Sunday, June 02, 2013

The Economy Is Improving?

I can’t quite figure it out. It looks like they added more punch to the punch bowl. The party is on again. Housing prices are up 10% and stocks are climbing ever higher. It’s kind of hard to figure out what investor would loan money to home buyers at 3.5 percent interest for 30 years; maybe for one or two years, but not 30. You can get a better return on you dollars in the stock market.

So let’s see how the game works. Ben buys all treasuries and real estate loans presented for sale. This keeps interest rates low. Since the banks are paying very little interest, retirees withdraw their retirement funds and “invest” it in the stock market. This makes stock prices rise and that increases the fervor to put more money in the market. Of course the low interest rate loans stimulate buying stocks on margin and increases commodity speculation. Borrowing a million or two to speculate in the oil market would only cost 30 to 60k per year. Plus it’s a business expense.

Silver and gold are still dropping. The coin dealer I buy silver Maple leafs from, is out again. He can’t seem to order it fast enough. If we’re coming out of a recession, why is a bullion dealer running out of product? It reminds me of a movie theater; if you smell smoke, don’t yell “FIRE” until you get to the exit.

Then we have the health care plan kicking in. The young, if they want coverage, will be $130 a month at a minimum. See the two charts below for pricing in Kalifornia.

The penalty for not buying insurance will be $95 next year and go up to $695 per person in 2016--  to a max of $2085 for a family of three or more. Of course if you earn less than $9,500 a year, there is no fine. I’m not quite sure how this affects the future price of produce harvested in California. But if you do the math, for a family of 4, if the wife can’t make more than $10 per hour, she’s better off economically and financially, sitting home and taking care of the kids, while the husband works. Daycare is not cheap. Notice if you earn less, you qualify for more benefits; whereas if you earn more, you qualify for a heavier dose of taxation.

California announced that they went from a 25 billion dollar deficit to an 851 million surplus in a little more than 2 years. You do have to wonder what they “threw under the bus.” It sounds like someone from Disneyland is doing the state’s accounting. Of course there is not a peep about the state’s unfunded pension liabilities that have topped half a trillion dollars – six times the present state budget (study by Stanford Institute for Economic Research).

The housing bubble is gone. Real estate is being bought as an investment that can return 3 to 6 percent over what the banks pay. What created this was a Federal Reserve policy. They have been buying the real estate paper and the redeemed treasuries – thus keeping interest rates low. It’s a little like squeezing a balloon, it pooches out in another direction. Seniors and investors now see the stock market as the “last bastion of investment” (fancy words for a bubble).

There are two private sector bubbles; the bond market, the stock market, and then there is the national debt. The real question is, which shoe drops first-- -the bond market or the stock market? It’s a 50/50 call. You are going to buy puts either way. It will be a one two punch, one bubble will pop and then the other a little while later. And of course, there is the national debt, whose size nobody can even comprehend.

The one economic condition that could collapse this house of cards is Obama’s health care. What would have gone for vehicle insurance  in many family budgets, will now go for health insurance. One of the things that made America great was the ability of each family to choose what they spent their earning on.  Naturally they neglected saving for retirement and health care in order to give their kids a chance at a better life.   Money used wisely is a tool you use to craft your life like a carpenter building a house.  Each person individually tries to determine their own destiny. So follow the chain: no car insurance---you wreck your car or have it stolen--you lose your job because you can't get to it-- money problems lead to a divorce and drugs,---downhill from there. The poor are being set up for failure. It reminds me of the story about the battle that was lost over a missing nail in a horseshoe.

The real question is this, how do higher taxes and more government regulations induce increased economic prosperity?  Common sense suggests that the people with all of the answers, are part of the problem.  Economic issues are never solved by government, only shifted into another direction. Every student in the US is entitled to a college education with government financing.  If enough people graduate, you might just need a degree to get a job flipping hamburgers.  But I digress; the economy is just doing great. It's the people around me that aren't.


Joseph Oppenheim said...

Sure, some speculation has entered the stock market, and a correction is overdue and healthy, but major corps have never been so well capitalized and PEs still reasonable. Gov't bad? It transformed SD with UCSD. made SD a world class wireless and biotech center. CA voters have kicked out obstructionists and is on a roll. SD mayor has an Ivy League PHd in the history of science.

dearieme said...

