I trust everyone had good holidays!  For the New Year, I have decided to try monthly blog updates.  These will occur in the middle of each month. 

THE RISING DEFICIT

If you recall, over the past year we established that the causes of the rising U.S. deficit were split pretty evenly between an increase in spending and a decrease in tax rates.  We have also seen that neither of our political parties is willing to truly address both issues.  So we are unlikely to see any meaningful solution, at least not until the elections.

GOOD NEWS on UNEMPLOYMENT?

The U-6 unemployment rate dropped 1.2% from September 2011 through December 2011.  But there is another government number that does not support this improvement at all!  The Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/empsit.pdf  shows September age-16-and-over employment/population as 58.4% versus December at 58.5% – virtually unchanged!  Since the workforce is 64% of the population, you would expect the drop in unemployment would be matched by an employment/population gain of 0.8%.  But the gain isn’t there!  In fact, the employment/population rate has been very stable for over two years.  And that has been during a period of high stimulus, including the extended unemployment benefits and the tax holiday regards social security withholding, which added an annual $350 billion into the economy last year.  

A good part of the perceived improvement in the unemployment rate is due to the labor-force-size calculation, which can be affected by people coming in and out of the labor-force.  Both the labor force size drop and the drop in employment rate can be seen very clearly in the chart labeled “Civilian Labor Force Ratios” on Page 28 of the graphs found in http://www.richmondfed.org/research/national_economy/national_economic_indicators/pdf/all_charts.pdf.  The employment rate dropped dramatically in 2008 and 2009, and it hasn’t recovered one iota since!

Without the continuance of current stimuli, which is only approved until the end of February, the economy will likely slow and drive up unemployment.  Republicans now have the spotlight on them.  Do they approve what some call an added tax by reversing the tax holiday regards social security?  And do they play the bad guys by ending the ever-continuing extensions of unemployment benefits?  The current depression is not yet as visible as The Great Depression.  One reason is that 99 weeks of unemployment checks are being sent to 10 million jobless Americans.

HOUSING  

A recent WSJ article noted that some big investors have turned bullish on the housing market in the past quarter.  These include the likes of hedge funds run by SAC Capital Advisors, Blackstone Group, and Goldman Sachs Group.  These prestigious groups are out of their collective minds!  Unless the time-tested concept of supply and demand has suddenly become invalid, there is no way this is going to happen.  Perhaps the reason for their bullish view on housing comes from the fact that housing prices have pretty much dropped to their historic inflation-adjusted price levels.  Or, maybe they believe that unemployment has turned the corner and everyone will be getting a job next year and immediately buying a house!  NOT GOING TO HAPPEN!

Let’s first look at housing supply.  Over 11% of U.S. homes are empty, and the U.S. real estate market is about to be hit by another surge of bank repossessions according to RealtyTrac.  And new home sales are unlikely to take off with all the existing homes on the market, some at greatly reduced prices due to foreclosures.

Now let’s look at housing demand.  Per Family Matters: Multigenerational Families in a Volatile Economy from Generations United, as of the end of 2009, the number of multigenerational households (three or more generations) in this country was nearly 5 million higher than in 2007.  That likely means that demand for homes has gone down substantially in two years.  Morgan Stanley projects some 7.5 million more foreclosures over the next five years.  Some of these foreclosed people will rent homes; but many will go into apartments or move in with relatives, further lowering the demand for single family homes.

CONSUMER SPENDING and SAVINGS RATE

Consumers broke out their credit cards for the holidays and spent!  Per Reuters, consumer credit surged 10 percent in November, its biggest jump in a decade.  But increased holiday spending was not universal.  As reported by Thomson Reuters, elite stores like Nordstrom and Macy’s had over 6 percent sales increases; Saks and Dillard’s had over 4 percent.  On the other end of the spectrum, some stores like Fred’s and Kohl’s actually saw same-store sales decline in December.  Increased sales were apparently led by the more affluent portions of our society, consistent with what we have seen with the growing wealth disparity. 

