Saturday, March 17, 2007

The Investing Crisis

Let’s examine two types of investments; the investment of cash into a new venture that creates a product and employs people and the second, the purchasing of the stock of a successful business like IBM.

Investment capital used to create a new enterprise; creates jobs and stimulates the economy. Society benefits from the use of the new product. It could range from building a home, a swimming pool, a county highway or what ever. Notice money was borrowed from the investor and repaid to the investor with an investment profit. Jobs were created and product produced.

In the second investment consider the purchase of IBM stock. When you buy IBM stock, you don’t buy it from the company; you buy it from someone who already owns it. IBM is out of the loop. They have a transfer agent that follows the current owner for dividend payments. Notice that the price people are willing to pay is determined by the free market. Investors in the stock are not creating any jobs or product for consumption.

The thing to realize is that your investment savings are being borrowed and used to back credit card consumption and to speculate in an already overpriced stock market. There is no investing that is stimulating employment and the economy. This tremendous unsecured credit card debt can’t do more than get worse with all of the new cards being offered.

Just as rents could end up determining the values of real estate, so could dividends determine the price of stocks. IBM at $94 only pays $1.20 dividend. So as a retiree holding a million dollars of IBM stock you would receive $12,766 per year in dividends. That kind of sucks doesn’t it?

Let’s see, it’s almost tax time and you have to send in that IRA contribution to get credit for last year on your taxes. So, with credit card in hand, do a cash advance for the IRA and pay your taxes at the same time, that’s quick and painless!

The stock market ought to climb a couple of hundred points with all of the new money flowing into all of the retirement funds during the rest of March and April. If you want to buy Google or IBM you’re just going to have to pay more for it!

I haven’t heard the word bubble when it comes to the stock market, but I have heard of the phrase “house of cards” mentioned. Remember when housing prices could never go down? It would be real bad timing for a real estate type fiasco. The Baby Boomer is in the cross hairs!


Anonymous said...

Hi Jim,

Would you mind if I posted a link to a copy of your CA foreclosure graph over at Ben Jones' blog? With credit to you and a link to this site of course. It looks like the latest data plot is right in line with the high estimate. Nice work!

Jim in San Marcos said...

Hi Dbots

Go right ahead. When I wrote that in December, I was hoping it would be close. I didn't expect to see it come in at 20,000 a month and a half early.

Real estate is getting real "fugly"

Anonymous said...

Your analogy with IBM (and stock in general) is misleading. The worth of a company should not depend solely on its dividends. You should also consider cash flow for the company. If IBM earns $2 per share but only distributes a dividend of $1 a share, should the share price reflect the $1 dividend or the $2 earning? If IBM then uses the $1 that is not distributed as dividends, and use that money to invest, isn't that the same as you investing money to create jobs and products?