, I would advise using a "Tactical" and aggressive mutual fund to accomplish this as most individual investors, despite their ardent beliefs, are not conducting enough active research to trade competently on their own. I would also suggest talking with a professional trader and perhaps hiring them to handle that portion of your portfolio (Warning: most financial advisors are mutual fund salesmen. Despite their rhetoric, most do not know anymore than you do).
Buckle up and prepare for this madness to continue for some time to come. When the markets go up, don't get caught getting complacent. No one ever went broke taking a profit. Also, DON'T EVER be afraid to carry large portions of cash in your portfolio. A good cash reserve will help you take advantage of trading opportunities and will protect you when markets plunge. Good luck, and don't ever to hesitate email questions. Also, as a reminder, feel free to email me directly at zkabraham1@gmail.com if you would like to talk off the record.
Monday, August 22, 2011
Market Madness!!: Buy Insurance For Your Investments
Markets like these can give you motion sickness. I must admit, I am currently wearing a neck brace from the whip lash over the past few weeks. For those of you who have been reading the blog, you may remember in a recent post that I believed this market would continue higher until the Fed quit pumping money. Well, the second round of quantitative easing (money printing) ended June 30th. We are down roughly 20 percent from that point. Now, our portfolios have held up much better, down roughly 5% from the recent highs, mostly due to profit taking and our substantial gold positions. If you want to know the best ways to own and buy gold, email me. I encourage investors to be cautious but opportunistic. I have been saying it for years and will continue to say it: the days of endless government spending have caught up with us and gold offers one of the only ways to profit and safeguard from the mayhem that is caused by currency instability. The economic picture for governments will not be improving any time soon. Cutting costs severely enough to balance government budgets will be extremely hard for the markets and the larger economy to digest. Yet, we cannot print our way out of these problems without inflicting even more damage to our currencies. Gold should do well in either scenario as it is a safe haven/inflation play.
I think we will go lower still, maybe not immediately, but soon. Now is not the time for wholesale selling. Drops like these are precisely why we were taking profits and building up cash three months ago. There are some good buys out there but be very careful. Just because a stock has dropped a lot does not make it a good buy.
There are many ways to protect your portfolio from drops like the one we have recently witnessed. I use hedging strategies in many or my clients' accounts that can actually make money when the market goes down. However, these strategies are often very complex and can be risky. So, what can investors do to protect their assets? In a recent conversation regarding the market, a client jokingly suggested that a financial institution should develop portfolio insurance. Well, they have!!
When I first entered the business, Annuity, as least as I was concerned, was a dirty word. People had a habit of flocking to annuities in times of hardship and locking in a low but guaranteed interest rate after taking a pounding in the market. The vast majority of annuity purchases would happen in the aftermath of a massive market correction. Sadly enough, investors that employed this strategy sold low and missed out on the rebounds that came after the devastation, often locking their money up for years and earning a paltry 3%. How the industry has changed. I recently discovered products that were offered by annuity companies that offer upwards of 150 funds and investment options, offering 100% control over your money. At the same time, the company guarantees growth to your income base. Sound too good to be true? It's actually very simple. Annuities are traditionally income investments. You give the company a lump sum and they guarantee a payment for the rest of your life. If you don't take the guaranteed payments, your lump sum grows by whatever amount your guaranteed payment is (invest $100,000 in a 4% annuity you can take $4,000 in payments or your income base grows to $104,000). These new annuities offer the same thing but you are able to invest the lump sum as you see fit. If you invest well and the market goes up, great! It's just like owning a mutual fund portfolio. However, if the market crashes, your income base (principal originally invested) continues to grow by the guaranteed amount. I recently found a company that offers a guaranteed 10 year income base double. So, if you invest $500,000 in their 5% product, regardless how the investments that have chosen perform over the next decade, after ten years you will be able to take 5% of $1 million for the rest of your life. Now, we would obviously hope to that our investments would outpace that, but it sure makes is easier to know that your retirement income is growing regardless of how the market is doing. These products aren't for everyone but they certainly have their place. For those of us who are within 15 years of retirement, annuities can prove invaluable. They are truly the equivalent of purchasing an insurance umbrella for your portfolio. Again, feel free to email me with any questions.
