Tuesday, December 30, 2014

The New Year Approaches

To the average person on the street, the economy is OK. Not great, but OK. So when we carry that concept further, there is nothing to fix because nothing is broken. If we were to ask if the economy is in need of being fixed, we would get the expected 3-5% lead pipe cinch return of yes. The thing to remember here is that these five percent opinions have more than two solutions to “fix” the problems.

At this point, 95 percent of the population has no idea that there are economic problems. Everything worked yesterday and everything works today. So if there is a problem, it is pretty much invisible. Remember economics is not a course that many study. Government debt and inflation are things we have always lived with in our life time.

We have a national debt of 18 trillion and a collective mentality that this is something that Congress can fix every year. The same with Social Security and any other financial problems, the solutions for all have been pushed into the future.

Do you get the idea that the average person is more into sports twitter and Facebook? Reality is where your mind meets the road. There are no pressing world financial problems as far as the average man is concerned. Providing for, and feeding your family are the goals for the present. Infrastructure, retirement, government finances will all be taken care of; if they aren’t we will elect someone else. The mindset of the 95 percent of the population is very simplistic, it works, and will keep working.

How can the concept of nation debt out of control be explained, or where the money went that was in the Social Security fund? These problems project no immediate peril to the Hoi Polloi, they are of little concern.

The basic concept of public officials is to push all of the pending problems past their time in office. So here we go with the coming New Year. Forget the canaries in coal mines, the deck chairs on the Titanic, people are tired of the stories and no longer pay attention to them. A while ago, the Vice President, referred to the last six years as “The greatest recession since the Great Depression.” All I can say to Obama and Biden, the horse ride is not over, there are still two more years for them in the saddle. And they are definitely not out of the woods, they’re part of the woods.

The coming year could be very telling. With the drop in oil prices, the Middle East will have to choose between guns and butter, and by the way, you can’t grow much food in a fox hole. Russia’s currency could hyper inflate to nothing, they don’t produce much for consumer consumption (if it explodes, it's not editable). The EU as a currency for the European Union could end, Greece and Spain want out. Look for our stock market to hit 26,000. It’s the last game in town. We are all going to get rich.

Belly up to the bar, our government will fix what ails you. I’m not sure how we will pay for all of this, but we know it will involve Republicans; they still have a few dollars left.

So with the year at an end, a toast to the incoming year; here’s wishing everyone a Happy New Year.

Saturday, December 20, 2014

Inflation coupled with deflation

It seems very unlikely to have both Inflation and deflation at the same time, but we have it. Health care costs are skyrocketing and gasoline prices are dropping.

The big items are not even being mentioned. The bond market is at an all-time high. If interest rates were to rise 600 basis points to about 8 percent, the bond market if marked to market would suffer a 75% loss. The bond market is at a top, it can go no higher from here, it can only go down. The California housing market is still unaffordable to the middle class unless both husband and wife work. This too could face a 50 percent cut in value, home values do not support the current rental rates so why own a home, rent.

Interest rates are low, so why save your money for later? Spend it now while it will still buy something and borrow some more or put it on plastic. Stocks are going up, and who cares if its selling for 200 times earnings, buy it and hold on for profits. It doesn’t matter what it’s worth, if it’s going up. For some reason, the housing fiasco seems to come to mind. Buy Apple at $1000 and sell it when it hits $1100 or borrow more and double your bet. The interest on the loan is peanuts compared to the rise in stock values.

The government is printing money, which is inflationary. The job market is not quite as it appears, people are returning to work, but most new jobs are a lot lower paying; less earnings is deflationary. Of course if you don’t have a job, no money is very deflationary.

Social Security retirement paychecks are inflationary. The government already spent the money paid into the program for other things, now they have to print dollars to cover the plan. Food stamps are a similar animal.

Once your unemployment runs out, you can go back to school on a student loan. Your own family might not have the ability to loan you money for school, but the government has a ready and willing check book. Sell your soul to the company store for a 4 year edu-vacation.

The one thing that is very easy to understand about the economy, is that it is not in a composed settled state, it is in a state of turmoil, a dynamic state of flux, twisting in different directions. Our bond market which is 10 times bigger than the stock market is not an area to park money for investment purposes. Interest rates are at zero. Investment funds are now dealing in indexes which are a step removed from the stock market. They don’t have to buy and sell stocks, just hold the index. The stocks on the stock market are real, the index options are a synthetic creature. There is a finite value of stocks to be purchased, but there are an infinite number of index options that can be sold on the stocks traded.

The real question, how long can the consumer be the driving force for our economy? Sooner or later people will either run out of items they deem necessary to buy or run out of funds to buy them with. At that point we begin to see deflation. Exhaustion of consumption from a lack of funds or credit. In 1929 it was different, there were no credit cards. In today’s world, let the good times roll, put it on plastic.

The present conflict is a war pitting inflation against deflation. We have a very good shot at the hyperinflation Germany experienced before WWII. They had everything with no deflation. Inflation won out, the Mark's value went to zero the hard way, a beer in the end cost 4 billion marks. Of course if you were a senior citizen who manage to save a million marks, that turned worthless as far a buying power went. From there, it wasn’t hard for Adolf Hitler to rise to power, he was going to change things and help those who had been screwed out of their life savings by a democracy that listened to no one, had all the answers and spent what they didn’t have.

The thing that needs to be pointed out is that there are contradictive things in motion. We just had a 400 point move in the stock market. And bonds are at a rate so low, you wouldn’t loan money to a relative. Does there seem to be something wrong with the way we value risk? Buy a stock it will go higher. As for bonds, compound interest used to be the 8th wonder of the world, now all investors do, is wonder who's buying them?

As long as the stock market goes up we are going to make money. That seems a bit artificial to me, an "investor" can make just as much money on a fast falling market as they can on a market going up. If you examine it, a majority of the players only play the up side. I once asked my broker why? And he said that it was easier to sell a market going up than a market going down. The human mind is geared for appreciation, not the negativity it takes to short a market.