Not only did consumers use credit cards to drive up spending, they have also reduced their saving rate in the recent few months.  After dropping their savings rate to near zero before this downturn started, consumers then recovered the rate to 8%.  But now, their savings rate is back down to 3.5%.  They can’t go much lower, which means they can’t keep using this as a way to increase their spending!  And if the tax holiday regards social security is not extended, the average consumer will no longer have the extra $1,000 per year to spend!

WEALTH GAP

This whole issue of wealth disparity isn’t going away.  According to a recent poll published by the Pew Research Center, nearly two-thirds of Americans believe that the wealth gap is the greatest cause of tension in America.  And that includes 55% of Republicans.  This may become a major issue for Republican front runner Mitt Romney who is portraying this as just a President Obama ploy of encouraging envy and class warfare.   Romney may be completely misreading the electorate.

THE EURO 

I have yet to see any scenario, other than additional delaying tactics, that show how the Euro is going to survive without losing countries like Italy and Greece.  And it isn’t just the excessive amount of debt of these countries.  These countries are not willing or able to cut spending enough to make a difference.  And, even if they do, austerity will just lead to slower economies with less tax income and higher debts.  Many people in countries like Greece don’t even own up to their own responsibility for the problems.  They blame it on banks, on Germany, on the wealthy, etc.  And Germany doesn’t want to eat Greece’s debt because they think that the Greeks are lazy and just living too luxuriously.  Sort of like listening to Democrats and Republicans argue about the U.S. economy!

IRAN 

It seems like we are heading to some sort of major event with Iran this year, with perhaps Iran blocking oil shipments or Israel/U.S. bombing Iran’s nuclear facilities.  Either one will hurt all nations’ economies and will perhaps bring the world closer to war. 

RENEWABLE ENERGY

Germany is leading the way!  Per the Associated Press, “Chancellor Angela Merkel’s government passed legislation in June setting the country on course to generate a third of its power through renewable sources — such as wind, solar, geothermal and bioenergy — within a decade, reaching 80 percent by 2050, while creating jobs, increasing energy security and reducing harmful emissions.”

Apparently the U.S. has no need for “creating jobs, increasing energy security and reducing harmful emissions.”  

PRESIDENT OBAMA

Although it seems a little late, President Obama is finally making some small steps in addressing both costs and jobs.  He is suggesting merging some governmental agencies to reduce redundancy, with a resultant reduction of people.  The people reductions will come through attrition, not layoffs.  On the job front, the President is talking to companies who have brought back jobs to the U.S.  President Obama is proposing tax breaks for such companies while removing tax breaks for those that outsource jobs to other countries.  Why wasn’t he talking to such in-sourcing companies a year ago rather than dealing with the likes of Jeff Immelt, the CEO of GE, who could be the poster child of outsourcing?

These small steps by our President may help get him reelected.  But his steps are baby steps compared to the huge strides this country needs to keep us out of a depression.

SUMMARY

Real unemployment has not gotten better and is likely to worsen as the U.S. moves away from stimulus.  Housing prices will continue to drop because of all the homes already on the market and those coming on the market with continuing foreclosures.  Current increased spending by consumers is temporary, enabled by increased debt and decreased savings, both of which are near their limits.  If the tax holiday regards social security and unemployment benefits are not extended, spending and the economy will slow.  And the breakup of the Euro or some major actions related to Iran are likely to be the triggers that finally cause this whole house of cards built on a foundation of debt to crumble.  And it will likely be this year; or next year at the latest.

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 50.  The current P/D of 50 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 66% 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.

The other reason I have to stop the blog for a while is that I have been contracted by McGraw-Hill to do a second edition of my book “Statistics for Six Sigma Made Easy.” This book sells very well worldwide, and McGraw-Hill wants me to update it to include current needs, like how Six Sigma assists in manufacturing innovation. This project will be taking much of my time for the next six weeks.

I will keep the blog site active until I review my decision in the middle of January. I will be reading your comments but not taking the time to respond. I encourage all of you to discuss the economy among yourselves and work through data on your own. Several of you have commented that I have been a good teacher, so let me see what you have learned!