I think we will go lower still, maybe not immediately, but soon. Now is not the time for wholesale selling. Drops like these are precisely why we were taking profits and building up cash three months ago. There are some good buys out there but be very careful. Just because a stock has dropped a lot does not make it a good buy.
There are many ways to protect your portfolio from drops like the one we have recently witnessed. I use hedging strategies in many or my clients' accounts that can actually make money when the market goes down. However, these strategies are often very complex and can be risky. So, what can investors do to protect their assets? In a recent conversation regarding the market, a client jokingly suggested that a financial institution should develop portfolio insurance. Well, they have!!
When I first entered the business, Annuity, as least as I was concerned, was a dirty word. People had a habit of flocking to annuities in times of hardship and locking in a low but guaranteed interest rate after taking a pounding in the market. The vast majority of annuity purchases would happen in the aftermath of a massive market correction. Sadly enough, investors that employed this strategy sold low and missed out on the rebounds that came after the devastation, often locking their money up for years and earning a paltry 3%. How the industry has changed. I recently discovered products that were offered by annuity companies that offer upwards of 150 funds and investment options, offering 100% control over your money. At the same time, the company guarantees growth to your income base. Sound too good to be true? It's actually very simple. Annuities are traditionally income investments. You give the company a lump sum and they guarantee a payment for the rest of your life. If you don't take the guaranteed payments, your lump sum grows by whatever amount your guaranteed payment is (invest $100,000 in a 4% annuity you can take $4,000 in payments or your income base grows to $104,000). These new annuities offer the same thing but you are able to invest the lump sum as you see fit. If you invest well and the market goes up, great! It's just like owning a mutual fund portfolio. However, if the market crashes, your income base (principal originally invested) continues to grow by the guaranteed amount. I recently found a company that offers a guaranteed 10 year income base double. So, if you invest $500,000 in their 5% product, regardless how the investments that have chosen perform over the next decade, after ten years you will be able to take 5% of $1 million for the rest of your life. Now, we would obviously hope to that our investments would outpace that, but it sure makes is easier to know that your retirement income is growing regardless of how the market is doing. These products aren't for everyone but they certainly have their place. For those of us who are within 15 years of retirement, annuities can prove invaluable. They are truly the equivalent of purchasing an insurance umbrella for your portfolio. Again, feel free to email me with any questions.
Wednesday, July 27, 2011
The Great Debt Debate: THERE IS NO RISK OF DEFAULT!!!!!!
I really have no idea how many people still read this blog. BUT, if you do, if you happen to be one of the faithful ten or so readers who still subject themselves to my rants regarding the utter madness that our economy has become, PLEASE email this blog entry to everyone and anyone you know. For those of you who know me personally, you can attest to the fact that although I am not always right, I am intellectually honest and will only present the facts when professing to do so. That being said, I have done my research and crunched the numbers and I am simply unable to remain quiet regarding this convoluted Desperate debt debate. So, being true to the nature of this blog, I will attempt to break the situation down in the accessible and simple manor in which it should be discussed.
First, let's define the terms. Default: Not paying all or some of a payment, in a timely and agreed to fashion, that one party is contractually obligated to pay to another.
Debt (as it relates to our government): Almost exclusively and entirely made up of bonds that are issued via the full faith and credit of the federal government to investors.
We are in no risk of defaulting on our debt. We just aren't. Our government brings in roughly (give or take a billion) $200 billion a month. Our interest payments on all bonds, social security, medicare and medicaid, military costs (including all additional war costs and veteran benefits), add up to about $165 billion. Now to be fair, our other costs that do include social programs and other entitlement programs do add up to more than the $35 billion remaining. Cutting back on these programs or not funding them does not equal a default. It actually would have the opposite effect. If we made hard and meaningful cuts into these social programs we would most likely preserve our AAA debt rating by reducing our long-term commitments and liabilities. For the record, I am not suggesting that this would be easy or even that it is the right thing to do. I am simply illustrating that we have no real risk of default unless our government consciously chooses to not pay our debt.