So here we are with, an elf like looking, Janet Yellen posturing how great the economy is. She has a cute cherubic look that could sell just about anything. It's Christmas and everyone wants the good times to return. One or two weeks of holiday cheer should fit the bill.

Merry Christmas everyone, and God Bless.

Friday, November 28, 2014

Numbnuts Our Emperor

Six years ago the President had full control of the Congress and passed Obamacare and never got around to the immigration issue.

We got affordable healthcare for everyone, so I am told. You go down and sign up and pay your premiums and you have health care for you and your family. How’s it work? Not sure. Would you stand in line for a free hotdog and a coke or would you stand in line to pay $10 for the same hot dog and coke? We can deduce that there are two lines, and the free line is the long one.

The passing of Obamacare, was done in Congress with the idea that Obama did not need Republican support to get it passed. It was done in a manner that was like sticking a branch into a wasps nest. He knew before the fact, that there would be harsh consequences. Afterwards, nothing constructive has come out of Congress. Then Obama got reelected and things deteriorated even further. Now as the chief executive in charge of enforcing the laws, he has chosen how to enforce them and I might add rather selectively

The newest executive order is his attempt to fix the illegal alien problem in the US. He wants to help these hard working people that snuck into our country with the right to stay here legally. Our hospitals and schools are flooded with illegals and their kids. Their kids get a better life at the expense of our kids who learn how to be tough enough to keep what’s theirs. There is no additional money allocated by Congress to support this influx of refugees.

Our institutions have fixed budgets that cannot accommodate the extra people. It’s a little like the VA hospitals. The budget was drawn up during peace time and was expected to keep up with a war time casualty rate with no additional funding. The indignation of the Congress and the President over the treatment of our veterans by the VA was laughable. It reminds me of Claude Rains in the movie Casablanca, the cop was given his winnings when he walks into the casino, and remarks “I'm shocked, shocked to find that gambling is going on in here!” The average citizen has no concept of how the VA or any organization gets their funding. Each organization submits a budget a year or two in advance and it either gets approved or sliced down a bit. The average time to get a street light installed on a heavily traveled intersection takes about 5 years; and 4 of that are to get the funds to pay for it.

Numbnuts has poisoned the well with his latest executive order, weeks before the newly elected Congress has been installed in office. My only question is why? The Republicans are not hard asses, I believe they were ready to formulate an immigration bill that wouldn’t have given away the store. Even if they weren’t, this sets the tone that their vote one way or the other wouldn’t matter. This, “My way or the highway” looks like the country may be facing another government shutdown.

Will this executive order on immigration be received with great celebration? Step up, sign in and be deported when the next president gets elected. Survival has more to do with being invisible with the forces at hand. Why bother to register? They already get free medical, schooling for their kids and don’t have to pay taxes. Who's supposed to to deport them if Obama won't?

What needs to be understood, is that usually a law has a penalty to punish violators. The penalty is the deterrent. We have removed the penalty for illegal immigration. I wonder, do you get bus fare to anywhere in the USA after crossing the border now; “I have a wife and kids in Bangor Maine.” If you're a border guard, what are your new duties?-- voter registration, border-greeter and maybe bus ticket agent? If there is no penalty for violating a law, what justifies its existence? HMMMMM

IMHO the President needs some comeuppance. We are not ready for his arrogant way to selectively enforce the laws of the land. Congress has not been offered a real choice of what to do unless they agree with his plan. Somebody said it well, the other day, “How can he expect to have an agreement on nuclear arms with Iran when he can’t even get an immigration bill out of the Congress?” His arrogance has turned many in Congress against him. His condescending lectures of what is wrong with America sets the wrong tone. No amount of his jawboning will push the economy into prosperity. Congress still holds the purse strings. Come January, he’s going to know what it’s like to be in line, in Wal-Mart with a full cart and a food stamp card, with zero dollars on it. And we know damn well, there is no Humble Pie in his shopping cart. Could be the fight of the Century--the economy country will be the sure loser.

Saturday, November 22, 2014

Government Subsidized Health Care Costs Vs Health Insurance

Many people interviewed on TV talk about the fact that they cannot afford their health insurance. What needs to be realized, is that these people are beyond health insurance, they can’t afford to pay for treatments they already need. Insurance is a concept of paying in small amounts for services you will need later and be able to pay for them fully over time.

Obamacare works if everyone is taxed for health care and pays into the system. The trouble is, that is not the way it is functioning. If you make no money as far as the Federal government is concerned, you avoid the tax all together. If your income changes, your health insurance costs change. Most people between the ages of 18 and 40 really don’t need health insurance (i.e. the most they would normally pay for health care treatment, is probably half of what their health insurance premiums would be). Figure average premium at about $300 per month extended out for about $3,600. Women look at this a tad different with child delivery. Why should a baby delivery cost 10K? -- ask a lawyer.

With Obamacare, many people presently cannot pay their medical bills and maintain their accustomed standard of living. These people want the program. Then there are those that have a pretty good idea that they need insurance, those over the age of 50 to the age of 65. Then we have those covered by an employer work sponsored program, where the employee pays part the employer pays the rest. In reality, the employee pays it all. What we have in the middle are a lot of people in the 18 to 50 age group that have no insurance at all or are employer insured. They really won't consume health care services, they are healthy.

Most people don’t buy car insurance because they need it, they buy it as a condition of the bank loan that they have made with their lender. Many buy it to comply with the law, but in some areas of Los Angles, half the people are driving without insurance. I’ve driven 30 years without an accident until last year and it was only a $1,500 fender bender that wasn’t even my fault. Over that same time, I spent probably close to $25,000 in auto insurance. On the other hand, I knew a person who had no auto insurance that had her car stolen, $12,000 went poof. If that’s all that happens to her in 30 years, she’ll be $13,000 ahead of me in the amount paid out.

