Mid-May 2013 Blog Update of THE GREAT DEPRESSION of DEBT

Note that my new novel “The Child Remover” is now available on Amazon as both a paperback and in a Kindle version. 

HAVE WEALTH AND WAGE DISPARITY REACHED THEIR LIMITS?

In the economic recovery from 2009 through 2011, the mean net worth of households in the upper 7% of the wealth distribution rose by 28%, while the mean net worth of households in the lower 93% dropped by 4%, according to a Pew Research Center analysis of newly released Census Bureau data.  This was largely due to the stock market going up while housing prices were stagnant or dropping slightly.  Ordinary people have most of their wealth in housing.

Since the beginning of 2011, median housing prices have rebounded (+10% through Feb).  But the stock market rebounded even more (+19%) in the same time period.  So the disparity of wealth between the haves and have-nots has likely grown even wider.  A recent article in The New York Times (http://www.nytimes.com/interactive/2013/04/26/business/Widening-Inequality-In-Wages.html?ref=economy) shows the same growing disparity in incomes. 

How much longer are the have-nots going to put up with this? History shows that this is a recipe for disaster.  Are we seeing the first signs of rebellion by cheap labor with the recent strikes by those working in fast food industries across the country?  National chains like McDonald’s, Wendy’s, and Subway have been affected.  Of special note is that a McDonald’s in Detroit brought in replacement workers to replace strikers, and they also walked off the job!  Workers are demanding $15 an hour versus the $7.40 per hour many are currently paid.  Workers maintain that no one can support a family on $7.40 per hour.  And workers are demanding the right to form a union!

According to the 2011 Bureau of Labor Statistics, there are approximately 2.8 million people employed in food preparation and serving jobs, which include fast food.  This is roughly 9% of the US workforce, so this is not a trivial group to be messing with.  And 5.4% of those workers are college graduates, which gives these workers even more motivation to strike since they are so underutilized versus their education levels.  And their education may give them some leadership skills on motivating other workers to walk.

An interesting observation is that these “strikes” occurred without having a union or any one overall leader.  Apparently the new social media is enough to get this level of action from workers.  This does not bode well for companies wanting to stop unions.  Even states like South Carolina (that has a mantra of “don’t go to China when you can get cheap non-union labor here”) will not be able to flip burgers at low cost for other states as SC does in manufacturing or assembly work.

ANOTHER DISPARITY EXAMPLE – RESPONSE TO SEQUESTER

When air travelers were inconvenienced by hour or more delays, Congress promptly modified the Sequester provision that caused the delay.  But federal funding for senior nutrition has also been reduced, meaning less food for poor people. The Meals On Wheels Association of America puts the loss at 19 million meals.  Congress seems to have no interest in addressing the meal problem.  I guess in the US a business person (or Congressman) being delayed an hour or two is more of a tragedy than poor old people going hungry! 

Sadly, the Sequester probably wasn’t even needed.  The annual deficit has fallen 32% over the first seven months of this fiscal year compared to the same period last year, according to the Congressional Budget Office.  The major reason is the increase in tax revenues.  And that does not include the $59 billion that bailed out Fannie Mae just announced that they are sending the government.  Although we still have a deficit, it is improving and we certainly don’t need the negative stimulus of the Sequester.

ANOTHER DISPARITY PROBLEM – CONTINUING TAX BREAKS FOR WEALTHY COMPANIES

Apple went $17 billion into debt to pay its shareholders a dividend despite having $145 billion in cash.  It did this because a large amount of Apple’s cash is overseas, and Apple would have had to pay an estimated $9 billion in taxes if it brought the needed funds back into the U.S.  It was cheaper for Apple just to sell bonds for its needed extra cash.

The U.S. continues to enable companies to play such tax sheltering games while the U.S. is desperate to use the taxes to reduce the deficit, pay off debts, or increase stimuli to put people back to work.  But hey, companies are people too!

A PREDICTABLE REACTION TO EXTREME DISPARITY

There have been many recent articles about how people are getting used to living on less, and living-on-the-cheap is becoming a socially acceptable life style.  The problem with this (related to U.S. economic growth) is that once frugality is embraced, it isn’t easily reversed.  Are there any of us who have not seen the reluctance of those who lived through the Great Depression to spend, even when later they had huge savings? 

An online poll of 1,538 people conducted March 4-8 by Reuters/Ipsos (http://www.huffingtonpost.com/2013/03/12/cut-monthly-spending_n_2862080.html) found that two-thirds of adults say they are cutting their monthly spending and almost all of the rest say their spending is little changed.

SO WHAT DOES ALL THIS MEAN?

If the fast food workers are successful in unionizing and driving up their wages, the cost of fast food will go up.  The workers on the next higher wage tier will see themselves passed in wages by the fast food people, so they will also demand higher wages.  People worry about the Fed printing money and eventually triggering inflation, but a wage spiral driven by unionism can do the same thing. 

If people continue cutting back on spending, companies will see business decline.  To keep profits up, companies will have to raise prices, triggering inflation.

The wealthy have been very successful in driving up wage disparity and keeping their wealth through tax loopholes.  They have achieved these loopholes by buying politicians and even buying the courts.  But the wealthy will be powerless against the huge forces of the masses if the have-nots get fed up and start demanding what they see as their fair share.  Kings, tyrants, and dictators all learned this lesson in the past.  Capitalists will too!  Without a doubt! 