As far as the aforementioned cuts to social spending and entitlement programs, it is not something I support unequivovally. No matter your view on entitlement spending, making deep and meaningful cuts into social programs is a painful enterprise. One must approach the matter with a sense of sobriety, knowing full well that such cuts will impact struggling families and hungry children. At the same time, we must acknowledge that the tens of trillions of dollars that have been spent on social programs since the inception of LBJ's heralded Great Society programs, the poverty level in this country has risen from 14% to 14.3%. You can draw whatever conclusion you want to but the numbers don't lie. Is it possible that the more we spend to help the poor we simply create more poor? Is it possible that the more comfortable, palatable and dignified we make living in a state of poverty that we are simultaneously encouraging more Americans to join the ranks of the impoverished? I am not, and will never, suggest that we should end social programs. My wife and I are ardent believers in helping those less privileged, both with our personal monies as well as our tax dollars. Yet, when looking at the cold hard numbers, we must take a serious look at how we are spending the money and examine whether or not we have pursued the correct course and philosophy as it relates to helping out our fellow man.
The other aspect of this debt and spending debate that seems to get ignored by both parties is the unsustainable nature of our out of control spending. REGARDLESS of how necessary you believe that any or all of the innumerable amount of social programs are, you cannot ignore the cost. We must all wake up to the fact that the government is spending ACTUAL money. The government does not have access to some magical bank account with supernatural replenishing powers. Therefore, the governments first concern should always be taking care of and carefully managing its main source of funding, the taxpayer. It is immaterial what programs you believe to be necessary and moral if the money does not exist to fund them. Furthermore, how compassionate is to recklessly spend and borrow to fund certain social programs while simultaneously straining our tax and borrowing base to the point of endangering ALL government programs. Additionally, we must cease looking to the taxpayer, whether rich or middle class, to pick up the ever expanding tab. If that worked, the EURO zone and its 50-60% tax rates would be amply funding their social spending. The fires burning in Greece and Italy (Spain will be there shortly) would suggest otherwise.
Cutting budgets and spending is never fun. You have to be a sadist to truly delight in the slashing of social programs. But I find it to be a much more bizarre and sadistic practice to endanger the solvency and existence of this great republic by the fervent refusal to curtail spending. Should we include such things as military and law enforcement? As unpalatable as that may be to the majority on the right, the answer is simply yes. There is waste to be trimmed in all areas. But, we must keep in mind what the ultimate goal of this Union was upon its founding. This country was based on the aim of securing life, liberty, and the PURSUIT of happiness. As one of my favorite movies points out, this country is obligated to give you fair shot at happiness. Even in 1776, our forefathers knew that we could never make happiness a certainty. Therefore, our spending must always be dedicated, first and foremost, to the preservation of our union and the safety of her citizens. We absolutely cannot risk our future solvency and survival in the hopes of securing and guaranteeing the comfort and happiness of all our citizens. That would truly be the pursuit of destruction.
First, let's define the terms. Default: Not paying all or some of a payment, in a timely and agreed to fashion, that one party is contractually obligated to pay to another.
Debt (as it relates to our government): Almost exclusively and entirely made up of bonds that are issued via the full faith and credit of the federal government to investors.
We are in no risk of defaulting on our debt. We just aren't. Our government brings in roughly (give or take a billion) $200 billion a month. Our interest payments on all bonds, social security, medicare and medicaid, military costs (including all additional war costs and veteran benefits), add up to about $165 billion. Now to be fair, our other costs that do include social programs and other entitlement programs do add up to more than the $35 billion remaining. Cutting back on these programs or not funding them does not equal a default. It actually would have the opposite effect. If we made hard and meaningful cuts into these social programs we would most likely preserve our AAA debt rating by reducing our long-term commitments and liabilities. For the record, I am not suggesting that this would be easy or even that it is the right thing to do. I am simply illustrating that we have no real risk of default unless our government consciously chooses to not pay our debt.
