And I'm back. I'm sure you all were waiting with baited breath, relentlessly checking the blog for my latest post. Or not. Anyway, I had the pleasure of being a stay-at-home mom last week as my wife was out of town on business. Needless to say, the blog was the furthest thing from my mind. We had a great time, but it was truly a baptism by fire! Much respect to all of the mothers out there--especially my wife (my wife added everything after the hyphen).
Now to the markets. We have seen a healthy comeback from the lows of the Japanese disaster. However, proceed with caution. Volumes (the number of shares traded on a given day) are very low. This is telling me that despite the rising stock prices, real conviction is lacking, and the market is moving north in a subtle manor. Historically speaking, light volumes are often followed by very sharp declines but not always. Something I found very telling were the earnings that were reported by Nike. Nike has been a solid mover and earnings producer throughout the recovery. Nike shares were pounded when they reported earnings that were significantly less than analysts' expectations. Nike cited higher input costs (oil, cotton, dye, energy, etc.) as being the main reason for the earnings' miss. This is precisely what I have been worried about. It will be very tough for companies to keep increasing profits (higher profits = higher stock prices) when they can no longer cut costs (jobs), and the materials that are necessary to produce their goods are more expensive. As for me and mine, we are cautiously moving forward--never hestitating to take profits. A wise man once said, "It's impossible to go broke taking profits."
So what's a deficit? That could quite possibly be the most often thought yet never spoken question. We constantly hear people talking about government deficits and debts; I have referenced them myself in previous posts. I realize that I have mounted my soap box and addressed this in previous entries, but I believe I failed in explaining in simple terms exactly what "deficit" means. It is vitally important that we all understand what a deficit is and what it means. I will do my best to explain: simply put, a deficit--as it relates to government spending--is the amount of the budget we are forced to borrow. Government generates "revenues" (I hate using the word revenue when it pertains to taxing the public) through income taxes, fines, permits, etc. Currently, government revenues are somewhere around $1.6 trillion a year. Our budget is around $3 trillion a year. That difference is made up through borrowing. The vast majority of that borrowing is done through issuing bonds. So, our deficit is $1.4 trillion this year alone. That breaks down to about $4 billion per day going directly on the proverbial credit card. Numbers this big are staggering--almost incomprehensible to the human mind. Our national debt is a whisper from $15 trillion. Next year, our debt will reach 100% of our GDP (Gross Domestic Product - the number that represents the total output of the U.S. economy) for the first time in our country's history. I truly believe it is important to understand the fiscal and political trends in any economy before you can put your money to work and invest. The question we should all be asking is this: how much debt can we handle? This is not a political question as neither party seems to show any real commitment to restoring fiscal sanity. However, it is a question that will impact all of our lives and our ability to provide for our families. Knowledge is power. Hopefully, when you understand the terms and parameters of the discussion, you will be able to sift through all of the noise out there and be able to make an informed decision.
On another note, I still have not received a single question. Email me directly with any topics that you would like me to address. All questions are confidential, and I will not use any names. Trust me, I have plenty of topics swirling around in my overactive mind. However, I would much rather address questions or concerns that you have.
Tuesday, March 29, 2011
Tuesday, March 15, 2011
Why The Unions Are So Upset
I REALLY want to talk about the union situations in Wisconsin and Michigan (and coming to a state near you, mark my words). They need to be addressed because they are intimately tied to what is going on in the markets and our economy. So, I am going to. First, let's discuss what is happening in the markets in general.