When will this rebellion occur?  I suspect it has already started with the fast food people.  How fast will the movement grow?  I don’t know.  But I suspect that once these workers taste victory in forcing higher wages, which could be within a year or two, the floodgates of unionism will open.  Then, man the lifeboats and watch the stock market fall!  We will have inflation with a slowing economy.

WILL THE REPUBLICAN PARTY BE DESTROYED BY THE NEWTOWN TRAGEDY?

The families of those killed in the Newtown tragedy want some action, even if it is a largely token expansion of background checks of gun purchasers (which is supported by 85% to 90% of people) and perhaps some limit on gun magazines.  Not only did Congress (mostly Republicans) successfully stop all action on this, some local Republican groups are literally making a mockery of any actions involving restrictions on assault rifles.  For example, the SC Bluffton Republican Club is conducting a raffle on an AR-15 assault rifle, with two 30-round magazines thrown in to whet the appetites and excite prospective ticket buyers.

Republicans should learn from the history of MADD (Mothers Against Drunk Driving.)  Beckie Brown, who started MADD, became involved when her son died at age 18 from injuries suffered in a traffic crash involving a drunk driver.  MADD has grown into a very successful non-profit group that has made huge changes in the way the US deals with drunk drivers.  There were 26 people killed at Newtown by an assault rifle (don’t email me that guns don’t kill), and those 26 people have families just as motivated by their losses as Beckie Brown was when she took on drunk driving laws.  Republicans just don’t realize the limitless energies of a grieving family, especially a mother who has lost her young child, to take on all who stand in their way.  And many of these families have the financial resources, the education, and the political backing of people like VP Biden in their battle.  The Gun Manufacturer’s lobby (the NRA) won’t know what hit them when the dust settles, and neither will many Republicans.  Sure, representatives from states like South Carolina won’t be affected.  Someone says “2^nd amendment” in SC and the people, including their Representatives, all bring out their assault rifles, their pit bulls, their confederate flags, and give a hearty rebel yell. 

But there are many states not quite that radical.  And Senators in those states will be targeted and will pay the price.  For example, for the following targeted four Senators that voted against background checks, polls show that Sens. Kelly Ayotte (R-N.H.), Mark Begich (D-Alaska), Max Baucus (D-Mont.) and Lisa Murkowski (R-Alaska) have seen precipitous drops in their approval ratings.  I am sure that more than a few other Senators that voted against background checks have taken note.

By the way, Republicans will also be blamed for the coming bad effects of the Sequester.  Next year’s elections will bring tears to the eyes of many Republicans.

WHAT SHOULD AN INVESTOR DO?

I should note that I do own a small amount of stock in a company that is shale drilling in North Dakota.  But the rest of my money is in money market funds.  I no longer own the ETF TIP.  I may buy TIPS directly from the government eventually, but only when the base interest rate goes up.

I make no claims on knowing what others should do with their money.  I think that it may be a great time to buy a home if you need one, because mortgage rates are so low and home prices are at their historical mean.  Other than that, it may be best to rely on old fashioned savings going into cash (money market?), and then eventually buying TIP directly from the government once you see inflation raising its ugly head. 

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

Mid-April 2013 Blog Update of THE GREAT DEPRESSION of DEBT

Note that my new novel “The Child Remover” is now available on Amazon as both a paperback and in a Kindle version. 

IS THE STOCK MARKET TOO HIGH PRICED?

Since I started doing this blog, I have used the price/dividend (P/D) ratio as a criterion to determine if the stock market was overpriced.  I did this because the P/D had been a traditionally stable and reliable measure for extended periods.  However, when the economy crashed in 2009, something changed to make this ratio less useful.  As expected, many companies had to cut dividends.  But when earnings returned, companies began holding back huge sums of cash rather than increasing dividends.  This is sometimes referred to as the $1.7 trillion “Dividend Vault.” This has resulted in lower dividends than would normally have been expected, making the P/D ratio unusually high and no longer a viable bench mark.  Because of pressure from stockholders, the return to higher dividends has now started.  But it may take several years before dividend levels return to prior levels. 

Per: http://www.loomissayles.com/Internet/InternetData.nsf/0/4ED2439036D9911585257B42005959C8/$FILE/AContinuingCaseforDividends.pdf, in 2012, companies paid out 32% of operating earnings in dividends.  If companies were paying 38% of operating earnings, which they did on the average for 20 years, the current P/D ratio would be 20% lower.  This would still indicate that the market was overpriced, but perhaps only by 30% versus the 50% I have been showing.

A lot of news reports have been saying that the S&P 500 has recently reached record highs.  Not so.  Per Shiller’s data, when adjusted for inflation the current S&P 500 price is 79.6% of its all-time high hit in August, 2000.  http://www.multpl.com/s-p-500-price/.  But looking at the chart, the price is still historically high.  The current price is about 35% to 40% higher than its mean trend line since the Great Depression.

Because the P/D ratio has lost meaning for the last few years, I will no longer include the P/D ratio calculation.  So, how do we determine if the market is overpriced?  Beats me!  Maybe the same way we determine if gold is overpriced (we guess).  Or, based on the above numbers, consider going back into the market if it drops 30%.