As far as the aforementioned cuts to social spending and entitlement programs, it is not something I support unequivovally. No matter your view on entitlement spending, making deep and meaningful cuts into social programs is a painful enterprise. One must approach the matter with a sense of sobriety, knowing full well that such cuts will impact struggling families and hungry children. At the same time, we must acknowledge that the tens of trillions of dollars that have been spent on social programs since the inception of LBJ's heralded Great Society programs, the poverty level in this country has risen from 14% to 14.3%. You can draw whatever conclusion you want to but the numbers don't lie. Is it possible that the more we spend to help the poor we simply create more poor? Is it possible that the more comfortable, palatable and dignified we make living in a state of poverty that we are simultaneously encouraging more Americans to join the ranks of the impoverished? I am not, and will never, suggest that we should end social programs. My wife and I are ardent believers in helping those less privileged, both with our personal monies as well as our tax dollars. Yet, when looking at the cold hard numbers, we must take a serious look at how we are spending the money and examine whether or not we have pursued the correct course and philosophy as it relates to helping out our fellow man.
The other aspect of this debt and spending debate that seems to get ignored by both parties is the unsustainable nature of our out of control spending. REGARDLESS of how necessary you believe that any or all of the innumerable amount of social programs are, you cannot ignore the cost. We must all wake up to the fact that the government is spending ACTUAL money. The government does not have access to some magical bank account with supernatural replenishing powers. Therefore, the governments first concern should always be taking care of and carefully managing its main source of funding, the taxpayer. It is immaterial what programs you believe to be necessary and moral if the money does not exist to fund them. Furthermore, how compassionate is to recklessly spend and borrow to fund certain social programs while simultaneously straining our tax and borrowing base to the point of endangering ALL government programs. Additionally, we must cease looking to the taxpayer, whether rich or middle class, to pick up the ever expanding tab. If that worked, the EURO zone and its 50-60% tax rates would be amply funding their social spending. The fires burning in Greece and Italy (Spain will be there shortly) would suggest otherwise.
Cutting budgets and spending is never fun. You have to be a sadist to truly delight in the slashing of social programs. But I find it to be a much more bizarre and sadistic practice to endanger the solvency and existence of this great republic by the fervent refusal to curtail spending. Should we include such things as military and law enforcement? As unpalatable as that may be to the majority on the right, the answer is simply yes. There is waste to be trimmed in all areas. But, we must keep in mind what the ultimate goal of this Union was upon its founding. This country was based on the aim of securing life, liberty, and the PURSUIT of happiness. As one of my favorite movies points out, this country is obligated to give you fair shot at happiness. Even in 1776, our forefathers knew that we could never make happiness a certainty. Therefore, our spending must always be dedicated, first and foremost, to the preservation of our union and the safety of her citizens. We absolutely cannot risk our future solvency and survival in the hopes of securing and guaranteeing the comfort and happiness of all our citizens. That would truly be the pursuit of destruction.
Monday, July 11, 2011
The Budget Battle in Washington: A Synopsis of the Issue
I have been absolutely amazed at the misinformation and contradictory summations of what exactly is going on in Washington regarding the budget and the debt ceiling. So, I'm going to keep all opinion out of my explanation and deliver only the facts. I believe it is imperative that every citizen of this country understands exactly what's going on and what the ramifications are for all proposed solutions. But, let's first take a look at what has been going on in the markets.
I WAS WRONG. There. I said it. I have been opining for months about how this market is overvalued and we are headed for a big sell off. Well, that hasn't exactly happened. Don't get me wrong, the economy is still a disaster. Record unemployment, houses still in free fall, and bad consumer spending are still dogging this so-called recovery. However, Wall Street is in full rally mode and keeps pushing ever higher. This has absolutely confounded me until my recent epiphany. I grossly underestimated the effect of the stimulus and the mountains of free money that the Fed has pumped into the system. Companies have been able to refinance their debt at essentially zero percent, make capital investments they previously could not afford, and use the free money to purchase short-term investments and essentially fabricate profits. Did you know that many investment banks that were bailed out on your tax dollar are borrowing money from the Fed to purchase short-term government bonds? This means that the big banks are using government money to purchase government debt, stripping off the interest payments and pocketing the profit, and then paying the Fed back with the proceeds from the sale of said government bonds!! So, they are borrowing your money to purchase investments that pay interest with YOUR tax dollars. Now, this is obviously unsustainable and is not without its consequences. All of this free money floating around is going to be a millstone around the neck of the dollar's value for years to come. Anyway, my point is simply that at least in the near term, Wall Street will continue to be able to post profits as long as the Fed keeps interest rates artificially low. So, barring any unforeseen events, my position now is that this market will probably keep floating higher. Yet, I am not changing my investment approach as the party has to end at some point and nobody knows when that will be.