The new health insurance is invisible to the 18 to 50 crowd. There are people in this group that are always cited by Obama as examples of those who need health insurance, like kids and single mom's. Give it a moment of thought, this group of people already know the cost of what they need and it falls outside of the realm of what they can afford or want to pay. Obama’s health insurance goes a long way to cover it by forcing the healthy to contribute to a plan they really do not need. The trouble is, the healthy are not waiting in line to sign up for it especially when the deductible is about $5,000.

The number of new cash paying customers that have opted to enroll in plan is the real issue. Did the numbers go up? I think not. There is still a tremendous number of people not enrolled in Obamacare. Open enrollment is for the people who have gotten really sick after the last open enrollment closed.

If you are young, without insurance, Urgent Care is where you go, show them a credit card and you might wait 15 minutes. Plus you know the total cost right then and there.

I'm sure that after winning a Nobel peace prize Obama believes that only he, knows what's best for our country, kind of makes you wonder who is in charge of those awards. Another Nobel prize winner was the doctor that perfected the ice pick lobotomy---I'd imagine that's the quickest way to turn a Republican into a Democrat, short of taxing them to death, and it's probably a covered procedure under Obamacare. Has anyone asked how much the "free" part of Obamacare is costing? Of course not, the government is paying for it- whoever that is.

Tuesday, November 11, 2014

The Big Squeeze

The government is telling us we are on the road to recovery. Rolls of toilet paper are now one inch narrower, the half-gallon of ice cream is now 56 ounces but the container takes up just as much space. If you have an inside seat on an airline, the people in the other two seats have to get up and out of their seats for you to use the rest room—the concept of personal space is not even considered when calculating the seating capacity of an airline. Forget the bathroom if the drink cart is rolling.

You’d think that the government couldn’t fiddle with a gallon of gas, but they have. They have added alcohol to it and make you pay more for it and you get less miles per gallon. Buy and electric car, electricity is free (or so its implied). Try heating a home with electricity if you want a heating bill you'll never forget.

Out on the West coast here, we are in a drought and the 100 year old water lines are bursting everywhere; replacing them might be a good start in fixing the problem, but no, we need a high speed rail system from LA to San Francisco. The irritating thing, as we consume less water, our rates go up. The utilities have fixed costs. Kind of makes you wonder if everyone got solar panels, do you get a free ride on the infrastructure? It’s a little like paving your driveway to the street and expecting to use the highways for free.

Obama announces a new leaf to be turned over at the VA. He mentioned that they need to hire 28,000 medical people in the next two years to fill the gaps to better serve our veterans. If you understand government funding, their budget for next year is set in stone, the money is there for what was proposed before the discovery of shortcomings. The money may never be there to hire the 28,000. From my own experience 45 years ago, I got out of the Army in 1968 and was told I had a year to go to a dentist and get any dental work I needed done. 10 months later I showed up for a dental appointment and was examined at the VA hospital in Syracuse NY. I was told any work I needed done, wasn’t covered because it happened after I was discharged. I asked for a petition to contest their decision. What makes that incident specifically embedded in my mind, was that they found one form, and it was under the break room coffee pot. I filled it out coffee stain and all. The VA’s return letter advised me to pick a dentist and they would pay the bill.

What the reader does not realize is the 6 percent rule is in play. Out of 100 people only 6 will complain. To show you how it works, take photo processing 20 years ago. It cost $1,000 in chemicals to process 1,000 rolls of film. If instead of throwing the chemicals out and using new chemicals for the next 1,000 rolls, they used the same chemicals for the second thousand, cutting their costs in half. Only about 6 percent of the second thousand demanded reprints because of bad quality (and you thought you took bad pictures).

The President and Congress can get up and investigate and brow beat any part of the government organization. Notice that neither one of them has a wheel barrow full of money ready to address or solve any of the issues. Funding can take from two to five years. And if you need 28,000 people, guess what you get, 5,000. So is the VA problem going away?-- not really, unless you consider downsizing the military considerably, and that is already underway—a short hop for many from Afghanistan to the unemployment line.

Obama points to the fear of deflation, when in fact we have had inflation. Our organization has been told to cut our budget by 20 percent. Just think, if we had had 20 percent deflation, we might not have had to cut our budget and let so many employees go. The choice for a government organization trying to meet a budget, is to reduce employees. The choice for business in the private sector, is to downsize, increase productivity and then do layoffs. If you have a job, you want to keep it at all costs. Good workers are now losing their jobs through no fault of their own. Normally when you quit, you give two weeks’ notice and get a little fare well party that no one wants to go to. Forget the party, you last work day could be sooner than you ever imagined.

America is downsizing and the government has no clue that they caused it. The squeeze is on. Every home in our neighborhood has three cars in the driveway and a three car garage that is packed to the top with whatever. There were so many cars parked along our street this year that they had to put up signs designating Thursday’s as street sweeping day in order to clear it to clean it. And that almost sounds like the start of a Paul Bunyan yarn.

Of course I digress, but examine what you hear from Obama and the government. Their response to our problems is rather distant; it’s kind of like Obama ordering ready-mix concrete in Los Angeles for Washington DC delivery, you’ll get the product—it’s just not in the form you had in mind. If everything is as great as it was in 2006, would it be necessary to remind everyone that things are going just great today?

Yesterday, I went down to PEP Boys to redeem a $15 dollar gift card and decided to buy a case of motor oil. To my surprise, $15 won’t even buy 4 quarts. So I bought 4. I’m spending more and consuming less without a conscious effort to do so. When I was a young one, I could work one hour for two dollars and buy 4 packs of smokes and get a nickel back; a pack of smokes today is almost one hours wages.

Obama and the Democrats are going to save us from deflation, God bless them. My only question, "Is the cure worse than the disease?”

Sunday, October 19, 2014

Ebola the Halloween Scare

In Africa, Ebola is killing hundreds of people per week. Most of the people dying travel short distances to buy groceries, and if they are sick, they might not walk at all. There might be a high level of interaction between other people because many families are living very close together and that allows the disease spread more easily. But in Africa, long distance travel is not the norm.