Governments have a remarkable ability to design financial features that can make things a good deal worse. Look at this post about housing in Sweden - it sounds a bit arcane, but I defy you not to guffaw.

Anonymous said...

Right on Joseph, glad there are others who understand the value of science and innovation. The college system in California is one of its crowning jewels, another being the great weather/geography.

What many don't realize is that Qualcomm would be a country, if it were on its own, same with many other companies. Every time we get a "facebook, its like finding thousands of tons of gold in your backyard, but many old-time thinkers cant comprehend such new trends.

Anonymous said...

California is a JOKE. By raising taxes and increasing regulation they are driving businesses out of the state. Those businesses are being welcomed by the smart states that have lowered or ended state income tax, reduced regulations, given incentives and basically made a more business friendly environment. California legislature and courts are corrupt, liberal democrats (the worst), welfare oriented, non-business friendly and destructive. California is circling the toilet.

Jim in San Marcos said...

Hi dearieme

Thank you for the link. Mish is always a good read. -- it kind of makes you want to be a renter for the rest of your life.

Jim in San Marcos said...

Hi Anon 6:25

I'm pretty much in agreement with you. I wouldn't call the legislature corrupt but I would accuse them of being incredibly stupid.

I remember back to when the state was paying $3 a unit for natural gas under a long term contract. Somebody in the legislature pointed out that spot prices for NG was less than a dollar. The state decided to buy NG on the spot market after their contract expired. Needless to say, spot price for NG shot up to $8. There were all sorts of investigations into price gouging. I think that they are buying NG under long term contract again.

The legislature in the past has caved into the voters demand for "I want it now." A lot of cities are seeing their retirement plans absorbing 100% of their total tax revenues. One more year of zero interest rates, and CalPERs could take legal action against the State of California to make them whole.

IMHO this miraculous recovery from a deficit in California is an effort to sell bonds. The state is bankrupt. I could accept 5 to 10 billion dollar of additional income coming in, but 24 billion is a real fairy tale. CalPER's is going to want a slice of this, you can bet your bottom dollar on it.

Joseph Oppenheim said...

CALpers just exceeded pre-finan crash high of $260B. Still 26% behind long term goal, but it's not the long term . So, obviously solidly on rebound, with tons of assets.

Jim in San Marcos said...

Hi Joseph

The issue with CalPERs is the interest rate projected by them on the interest rate generated by their portfolio.

Using the rule of 72, a current 3% interest rate means their dollars in the fund will double every 24 years. Using their stated rate of return on investment of 7.5% it takes about 9.6 years for the principle to double.

When they were using the the 8.5% rate, they were 75% away from being fully funded for future claims.

From my understanding, if CalPERs was to set their current return rate on investments to a more realistic 3.5%, California would have to kick in an additional 20 to 40 billion a year (depending on your source) to prevent exhaustion of the funds.

Of course if everyone accepts the 7.5% value, then the legislature has more money to spend on other programs.

AIM said...

Housing can't go up based on fundamentals unless new jobs are coming on line and/or wages are rising. How can this be? (Ominous intervention and credit creation.)

The Fed is on an inflationary push, the government is on a deflationary push. Go figure.

Growth and/or cutting expenses is the only way to build strength. Neither is happening.

We are in an Alice In Wonderland type of new world where the rules are whacky or there are no longer rules or principles. Maybe gravity will be the next thing to go.

This country is a lunatic asylum.

Jim in San Marcos said...


I can't figure it out either. Silver, gold and platinum seem to be the only alternatives.

As you suggest "Alice in Wonderland" is where we are at. What should be reality isn't.

Things will have to unwind--only the time line is a little vague.

Joseph Oppenheim said...

Calpers only has 16% bonds, but prob have some from past yrs at high rates. Heck, even I locked up CD rates before big drop.

AIM said...

Right Jim. The two key questions are...

What is actually the most optimal preparation to take to preserve as much of my wealth as possible?

How long do I have to make these preparations before the chaos comes?

Jim in San Marcos said...