Now to the budget. We have discussed the budget crisis at great length in previous posts so I will try to stick to the current debate and not digress to previous discussions. First off, this is not a partisan or politically based issue. People are trying to make it a political issue but it is simply an economic issue. Both parties have been spending more than we are bringing in for some time. Now, our debt has surpassed our entire gross domestic product. We currently do not have enough revenue coming in to cover all of our obligations. So, the President is advocating that we raise the self-imposed debt limit in order to issue more government debt (sell more bonds) to pay our bills. Republicans are refusing to raise the debt limit unless the government cuts spending that at least equals the amount that the debt will be increased. Democrats are advocating that taxes be raised in order to pay for the debt increase. Republicans will not sign on to the debt increase if tax hikes are included and the Dems have vowed to nix any plan that doesn't include tax increases as well as any reductions to entitlement programs like Welfare and Medicaid. We are at a bit of a stalemate.
What's the answer? As much as I hate to say it, we must raise the debt limit, TEMPORARILY. As for raising taxes, we do not have a revenue problem. What other company or organization in the world confronts a budget crisis without making cutting costs an absolute priority? We can no longer pay for programs that we BELIEVE government should provide without considering whether or not we can afford them. As for raising taxes, it's just not a good idea in a recession. First of all, the assertion that raising tax rates equals more tax revenue is ridiculous. Tax hikes may result in a segment of society paying more money, but large corporations and the wealthy will simply move the equivalent amount of capital or business offshore to counteract the tax increases. This equates to less jobs and money here at home. This is best illustrated by the fact that GE profited nearly $14 billion last year and didn't pay a cent in federal income taxes. They simply routed the profits through international channels and absorbed the costs here at home. In short, tax increases are dead weight on an economy and many on the Left refuse to accept it. What we need to do is cut spending and incentivize businesses to do more business here at home. For example, does the government make more money if 100 people are paying 35% of their income in taxes or if 120 people are paying 30% of their income taxes? You don't have to have a mathematics degree from Harvard to realize that more people paying a lower percent will yield more revenue for the government. We need to create more jobs and get this economy cranking again as well as cut government spending in order to pay off this ridiculous debt and avoid fiscal calamity in the future. Let's hope reason wins out in Washington. Well, that may be a bit naive!
I WAS WRONG. There. I said it. I have been opining for months about how this market is overvalued and we are headed for a big sell off. Well, that hasn't exactly happened. Don't get me wrong, the economy is still a disaster. Record unemployment, houses still in free fall, and bad consumer spending are still dogging this so-called recovery. However, Wall Street is in full rally mode and keeps pushing ever higher. This has absolutely confounded me until my recent epiphany. I grossly underestimated the effect of the stimulus and the mountains of free money that the Fed has pumped into the system. Companies have been able to refinance their debt at essentially zero percent, make capital investments they previously could not afford, and use the free money to purchase short-term investments and essentially fabricate profits. Did you know that many investment banks that were bailed out on your tax dollar are borrowing money from the Fed to purchase short-term government bonds? This means that the big banks are using government money to purchase government debt, stripping off the interest payments and pocketing the profit, and then paying the Fed back with the proceeds from the sale of said government bonds!! So, they are borrowing your money to purchase investments that pay interest with YOUR tax dollars. Now, this is obviously unsustainable and is not without its consequences. All of this free money floating around is going to be a millstone around the neck of the dollar's value for years to come. Anyway, my point is simply that at least in the near term, Wall Street will continue to be able to post profits as long as the Fed keeps interest rates artificially low. So, barring any unforeseen events, my position now is that this market will probably keep floating higher. Yet, I am not changing my investment approach as the party has to end at some point and nobody knows when that will be.