MAYBE WE CAN ESTIMATE FUTURE STOCK MARKET PRICE CHANGES BASED ON THE EXPECTED FUTURE ECONOMY!

Well, most economists say that future economy expectations are already priced in.  So, unless we are smarter than everyone else on predicting the economy, we have no ready advantage.  But at least we can look at some of the big forces affecting the economy and see if we can perhaps see something others have not.

The results of the Sequester have yet to be felt.  But if the Sequester cuts are not reversed, we are likely going to see a recession by perhaps the end of the year.  Retail sales look like they are already weakening due to the recent 2% raise in Social Security tax back to its previous level.  That is equivalent to a 1.5 hit on GDP!  As Sequester unemployment and reduced hours come into effect later in the year, the slowing in retail sales is likely to get another big hit.  But here’s the kicker!  Does anyone know what Congress will do?  Will the Sequester get cancelled once the legislators start feeling the heat from voters when the economy slows?  Certainly those up for reelection next year are going to have second thoughts.

Housing prices have recently been going up, mainly because of a mini-bubble the Fed has started with its 3.5% mortgage rates.  Even at the current low 2.1% inflation rate, a qualified buyer may very well be making money on a home purchase when the gains from mortgage interest deductions on taxes are included.  The only thing that is keeping this bubble mini is that banks are not allowing those without good credit to buy, nor are they allowing the fictitious home appraisals that were so common in the most recent housing fiasco.  Also, with $1 trillion dollar of education debts in the age group most likely to start buying houses, this bubble is limited in size because housing demand will be limited by those huge debts.

The labor force participation rate has dropped to 63.3% from its high of 67.3% in 2000.  So 4% fewer potential workers are contributing to the growth of our economy.  This is bad, right?  But in those same years, GDP has grown 64%.  That means that we have become much more efficient!  Now, what if we grow from here!  We have 4% of workers, who, with the right kind of jobs and the right pay, will likely be willing to come back to work.  And with the improved efficiencies, our economy will steam!  Yes, part of the efficiency gains came by basically freezing the wages for most workers (when inflation is included).  But, with needed tax changes in closing loopholes where the wealthy and corporations got all the recent gains, can’t future gains be shared much as they were in the 1980’s?  This isn’t all that much of a stretch!

Where would the additional jobs come from?  Well, with the added efficiencies, already there are some trends showing jobs moving back to the US.  And if the US becomes energy independent, which I and others believe is going to happen, this will give us another cost advantage, along with the direct and indirect jobs added by the expanding energy industries.  And this will be long term, because the first stage will be oil and gas recovery, with the second stage being solar and wind with natural gas backup.  This could be an exciting future for the US.  And, this is one area that I do not see yet incorporated in future economic forecasts or the likely related gains in the stock market. 

Okay, time to dampen the optimism.  Although North Korea may be all bluff with no related resultant war, Iran and its nuclear development is more likely to result in conflict.  Israel will go after Iran’s nuclear facilities, and the US is likely to be drawn into the conflict, at least on a military material and support basis.  And this is likely to happen within a year or two.  Then, all bets are off because the US will not yet be energy independent.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

Mid-March 2013 Blog Update of THE GREAT DEPRESSION of DEBT

Note that my new novel “The Child Remover” is now available on Amazon as both a paperback and in a Kindle version. 

CAN YOU HEAR THE MOBS PUSHING THE GUILLOTINES INTO THE STREETS? 

Okay, maybe not yet.  But there is bound to be some reaction by the resulting “sans-culottesas” if we continue to reduce the amount of wealth held by the common man.  Here are the recent percentages of US total net worth held by US “citizens” in the lower economic 80% (from an article by Domhoff, “Wealth, Income, and Power”):

1983    18.7%

1989    16.5%

1992    16.2%

1995    16.1%

1998    16.6%

2001    15.6%

2004    15.3% 

2007    15.0%

2010    11.1%

The situation is even worse for those in the lowest 50%.  They have gone from having 3.6% of total US net worth in 1995 to 1.1% in 2010 (per the Congressional Research Service).  Among countries with at least a quarter-million adults, only Russia, Ukraine, and Lebanon are more unequal, according to Credit Suisse Research.  We have taken the lower 50% of people out of the American Dream.  What do parents in this group tell their kids, to “Work hard so you can buy the wealthiest a few more houses or Picasso paintings?” 

I don’t know what percentage of this drop in common-man-wealth is due to tax loopholes, change of tax structure, reduced taxes on corporations, or whatever.  But I suspect that the drop is NOT because the top 20% are smarter and working harder than they were thirty years ago, or that the lower 80% have become lazier.  I also know that history tells us that if you get enough have-nots, they eventually demand what they perceive of as their fair share, and they back up their demands with violence. 

If the top 20% were truly smart, they would be reducing this wealth transfer for their own survival and well-being.  Even if the “haves” all buy assault rifles for protection, those without wealth will have even more of these weapons and truly know how to use them.  In my opinion, the only thing that has stopped some degree of public rebellion already is the lack of a charismatic leader of the poor. 

There are those in the high wealth category, like Warren Buffet, who are bringing attention to this issue.  But they seem to be outnumbered by those wealthy who are buying windup politicians with limited abilities who only know how to say “no new taxes.” 

