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

August 11, 2013

My novel “The Child Remover” is available on Amazon as both a paperback and in a Kindle version. 

This will be my final blog update.  Thanks to all of you who have stayed with me and shared thoughts over the years.  For many reasons, doing these updates, with all the required work, is no longer as rewarding as it used to be.  Also, watching the future economy is going to be more like tracking a moving train rather than the rocket it was when we were heading to the breakdown of our economy due to the debt, mortgage, housing, and banking issues.

POLITICS

I believe that politics will be a key mover in our economy in coming years.  I have already covered in great detail why I think we are heading towards energy independence.  But that could actually reverse if the government would suddenly cancel its stance on higher MPG for vehicles.   That could happen if a Republican gets elected president and he/she decides that one way to stimulate the economy is to remove all MPG targets for the automotive industry.  I have shown in earlier blogs that, although oil coming from fracking will contribute, the major factor for energy independence in the US is improved gas mileage for vehicles.  I am not saying that a Republican president would necessarily remove the MPG requirements, but it certainly would be a risk given the Republicans’ historical stance that the government has no business being involved in such detail – it should be market demand that determines vehicle design and the resultant MPG.

I have covered in earlier blogs that an on-going problem in the US is the continuing increased flow of money to the very wealthy.  This flow is enabled by current tax laws in the US and the continuing low wage growth by the average working person, including minimum wage.  This trend will likely only be reversed if both houses of Congress and the President are Democrats.  Unionism is starting to raise its head in the US, especially related to fast food workers.  But how much support this movement gets from the courts and Congress will greatly influence its growth.

The US is heading for isolationism, and I think that this trend will continue with either party in control.  Even the McCain-types are seeing the difficulty of finding any groups worth backing militarily in the multiple Middle East upheavals.  Even with Israel, US backing in any action they may take against Iran is likely to be muted compared to our commitment to Israel in prior years.  The US is tired of costly wars that never seem to resolve anything. 

How likely is it that the Democrats will win the 2016 presidential election?  Recent polls show that Hillary Clinton could beat all comers.  Chris Christie is the only Republican who even comes close, but he is looked on by many Republicans as being a RINO (Republican In Name Only). 

A May, 2013 Fairleigh Dickenson University poll shows unhappiness among Republicans for ALL mainstream presidential candidates, including Christie.  2016 is a while away, and things can change.  But if one were a betting man right now, Hillary easily wins by a couple body lengths.

Reading the above may give someone the impression that I am just a typical Democrat blindly promoting my causes.  Not true.  I believe that when Democrats are in charge too long they cause the economy problems by enacting too many giveaway programs with little thought of payment.  But right now, the biggest risk to our government, in my opinion, is the continual flow of funds to the ultra-wealthy.  Eventually that could lead to mass riots and a total breakdown of our government.  Even the most conservative Republican should be able to see that; but none of their programs seem to be geared to trim the ever-increasing flow of money upwards.  Even in the Middle East, much of the efforts to overthrow governments have been triggered by the have-nots demanding their share, rather than religious issues.  We are not immune to that sort of action by our populace.

WE DON’T HAVE TO RUN FASTER THAN THE BEAR

Economically the most important thing is to stay ahead of the competition, which includes Europe, Japan, China, and India.  Europe has an on-going problem that some member countries are heading to economic disaster, and economically sound countries like Germany are getting tired of supporting them.  This issue will continue to bog Europe down economically for the foreseeable future.

Japan has an on-going huge debt problem, and its energy policy is in tatters given the on-going issues with the Fukushima Dai-ichi nuclear power plant. 

China has been investing in factories, cities, and infrastructure faster than their economy can absorb, and this will eventually have to stop.  Then its political system may be challenged.  China may pursue a similar MPG goal on its vehicles as in the US; but China’s exponential growth in vehicle ownership will easily overwhelm any improvement in reduced oil usage through improved MPG.

India has potential, but has yet to figure out how to build on that potential.  Poverty and poor infrastructure are among many issues burdening India.