Now to the budget. We have discussed the budget crisis at great length in previous posts so I will try to stick to the current debate and not digress to previous discussions. First off, this is not a partisan or politically based issue. People are trying to make it a political issue but it is simply an economic issue. Both parties have been spending more than we are bringing in for some time. Now, our debt has surpassed our entire gross domestic product. We currently do not have enough revenue coming in to cover all of our obligations. So, the President is advocating that we raise the self-imposed debt limit in order to issue more government debt (sell more bonds) to pay our bills. Republicans are refusing to raise the debt limit unless the government cuts spending that at least equals the amount that the debt will be increased. Democrats are advocating that taxes be raised in order to pay for the debt increase. Republicans will not sign on to the debt increase if tax hikes are included and the Dems have vowed to nix any plan that doesn't include tax increases as well as any reductions to entitlement programs like Welfare and Medicaid. We are at a bit of a stalemate.
What's the answer? As much as I hate to say it, we must raise the debt limit, TEMPORARILY. As for raising taxes, we do not have a revenue problem. What other company or organization in the world confronts a budget crisis without making cutting costs an absolute priority? We can no longer pay for programs that we BELIEVE government should provide without considering whether or not we can afford them. As for raising taxes, it's just not a good idea in a recession. First of all, the assertion that raising tax rates equals more tax revenue is ridiculous. Tax hikes may result in a segment of society paying more money, but large corporations and the wealthy will simply move the equivalent amount of capital or business offshore to counteract the tax increases. This equates to less jobs and money here at home. This is best illustrated by the fact that GE profited nearly $14 billion last year and didn't pay a cent in federal income taxes. They simply routed the profits through international channels and absorbed the costs here at home. In short, tax increases are dead weight on an economy and many on the Left refuse to accept it. What we need to do is cut spending and incentivize businesses to do more business here at home. For example, does the government make more money if 100 people are paying 35% of their income in taxes or if 120 people are paying 30% of their income taxes? You don't have to have a mathematics degree from Harvard to realize that more people paying a lower percent will yield more revenue for the government. We need to create more jobs and get this economy cranking again as well as cut government spending in order to pay off this ridiculous debt and avoid fiscal calamity in the future. Let's hope reason wins out in Washington. Well, that may be a bit naive!
Thursday, June 16, 2011
The Greek Debt Crisis And How It Can Impact Your 401k
If you have been paying attention to the news then you most certainly have heard about the Greek debt crisis and have probably noticed the coinciding drop of our own stock market. What's the connection? Is there a connection? The simple answer is yes, there is a very important and critical connection. So, what's going to happen? That is the million dollar question. Is it possible that everything will work out in the European Union and that they will successfully deal with the Greek debt issue? Sure. One thing I have learned is that you should never underestimate the resourcefulness and determination of market forces to stabilize potentially damaging situations. However, what's more interesting, and scary, is what the situation in Greece is showing us.
The situation in Greece is fairly simple. Like nearly all other European Union member countries, Greece has a socialist society. By socialist I simply mean that the government provides cradle to grave benefits for its citizens which are paid for with pretty steep tax rates. When the global market melted down, so too did corporate and personal income tax payments. Greece, much like the US, ramped up spending and debt with the assumption that revenue from taxes would keep increasing. Well, we all know what happened. Greece now lacks the money necessary to make the interest payments on their outstanding debt and is relying on the EU to bail them out (write them a check for $12 billion to make their immediate payments). The problem is that Greece will be in the same situation 60 days from now. The long and short of it is that if Greece defaults it will send shock waves through the banks that own Greek debt could create a crisis much like the collapse of Lehman Brothers. The most concerning aspect of this is that there are several other EU countries that are in similar shape. Actually, the most concerning thing is that the US is in similar shape. So, what does this say about the market and your 401k?