MORE ARTICLES ON US ENERGY INDEPENDENCE AND RELATED ADDED JOBS 

USA Today, October 23, 2012

“IHS says the oil and gas drilling boom, which already supports 1.7 million jobs, will lead to the creation of 1.3 million jobs across the U.S. economy by the end of the decade.”

“It’s the most important change to the economy since the advent of personal computers pushed up productivity in the 1990s,” says economist Philip Verleger, a visiting fellow at the Peterson Institute of International Economics.”

“The major factor driving domestic production higher is a newfound ability to squeeze oil out of rock once thought too difficult and expensive to tap. Drillers have learned to drill horizontally into long, thin seams of shale and other rock that holds oil, instead of searching for rare underground pools of hydrocarbons that have accumulated over millions of years.” 

CNBC, February 11, 2013

US Is on Fast-Track to Energy Independence: Study

“U.S. oil and gas production is evolving so rapidly—and demand is dropping so quickly—that in just five years the U.S. could no longer need to buy oil from any source but Canada, according Citigroup’s global head of commodities research.” 

“Citigroup’s Edward Morse, in a new report, projects a dramatic reshaping of the global energy industry, where the U.S., in a matter of years, becomes an exporter of energy, instead of one of the biggest importers.” 

“Crude oil generated the largest single annual increase in liquids production in U.S. history last year, with an increase of 1.16 million barrels per day. Oil production is booming in places like Texas and North Dakota, which has the lowest unemployment in the country at just 3 percent last September, compared to the national rate of 7.8 percent then.”

“At the same time, Citi sees a big impact on the U.S. economy. The current account deficit is about 3.2 percent of GDP, and the oil import bill is 1.7 percent of GDP. Citi expects that energy self-sufficiency, combined with the impact of low natural gas prices, could cut the current account deficit by up to 2.4 percent of GDP.” 

“The Citi report, titled “Energy 2020: Independence Day,” also projects a larger and quicker decline in demand for oil in the U.S. over the next decade or two, due to efficiency and the shift to cheaper natural gas. For instance, Citi expects 30 percent of the U.S. heavy duty truck fleet to turn to natural gas-based fuel by 2015. That would reduce diesel demand by an estimated 600,000 barrels per day. It also expects new automotive efficiency standards to reduce U.S. oil production by two million barrels per day.”

REUTERS, March 13, 2013

“Exxon Mobil Corp expects oil and natural gas production in North America to rise 45 percent over the three decades to 2040, boosted by output from U.S. shale formations, Canadian oil sands projects and the Gulf of Mexico.” 

“The company sees U.S. energy consumption falling about 5 percent from 2010 to 2040, driven by efficiency gains in the transportation sector.”

“The combination of rising output and slowing demand should lead to North America becoming a net energy exporter by about 2025, Exxon said.”

HOW DOES THIS ENERGY EXPLOSION TIE IN WITH THE SEQUESTER?

It doesn’t!  Rather than dynamically including this economic growth opportunity in future budgeting, including its likely benefit in reducing our deficits, Republicans are emphasizing immediately cutting back dramatically and the Democrats want to blindly move forward with little thought on how we will pay for current or future programs.

THE COST OF FOOLISH WARS

Almost unspoken in the current budget debates is what we have wasted on foolish wars.  We want to reduce teachers, social programs, Medicare, and so on, but Congress doesn’t want to discuss how much we have wasted on our silly military excursions.  Yet a March 14, 2013 article in Reuters show that the total cost of the war in Iraq, besides the sad loss of lives, could grow to more than $6 trillion dollars.  Not only aren’t the costs mentioned, but some of those most ardent Senators on our needing to reduce our deficit (like Lindsey Graham and John McCain) harassed Chuck Hagel, the new Secretary of Defense, in his confirmation hearings.  He was harassed because he was one of the few voting against the Iraq war. In a fair and just world, Graham and McCain would be apologizing to Hagel! Perhaps in the remaining Obama presidency there will be more restraint before we spend lives and dollars on foolish wars.

SO, WHAT SHOULD WE BE DOING? 

Tax laws, loopholes, and so on for wealthy Americans and corporations should be changed such that the wealth disparity is reduced.  Not eliminated (socialism), just reduced.  Stop pushing for severe austerity which will devastate our country.  Instead, invest in and encourage growth of businesses that can gain from an abundance of energy that the US is about to experience.  Use the related direct and indirect job growth, and the resultant increased tax income, and the increased taxes from wealthy individuals and corporations, to reduce our deficit.

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 49.5.  The current P/D of 49.5 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 48% to get down to its median P/D and drop 65% to get to my own entry target P/D. `

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it has since the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

Mid-February 2013 Blog Update of THE GREAT DEPRESSION of DEBT

Note that my new novel “The Child Remover” is now available on Amazon as both a paperback and in a Kindle version.  

 

THINGS REALLY ARE GETTING BETTER 

The U.S. economy is in a very slow but very real recovery.  For example, non-farm employment (seasonally adjusted) peaked at 138.1 million in January, 2008.  Employment then tanked, dropping to 129.3 million in February, 2010.  Since then, the economy has recovered 63% of the lost jobs, and employment is now at 134.8 million.  These recovered jobs are not all equivalent to the jobs lost, and the population is growing; but some people are indeed getting back to work. 

During the same time period that jobs were slowly recovering, the annual deficits were declining.  The annual deficits as a percent of GDP were:  2009 -10.1%, 2010 -9.0%, 2011 -8.7%, 2012  -8.5%.  The lowering of the annual deficits gives some credence to the theory that the answer to the deficit is more jobs. 