We have had one person with Embola get into the US and the first thing that happen was that he got sent home from the emergency ward with some medications. Why?? Because he had no health insurance. Note though, he was seen by a doctor, the ER process works, but without insurance, he would have been competing for a hospital bed with someone sicker or in worse shape that could pay.

Now let’s look at reality in this country. We don’t just live and operate in a 5 mile area like in Africa. We have had one person successfully gain entrance to the country with Ebola. One of the two infected nurses that treated him, made a trip to Detroit and back to Dallas. One person that handled embola blood samples is even on a cruise trip in the Caribbean. Common sense suggests that to control a disease of this magnitude, is very easy when, most people don’t have the ability to move great distances. Once they have mobility, everyone has the potential for exposure.

If we were to eliminate flights to Africa, many suggest that it would stop nothing. I argue that it would slow them down. It could take a person 10 to 15 days to make it to an airport where they could have access to regular means of travel. So in most cases, the disease would be spotted before it went further. That is pretty much the case with immigration from Mexico, it takes about a month to get from Panama to the border into the US, and so there would not be much of a worry about Ebola infections.

The real problem that is severely understated is the fact that in the United States, we have high mobility. Do we have the resources to control several outbreaks? When you come to the realization that the resources are not there, then you understand why the battle has to be fought in Africa. We have to fix the problem there first, or we are at risk at home on a higher level. It won’t spread from village to village in this country, but rather hop city to city, like San Francisco to New York.

Our country’s emergency rooms are closing in droves, they can’t pay their bills. We even had one ER unit that was forced to stay open and was going broke slowly. All it took was for one person to die in their waiting room and the government shut them down for gross incompetence; “Please Brer Bear, don’t throw me in the briar patch.” They were not allowed to go out of business, because they served the public, but incompetence set them free. Go figure!

At the Pentagon the other day, someone threw-up in the parking lot and they called for a hazmat team. So examine our first responders. Their first question is “Do you have insurance?” Their second question is “Have you been to Africa or Dallas in the last 3 weeks?” At that point, the health care provider might be asking themselves, “Shouldn’t I be wearing some protective clothing?”

Ebola in the United States has only hit three visibly traceable people. What happens if it was to infect part of our invisible economy, a drug addict or hooker? A 6 to 8 hour wait, in an emergency waiting room, kind of turns ER into an incubation Day Care Center for Embola. What if the person arrives to ER unconscious? I guess if you are having a heart attack you don’t have to wait 8 hrs, but everyone else does. After one exhausting 6 hour visit there 30 years ago, my next visit was to Urgent Care. I showed them a credit card and saw a doctor in 5 minutes.

In this country, we have a war on who is entitled to health care and how will it be paid for. The government pays pitifully little for uninsured ER procedures, reducing the hospitals to steal from their insurance paying customers. Our government is great at appointing people to oversee a problem and issuing directives, but short on funds to really implement any sort of action.

The real worry could be a country like India with a very concentrated population, with many very affluent people traveling to or living abroad in other countries.

Ebola could change our way of life. If you think you have it, you can go sit with a bunch of others in ER for 6 hours who have some sort of stomach flu. The hospital’s employee dress code with people in orange space suits might make you wonder a bit, but then you’d realize that it’s kind of hard to throw up wearing one of those suits, so it wouldn't do you much good to be wearing one. Of course, ABC reports that the Dallas hospital that had the first case now resembles a ghost town. It’s kind of vacant. The good news, there is no wait time at that emergency room, just come on down.

Thousands die in Africa every week and one of them made it stateside. Presently three schools are closed in Cleveland and a commercial airplane has been taken out of service, so they can be decontaminated. ABC reported that “There are four hospitals with bio containment facilities in the United States, and they have 11 beds that can be used at any one time for Ebola patients,”--- and four of them are in use.

An orange hazmat suit, looks like the ideal Halloween costume, the color fits as does the symbolism it represents. 8 billion people in the world and Embola could kill 5.7 billion of them if we drag our feet on this. Congress with it's excessive hubris, won't do much, its an election year and an incubation period of 21 days is too short an interval to have a public opinion on. I’m just hoping the disease is more partial to Democrats who are for everything.

Remember one thing, the problem will go away if we do nothing. And when you think about it, oddly that's correct, if we are not around, the problem ceases to exist.

Wednesday, October 15, 2014

Reality Vs Perception

People protesting in the streets of Turkey demanding that the government do something about ISIS. Ever notice that protestors don’t carry guns and they are all in their 20’s. They really don’t want to fight in a war either, let someone else die for the cause. I guess that’s why we draft people into the military, they don’t want to go voluntarily.

Americans think that people that vote in other countries have Democracy. How does a bottle of purple ink to dip your finger even suggest an aura of Democracy?

Minimum wage, what is it? It is a wage they have to pay per hour for a job that can’t be done in a foreign country. Hamburger flipper comes to mind. How many more do we need? The US could become more like Spain, where laborers are private contractors. As an independent contractor, you would get paid a commission on the number of hamburgers you sold. You would be responsible for Social Security, health care and taxes. There is no minimum wage for contractors. How many hotel rooms can you clean at $10 per room? At $5 per room????

Looking to the wars being fought in the Middle East, where does all the money come from to purchase the explosives, bullets and bombs that are being used? An AK-47 now sells for $2,100, a grenade launcher for $2,000 and grenades for $500; think about it when you fill up your car at a gas station, the money comes from oil. Minimum wage in Syria is probably about 10 cents an hour. So we know who is not buying them; finding an AK-47 would be the equivalent of winning the lottery over there. When you run out of money, you run out of ammunition, and you lose; wars are expensive. When you see many soldiers fire off 20 rounds into the air, you realize the mentality of these warriors—idiots. Bullets are not free.