Have an enjoyable holiday season everyone. I am looking forward to spending time with my family without having to think about my blog update!

THIS WILL BE MY LAST BLOG UPDATE! 

I will leave this site up a few more weeks for comments. But I remarked several times that I didn’t want to just be a score keeper as our economy goes into a depression, which I now believe is irreversible.  In the past, I tried to get some enthusiasm going for a boycott on Chinese goods to bring back jobs to the U.S., but I failed.  I tried to get some interest on tariffs on Chinese goods; but not only are we not putting on any tariffs, the currency imbalance between the Chinese currency and the dollar remains almost as strong as ever.  I tried to get some massive green energy program going to bring us out of this jobs problem, but the taxes required to finance this would come from the wealthy (or, as the Republicans like to call them, the “job creators”).  And that is apparently a no-no since, per “Americans for Tax Reform,” 41 senators and more than 235 House members have pledged in writing to oppose all tax increases.  So we (our Congress) feel that the wealthy were not wealthy enough thirty years ago, and we want them to become even MORE disproportionately wealthy since all the tax changes that enabled the current growth of wealth are still in place.

HOW ARE MY BOOK’S PREDICTIONS DOING?

I will use this last update to look at where I think our economy and the stock market will be going in the next year or two.  I will use “The Great Depression of Debt,” Chapter 5, (“What This Depression Will Be Like”) for relative baseline quotes, both to show how well my predictions are going and what I may have missed.

“The government will either have to raise taxes or borrow even more money to stay solvent.  If the government tries to reduce spending by shrinking the size of the government bureaucracy, the resultant increase of people out of work will also slow the economy.”  Well, we are choosing the latter – austerity is the game we are about to play.  In 1937 we tried a similar austerity plan, and unemployment jumped from 14.7% in 1937 to 19.0% in 1938.

“Companies have been optimizing bottom lines rather than investing for future businesses…Companies will respond to any slowdown with layoffs to lower their expenses, and they will implement price increases in an attempt to maintain profits (and their executive salaries).”  We are seeing that even with a slow economy, inflation is running at a 3.5% rate.  There is no reason prices will not continue to rise, and the Fed’s actions on money creation is just going to exacerbate inflation. 

“The number of people giving up on making house payments is skyrocketing…banks have been forced to foreclose on homes and sell them, causing a glut of homes on the market and a deflation of home prices.”  Many experts, such as Robert Shiller, believe that home prices may drop another 25%.  This will cause even more homeowners to be underwater on their mortgages, and more people will stop making home payments.  This will drive additional foreclosed homes on the market.  This problem is a long way from being over and will continue to be drag on the economy.  When home prices drop, even people not in danger of losing their homes begin to reign in their spending because they feel poorer.

“President Bush and Israel may decide to bomb Iran’s nuclear facilities before Bush leaves office.”  Well, Bush didn’t do this.  But bombing these facilities is certainly becoming closer to being a reality and this would definitely upset the balance in the Middle East and in world markets!

“The birth rate will go to zero…No one will want to bring a child into the very tenuous economy that will be gripping the United States.”  Well, it hasn’t got down to zero yet.  But the births in 2007 were 4.3 million, 2008: 4.2 million, 2009: 4.1 million, and 2010: 4.0 million.

“By 2013, people in the United States will have given up.  Unemployment will be over 15%, and the stock market will be down over 60% from its early 2008 price level…The debt problem will slowly diminish because, with inflated dollars, both the consumer debt and the government debt will seem smaller, and they will be paid down with dollars worth far less than they are now.”  I still stand by these predictions.

“There will be cries to go back to the gold-backed dollar.  Young people will rebel en masse against the debt that is being left them…Environmental concerns will take a back seat to getting industry running.  The exception will be the heavy government support for renewable energy sources.”  I was doing well until that last sentence!

“Protest groups will have a new and powerful means to rally forces against the government.  The internet will be used to coordinate protest marches and other mischief.”  We have yet to see the full power of this.  Move-on is planning to back people running for government to nullify the effect of the Tea Party.  And Occupy Wall Street is certainly calling attention to the fact that many in our country feel that the government is being run for the betterment of the rich and powerful with little concern for the average person.