So, should we be making radical changes in our efforts at recovery, or continue on our current path of some stimulus, some cost reductions, and some adjustment to the taxes on the wealthy.  Paul Krugman, the liberal economist who was very critical of the Bush policies, is now critical of the current Obama policies because Krugman believes that the amount of stimulus is too low.  But the Republicans, especially the TEA Party element, feel that our current stimulus is too high and sure to lead to hyperinflation.  Has the Obama administration found the sweet spot in the middle, the art of the possible?  Of the extremes on either side of the current approach, I feel the path of extreme austerity is the most suicidal given all the real-time evidence coming from European countries trying radical cost reductions.  Long-term costs like Medicare can slowly be reduced by eliminating foolish tests and treatments.  For example, the U.S. spends $8 billion annually on prostate cancer treatments even though most studies show that these treatments are no more effective than doing nothing.  No other major country wastes medical costs this way.  And military costs can be slowly reduced by bringing our troops home, like we are finally doing in Afghanistan.  A middle of the road approach to the economy may indeed be the best approach, with some inflation likely in future years.  In the eight years between 1973 and 1981, the dollar (and real debt) lost half its value, yet the U.S. survived quite nicely.  If we can slow future deficit growth, it is certainly possible that the same thing will happen to our current total real debt as some inflation creeps in.

 

THE COMING YEARS 

For a country to grow, three of the most critical elements needed are a stable government/currency, a workforce that is energized and affordable, and a vast supply of affordable energy.  Let’s look at these three areas in a little more detail.

 

GOVERNMENT/CURRENCY 

Despite the sometimes vigorous political battles, no other major economic area in the world has the political and currency stability of the U.S.  Europe has the issue that the individual governments do not control their own currency, and the lack of budget control of some countries within the Euro will bring the Euro to its knees, or may even destroy it.  China is a strange mix of capitalism and communism, and there is no way this can survive without some issues.  As a minimum, as the economy in China continues to grow, the Chinese will demand more freedom and equality, and this will cause internal turmoil.  Japan has a stable government, but its debt makes ours look manageable.  And Japan’s reliance on exports makes it at risk to all outside economic forces.

 

WORKFORCE 

The U.S. workforce can match any in the world as to being motivated.  However, China will continue to have a labor cost advantage over the U.S. in the foreseeable years.  But there are other costs, such as transportation and energy, which might cancel out this advantage, especially when technology and automation are added to the equation.  China (and India and other low cost countries) will continue to have the advantage on labor-intensive products with short life cycles that cannot support automation costs (with the exception of newer robotics, discussed below).  But continuing pressure on companies like Apple that use Chinese firms that have terrible workplace conditions will cause some return to the U.S. of even labor-intensive products.

 

ENERGY 

Here is where the U.S. is going to shine, and this will cause a major realignment in world economies.  This is the main area that made me change my mind as to the risk of a severe downturn in the U.S.  Through technologies like fracking and horizontal drilling, the U.S. is finding vast amounts of oil and natural gas.  In addition to finding additional gas and oil, the on-going improvement in automobile MPG is taking us swiftly down a path to energy independence. Per the U.S. Energy Information Administration, per capita imports of oil have already gone down 21% since 2005.  And this is despite the tightening of environmental controls on drilling in the Gulf, which many people a few years ago were predicting would be the demise of future Gulf oil. The money saved from reduced oil imports is now going into our own coffers rather than flowing to foreign countries.  Also, just as importantly, the U.S. will no longer feel the temptation to go to war every time someone threatens Middle East oil countries.  And things are just going to get better! 

Look at vehicle MPG.  Current rules for the Corporate Average Fuel Economy mandate an average of about 29 miles per gallon, with gradual increases to 35.5 MPG by 2016. Future MPG standards mandate an average fuel economy of 54.5 miles per gallon for the 2025 model year.  Of course, real-world MPG will be much less.  However, the “percentage” improvement will likely be valid.  It means that in three years new cars will use 18% less gasoline than current new cars, and 47% less by 2025.  Of course, it will take 10 years after that before the majority of cars on the road get the full improved mileage.  Current gasoline use is about 486 gallons per person, so the average person will eventually save about $800 per year at $3.50 per gallon cost per gas.  At a 315 million population, that is a savings of 71.6 billion gallons of gas (or $252 billion) per year.  Assuming we get 19 gallons of gas per barrel of oil, we would save 3.8 billion barrels of oil per year.  That exceeds the 3.2 billion barrels of oil we imported in 2012.  And that does not take into account the increased amount of oil we are going to be able to extract in the U.S.

Some may doubt the automobile manufacturers’ real commitment to make these higher MPG numbers.  But the reelection of President Obama will keep the heat on the manufacturers for at least four more years.  And car makers are finding that consumers want higher mileage cars, and are even willing to pay more.  Perhaps because the middle class are getting poorer, they no longer think it fun to spend $60 filling up an SUV that gets 15 MPG.  Also, the Prius has already proven that the higher gas mileage numbers are achievable.  In fact, auto magazines are already reporting that the redesigned 2015 Prius will get 60 MPG, even without plugging it in!