Your last line reminds me of the cartoon about a doctor advising his patient that he has terminal cancer. The patient asks "How long do I have?" And the doctor says, "If you hurry, you have enough time to say good-by to your wife."

I tend to believe that our imaginations will exaggerate our fears and give us a picture of what can probably never happen.

Diversity should be the key. Expect the government to pass laws to keep you from taking advantage of what may be happening.

Having enough food (that you enjoy eating) to last a month and enough savings to last 6 months would be ideal. It doens't say much for those living pay check to pay check.

I'm a firm believer of gold and silver, but I am not cashing in my 401k or IRA to buy them.

I must admit, the act of purchasing silver gives me the feeling that I am buying something of value that will not lose its value over time.

Heavenly Prepper said...

Jim, I agree it is hard to know how bad it could get and we tend to blow it out of proportion. But on the other hand, has there been another time in history where every single currency in existence was backed by nothing except a government promise and nothing of tangible value? The issue is we have no idea how bad a black swan event could be since there is no true safe haven outside of gold and silver and there is a limited amount of precious metals whereby if all investors ran to silver and gold assets it would be bought up in weeks. Stack before that becomes an issue is what I say! Diversify and cover your bases now. Why not have 10% of your allocation in physical precious metals? What is the downside?

Jim in San Marcos said...

Hi Heavenly Prepper

I don't see any downside in having 10% in precious metals. I did just that in 1985. Of course now its about 50% of my portfolio just from appreciation. Put in more realistic terms, it will still buy what it bought in 1985.

If you're young and short on cash, purchasing a home might be a better way to start. You can live in the house.

The thing not realized by most people for not so obvious reasons, is that there are two different mind sets on precious metals. There are the young who have never really experienced inflation and the old who have seen their savings ravaged by it.

There are 40 billion ounces of silver, 5 billion ounces of gold and 186 million ounces of platinum in the world and 8 billion people.

I tend to agree with you that the paper markets are driving precious metal prices right now, and that the real thing will win out. Paper money is like a photograph of your wife, it's not the real thing.

Anonymous said...

Precious metals might not prove out to be an advantage. The major indicators are showing deflation. The debt and deleveraging on a global level may defeat the central banks after all, no matter how much QE or printing they do.

It could be cash that gives one the real advantage. Just like in the US depression of the 30's.

A gold standard is not feasible as it would cause deflation. We are beyond backing money with commodities or value now. It will be electronic and backed by the word of a government (backed up by its military, natural resources and GDP). It's a new world.

The only solution due to the non-prediction is to cover all one's bases: water, food, shelter as your basic wealth and then stocks, bonds and commodities as your secondary wealth. If deflation does win you'll wish you were in water, food and shelter and cash.

Joseph Oppenheim said...

There is always a role for gold. It is a money. As such, a practical insurance policy on a country's currency. Same with silver. In fact pre-1966 US silver coins can never lose all value, retain face value. So, certainly a modest amount is wise keeping, never intending to use/sell except for emergency and can be passed on after death with stepped-up value. But, buying/keeping more than modest amt is pure speculation, not investing.Speculation is OK,but should be recognized as such.

Jim in San Marcos said...

Hi Joseph

I tend to agree with you. But with the low interest rates being offered to savers by the banks, I'm starting to change my mind. Buying silver (10 ounces per month) may be a better deal for young people entering the work force.

Of course that could change if the banks gave a better return on your savings

Joseph Oppenheim said...

Jim, the crash created a once in a lifetime opportunity to by real assets which return income/dividends and are raised each, stocks of great companies at bargain prices. Protection against inflation and deflation. Still some opportunities remain. Plus investing, not speculating.

Anonymous said...

They (The Fed, the govmt, brokerages and main-stream media) are piling all of the sheeple into the stock market. Any contrarian knows that this is a setup for a slaughter. More (or the remainder) of middle class wealth will transfer up to the top 5% of the wealthy. You can expect a major drop in the market within the year, maybe two. We are experiencing the biggest wealth transfer in the history of the USA.

Joseph Oppenheim said...

The sheeple were those scared of great stocks after the crash. Silver has crashed 60%. Tell Buffet he's one of the sheeple.