Confession: when I said in the Sunday post that it was a big week for the market and that we were really close to a big pull back, I was cheating a little bit. Before I wrote the post, I was on the internet watching the opening of the Nikkei (Japanese stock market). I saw Japanese stocks getting pummeled. When you add that to what is going on in the Middle East, it seemed simple: this market was going to shrug off this bad news as it has been doing for nearly two years, or we were finally going to see some reality set in. We were down huge early today and bounced back pretty remarkably. We did post an ugly loss, but we actually made up more than 50% of the losses that the market was showing this morning. I cannot reiterate this enough. This is not the market in which to learn how to trade stocks. I promise you that I am not saying this simply because it is what I do for a living. I'm saying it because it's scaring me too! The swings are SO violent and normal information is no longer driving the markets. We have reached a breaking point. The market wants to move violently upward or downward. It just hasn't made up its mind which one. Let's keep a good amount of cash on hand, earn our dividends, and see where this thing goes. Keep your eye on the action this week. I look at Friday as a HUGE hallmark for things to come. If we close Friday higher than we are now, I look for us to move substantially higher. Likewise, if we close lower I will expect that trend to continue into next week.
Now to the Unions. We have all seen the stories and news casts from Wisconsin, the debate raging on whether or not we should limit the rights of labor unions to use collective bargaining. It is important to point out that collective bargaining itself is not on trial. Collective bargaining for state employees is the issue. The issue can be boiled down to this: do state employees have the same right or ability to make demands when they are being paid with tax payers dollars? Interestingly enough, Federal employees gave up the right to collective bargaining in 1979 because the federal government decided it was not fair to have unrestrained bargaining over tax payer dollars. So, why are the state employees putting up such a fight? Well, I'm gonna give you my unadulterated view of this whole thing. States cannot carry the burden that all of these mandatory raises, paid vacation hours, deluxe health insurance, and pension plans. That is not an opinion. Can you afford to pay more taxes? How much will be enough? Now, here is where I differ from many people that hold that same view. Is this problem the union's fault? Are we really going to lay this monumental fiscal disaster at the feet of the middle class government worker that has served us all for their entire career? Truly, the union's have a great point. For the last 40 years, the value of a union wage has been diluted and eroded. However, this dilution is not because of unsubstantial "COLAs" (cost of living adjustments) or insufficient wages. Ironically, the fiscal handicap of the modern day government union member,--or any union member for that matter--can be laid at the feet of the very politicians who claim to be "fighting" for unions. The greatest tax and monetary blow to the working middle class is the depreciation of our currency. As the dollar falls, goods such as oil, corn, plastic, gas, lumber, copper, wheat, coffee, sugar, cotton, and nearly everything else we consume, increases drastically in price. The upper class is able to offset such increases through investments and economic growth. Your average middle class union worker lacks the readily accessible 100k to purchase oil futures and benefit from a weakening dollar. The very politicians who have lobbied for increased government spending and "programs" have unwittingly undermined the foundation of our middle class. A middle class union member used to own a home and two cars. Now, a union wage gets you a mortgage that's underwater and a car payment that's double than what you paid in rent on your first apartment. Inflation is insidious and truly is the greatest tax on the middle class. In fact, it is decimating our middle class as we speak. Perhaps government cut backs and fiscal restraint won't ruin the middle class or the union family; it may be their only hope.
Confession: when I said in the Sunday post that it was a big week for the market and that we were really close to a big pull back, I was cheating a little bit. Before I wrote the post, I was on the internet watching the opening of the Nikkei (Japanese stock market). I saw Japanese stocks getting pummeled. When you add that to what is going on in the Middle East, it seemed simple: this market was going to shrug off this bad news as it has been doing for nearly two years, or we were finally going to see some reality set in. We were down huge early today and bounced back pretty remarkably. We did post an ugly loss, but we actually made up more than 50% of the losses that the market was showing this morning. I cannot reiterate this enough. This is not the market in which to learn how to trade stocks. I promise you that I am not saying this simply because it is what I do for a living. I'm saying it because it's scaring me too! The swings are SO violent and normal information is no longer driving the markets. We have reached a breaking point. The market wants to move violently upward or downward. It just hasn't made up its mind which one. Let's keep a good amount of cash on hand, earn our dividends, and see where this thing goes. Keep your eye on the action this week. I look at Friday as a HUGE hallmark for things to come. If we close Friday higher than we are now, I look for us to move substantially higher. Likewise, if we close lower I will expect that trend to continue into next week.