So, the US becomes the winner, as does the dollar.  This is important, because the strong dollar makes it likely that we can continue to borrow at a low interest rate until we start reducing our real debt in a substantial way.  Also, the strong dollar will enable the Fed to keep inflation under control.  The Fed wants some inflation, perhaps 4%, but not runaway inflation.  We are likely to have several years of slow or no growth, but that will actually look good compared to most countries.  Then after 2015 or so, when a lot of the energy independence gains start to be felt, the US economy may really take off.

BUDGET PROBLEMS

As noted in an earlier blog, 2014 is likely to see a sustainable budget deficit, which means that the growth in GDP is likely to exceed the growth of the deficit.  That budget includes some sizable reductions in money for the military, as determined by the sequester cuts.  But even with these huge cuts, Defense Secretary Chuck  Hagel said at a Pentagon news conference,  “This strategic choice would result in a force that would be technologically dominant but would be much smaller and able to go fewer places and do fewer things, especially if crises occurred at the same time in different regions of the world”.   That doesn’t sound like a risk to me.  We have no business trying to be the policeman for the world.

As I have stated before, some on-going problems like Medicare spending have obvious solutions.  We only have to look to countries that spend less on healthcare than we do but get similar or better outcomes.  We will eventually follow their paths, but not before we repeatedly get slapped in the head with our wasted medical procedure costs.

Social Security retirement needs relatively minor fixes, probably through some combination of delayed retirement, increased taxes, and/or changing the formula on how inflation is calculated for retirement benefit adjustments.

 MONITORING MY THREE STOCK PICKS

I assume that someone bought an equal dollar amount of stock of each of these companies at their closing prices on June 14, 2013.  I compare their average performance to the S&P 500 (SPY).  The three companies and SPY closing share prices are as follows:

CLR    6/14/2013  $86.31      8/10/2013  $95.77      

OAS    6/14/2013  $41.37       8/10/2013  $40.90

WLL     6/14/2013  $48.07       8/10/2013  $51.01

Average Gain = 6.07%

SPY     6/14/2013   $162.32    8/10/2013  $169.31     Gain = 4.30%

So, someone would have gained 41% more with my stock picks over the S&P 500.

Note for transparency: I own a small amount of all three stocks.  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-July 2013 Blog Update of THE GREAT DEPRESSION of DEBT

July 12, 2013

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

ENERGY INDEPENDENCE

US OIL INDEPENDENCE, IGNORING FURTHER INCREASES IN SHALE OIL

Let’s look at future US oil independence if no further gains are made in shale oil, but US oil production remains at the current level.  2013 YTD, the US produced about 7 million barrels of crude oil per day and imported about 7.4 million barrels per day. 

Per http://www.whitehouse.gov/sites/default/files/fuel_economy_report.pdf, the required 2025 CAFÉ standards in cars and light trucks of 54.5 mpg will lower the use of oil in the US by 4 million barrels per day by 2035.  Note that this goal is very achievable given that the plug-in Prius and Volt already get 95 and 98 mpg respectively (based on the CAFÉ tests).  Even the regular Prius gets 50 mpg.  In addition, per the Annual Energy Outlook 2013, the projected conversion of heavy trucks to natural gas will save 0.7 million barrels of oil per day (this is a conservative number, since trucks consume 3 million barrels of oil per day).

In addition to the above, per the Federal Highway Association, people over 65 drive about half as far as the average miles driven by other age groups.  In 2009, there were 33 million licensed drivers over 65.  That number doubles by 2030.  The effect of this change in demographics, which is not included in other studies, will reduce the total miles driven by about 8.5% and reduce oil usage by an additional 0.4 million barrels per day. 

The total oil use reduction of all the above changes is 5.1 million barrels per day by 2035.  Given that the current oil import rate is 7.4 million gallons per day, these changes alone will reduce total oil imports by almost 70% and completely eliminate the need for oil imports from any country other than Canada. 

So, even without additional shale oil, the US is making great headway towards energy independence.  And note that I did not include the effects of a growing use of renewables like solar and wind, because their initial effect will be to shut down high polluting and expensive coal powered electric plants, not to save oil or gas.  But eventually, the increased use of renewable energy along with the conversion to electric cars will further reduce oil usage.  And if the incentives for converting trucks to natural gas were improved, the US could get complete energy independence even without shale oil.