Per Energy API, U.S. Oil production was up 13.8% in 2012 versus 2011, the largest annual increase since 1859.  Since 2008, U.S. oil production is up a remarkable 28%.  As our need for gasoline (oil) decreases, we are also dramatically increasing supply.  And this trend seems likely to continue for years, with the U.S. soon to be energy independent and eventually becoming a net exporter of oil. 

I haven’t even talked about clean renewable energy, which the Obama administration is still promoting.  The increasing supply of natural gas almost assures that solar and wind devices will become an even bigger part of the U.S. energy pie.  This may seem counter intuitive, but both solar and wind need economical and viable backup for when wind and solar are not cooperating.  A few years ago, it was thought that batteries would play this role.  But the development of cost effective batteries has been problematic at best, and it will likely be five or ten years before viable batteries are commercially available.  But new natural gas power plants with high efficiencies and quick power-up abilities will work well in the interim.  Why not just use the natural gas power plants and forget about solar and wind?  Because as the cost of both solar and wind devices continue to fall, hybrids of natural gas and solar/wind will soon be the most cost effective power plants.  And yes, they will not be as environmentally clean as solar/wind/batteries, but they will be close.  Especially when the effects of coal fired power plants being slowly shut down are included because they won’t be able to compete economically with the hybrid power plants.  And eventually improved batteries will start taking more of the load, especially in affordable electric cars. 

I noted that excess energy was one of the main reasons that I changed my outlook on the economy.  That would not have been the case if Mitt Romney had been elected, because he likely would have removed the requirement for higher MPG cars and the continued investment in green energy.  Only the “drill baby drill” would have survived, which would have moved the likely date of energy independence further into the future.  Also, Romney would likely have subscribed to the stringent austerity approach to fixing the economy, with no new taxes on the wealthy.  That would have been a far more risky strategy.

 

ROBOTICS 

One of the main reasons that Apple went to China for assembly of their devices was the ability of Foxconn of China to almost instantly have thousands of people ready for relatively simple assembly operations.  A future alternative is to have a U.S. company geared up with thousands of robots with a stocked variety of end effectors (the devices that actually grab and maneuver the product) that would be instantly ready for U.S. manufacturers.  The robotic/sensor/computer technology is already available.  All this concept needs is a well-funded entrepreneur to make this huge robotic assembly plant a reality.  Then, China will have neither a cost or reaction-speed advantage.  Foxconn will have a robotic competitor in the U.S.

 

DOWNSIDE RISK:  HOW BADLY HAS BOEING BLOWN IT? 

Aircraft is one of the U.S.’s leading industries.  But the Boeing Dreamliner might be on the way to becoming a nightmare.  The problem Boeing is having with the plane’s lithium-ion batteries is not a proverbial black swan.  It had been recognized by Boeing as being an issue from the very beginning, and earlier fires with similar batteries in computers and several electric cars had certainly underscored the risk.  You can walk away from a computer fire or drive a burning car to the side of the road, but the risk of a fire on an airplane dwarfs all those other risks.  Certainly the tests on these batteries should have been such to exceed seven-sigma confidence.   And yet, there have already been two incidences of battery fires on the Dreamliner, and the planes have been grounded.  This makes you wonder if Boeing, in its desire to reduce costs and defeat unions (even their engineers are threatening a strike), has taken its eye off quality and safety.  Boeing sent some of its carbon fiber assembly to non-union plants in South Carolina. The French firm Thales designed the Dreamliner’s electrical system and commissioned Japanese firm GS Yuasa to produce the batteries.  In fact, per a February 6, 2013 article in “Today in Travel,” only 40% of the parts in the Dreamliner are made by Boeing.  They work with 50 “strategic partners,’ with all the issues related to such a worldwide supply chain. Is it really that easy to out-source such critical work without risk?  Boeing never did it on their earlier planes.  What other quality issues are going to raise their ugly heads in coming years on the Dreamliner.  And what economic effect will it have on the U.S. economy if we lose our lead on aircraft manufacture and sales?  

Boeing’s CEO is W. James McNerney, Jr., one of Jack Welch’s protégés.  Look at what happened to GE stock after Jack Welch bled the company then retired.  Even including dividends, in real dollars GE stock is only worth 56% of what it was in 2001.  Let’s hope that McNerney doesn’t follow his leader!

 

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 49.5.  The current P/D of 49.5 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 48% to get down to its median P/D and drop 65% to get to my own entry target P/D. `

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it has since the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

End-of-January 2013 Blog Update

In the recent comments, some of you have requested me to continue the updates even though I stated that a depression in 2013 seems highly unlikely and acknowledged my inability to forecast future event dates.  Because of these requests, I will continue my updates.  I will still try to analyze data related to the economy to highlight risks and opportunities, and will continue to monitor where stock dividends are relative to historical levels.  Readers can do what they want with these analyses and numbers, especially regards their own investment decisions.

 

My next update will be mid-February.

Mid-January 2013 Update of THE GREAT DEPRESSION of DEBT

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com: http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

Note that my novel “The Child Remover” is now available on Amazon as both a paperback in a Kindle version. 