Now to the Unions. We have all seen the stories and news casts from Wisconsin, the debate raging on whether or not we should limit the rights of labor unions to use collective bargaining. It is important to point out that collective bargaining itself is not on trial. Collective bargaining for state employees is the issue. The issue can be boiled down to this: do state employees have the same right or ability to make demands when they are being paid with tax payers dollars? Interestingly enough, Federal employees gave up the right to collective bargaining in 1979 because the federal government decided it was not fair to have unrestrained bargaining over tax payer dollars. So, why are the state employees putting up such a fight? Well, I'm gonna give you my unadulterated view of this whole thing. States cannot carry the burden that all of these mandatory raises, paid vacation hours, deluxe health insurance, and pension plans. That is not an opinion. Can you afford to pay more taxes? How much will be enough? Now, here is where I differ from many people that hold that same view. Is this problem the union's fault? Are we really going to lay this monumental fiscal disaster at the feet of the middle class government worker that has served us all for their entire career? Truly, the union's have a great point. For the last 40 years, the value of a union wage has been diluted and eroded. However, this dilution is not because of unsubstantial "COLAs" (cost of living adjustments) or insufficient wages. Ironically, the fiscal handicap of the modern day government union member,--or any union member for that matter--can be laid at the feet of the very politicians who claim to be "fighting" for unions. The greatest tax and monetary blow to the working middle class is the depreciation of our currency. As the dollar falls, goods such as oil, corn, plastic, gas, lumber, copper, wheat, coffee, sugar, cotton, and nearly everything else we consume, increases drastically in price. The upper class is able to offset such increases through investments and economic growth. Your average middle class union worker lacks the readily accessible 100k to purchase oil futures and benefit from a weakening dollar. The very politicians who have lobbied for increased government spending and "programs" have unwittingly undermined the foundation of our middle class. A middle class union member used to own a home and two cars. Now, a union wage gets you a mortgage that's underwater and a car payment that's double than what you paid in rent on your first apartment. Inflation is insidious and truly is the greatest tax on the middle class. In fact, it is decimating our middle class as we speak. Perhaps government cut backs and fiscal restraint won't ruin the middle class or the union family; it may be their only hope.
Sunday, March 13, 2011
Where Is This Market Heading?
I hate making predictions. They are so irrelevant when it comes to making money. The one thing that I don't think enough people understand is that the best traders and investors don't particularly care what certain stocks are doing. They invest in certain stocks and sectors because they believe in the fundamentals that will eventually win out. Short-term price movements are irrelevant. Most of us are trying to make money in 5-10 year windows. So, invest in funds and stocks for fundamental reasons. If the price of that particular security goes down, and the fundamental reasons you like it remain unchanged, buy some more. Stay unemotional. That is exactly why I hate predictions. If your prediction doesn't come true, one will often assume that they were wrong and reverse their stance, only to get slammed soon after. Try to avoid predictions and stick with fundamentals. That being said, I'm going to make a prediction!!
Ok. I'm not really going to make a prediction--more like an observation. This is a HUGE week for the market. My overall feeling is that this market is relatively close to a big pull back. We have serious problems in Europe, rising inflation, rising taxes, and major global concerns. The other issue that I see out there is simply that I do not believe our economy is going to enable companies to continue their current earnings' growth. Companies have been relying on modest growth and major cost cutting to hit their earnings' projections. There just isn't that much cost cutting left to do. Consumers make up 65% of our economy. Continuing real estate weakness and inflation will continue to tax the average consumer thus decreasing their purchasing power. Anyway, I don't think we are looking at a total collapse, just a long period of sharp ups and downs. Never hesitate to take profits or buy the dips.
Continue to keep an eye on oil. It did breach $100 but with very little conviction. It appears to me that it will pull back a little here but then move back up and hover around these levels. This week will tell us a lot about where this market is heading in general. But, like I said, do not get too confident if it does indeed move in a positive direction. There are clouds on the horizon and everyone needs to move forward with extreme caution.