People all over the world are in to protesting. It is painless and appears to have a semblance of results. What people don’t realize is that organizations like ISIS with a couple of thousand followers can threaten and intimidate millions of people. They could run out of money; logistic concepts are an unknown concept to religious zealots. But don’t fool yourself, these people will kill innocent relatives to impose their will. Your son or daughter is more precious to you than your political beliefs and that is the medium they work within: the fear of loss.

Here in the US, absurdity is being mixed with reality with varying results. With the new diet pills, if you lose too much weight, only take them every other day. After having a hip replacement you can go mountain climbing, more likely, you might want to throw away your aluminum walker. The pill ads for Viagra show a middle age trim couple. Reality is a wife that has put on 40 pounds and thinks he husband should have outgrown sex long ago; don’t get too excited, those 50 pills could take you a half century years to use up— plus the threat of 4 hours of sex might make you appear to be some sort of sex fanatic that needs to be put down. Can you imagine the dialogue at breakfast the next morning? “Honey if you take one more of those pills, we are through.” Of course, your response, “I felt like I was about to have a cerebral hemorrhage”— might make her consider one more encounter.

The reality, we have a bunch of old farts in Congress trying to run our country, times have changed and left them behind, of course, they are the last to realize it.

We need some young leadership that will go into the Middle East and kick some ass. IMHO forget health care, if you can’t pay for it, you don’t need it. This country was not built to provide what you can’t afford to pay for. Spending a million dollars on a premature baby is noble, but that amount of money would pay for a hell of a lot of new infrastructure for water delivery in Los Angeles. Of course the idea that we must choose between a new life and old plumbing is a real tear jerker, but Amerika needs to step up and address the real issues. The premise that we can have it all, is fiction. It's a little like getting married so you can pimp out your wife to your buddies to make the house payment, it works for all the wrong reasons (until the wife catches on). We will pay for this mess, but hey that's a thousand years from now--maybe, maybe not.

Sunday, September 28, 2014

The Financial Disaster Leading to a World Depression

Financial bubbles collapse and usually initiate a depression. Whether it’s tulips in Holland or livestock in Africa, when it hits, the rich become suddenly poor. People starve to death in a lot of cases because their wealth vaporized in front of their eyes, now they have no money.

We are looking at people very well off that all of a sudden become destitute, through no real fault of their own. You have a million dollar tulip that drops to zero, or 1,000 head of cattle that you can no longer afford to feed. A miss allocation of resources given enough time, the expected outcome changes into to something unimaginable.

The Great Depression of 1929 was one of them, only it didn’t start in 1929, more probably closer to 1926 with the hurricanes hitting the Florida coast. And of course, it didn’t come into full bloom until 1934 and some argue 1937. At that point people thought they were in a bottomless pit and things could only get worse. There was no unemployment insurance, or food stamps, or welfare and the old people in the streets scavenging trash cans for food was probably enough of a government embarrassment to start up Social Security. The wealth of a nation had gone down the drain. Between the banking system and the stock market the average saver had lost 90 percent of their savings and investments. And when you examine the era, it was the age of Radio, the light bulb, the telephone, airplane travel, motor cars, harvest machines, and tractors.

Then we come to today and everyone believes that things are different now, we have avoided a Great Depression. Food stamps and unemployment insurance have eliminate the food kitchens and the people queuing up to be fed. So there is an invisibility factor that leaves this great depression labeled the “Great Recession.” The stock market has not crashed, and the bond market is paying zero interest, which is an absurdity beyond comprehension.

The Great Depression was ended by a world war. Half of the world was destroyed and our economy produced what they needed to get back on line. This is what brought us out of the Great Depression. What may not have been observed is the savings of our middle class ready for retirement was destroyed in this fiasco in 1929. If you were ready to retire, you were ruined. The World War also ruined those retired in Europe. The process of a depression or war is selective, it is the retirees that pay the ultimate price.

So now we have a country that has figured out that it can spend our collective savings because we have no need for it until retirement. It has borrowed 17 trillion which is the collective amount that we have saved, I wonder if that is a coincidence? You can’t borrow what isn’t there.

From here, we have a problem with the recovery. Everyone owes money. There are no destroyed world economy’s to rebuild. So what we have, is a world that has everything and needs nothing really, unless you are talking about a new Iphone or Galaxy.

Gold silver and Platinum have dropped below their mining profitability price. Looks like people are in a need to raise money. I always joke about stock traders selling the blue chips and holding on to the dogs hoping they will come back. But if you’re broke, you are going to sell whatever has the highest value and least utility, like wedding rings, and old silver. The things that have held their value well will be sold first, it is human nature to not want to suffer a loss on an investment. And you don’t realize the loss until you sell it.

Our national debt is at 17 trillion and if the interest rate went to 10 percent, we would be in default in a matter of minutes. Food stamps, unemployment insurance and Social Security would not necessarily stop, but our government would not have the option to borrow, only to print. At that point, the government would be called upon to redeem the debt in some manner. The most likely scenario is to issue new dollars that are each worth 10 of the old dollars. So the national debt would lose a zero and become 1.7 trillion, which would be economically manageable. At this point we could be facing very severe deflationary spiral. Or keep printing, until the minions no longer accept the dollars. Toilet paper could reach $1,000 a roll and what the heck put it on your credit card, you get 1 ½% back on all purchases, what a deal.

The question, “Where too from here,” comes to mind. If the government cannot pay back what it has borrowed, at the stated interest rate, and is in default, does the absurdity of the amount borrowed from the banks have any relevance? Or does the absurdity of the amount borrowed leave one to wonder how the act was accomplished without using a gun.

In a financial bubble, of which this one is worldwide, currencies can fluctuate in value all the way to zero. Precious metals have a base price. An ounce of gold can fluctuate from a week’s wages to a month’s wages. Silver can fluctuate between a day’s wages and a week. The neat thing about precious metals is that the price is independent of government control.