US OIL INDEPENDENCE, INCLUDING PROJECTED INCREASES IN SHALE OIL

The projections for shale oil production are going up almost monthly as drillers are learning new and improved techniques for gettting more oil out of the shale formations.  These new techniques include re-fracking, horizontal drilling in multiple directions from the same drilling site, moving the whole drill rig without disassembling it, etc.  These improvements have cut costs and cancelled out some of the earlier concerns about decline rates of the fracked sites.  U.S. shale oil production, which was 230,000 barrels a day in 2007, is forecast to top 2.3 million barrels this year, a 1,000 percent increase according to the Department of Energy.  A team of analysts and economists at Citigroup says U.S. oil production might climb more than a third by 2015, driven by “tight oil” from shale and tar sands.  And versus my estimate above that without shale oil North America will achieve energy independence by 2035, Citi says that the U.S., or at least North America, can achieve energy independence by 2020 when additional shale oil is included.

A very recent study, EIA, Annual Energy Outlook, 2013 and Short-Term Energy Outlook, May 2013, gives similar projections.  It shows domestic oil production growing to 9.5 millions of barrels a day by 2020.  That is 2.5 millions of barrels a day more than current, and when the above oil usage reductions are included, it eliminates the need to import oil completely and makes the US totally oil independent.

US NATURAL GAS INDEPENDENCE

The story on natural gas from shale is even more positive than oil.  Per the Annual Energy Outlook 2013, U.S. dry natural gas production continues increasing, outpacing domestic consumption by 2020 and spurring net exports of natural gas. Higher volumes of shale gas production are central to the transition to net exports. U.S. exports of LNG from domestic sources are expected to rise to approximately 1.6 trillion cubic feet in 2027.  Not only does the additional supply of natural gas enable the US to become an energy exporter, it also enables US industrial production to grow rapidly due to an extended period of relatively low natural gas prices, which lower the costs of both raw materials and energy.

WHAT WILL ENERGY INDEPENDENCE BUY THE US?

A team of analysts and economists at Citigroup says that more energy independence could mean 3.6 million new jobs, enough to cut unemployment by two percentage points.  Per http://dickatlee.com/issues/econ/unemp_deficit.html, each 1% of excess unemployment adds nearly $60 billion to the deficit.  The Congressional Budget Office forecasts the annual deficit will be $670 billion when the budget year ends on Sept. 30.  So, compared to this year’s budget deficit, if we had the projected energy savings now, we would have a current budget deficit reduced by $120 billion, making the deficit $550 billion.  That would still be a large deficit.  But as Paul Krugman noted on March 10, the budget doesn’t have to be balanced to put us on a fiscally sustainable path; all we need is a deficit small enough that debt grows more slowly than the economy.…a current sustainable deficit would be around $460 billion.  So we would be getting awfully close to a sustainable budget deficit this year if somehow we were already getting the benefits of energy independence.  And given that the CBO is projecting that the deficit will fall to $378 billion by 2015, we are getting close to not only having a sustainable deficit, but actually paying down our national debt versus the size of our economy.

 Note that the above numbers do not include the other likely benefits we would get from energy independence.  For example, Milton R. Copulos, President of the National Defense Council Foundation, estimates that the fixed costs of defending Persian Gulf oil amounts to $138 billion annually.  I have no way of verifying these numbers, but we all know that the costs are huge and are likely go down as we no longer need Mid-East oil.

 IS FRACKING HURTING THE ENVIRONMENT?

Yes!  But how badly is an open question.  Fracking is exempt from key federal environmental regulations. The federal Energy Policy Act of 2005 (passed during the Bush/Cheney era) contained a provision that has come to be known as the “Halliburton Loophole,” an exemption for gas drilling and extraction from requirements in the underground injection control program of the Safe Drinking Water Act.  This has limited the amount of governmental scrutiny and oversight that fracking would have normally received.

One of the environmental issues is wells leaking methane. This is largely controllable with proper sheathing of the cement casing that surrounds a newly drilled well.  A second concern is the potential for the fracking fluid to contaminate water.  The third concern is all the wastewater that flows back up the well that has to be properly disposed of.