WHAT DID I MISS?

1)      The Euro Crisis

When I wrote my book there were many that were saying that people should abandon the dollar and flee to the Euro.  Now, people are fleeing the Euro.  And this crisis will not end gently.  Sometime in 2012, the Euro countries will no longer include Greece or Italy!  And U.S. banks and others are going to be hit badly.

2)      The Tea Party

The Tea Party’s success in stopping any new taxes is going to make the depression far worse than it would have been otherwise.  They have taken away a valid option for the economy and stifled any hope of compromise.

3)      Gold!  My suggestion on being out of the market and buying TIPS was quite good, but nothing like the price rise of gold.

WHAT TO MONITOR

1)      Will unemployment benefits be extended and the tax holiday regards social security withholding be continued?  If not, Roubini, the chairman of Roubini Global Economics, predicts the “fiscal drag will be $350 billion, 2.3% of GDP,” in 2012.  I actually think that Roubini is being optimistic, which is unlike “Dr. Doom!”

2)      Can Bernanke pull a miracle out of his hat?  The Fed, unlike Congress, is trying to fight the coming depression.  QE3 may include the Fed buying problematic mortgage backed securities from the banks in an attempt to free up money for new mortgages.  But I believe that this will be too little too late.

3)      Is President Obama willing to risk impeachment by going around Congress to spend on additional stimulus?  The president could reference some esoteric emergency regulation that would enable him to spend for the well-being of the economy.  But he would have to do a massive stimulus this late in the game, and the resulting jobs must be self-sustaining, not things like road paving.

4)      The elections.  President Obama will likely be reelected NOT because he has been a good President but because the Republican candidates are so problematic!  The real question is whether our economy is so sick by then that people will realize that “the just say no” Congress people should be kicked out and replaced by people willing/able to think and compromise.

THANKS TO ALL

Thanks to all of you who have purchased my books or have been following this blog.  Good luck to all of you in the coming years.  With a little luck and a lot of monitoring of personal expenses, many will get through this depression with a limited amount of hurt.  We as a country will survive; but we will come out of this a poorer and more humble nation!

Warren Brussee

TWO OPPOSING VIEWS: Austrian versus Keynesian Economics

There are two diametrically opposite views on the economy that are driving many of the votes in Congress.  I have neither the knowledge nor time to explain both of these views in detail, but with two short paragraphs I can probably cover more than most of our politicians really understand.

AustrianSchool.  Central banks are evil and cause all recessions/depressions by periodically creating too much paper/electronic money which then causes boom/busts.  Central banks should be disbanded and we should go back to a gold standard. Austrian economists reject empirical statistical methods, natural experiments and constructed experiments because people and their actions are too complex to fit into formulas.  Austrian theories are not presented mathematically. They rely mainly on verbal arguments based on self-evident axioms.  Laissez-faire is the best way to run an economy.

Keynesian Economics.  Well-meaning actions by multiple firms can sometimes cause the economy to operate below its potential, with high unemployment, etc.  This requires policy responses by the public sector, including monetary actions by the central bank and fiscal policy actions by the government to minimize the economic swings.  Keynesians believe that the solution to the Great Depression was to stimulate the economy through a reduction in interest rates and government investment in infrastructure.  Mathematical models and statistics are used extensively in Keynesian economics.

Reading these two obviously simplified explanations, a couple of things stand out.  First, the general mistrust of scientific methods by Austrian followers explains why there seems to be a lot of disbelief in science in general by these people, which include many of the Republican presidential candidates.  This includes their doubts on man-caused global warming and evolution.  It also explains why there is little room for discussion between the two opposing views and why there is such vehemence by the Austrians against the Fed, especially Bernanke because he is a strong Keynesian. 

 SPEAKING OF BERNANKE! 