Then there is the argument that gold, platinum and silver have lost half of their value in 3 years. Many investments fall out of fashion and drop in price only to later come back. Gold, Silver and Copper have dropped out of our coinage. The penny became worth more than a penny (it cost the government 1 ½ cent to buy the copper to make it). From that you can kind of figure even if you don’t understand the mechanics of inflation, that something isn’t quite right.

Let’s do a comparison 100 ounces of gold purchased at $1,200 an ounce verses 120K in the bank. If the government does a 10 for 1 conversion of the120k, you net $12,000. That $12,000 will now buy 10 ounces of gold. Notice you had to do nothing for the conversion to take effect, it is automatic. For every dollar of debt you held, you would get 10 cents in the new currency. Using this method, our government could wipe 15.5 trillion dollars of debt off of the books with the stroke of a pen. Social Security, unemployment, welfare and food stamps could again be funded with further borrowing. What do you want gold or currency?

The neat thing is that if you are dead broke, you lose nothing. So the poor won’t riot in the streets from the loss of funds, but if you are an employer trying to make payroll, you may come up a tad bit short on the conversion.

The only thing that we can really extract from a global financial collapse is the mobility of precious metals. All other assets are subject to what the buyer is willing to pay for it and what the seller will accept. Those with a lot of toys, might find the taxes too high to pay to keep them. Most rich people only have a vague idea of what they are worth, it is the cash flow pumping through their empire that keeps everything afloat. Destroy the cash flow and most of the real rich will wither away. I’m not talking about someone with one million in the bank, I’m talking about someone who has a payroll of one million a month and if he has to sell the place from a lack of business, he gets 100k because no one wants to buy the company.

The bottom line is this, things are not as they appear. World governments have stepped in and manipulated the financial markets to their advantage. The only people that they can borrow beg and steal from are the savers. They have done that. They cannot possibly repay what they have borrowed, they can barely pay all of the benefits promised to the people waiting in line for them.

We are at a peculiar point in time, the spread between gold and platinum is only one hundred dollars. It could be time to trade some of your gold for platinum. It is 30 times scarcer than gold. It is almost a given certainty that a new model of international trade has to emerge. And it will have to be based on gold and silver, but platinum could be the new guy on the block.

I am not sure where we are going, but if you think that our government has your best interest in mind, you’d better think again. If you are broke, penniless, and illegal, they have your interests in mind, we know that. So where to from here? Somewhere between nowhere and the poorhouse. You can save all of your life and still go broke, go figure. The scary question, will this just involve the United States? --To quote Shakespeare; "Methinks not."

Wednesday, September 17, 2014

The Dumbing Down of America

The average US citizen is a vegetable that reclines on a couch. Overweight, hates his or her job and wants to make more money to buy more toys. Nobody saves for retirement until they approach 55. Then they put their retirement fund in a 401k or IRA and the salesman shows them a pyramid diagram and asks them where they want to invest their funds—down at the bottom where it’s safe or up at the top in the winner’s circle?

Did you know that solar panels are a “no-brainer?” Just ask Ed Asner. That means you don’t have to think to make money. Then there are the hybrid cars that you need to own 10 years to break even on, the only trouble is most people get a new car every 4 years because the one they’ve got, is falling apart. Plus after 10 years the car is worthless unless you replace the battery.

Obama’s wife started a healthy school lunch program to keep kids from getting fat. All it has done is reduce the number of American kids eating the lunches. Fat kids know what tastes good, they enjoy deep fried food and pizza. If you’re from Central America, any lunch is better than no lunch. The neat thing about the new kids in the school is that the school district gets $8,000 for each one, to educate them. And this is government money, it’s not like it is taxes that we paid. I’m not quite sure where that sort of logic leads to, but I wouldn’t wait for the music to stop, to sit in a chair—their playing with half a deck.

Then we tell our kids they have to go to college to get a better job. It’s true for some professions, but how many rocket scientists and brain surgeons do we need? As long as we have rich people, we will never have enough lawyers, go figure. As the student loan approaches 200k it becomes a form of slavery, from which there is no relief. Lincoln freed the slaves and by God Obama will get them back. This time it won’t be an issue of skin color, but rather one of naively trusting a government program to do what it promised. Name me one government program that has—I go ballistic with the mention of the ethanol gas program.

The new minimum wage will give everyone a boost in wages. So everyone up the ladder gets a pay raise. It’s a little like putting a magnifying glass in front of the carrot on a stick. You’ll never enlighten these workers about inflation and its causes; they’re more into cars, women, football and basketball. Notice as you earn more, you have to pay more in taxes, and 50 percent of the population pays no Federal income tax now so that should drop a tad, to say 48 percent with the pay raise.

When people discuss presidential administrations in relation to their successes and failures, they often forget to realize that it takes about 4 years before there is a cause related effect. The president on watch gets credit or blame for what was set in motion 4 to 10 years earlier. Clinton is cited for balanced budgets, guess what? Congress was Republican, both houses then. The president may be the head honcho, but he is not the one issuing the laws and writing the checks. This argument would glaze over the eyes of most minimum wage earners; the knowledge puts no money in their pocket.

Our government’s 17 trillion dollar debt is so large that it escapes comprehension. This method of accounting will work until it doesn’t. The warm and fuzzy feeling is gone, financial security is what we desire. But look at it from the government’s point of view, everyone is setting there watching and hoping that nothing overturns the apple-cart (notice how we have progressed from the analogy of the straw on a camel’s back). We are good for now, but now, is not forever.

Many cite this country as being the greatest in the world. It was at one time. You used to have to be a citizen to vote, now nobody cares, anyone can vote if they look old enough, and they can vote more than once if they feel like it. Our government hands out free money to anyone who can make it here (of course those aren’t my tax dollars that I paid to the Federal government). It still is the greatest country in the world, but it depends on whether you’re in, looking out; or out, looking in.