There is little doubt that industry can reduce all of these environmental concerns somewhat (for example, a new study by scientists at Duke University and the U.S. Geological Survey found no evidence of groundwater contamination from shale gas production in Arkansas), but it seems obvious that some degree of all three problems will continue as long as fracking is used.  These concerns have to be balanced against the proven environmental harm of coal (power plants that burn natural gas emit about half the amount of the greenhouse gases as coal-fired power) and the burning of excess oil that natural gas can replace.  Since natural gas gives us a viable backup for solar and wind, which are undeniably cleaner sources of energy, it seems like fracking and the resultant increased availability of oil and natural gas will help us get to a higher level of solar/wind usage and an overall improved environment.  In the meantime, we should all be pressuring Congress to get more oversight/controls on fracking.

SUMMARY

It seems that the US is likely to reach complete energy independence sometime between 2020 and 2035.  Although that won’t solve all our budget deficit issues, it will help dramatically.  Longer range issues like Medicare costs will have to be addressed separately.  But we have so many examples of countries around the world that control healthcare costs without sacrificing quality of healthcare services that once US health costs get so high that we have no choice but to address them, we will reign in the costs.  Democracy doesn’t work well until it absolutely has to!

The other thing worth noting is that most of the steps to getting to energy independence have nothing to do with fracking.  Projected energy independence is mostly due to changes in our CAFÉ MPG for vehicles.  Will this really happen?  Well, the technologies are already there, and car companies have bought into this because they have learned that increased MPG sells cars.  But there is still some risk that some future government will cancel the MPG requirements due to lobbying pressure by oil companies or unforeseen problems as new technologies are implemented across the board. 

Although a lot of the above numbers are estimates, even if they are off substantially it seems that the US is at the start of a potentially huge growth spurt fueled (pun intended) by energy independence.  At the end of next year, several pipelines are scheduled to be completed that will ease the transportation of the new energy freed up by fracking, and at that point our economy should start to realize some of the potential benefits in a big way.  This, coupled with our already improving economy, may prove to be the catalyst for the start of an exciting new economic period for the US.

MONITORING MY THREE STOCK PICKS

I assumed that someone bought an equal dollar amount of stock of each of these companies at their closing prices on June 14, 2013.  I compare their average performance to the S&P 500 (SPY).  The three companies and SPY closing share prices are as follows:

CLR    6/14/2013  $86.31      7/12/2013  $92.78      

OAS    6/14/2013  $41.37       7/12/2013  $41.90

WLL               6/14/2013  $48.07       7/12/2013  $48.51

Average Gain = 3.23%

SPY     6/14/2013   $162.32    7/12/2013  $167.51     Gain = 3.20%

Note: I own a small amount of one of these three stocks.  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-June 2013 Blog Update of THE GREAT DEPRESSION of DEBT

June 16, 2013

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

WE SHOULD INCREASE TAXES AND DOUBLE THE SEQUESTRATION AMOUNT

Why not?  After all, payroll and Social Security taxes went up substantially in January, and the $85 billion 2013 government spending cuts called the Sequester took effect at the beginning of March. Despite (or because of) those changes, things seem to be going quite well for the economy.  Look at all the good things happening. 

The Labor Department reported that 12,000 fewer Americans filed new claims for unemployment benefits last week. Jobless claims are now close to their lowest levels since 2007.  The unemployment rate has dropped from 7.9% in January to its current 7.6%.  Consumer spending also seems to be gathering steam. Retail sales jumped 0.6 percent in May, after a slight increase in April.  The Small Business Optimism Index increased 2.3 points to 94.4 last month, the highest level since May last year.  Home prices have risen at the fastest rate in seven years. Sales of previously owned homes in April hit their highest level in more than three years. The S&P 500, despite its recent drop, is up 16% since the beginning of the year.

THE GREAT FACADE

The Sentier Household Real Median Income Trends Report shows that incomes from the first of the year through April are basically unchanged.  So what is driving the perceived improvement in the economy?  It isn’t worker productivity, which gained only 0.5 percent on an annual basis in the first quarter, according to the BLS. That’s weaker than the 0.7 percent gain in 2012 or the 0.6 percent gain in 2011. Productivity is down dramatically from average annual gains of 3 percent in 2009 and 2010. 