If Ben were following a list of things he could do to irritate  the Austrians, especially people like Ron Paul, he would not be doing much different than he is already doing.  To further drive down interest rates from their already historic lows, the Fed is doing the Twist where the Fed sells short term securities and buys long term Treasuries.  He is also buying up mortgages from banks to give the banks more cash for lending.  And, he is going crazy on money creation!   Per the Federal Reserve, for the last 13 weeks ending Oct 31, 2011, the M2 money supply has been increasing at an 18.8% seasonably-adjusted annualized rate.  Now THAT is money creation!  Per Austrians, that excessive money creation is guaranteeing future inflation.  And indeed, our current annual inflation rate is already 3.9% through September.  That is the highest it has been since the middle of 2008!

MY FEELINGS! 

Congress, no matter what the Deficit committee comes up with, seems determined to make large cost cuts to get our deficit under control.  They seem to want to follow an Austrian view of no more stimuli; let the economy work things out on its own. 

Since most of the likely cost cutting measures involve job reductions, this will certainly exacerbate the unemployment problem.  Also, it is unlikely that extended unemployment benefits will be continued.  Nor is the Social Security Withholding Tax Holiday likely to be extended.  And earlier stimulus is winding down. Savings rate reductions, which have been giving the consumers more spending money, are likely to bottom out in February.   States are cutting people to get their budgets under control.  And the European Euro crisis is not going away and is likely to explode within months.  All of these events are very likely – sort of a perfect storm!  And the Fed’s actions are not going to be enough to counter Congress’ direction.

An alternative approach to our economy is to realize that we have the wealth in this country to fight this slowdown.  If we take taxes back to where they were perhaps 30 years ago, recover some of the $6 trillion excess wealth that flowed to the top 5% over the last 40 years, and bring our troops home and put them on our borders, we would have enough additional income and saved costs to enable us to heavily invest in self sustaining jobs, like clean renewable energy.  We could then grow our way out of our problems with lower unemployment and a higher GDP.  But alas, the chances of any of this happening are about zilch!  We are choosing to let our economy slide into a depression without a fight!  The Austrians are going to win!

HOW DUMB DO THEY THINK WE ARE? 

Per CNN Money, the top five executives at Fannie Mae received $33.3 million in 2009 and 2010, while the top five at Freddie Mac received $28.1 million. And each company has set pay targets of as much as $17 million for its top managers for 2011.  That’s a total of $95.4 million which will be coming from taxpayers who have been keeping the mortgage finance giants alive with regular quarterly cash infusions. 

But Fannie Mae and Freddie Mac executives may have finally reached the tipping point.  Congress is considering legislation to put strict limits on pay at the two firms.  But I am SURE that there will be some legislators claiming that we should not be setting salary limitations.  They will claim that we need to pay those wages to get the required talent!

 THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 49.  The current P/D of 49 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 47% 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 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.

WHY THE ECONOMY FEELS WORSE TO WORKERS THAN 9.1% UNEMPLOYMENT

The Official unemployment rate is 9.1%.  The broader U-6 unemployment rate is 16.5%.  Both of those numbers are understated because since the year 2000, 3.1% of the population (which equates to a 4.7% reduction in the workforce) has dropped completely out of the workforce for various reasons.  So, realistically, these two numbers should be 13.8% and 21.2%.

But an additional sinister change has been happening that gets far less publicity than a small change in unemployment.  Companies have been reducing real wages dramatically!  Per a recent article in The NY Times (http://www.nytimes.com/2011/10/10/us/recession-officially-over-us-incomes-kept-falling.html), when I correct for any change in workers per household, real individual wages have fallen 4.9% in the last 4 years (since the start of the recession).  In fact, the rate of real wage decline has actually increased since the recession was declared officially over! 

Since from a workers’ standpoint these reductions in real wages have about the same overall effect on their economy as an equivalent increase in unemployment, let’s do a pretend.  Imagine the attention this would be getting if the U-6 unemployment number was 25.3%, which is the above number plus the effect of the 4.9% real wage reduction.  This would be approaching Great Depression type numbers!  This is what workers sense and what their purchasing power actually feels like!  That is why we are starting to see widespread unrest, as is being expressed by the Occupy Wall Street movement.