We need to understand that whatever our beliefs on the issues, it will not influence the final outcome. But one thing is very obvious. Things are promoted or sold to make money. SOMEONE ends up paying all of the bills. If government was smaller or had a smaller budget, we would have less of the stuff we really don't need. I guess that is just too simple of an idea to work. (Mr. SOMEONE lives down the street from me SOMEWHERE, God bless him for all the taxes he pays)

Tuesday, September 09, 2014

Surfing the Kondratieff Wave Reprinted from2006

Here is a reprint of my second post as a blogger way back in May of 2006. Click on the link in this article, you won't be disappointed. Little bit of writers block lately coupled with a heavy work load at my regular job. Hope to get back in form next week with something new.

If you're into investment cycles and charts, the Kondratieff Wave is one to examine. Basically the boom and bust cycle had a 60 year span. Here is a link to more detail http://www.kwaves.com/kond_overview.htm Credit the picture above from this link.

The cycle this time around is a little long in the tooth. There is a reason for this and I believe as do some others, that it has to do with the increase in the length of the average persons life span.It use to be about 60 years now we are up to about 75 years.

Each generation has a group of elders that can draw from past mistakes. We are at a point right now, that the follies of the 1920's and 1930's are not part of our "group memory" any more. Most people from that era would be at least 100 years old now. Now when you quote some historical aspect a cause of the last depression, you hear the phrase,"Its different this time."

People today think that the interest only no money down mortgage is something new. Well it isn't. They were written right up to the collapse in 1929. The banks soon realized that it was like the neighbor taking out your daughter for a "test drive" before he married her. The responsibility factor was missing.

Cycles are usually displayed as circles that would follow through phases and complete back where they started. I think that this is not a true analogy of what is happening here. If you start with a spiral going out from the center, this more correctly displays "history repeating itself." It s not quite the same, things have changed somewhat.

People are consuming more and more, and with that, comes the creation of more debt. It is this debt that will be marked to market. Mr. Kondratieff's theory suggests that all of this debt will disappear and the money supply will contract accordingly (drastically in this case).

I don't think that people fully realize how money disappears. Take Lucent Technologies a few years back. It sold for $80 per share and went down to $2. Somebody owned it the whole way down.

What really scares me today, is the people with savings and retirement funds, they have been funding this whole thing. The market will always go up (believe that and I'll tell you another). The trouble is, a majority of the owners of wealth, are going to want to get out of the market pretty soon and they are at the head of the line-- the baby boomer's.The baby boomer's think that this will be a relaxing walk into retirement. More likely its going to be one hell of a panic. If Mr Kondratieff is right, there will be a drastic contraction of the money supply because of the debt marked to market, and because of this, commodities should fall in price.

My question is this. If the world population has increased 4 times in the last 60 years and most of these governments have been printing money at a very vigorous rate, can gold and silver still be considered commodities? I think that they reside outside the realm of consumables.

As an addition to the original post, here is a little bit of video from You-Tube that everyone is carrying.

Monday, August 25, 2014

The Upside Down Logic of Today’s Economy

People used to buy homes because it was cheaper to own than to rent. Let’s face it, the ability to pick up and move at the drop of a hat, is real freedom. And just that alone should dictate that renters pay more for that freedom. That doesn’t seem to be the case. Selling a home in California can cost 20K, and that’s a year’s rent.

Common sense suggests that if you want people to save their money, you should pay them a reasonable interest rate so they would forgo immediate gratification. I can’t think of one reason if you are young, to put money in a bank at these interest rates. Buy something real and enjoy it.

If you are ready for retirement, even Suze Orman is suggesting that you hop into the stock market. The return on bonds is so low that you need to invest in stocks with some reasonable amount of return even if the risk is greater. Otherwise you will outlive your savings. And to think, that the eighth wonder of the world used to be “Compound Interest.” Right now the spread between Junk and Treasury’s is about 100 basis points and at times in the past, used to be as high as 800 to 1400 basis points (that's before the government insured everything).

It used to be that the minimum wage was an entry rate into the labor force. You couldn’t live on it as a career wage, but it gave you training and gave your employer a way to measure you for advancement. Now we have the realization by the masses that you can’t support a family on the minimum wage. Plus we have a new economic concept that raising the minimum wage will solve problems. Let me ask you one question, does a law solve a problem or set fines for violators? Just maybe pointing out that the minimum wage won’t support a family sells more newspapers. Everyone earning the minimum wage has a pretty good idea that family life will really suck on the minimum wage.

The infrastructure in most of the states is over 60 years old and needs to be replaced. “Infrastructure is a fancy name for; roads, sewer, water and electricity. On top of that, my state, California is in the middle of a drought. Add insult to injury, consuming less water by everyone will raise everyone’s water rates. A lot of the fixed costs used to be passed on to the large consumers. So in a down economy, consuming less costs more and we are not even talking inflation.

Inflation appears to have disappeared if we look at all of the government statistics. But if we examine the national debt, a jump of 10 trillion in the last 9 years, kind of makes one wonder. When I pointed out to someone some wastefully spending in our organization, the reply was, “Oh, that’s government money.” There appears to be a complete disconnect between the taxes we pay and government spending. So it’s not surprising to see that the average man on the street looks at the national debt as a government thing that has nothing to do with the people. Then carry it one step further; this form of government financing has worked great so far, why not continue it? Don’t rock the boat.

I remember as a kid offering up an excuse for bad behavior to my parents with “The other kids do it or their parents think its ok.” The response from my parents was wisdom for growing up into adulthood, “they might do it, but it doesn’t make it right. In this house you live up to our standards, not their lack of standards.” So when you open the morning paper and find out that all of the other countries are printing money at a very rapid rate just as we are; what you can deduce from the fracas, is that there are no “adults” in charge.

Common sense suggests that the economy is stressed to the limit. We are not sure, why or how but the facts don’t fit any model we use. Something is wrong, there is an economic conflict that has to be resolved. We cannot spend what we have not taxed, forever. There comes a point to where it has to fail. Of course we are not there yet, so as long as it works, it works.