Ok. I'm not really going to make a prediction--more like an observation. This is a HUGE week for the market. My overall feeling is that this market is relatively close to a big pull back. We have serious problems in Europe, rising inflation, rising taxes, and major global concerns. The other issue that I see out there is simply that I do not believe our economy is going to enable companies to continue their current earnings' growth. Companies have been relying on modest growth and major cost cutting to hit their earnings' projections. There just isn't that much cost cutting left to do. Consumers make up 65% of our economy. Continuing real estate weakness and inflation will continue to tax the average consumer thus decreasing their purchasing power. Anyway, I don't think we are looking at a total collapse, just a long period of sharp ups and downs. Never hesitate to take profits or buy the dips.
Continue to keep an eye on oil. It did breach $100 but with very little conviction. It appears to me that it will pull back a little here but then move back up and hover around these levels. This week will tell us a lot about where this market is heading in general. But, like I said, do not get too confident if it does indeed move in a positive direction. There are clouds on the horizon and everyone needs to move forward with extreme caution.
Tuesday, March 8, 2011
Inflation: The Dollar vs. Gold III
Well, I'm back. I hope you will forgive the long absence as my wife coordinated a wonderful and extended weekend for my birthday. Let's start where we left off.
In my last post, I discussed precisely why I saw gold as a good investment. Let me state plainly that I do not believe you should make gold your entire portfolio. It should be used in concert with other appropriate investments. That being said, how does one go about investing in gold? Should we go door to door and offer cash for old and/broken jewelry? Should you buy gold coins and bury them in your back yard? I have heard a lot of strange ideas and strategies. Here is what I think is the best way to take advantage of inflation.
There are ETFs (Exchange Traded Funds) and gold funds out there that allow you to invest in a fund that owns actual gold. I think this is a viable way to invest in gold and certainly has its place in your portfolio. I also think that you should invest in gold mining companies. While a downturn in the market would most certainly drag down gold stocks as well, eventually, the company's earnings would reflect the higher price in gold and the company's stock would eventually rise to reflect their higher earnings. Wall Street pays a multiple for earnings. Basically, this means that we can make more by owning company's that produce gold rather than owning the gold itself. Now, there are inherent risks with owning a company rather than the gold itself. However, both investing strategies can be useful and should be deployed. For specific companies or funds, email me directly and I will point you in the right direction.
I received a call from a really frustrated client today regarding the overall market. This individual was frustrated that many of our stocks were not performing as well as the overall market. I have to admit, I share this frustration and this phone conversation threw me into an afternoon of thought and introspection. I came to this: when we see insanity occurring, we must abstain from joining the party. This market has exploded in the past two years despite record unemployment and spectacularly out of control government spending. The endless pump of government money into this market has skewed the reality. I have sat and watched companies like Netflix endlessly rise despite the fact that their earnings are no where close to justifying their share price. I firmly believe that we are in the middle of another asset bubble that has been created by easy money. I will forsake short-term gains for long-term security and so should you. We must focus on quality companies, preferably those paying dividends, and investments that will protect us from inflation. We must not be tempted and coerced into chasing performance. We must stay disciplined and stick with the fundamentals. I learned this lesson 4 years ago while I was doing market research with a finance professor. At the time, the market was at all time highs and most pundits were arguing it was going higher.
"This is not the Tech-Boom. This bull market is fueled by earnings. Earning multiples are still conservative and this market is going much higher."