Wall Street has not felt this effect because companies actually gain by real wages falling.  And sourcing to other countries has enabled companies to keep profits high despite the negative effect on current and former employees.

WHERE ARE CONSUMERS GETTING THEIR SPENDING MONEY?

Americans spent 0.6 percent more in September, three times the increase from the previous month.  So where are they getting their money if real wages are dropping?  They financed the gains from savings, dropping the savings rate down to 3.6%, the lowest level since Aug 2008, the start of the recession. (http://ycharts.com/indicators/personal_saving_rate#startDate=10/31/2001&endDate=9/30/2011&zoom=).  You can see the recent trend in savings rate: June 5.3%, July 4.5%, Aug 4.1%, Sep 3.6%.  At this rate, we will be down to the 2005 low of 0.8% by February, 2012. 

This sounds like the same kind of scenario that caused me to write my first book on the coming Depression.  There is a brick wall that consumers are going to hit on drawing down their savings rate to support their lifestyle.  And this time there is no housing ATM to go to for additional funds.  Consumers will literally have to go into existing savings or reduce their lifestyle. 

I believe that, given all the concerns of having enough to retire or pay their kids’ way to college, that consumers will cut down on their spending, further slowing the economy.  At that point companies will start feeling the effect on their profits, and by the middle of 2012 (at the latest) the market will start to fall.  Of course, the Fed may come to the rescue again with QE?.  But each one of these Fed “rescues” becomes less and less effective; so any positive effect of the Fed is likely to be short-lived.

We now have two economies.  The economy sensed by Wall Street is still doing reasonably well, with corporate profits holding their own or rising.  The other economy is that felt by the middle class and by the poor.  Their alternative economy is really sick.  But right now, the Wall Street economy is driving Congressional actions.

EDITORIAL ON THE OCCUPY WALL STREET MOVEMENT

I have visited several times with our local contingent of this protest.   I took along my dogs, including a beautiful 120 lb. Newfoundland which attracted a lot of people and enabled a lot of very casual conversation.  Dogs do that!  Here is what I found on these visits.  The protestors included a broad mix of people that seemed to represent overall society, with the exception that probably few Republicans were present.  Some of the people were educated, some not.  Age was diverse, but with the young being predominately the 24 hour people.  Some protestors were driven by personal needs (they couldn’t get a job); others were driven by some sense that there was a major problem with our society, with disproportionate wealth among the favored few being identified as a key component.  Some were there just because that is where the action was.  But the majority had some defined motivation.

Most of the people did not seem to be naïve.  They knew that this protest must continue for a long time to have a lasting effect; nor did the protestors pretend to have a simple solution to our economic problems.  They just felt that with all the lobbyists and money influencing those in government, the ordinary people had not had a voice.  They just wanted to be heard and hopefully have an effect.

The protesters are going to have a hard time surviving the winter, and those against this movement are betting on this.  But I sense that this movement will survive and affect the next elections.  Even without having a specific agenda, they are forcing politicians to make some sort of statement as to the protestors’ concerns.  This is being contrasted by several members of Congress, and some Republican candidates, saying that the solution to our problems is to tax the poor and middle class even more so “they pay their fair share”!  Reading virtually every public poll, these politicians and presidential candidates are out of touch with reality and suicidal as far as their political aspirations.

I encourage every reader of this blog to go and spend some time with these protestors.  Even if you don’t believe in what they are protesting, it is hard to walk away without the feeling that this is a true democratic expression of beliefs; without big money, lobbyists, and other power groups dominating.  How refreshing!

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 50.8.  The current P/D of 50.8 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 49% to get down to its median P/D and drop 66% 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.

If anyone has an interest, I have a new book out, “A Step Beyond Six Sigma: Manufacturing Innovation.”  No knowledge of Six Sigma is needed to use this book.  It is a case-study-driven look at manufacturing innovation, which we need to bring back U.S. manufacturing jobs.  You can find it on Amazon.com.

DO THE “OCCUPY WALL STREET” PROTESTORS HAVE A POINT?