REVIEW OF MY PAST PREDICTIONS

First, where I was right:  In 2004, I accurately predicted the 2008 collapse of the U.S. housing market, equity markets, and consumer spending.   It is important to know how I was able to do that.  It wasn’t just an awareness that personal debt cannot just keep building forever.  I was able to predict actual dates because there were specific triggers already in place that would cause the bubble to burst, specifically resets on adjustable rate mortgages and consumer savings rate trends hitting zero.  Without those very identifiable dates, which were to occur in only a few years, I would only have been able to say “sometime in the future.”   And the problem with issues “in the future” is that there are many unpredictable factors that can nullify any prediction.  Another thing I had right was suggesting investing in TIPS rather than the high-priced stock market.  I cover details of TIPS below. 

Here is where I was wrong.  This is a general list of things I never saw coming and which affected my long-term predictions, specifically regards going into a depression.  The extremely aggressive actions of the Fed, the willingness of the government to save private banks and industry no matter what the cost, the ability of companies to squeeze ever more work from fewer employees (and having the workers accept it), the willingness of the masses to allow the massive outflow of jobs to China, and the willingness of the masses to allow the top few percentage of people to accumulate ever increasing amounts of the country’s wealth. 

Because of the above events, I no longer believe that we are heading into a depression in 2013, nor do I see any such a thing on the horizon.  I believe that we are at risk of future inflation; but without an identifiable trigger, I cannot predict when.  It could be within a year or not for ten years.  

The risk to the Euro is far greater than to the dollar, and China is still trying to decide what their political system is.  So the dollar looks pretty secure compared to the alternatives.  And nothing on the horizon looks like anything close to a gold standard will return.  It appears that manufacturing is slowly returning to the US, even though the jobs will pay no more than service jobs.  But they will be jobs that enable a simple but livable wage if both members of a family work.  And energy independence for the US gives it huge future economic advantages over most other countries.   Our labor costs may still be higher, but energy costs should be much lower than for most countries.

So, given my hits and misses, should I continue this blog?  I may be having some effect.  Over half my economic book sales in the last two years have been in the Washington, D.C. area.  People in 76 countries read my blog in 2012, and there have been over 291,000 hits since I started.  But the main reason I wrote my first book on a coming depression was that specific data was screaming to me that 2008 was going to be disastrous, and my prediction was based on very specific time-based data.  No such data exists at this point, so any value I bring to an analysis on the economy has diminished dramatically.  SO, THIS WILL BE MY LAST BLOG UPDATE.  Thanks to all those who have shared this journey with me since 2005. 

Here are a few last observations/opinions.  

For the coming year, our economy may be very slow.  Obama and Congress had reduced the share paid by workers for Social Security to 4.2% from 6.2% for 2011 and 2012, saving a typical family about $1,000 a year.  This is now reversed.  So, a typical family will have $1,000 less to spend in 2013. 

Our debt problem may not be as urgent as commonly reported.  A time article http://business.time.com/2012/06/12/how-dangerous-is-americas-debt/ makes a reasoned case that we have ten more years before it becomes critical.  Even if we have only five years, it has become obvious to me that neither our government nor the Fed is going to allow us to go into a depression without massive intervention, even if their actions dramatically increases our debt or trigger high inflation.  I don’t see how anyone can look at the events following 2008 without reaching this conclusion.  That is what I have learned. 

One of the most positive change that has occurred over the last several years is the awareness that we are likely to be energy independent within a relatively few years, and with no technical breakthroughs needed.  No new batteries, electric cars, wind farms, or solar farms are needed.  Horizontal drilling, fracking, shale fields, and more economical cars are going to make it happen.  Yes, the use of gas and oil will not be as environmentally clean as wind and solar. And additional environmental controls are needed, especially on fracking.  But coal use in the US will decline, which is the dirtiest power source of all.  And other countries will have to put in massive amounts of investment to make solar and wind practical and electric cars viable.  Once these clean technologies are proven and economical, we can incorporate them without the risk and cost of development.   Our relatively cheap energy independence will help us “grow” out of our debt crisis, which is the ideal solution.  Full employment will do much to reduce our deficit problem and reduce the risk of a depression. 

If the US would bite the bullet and bring most of our troops home, we could cut our military budget dramatically without increasing unemployment.  If Chuck Hagel gets the job of Secretary of Defense, this may very well happen.  And our medical costs could also be substantially cut by just following the example of other advanced countries that have equal or better healthcare at much lower cost.  Just cutting costs in these two areas can bring our deficit down dramatically. 

Huge world-changing events may nullify every possible forecast.  Note that these are NOT “Black Swan” events, because their possibility is known and the odds of them happening are not trivial.  Europe could erupt into a war when the Euro collapses.  Chinese people could revolt in the cause of freedom.  Israel may bomb Iran and cause a huge regional conflict.  The people in the US could get tired of the few chosen getting all the wealth and could rediscover unionism. 

TIPS 

Every six months I review my advice to buy TIPS rather the buying into the high-priced stock market.  To include the effect of dividends, I compare the ETF TIP to the S&P 500 ETF SPY.  If someone bought TIP on July 2, 2005, shortly after my book was published, as of January 2, 2013 they would have had a gain of 55.3%.  If they had instead bought the ETF SPY, their gain would have been 42.7%.  So someone would have made 8.9% more with TIP than with the S&P 500, without as much volatility (risk).  Note that the purpose of buying TIP was to keep up with inflation as I was waiting for the market to drop in price.  Since TIP gained 55.3% while inflation only went up 21.9%, that goal was easily met.  Even if inflation is understated by about 1% a year, which I believe it is, the performance of TIP easily outperformed my estimate of 30% real inflation. 