Sound familiar? I, along with the help of the good professor, began researching this very statement and inadvertantly stumbled on some alarming facts. We could not argue with the record earnings that company's were posting at the time. We wanted to know where the earnings were coming from. We found that the overwhelming amount of new jobs that had been added to the economy over the past 7 years were directly due to the real estate market. Banks and financial firms were making record profits, the overwhelming majority of which were from real estate loans and the various mutations thereof. Everyone and their mother was making up to 100% of their normal income by flipping a house or two. How many of you know someone who purchased a boat or a car by refinancing their home? The point is that nearly every aspect of the economic boom was directly attributed to the housing market. At that time, the housing market was appreciating by nearly 20% a year. History showed us that this was completely unsustainable and would come to a disastrous end. I promptly liquidated every investment that my wife and I had at the time (except our gold stock!). I even met with a portfolio manager at the mutual fund company that I worked for at the time and shared with him my findings. I was brushed off and told that nobody can time the markets and earnings were healthy. Within the next year the market had fallen nearly 50% and the whole financial system hung precariously by a thread. I don't tell this story to proclaim my financial genius but rather to point out the irrational exuberance that almost always accompanies a rising stock market.
History is repeating itself. Consumers are in bad shape. Most of our homes are underwater. Unemployment is really near 17% (I will explain this statement and the unemployment rate in a later post). High oil, sugar, wheat, coffee, and corn are putting an additional strain on our budgets. Rising interest rates are on the way. So, why is the market going up? What has changed? The fed is pumping money. It can't continue forever. Be VERY careful and keep an unusually high amount of cash in your portfolio. Eventually, the fundamentals win out. Some argue that the government can continue pumping and "stimulating" this economy back to health. I will leave you with a quote from a man who was much smarter than I--
"We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." - Winston Churchill
In my last post, I discussed precisely why I saw gold as a good investment. Let me state plainly that I do not believe you should make gold your entire portfolio. It should be used in concert with other appropriate investments. That being said, how does one go about investing in gold? Should we go door to door and offer cash for old and/broken jewelry? Should you buy gold coins and bury them in your back yard? I have heard a lot of strange ideas and strategies. Here is what I think is the best way to take advantage of inflation.
There are ETFs (Exchange Traded Funds) and gold funds out there that allow you to invest in a fund that owns actual gold. I think this is a viable way to invest in gold and certainly has its place in your portfolio. I also think that you should invest in gold mining companies. While a downturn in the market would most certainly drag down gold stocks as well, eventually, the company's earnings would reflect the higher price in gold and the company's stock would eventually rise to reflect their higher earnings. Wall Street pays a multiple for earnings. Basically, this means that we can make more by owning company's that produce gold rather than owning the gold itself. Now, there are inherent risks with owning a company rather than the gold itself. However, both investing strategies can be useful and should be deployed. For specific companies or funds, email me directly and I will point you in the right direction.
I received a call from a really frustrated client today regarding the overall market. This individual was frustrated that many of our stocks were not performing as well as the overall market. I have to admit, I share this frustration and this phone conversation threw me into an afternoon of thought and introspection. I came to this: when we see insanity occurring, we must abstain from joining the party. This market has exploded in the past two years despite record unemployment and spectacularly out of control government spending. The endless pump of government money into this market has skewed the reality. I have sat and watched companies like Netflix endlessly rise despite the fact that their earnings are no where close to justifying their share price. I firmly believe that we are in the middle of another asset bubble that has been created by easy money. I will forsake short-term gains for long-term security and so should you. We must focus on quality companies, preferably those paying dividends, and investments that will protect us from inflation. We must not be tempted and coerced into chasing performance. We must stay disciplined and stick with the fundamentals. I learned this lesson 4 years ago while I was doing market research with a finance professor. At the time, the market was at all time highs and most pundits were arguing it was going higher.
"This is not the Tech-Boom. This bull market is fueled by earnings. Earning multiples are still conservative and this market is going much higher."