Although the complaints of the protestors are not clearly defined, their complaints generally have a common theme that the wealthy and powerful have taken more than their fair share, and this has hurt the economy and the majority of Americans.  Does data support their stand? Is anybody looking at this in an unemotional way driven by financial numbers?

The net Assets of the U.S. as of the 2^nd quarter 2011 are $72.6 trillion.  Between 1962 and 1983, the proportion of U.S. wealth held by the wealthiest 5% of citizens was approximately 55%.  Per the most recent 2009 data, the wealth of the top 5% is now 63.5% of the total.  That means, in current dollars, the wealth of the top 5% has gone up 8.5% of the total, or $6.17 trillion.  If that excessive wealth flow would have instead been applied to the deficit, our current $14.8 trillion federal debt would be 42% lower at $8.6 trillion. Our current national debt versus GDP is 120%.  If our debt had been reduced by the above $8.6 trillion, the current national debt versus GDP would be 70%.  This would take us back to the same national debt versus GDP we had in 1990!

The size of our national debt is being used as the reason we must cut spending and eliminate many social programs.  But is that really needed?  If we were to put taxes back to what they were perhaps fifty years ago, and maybe even take back some of the excessive flow of wealth by taxing excess assets (jet planes, Picassos, Maseratti’s, huge or multiple houses, etc.), would this not enable us to use some of the money to invest in job growth, give some relief to those underwater on their mortgages, and do some of the other things that the protestors are demanding?  The rest of the money could be used to reduce our deficit.

For those wishing to check my numbers, below are the sources for my data: 

http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf,

http://www.irle.berkeley.edu/cwed/wp/wealth_in_the_us.pdf,  

http://www.usgovernmentspending.com/spending_chart_1950_2016USp_12s1li011mcn_H0fH0t_US_Federal_Debt_Since_The_Founding. 

Is taking back this money un-American, anti-capitalist, socialist, anarchist, etc.?  Or would it be just correcting for a system that has obviously been tainted by biased tax laws and loopholes.  After all, I don’t want to spread the wealth evenly; I just want get back to, as one commenter said, when “we used to have enough regulation that there was a healthy tension between business and government.”  For those who maintain that the very wealthy deserve the excessive wealth flow of the recent years, I ask why?  Are they working harder than they were fifty years ago?  Are they smarter than they were fifty years ago?  Or have they cleverly tilted the legislature and judicial systems to give themselves favorable tax and regulation treatment?

For those interested, I also looked at this on a household level.  For those who get headaches from data, you may want to scan through this very quickly.  Comparing average real household net worth in 1998 compared to 2011, including subtracting the applicable portion of national debt:

1998 Average Household Net Worth, in 2011 dollars including subtracting applicable Federal Debt, = $317,000.

2011 Average Household Net Worth including subtracting applicable Federal Debt= $356,000.

Here are some of the components I used to get the above numbers:

1998 Household Portion of total Federal Debt (in 2011 dollars) = $75,000

2011 Household Portion of total Federal Debt = $124,000

1998 Average Household Net Worth, not including Federal Debt (in 2011 dollars) = $392,000

2011 Average Household Net Worth, not including Federal Debt = $480,000

The above numbers include some good news and some bad news.  The good news is that this country is wealthy enough to handle our current debts without panicking – for example, there is no reason to suddenly stop all social spending or investments in jobs for the future. People around the world are correct in judging that the dollar is a safe haven – we have more than enough assets to back up our debts.

But here is the bad news.  The numbers I used above were for the AVERAGE household net worth.  And averages are very much distorted by including extremely high wealth numbers.  If I look at the MEDIAN numbers, (listing all household wealth in ascending or descending order, then picking the middle number), I get the following values:

1998 Median Household Net Worth, not including Federal Debt (in 2011 dollars) = $99,000

2011 Median Household Net Worth, not including Federal Debt = $91,000. 

So, the Median Household Net Worth has actually been going down as Federal Debt is going up.  If I include the applicable portion of Federal debt in the Median Household Net Worth numbers, I get the following:

1998 Median Household Net Worth, including applicable Federal Debt (in 2011 dollars) = $24,000

2011 Median Household Net Worth, including applicable Federal Debt = $-33,000.

So the median income family would no longer be able to afford to pay off their applicable portion of the Federal Debt even if they were able to sell all their assets! 