There are 2 ways to deal with the problems that Greece, the entire EU, and the US are currently dealing with. The first method is to monetize the debt. This means simply that you print money to pay off your debts. Monetizing the debt is precisely what we, along with the EU, have been doing. The hope here is that the increase in the money supply that is caused by all of the printing will feed into the economy and will result in greater tax revenues which will enable the government to slowly and gradually balance the budget. Well, as we all know, the economy is not cooperating. The only other way to fix the problem is to drastically cut budgets. Politicians in the US and abroad refuse to do this as providing expensive social services has served as the most effective way to stay in office. Basically, the problem is quickly coming to a head and the governments around the world, including ours, are running out of time. At some point, the printing will have to stop. When this occurs, the economy and the society, as we are seeing happen in Greece, behaves much like an addict coming off heroine. Riots break out and social services come to a grinding halt. As you can imagine, this has devastating effects on the stock market as commerce is gravely hindered. Markets crash.
Now, this may be a worse case scenario but it is all too possible. Basically, now is not the time to be aggressive. Investors should be focused on preserving principal rather than making profits. Commodities have taken a bit of a hit lately but stick with them. If you don't own gold in your portfolio, buy some. Gold stocks are taking a hit right now along with the rest of the market. However, they are suffering from guilt by association. Gold is the one thing that has held up, nearly unscathed, during this recent market downturn. Gold stocks will bounce back as soon as the market realizes that they are being unfairly punished. In fact, the mining sector may be the only sector to garner healthy profits in the months to come. As the fears of default and more money printing build, gold will continue to rise as it is seen as the only way to hide from the wide spread currency devaluation.
Once again, if you have any questions or would like further information on how to protect your investments, never hesitate to email me. If I can't help you I can certainly direct you to someone who can. Best of luck
The situation in Greece is fairly simple. Like nearly all other European Union member countries, Greece has a socialist society. By socialist I simply mean that the government provides cradle to grave benefits for its citizens which are paid for with pretty steep tax rates. When the global market melted down, so too did corporate and personal income tax payments. Greece, much like the US, ramped up spending and debt with the assumption that revenue from taxes would keep increasing. Well, we all know what happened. Greece now lacks the money necessary to make the interest payments on their outstanding debt and is relying on the EU to bail them out (write them a check for $12 billion to make their immediate payments). The problem is that Greece will be in the same situation 60 days from now. The long and short of it is that if Greece defaults it will send shock waves through the banks that own Greek debt could create a crisis much like the collapse of Lehman Brothers. The most concerning aspect of this is that there are several other EU countries that are in similar shape. Actually, the most concerning thing is that the US is in similar shape. So, what does this say about the market and your 401k?
There are 2 ways to deal with the problems that Greece, the entire EU, and the US are currently dealing with. The first method is to monetize the debt. This means simply that you print money to pay off your debts. Monetizing the debt is precisely what we, along with the EU, have been doing. The hope here is that the increase in the money supply that is caused by all of the printing will feed into the economy and will result in greater tax revenues which will enable the government to slowly and gradually balance the budget. Well, as we all know, the economy is not cooperating. The only other way to fix the problem is to drastically cut budgets. Politicians in the US and abroad refuse to do this as providing expensive social services has served as the most effective way to stay in office. Basically, the problem is quickly coming to a head and the governments around the world, including ours, are running out of time. At some point, the printing will have to stop. When this occurs, the economy and the society, as we are seeing happen in Greece, behaves much like an addict coming off heroine. Riots break out and social services come to a grinding halt. As you can imagine, this has devastating effects on the stock market as commerce is gravely hindered. Markets crash.
Now, this may be a worse case scenario but it is all too possible. Basically, now is not the time to be aggressive. Investors should be focused on preserving principal rather than making profits. Commodities have taken a bit of a hit lately but stick with them. If you don't own gold in your portfolio, buy some. Gold stocks are taking a hit right now along with the rest of the market. However, they are suffering from guilt by association. Gold is the one thing that has held up, nearly unscathed, during this recent market downturn. Gold stocks will bounce back as soon as the market realizes that they are being unfairly punished. In fact, the mining sector may be the only sector to garner healthy profits in the months to come. As the fears of default and more money printing build, gold will continue to rise as it is seen as the only way to hide from the wide spread currency devaluation.
Once again, if you have any questions or would like further information on how to protect your investments, never hesitate to email me. If I can't help you I can certainly direct you to someone who can. Best of luck
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