Sound familiar? I, along with the help of the good professor, began researching this very statement and inadvertantly stumbled on some alarming facts. We could not argue with the record earnings that company's were posting at the time. We wanted to know where the earnings were coming from. We found that the overwhelming amount of new jobs that had been added to the economy over the past 7 years were directly due to the real estate market. Banks and financial firms were making record profits, the overwhelming majority of which were from real estate loans and the various mutations thereof. Everyone and their mother was making up to 100% of their normal income by flipping a house or two. How many of you know someone who purchased a boat or a car by refinancing their home? The point is that nearly every aspect of the economic boom was directly attributed to the housing market. At that time, the housing market was appreciating by nearly 20% a year. History showed us that this was completely unsustainable and would come to a disastrous end. I promptly liquidated every investment that my wife and I had at the time (except our gold stock!). I even met with a portfolio manager at the mutual fund company that I worked for at the time and shared with him my findings. I was brushed off and told that nobody can time the markets and earnings were healthy. Within the next year the market had fallen nearly 50% and the whole financial system hung precariously by a thread. I don't tell this story to proclaim my financial genius but rather to point out the irrational exuberance that almost always accompanies a rising stock market.
History is repeating itself. Consumers are in bad shape. Most of our homes are underwater. Unemployment is really near 17% (I will explain this statement and the unemployment rate in a later post). High oil, sugar, wheat, coffee, and corn are putting an additional strain on our budgets. Rising interest rates are on the way. So, why is the market going up? What has changed? The fed is pumping money. It can't continue forever. Be VERY careful and keep an unusually high amount of cash in your portfolio. Eventually, the fundamentals win out. Some argue that the government can continue pumping and "stimulating" this economy back to health. I will leave you with a quote from a man who was much smarter than I--
"We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." - Winston Churchill
Tuesday, March 1, 2011
Inflation: The Dollar vs. Gold II
Gold. I'm sure everyone reading this blog has heard about the price of gold. Gold is soaring right now at $1430 an ounce! The markets pulled back while gold and oil shot up sharply today. Clients of mine know that I am a big fan of taking profits and selling nearly ANY stock at historic highs. Well, not this time. Gold is an essential part of all stock portfolios. So, let's dig into what has pushed gold up and look solely at the facts. Bare with me while I frame the argument. I will try to keep it concise!!
As I wrote yesterday, gold is denominated in US dollars. This means that the price of gold is quoted in US dollars the world over. This is extremely significant because of the fact that the US dollar and gold are the most widely sought after and accepted currencies in the history of the world. It's not even close. They are DEEPLY linked.
Unlike gold, the dollar is a fiat currency. This means that a central bank has control over the currency and can print more of it whenever they feel the urge. Furthermore--and this is huge--the government can print the currency without doing ANYTHING at all to account for it: they don't need to put more gold in Fort Knox; they don't need to pay off debt. All the Federal Reserve Bank has to do is flip the switch and print away. The Fed, as well as nearly every other central bank in the developed world, has been printing, and quite vigorously at that. Meanwhile, gold is becoming more scarce because of the increasing demand in emerging markets and the fact that it's an element, and they aren't making anymore. The printing and overspending is taking its toll in global markets that were once seen as unshakable. Greece saw riots in the streets as their insolvent government could no longer meet its fiscal promises. The entire Euro zone is facing the real possibility of defaulting on loans. Meanwhile, our country is running a deficit (meaning simply the amount of our budget that we have to borrow because we lack the revenue) that is over 10% of our gross domestic product. To put this in prospective, we have averaged 3.5% of our gross domestic product for the last 80 years or so. That massive increase in spending is seen as a credit risk for our country. Simply put, the world no longer wants to pay a premium price for our government issued bonds that they once did. We are not seen as the risk free bet any longer. So, what would make investors continue to want to buy our bonds which would enable us to meet our fiscal demands? Well, we would need to pay a higher interest rate. Right? Remember, higher risk = higher interest rates.