What is the obvious cause of this problem?  It is the increasing flow of wealth to the top tier of wealthy people.  That is why the earlier numbers based on averages looked okay!  We are in reasonable shape as to TOTAL wealth versus debt, including Federal Debt.  But the wealth distribution has gotten terrible, even when compared to “way” back to 1998!

In Six Sigma, the emphasis is to take out emotion and let the data drive decisions.  That is exactly what I am trying to do with the above analysis. 

HERE’S THE PROBLEM

If we don’t do anything different and just keep letting things go in their current direction (or even make them worse by reducing a lot of government spending that further costs jobs), all of the above numbers related to disproportionate wealth distribution are just going to get worse.  The ordinary working people will keep losing jobs, replacing them (when they even can) with lower paying jobs.  I indicated in my last update that housing could fall another 35% without some government action (this is supported by a recent report by the U.S. Census Bureau that the number of vacant housing units jumped to 15 million in 2010, up from 10.4 million in 2000.)  We will buy more from China, and China will continue to undervalue their currency because we are afraid of a trade war.  Companies will just keep doing more things overseas and continue to play tax games to minimize their U.S. taxes.  More and more people will be unemployed for so long that they become virtually unemployable.  The proportion of people actively in the workforce will continue to decline, wasting our most valuable resource.  Social unrest will grow as the number of have-nots keeps growing. 

And yet we have the financial resources in this country to actively fight all this.  All we have to do is take back some of the disproportionate gains of the last fifteen or twenty years of the wealthy and put tax structures back to where they were historically.  Some of that recovered money should be used to support investments in green energy and infrastructure that weans us from OPEC oil.  And don’t tell me about the recent solar company failure – that is an inherent risk in backing new companies.  Some will fail. But others will succeed and be our future!

JUST TAXING THE WEALTHY IS NOT ENOUGH

As I have said before on this blog, we must cut costs.  But they must be cuts that do not greatly add to our unemployment problem.  Bringing troops home and putting them on our borders is one huge possibility. 

We must also reduce imports and reignite industry in the U.S.  Correcting the currency value issue with China would help.  Economists estimate that the Chinese currency is undervalued by 25%.  Some estimates are that this undervaluation costs the U.S. over 2 million jobs.  Some in the U.S. are afraid of igniting a trade war with China.  But this is one of the few wars we could go into that we could actually win (wouldn’t that be novel)!  The Chinese have a lot more to lose than we do because the value of Chinese exports to the U.S. greatly exceeds what we export to them.

We must invest in Green energy companies that create U.S. jobs.  This will eventually help decrease the $323 billion we spent in 2010 on imported oil.  Other countries like China are investing in their energy companies, and our companies are going to be overwhelmed if our country does not help our energy development similarly.

GREECE AND THE EURO

I am not an expert on this.  But one fact can not be ignored.  The more Greece is being pressured with economic reforms, the worse their predicted future economic situation becomes, requiring ever bigger bailouts. Greece will eventually default, abandon the Euro, and go back to their own currency.  But since this will cause unknown financial chaos worldwide, the ball will continue to be kicked down the court by other Euro countries as long as possible through temporary financial bailouts to Greece.  But I believe that eventually Greece will go out of the Euro. Greece will become just too costly to save.  But I don’t know if it will be in 3 months, a year, or whatever.   

THE OCCUPY WALL STREET MOVEMENT

This movement is both impressive and frightening.  This morning, when the police were going to evict the protestors, thousands had gathered to resist.  If the decision to evict them (clean the area) had not been reversed, how likely would it had been that there would have been violence?  Although those initiating these protests may be very peaceful, such protests sometimes attract those who are perhaps just looking for trouble.  Or some small spark ignites violence.  Tomorrow, similar protests are taking place at over 200 places around the country.  Let’s hope that cool heads prevail.  Honest discourse would be the desired outcome of all these protests.  And, an honest awareness of the related financial numbers!

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.