But investing one lump sum is not the way most people invest.  Instead, let’s look at $100 invested every month starting 7/2/2005 in both TIP and SPY, and see what the accumulative savings would have been by January 2, 2013.  With TIP, the accrued savings would be $12,074, so you would have gained $3,074.  With SPY, the accrued savings would be $11,615, with a gain of $2,615.  So, you would have gained 17.6% more with TIP.  

One of the reasons that TIP has been so successful is that interest rates have been falling, making older TIPs more valuable because they had a higher base interest rate.  Once interest rates start to rise, the opposite effect will occur, so the ETF TIP may not be such a good investment at that point.  Since the Fed has committed to keep interest rates low for the foreseeable future, this is not an immediate issue. 

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 47.6.  The current P/D of 47.6 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 45% to get down to its median P/D and drop 64% to get to my own entry target P/D. `

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

Mid-December 2012 Update of THE GREAT DEPRESSION of DEBT

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com: http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

 THE BAD NEWS ON WAGES

According to the “2012 Economic Report of the President,” real private industry weekly earnings are 14% less than they were 40 years ago, and this trend is not likely to reverse given the number of states adopting right-to-work laws.  Michigan just became the 24^th state to pass such a law.  Unions now represent less than 12% percent of U.S. workers, down from 28% percent in 1954.  Union workers average 10-30% higher pay than non-union in equivalent jobs/locations, so you can see why industry fights unions.  Of course, unions have participated in their own share of greed and stupidity, causing some of their own demise. 

Many states like South Carolina actively advertise their anti-union stance to attract companies, thus the transfer of some of the Boeing Dreamliner production from Washington State to South Carolina.  Quote from the new-employee orientation booklet of the largest hospital (and employer) in Columbia, SC: “We are totally against having any union at Palmetto Health.  We will do everything the law allows us to do to remain union free.”  SC Governor Nikki Haley declared, “And we’ll make the unions understand they are not needed, not wanted, and not welcome in the state of South Carolina.” 

Even the return of a few manufacturing jobs is not likely to reverse this downward earnings trend.  A Reuters article by Felix Salmon, “The Problem with the Return of Manufacturing,” points out that we lost $21 per-hour manufacturing jobs and are getting back  $13.50 per hour manufacturing jobs.  With housing now doing a partial recovery, a similar effect is likely.  The recovered construction jobs are probably going to be at a much lower wage than the lost jobs because of the number of people fighting for these returning jobs. 

This continuing lowering of earnings has likely contributed to the dropping labor participation rate, which is now 63.6% versus 67.3% in the year 2000.   With dropping wages, there is less incentive to go back to work, especially if you are a second-income wage earner.  The cost of daycare for children may very well exceed the benefits of going back to work.  The labor participation rate is now at the same level it was in 1978.

Reduced real earnings and reduced labor force participation does not bode well for our future economy, at least as measured by GDP growth.  Henry Ford recognized that workers’ pay should be sufficient for them to have a decent life and be able to buy the products they produce, but that sentiment seems to be largely absent from current corporate thinking.  Without some force (like unions) to fight against the power of corporations and the backing they now have through state laws (which are often passed by legislators whose campaigns have been largely financed by corporations), individual wages will continue to drop.  It is perhaps the Achille’s heal of capitalism, that the powerful will continue to take an ever increasing portion of the economic pie.  In the forties, this trend was broken by WWII, where every able bodied person was needed to support the war effort.  Without that war and the aftermath where the US was the only remaining industrial power in the world, would the Great Depression had ever ended without mass civil dissention and a challenge to capitalism?

TAXES ON THE WEALTHY

Even though it is likely that President Obama will eventually get his way regards higher income taxes on the wealthy, that will do little to slow the flow of wealth to the wealthiest few.  They don’t get most of their money through traditional earnings, so the wealthy will be only minimally affected.  As for closing the other tax loopholes, some token loopholes may be closed.  But the wealthiest and most powerful have done so well on building protective firewalls by purchasing legislators and the courts, that no real substantive changes in tax policy for the wealthy are likely.

THE GOOD NEWS

Housing may finally have reached the bottom given that the number of homes entering the foreclosure process or scheduled for auction for the first time sank to 77,494. That is the lowest number of foreclosure starts since December 2006.

30-year fixed mortgage rates are at an unbelievable 3%.  The historical inflation rate is 3.5%, so if inflation returns to its historical level and home prices adjust accordingly, a buyer will be “making” money on his mortgage.  These low rates will increase the activity in the housing market, and home prices will likely stabilize or go up slightly.  But housing prices are unlikely to soar given the previous discussion on wages being level or dropping.

INFLATION

The Fed continues to do what is required to keep interest rates low, and so far, inflation is under control.  But the Fed is likely planting the seeds for future inflation.  For example, 30 year fixed-rate mortgages at 3% will lose value if inflation returns to former levels.  The government is backing many of these low-rate mortgages, so the Fed will be the one holding the bag.  In response, they will print even more money, stoking the inflationary process.

THE FISCAL CLIFF

What will happen in the on-going negotiations or its effect on the markets is up for grabs. 

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 46.  The current P/D of 46 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 44% to get down to its median P/D and drop 63% to get to my own entry target P/D. `

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.