I promise I'm coming to a point here, just bear with me. Ok, well we have established that our country is forced to borrow (which just means that they sell bonds) nearly half of our budget every year. But, we also established that investors are going to want a higher interest rate if they are going to take on the ever-increasing risk that is presented by our massive spending. Well, herein lies the problem: if we increase interest rates by 1%, the interest payments our government would have to pay out on those bonds would increase by over $250 billion dollars!! So, we would just be digging ourselves a bigger hole. Ok, enough of that. You get the idea. We are in real trouble. If we continue spending, we will actually get to a day in the not-so-distant future when the interest payments on our outstanding debt will surpass our entire federal budget. No kidding. With all of this going on--all of this deterioration of global currencies--how would gold not go up? Or, has gold gone up or merely adjusted itself to reflect the dilution effect that all of this printing has had?
Gold is the one currency that has not been printing.
Is this making sense? Let me know if I am confusing you. It is just SO important that everyone out there understand the intense severity of what is currently going on and how to protect their family's financial well being from the madness that has taken over our system. I also want to explain WHY gold is a good investment. On Thursday, I will pick-up where I left off and give you some thoughts as to what the best way to invest in gold is. Until then, keep an eye on this market. Oil is at a tipping point and could run much higher which will probably push this market much lower. This scenario should also play well for gold.
As I wrote yesterday, gold is denominated in US dollars. This means that the price of gold is quoted in US dollars the world over. This is extremely significant because of the fact that the US dollar and gold are the most widely sought after and accepted currencies in the history of the world. It's not even close. They are DEEPLY linked.
Unlike gold, the dollar is a fiat currency. This means that a central bank has control over the currency and can print more of it whenever they feel the urge. Furthermore--and this is huge--the government can print the currency without doing ANYTHING at all to account for it: they don't need to put more gold in Fort Knox; they don't need to pay off debt. All the Federal Reserve Bank has to do is flip the switch and print away. The Fed, as well as nearly every other central bank in the developed world, has been printing, and quite vigorously at that. Meanwhile, gold is becoming more scarce because of the increasing demand in emerging markets and the fact that it's an element, and they aren't making anymore. The printing and overspending is taking its toll in global markets that were once seen as unshakable. Greece saw riots in the streets as their insolvent government could no longer meet its fiscal promises. The entire Euro zone is facing the real possibility of defaulting on loans. Meanwhile, our country is running a deficit (meaning simply the amount of our budget that we have to borrow because we lack the revenue) that is over 10% of our gross domestic product. To put this in prospective, we have averaged 3.5% of our gross domestic product for the last 80 years or so. That massive increase in spending is seen as a credit risk for our country. Simply put, the world no longer wants to pay a premium price for our government issued bonds that they once did. We are not seen as the risk free bet any longer. So, what would make investors continue to want to buy our bonds which would enable us to meet our fiscal demands? Well, we would need to pay a higher interest rate. Right? Remember, higher risk = higher interest rates.
I promise I'm coming to a point here, just bear with me. Ok, well we have established that our country is forced to borrow (which just means that they sell bonds) nearly half of our budget every year. But, we also established that investors are going to want a higher interest rate if they are going to take on the ever-increasing risk that is presented by our massive spending. Well, herein lies the problem: if we increase interest rates by 1%, the interest payments our government would have to pay out on those bonds would increase by over $250 billion dollars!! So, we would just be digging ourselves a bigger hole. Ok, enough of that. You get the idea. We are in real trouble. If we continue spending, we will actually get to a day in the not-so-distant future when the interest payments on our outstanding debt will surpass our entire federal budget. No kidding. With all of this going on--all of this deterioration of global currencies--how would gold not go up? Or, has gold gone up or merely adjusted itself to reflect the dilution effect that all of this printing has had?
Gold is the one currency that has not been printing.
Is this making sense? Let me know if I am confusing you. It is just SO important that everyone out there understand the intense severity of what is currently going on and how to protect their family's financial well being from the madness that has taken over our system. I also want to explain WHY gold is a good investment. On Thursday, I will pick-up where I left off and give you some thoughts as to what the best way to invest in gold is. Until then, keep an eye on this market. Oil is at a tipping point and could run much higher which will probably push this market much lower. This scenario should also play well for gold.
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