So what is enabling all the “good news” the economy has been getting, especially the data that shows that the consumer is still hanging in there on spending.  Let’s look at the consumers’ savings rates for the first 4 months of this year, starting in January: 2.3%, 2.7%, 2.5%, and 2.5%.  These are the lowest savings rates since the end of 2007, when the recent recession was just starting.  To put this in perspective, the average savings rate between 1959 and 2013 was 6.9%.  Perhaps because the consumer feels that the economy is about to turn upward, or because they think the sequester cuts are only temporary, or because they are trying to hang on to their lifestyles no matter what, consumers have given up saving and are living for today.  NOT a prescription for a healthy economy!  The lowering of the savings rate is what is carrying the economy.  But the savings rate cannot be lowered much more, nor can the consumer ignore savings forever, so this boost to the economy is indeed temporary.

Because of this, I feel we are in for a slowdown for the short term, perhaps for a year or two.  My thoughts for a slowdown are further supported by the recent debunking of Reinhart And Rogoff’s Pro-Austerity Research, which was the rationale of many in our country who were using this study to justify harsh austerity measures, including the Sequestration.  The debunking studies were done at University of Michigan and University of Massachusetts.

WHAT WILL EVENTUALLY TAKE US OUT OF THE ECONOMIC DOLDRUMS?

The mess in The Middle East will eventually affect worldwide oil supply.  The Syrian conflict is turning sectarian, with Sunnis against Shiites.  As the balance of power sways one way or another, more and more countries with their own sectarian majorities will be entering the fray, and eventually even countries like Saudi Arabia will be affected.  And so will oil supply.  Israel, which will not allow Iran to go nuclear, will eventually use the cover of the turmoil in Syria to bomb Iran’s nuclear facilities.  And Iran can affect both oil production and transport, which they are likely to do in response to any Israel aggression against their nuclear plans.  What a mess!

The good news is the US is well on its way to oil independence.   In 2012, an increase in output of 1 million barrels a day caused net oil imports to the U.S. to drop by 930,000 barrels a day.  Oil imports are now 36 percent below their 2005 peak, BP said in its annual Statistical Review of World Energy. The expansion of both oil and natural gas production in the U.S. was the fastest in the world last year.  A lot of this increase came from unconventional sources like shale oil. 

I believe that once the US accepts that the Middle East and its oil supply are headed for disaster, support for even faster development of shale gas and oil in the US will occur.  With the recent gains in horizontal drilling, multiple direction drilling from one drill head, deep drilling under the shale, and fracking improvements, it seems that the estimates for proven shale reserves of oil and gas just keep going up almost monthly.  Believers in Peak Oil are getting to be rare birds indeed!

CAN WE GAIN FROM THIS KNOWLEDGE?

For several months I have been emphasizing how energy independence will change the future for the US and open up all sorts of scenarios, including the growth of solar and wind power and the return of manufacturing.  But now I would like to present an investment scenario on which I can be measured, much like my promoting the benefit of TIP way back in 2005.  Here is my scenario.  I have picked three stocks (of which I own shares in one) that I will track monthly.  These companies are active in drilling in the shale areas of the US.  For my measurement baseline, I will assume that someone bought $10,000 of stock of each of these companies at their closing prices on June 14, 2013.  Note that I just picked several of these companies somewhat randomly.  There are many other company options available.  The three companies and their closing share prices are as follows:

Continental Resources (CLR)   $86.31

Oasis Petroleum (OAS)   $41.37

Whiting Petroleum (WLL)   $48.07

Just for reference, if someone had bought an equal dollar amount of shares in each of these companies a year ago, they would be up 37.6% now.  But that is history.  My baseline measurement will begin at the prices on June 14, 2013.

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-May 2013 Blog Update of THE GREAT DEPRESSION of DEBT

May 12, 2013

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 “2nd 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

April 14, 2013

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

March 15, 2013

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.


Follow

Get every new post delivered to your Inbox.

Join 54 other followers