It kind of reminds me of a roller coaster ride video from a blogger a few years ago about the Stock Market, we are now most certainly near a top and are ready for the real ride to begin. Or better yet, it's enjoying snow cones on the Titanic after the iceberg hit. Are we having fun yet? Do you get the idea that reality and common sense, are traits lacking from the players at our "roulette table" commonly referred to as the stock market? "Faites vos jeux."

Tuesday, August 12, 2014

War and Non Wars

I wrote this a week ago and published it for about 12 hours and then unpublished it. It didn't really conform to what this blog is about and that's why I pulled it. But it seems to have a of a lot of relevance when we watch the cruelty going on in the third world news.

This is a little off topic, but right now the world is in the midst of several armed conflicts and many are mislabeled “wars.” Wars are fought by two differing groups wearing uniforms to designate their affiliations and there are rules of engagement. If you remove your uniform and go behind enemy lines, you are then considered a spy and entitled to be immediately shot if discovered. In these types of conflicts, civilians are a protected group.

In a second type of conflict many times labeled “a war,” are religious conflicts. There are no uniforms to designate participants, in fact, most are masked. These barbarians think nothing of killing a man’s family, if they cannot get the man himself. What we need to realize is that these people are terrorists and do not even deserve the right to surrender and be captured. They claim to be innocent civilians when discovered.

We need to recognize what terrorism is, it is an attack on everyone, not just the military of a country. We have a war in Syria and at least half of the combatants wear uniforms; in Israel, the same thing. In both cases, only one side is held accountable, only because they follow the rules of war.

In the Ukraine, they have a civil war and the war is real, they’re not trying to kill civilians. It is soldier killing soldier. When it’s over, the winner’s rule and it has nothing to do with religion.

Most of the civil unrest in the world right now involves the Muslim religion. They are using terrorism to conquer those who block their path with mindless senseless trails of death and destruction, through terror and intimidation, with the hope to conquer, kill and convert what is left.

A pressure cooker blows up during the Boston Marathon and it sets a whole nation on edge. Our airlines could be on the verge of collapse with one or two future successful terrorist attacks.

As a suggestion, why not drop one or two nuclear bombs on ISIS to show them what we are using for a pressure cookers? We don’t need boots on the ground to vaporize someone who is a terrorist. This might give Iran second thoughts on producing a nuclear device. If they want to wear a uniform and play by the rules of war, then that would change the game plan. Right now our game plan doesn’t work because they don’t play according to the rules of war. They are playing to win and are succeeding, the threat to kill your wife and kids will make anyone toe the line.

A nuclear bomb would bring home to them the absolute horrors of real war, more so than a car bomb or a pressure cooker. The certainty of the lethal impact of a nuclear weapon makes a car bomb seem like an act of futility. If you get vaporized, you don’t get the 60 virgins. Of course I could be wrong on that, no one has come back to complain that they didn’t get their quota of virgins. And if we are talking sheep, I can see a realistic possibility of filling that quota of virgins.

We need to examine the rules of engagement for terrorists. Do we play by our rules, or do we give them a dose of what they are handing out to the rest of the world?

I'm sure that I will be more on topic next week.

Sunday, July 27, 2014

Show Me a Company That Pays Taxes

The most idiotic statement I heard the other day was from President Obama stating that these "Business Inversions" going on, were a way for business to avoid paying U.S. taxes. Show me ANY company that pays government taxes. There are NONE! The tax is added on to the price of the product and THE CONSUMER PAYS THE TAX.

Basically a corporation makes widgets at a reasonable price, or goes out of business. There are all sorts of taxes the corporation has to collect and turn into the government. If the government decides it wants 26 percent of the company’s earnings and call it taxes, so be it; it is a cost of business and is factored into the price of the final product. So when you buy a new American car, built for 20K the selling price has a 26 percent markup just for the tax --- figure $25,200 with GM’s tax added in. Then figure profit for dealer and producer and the price hits $30,000 also envision all of the car parts from suppliers paying the same government tax. And add that on to what the car company has to pay to acquire parts to produce the vehicle. When done this way, the buyer has no clue to as to what goes into his 10 percent sales tax tacked on to his purchase price— he is paying tax on taxes already paid by the auto producer and his suppliers.

The President and Congress express the need for tax reform, and big business has figured out what that means, there won’t be any. Moving your mouth is not the same as rolling up your sleeves and picking up a shovel. This country wasn’t created because of religious freedom and voting rights, it was created over unjust taxation. People were tired of paying the King of England tribute taxes with no visible benefits. Obama thinks that it is our patriotic right to pay taxes. We fought a war to fix that 200 years ago and it looks like we are facing the same problem again.

All governments are incredibly stupid when it comes to taxes. The Great Depression of the 1930’s was greatly exacerbated by municipalities using the logic; “If we raise taxes, we will increase the amount collected.” People couldn’t pay the taxes and gave the city their keys to the property. The net effect, the tax revenues collected, dropped drastically. The politicians didn’t comprehend the cause and effect of what they had done, but that mattered little, they didn’t get reelected, so there was no lesson learned. The tax rate on the rich at one time was almost 90 percent and when the government dropped it down to 20 percent, there was no change or decrease in tax receipts, the rich now had more places to invest without being penalized. Changing the rate on the rich, in no way affected the amount collected. You can be stupid and poor forever, but you can’t be rich and stupid for very long.

The cost of running a business in the USA is chasing manufacturing off shore. Taxes are only one item; there is Obamacare, Social Security, unemployment insurance, workers comp and liability from ambulance chasing lawyers.

This country was settled by people voting with their feet. Corporations are now considered people, and they seem to be voting with their feet. Why do I get the feeling that the political logic doesn’t fit here? The real question that needs to be asked, is this: Why does government need more money to fix what isn’t broken, and at the same time, need less money to fix what is broken?

Common sense suggests that if it works in the USA, it will work a hell of a lot better in another country at half the price. Why does that seem like the wrong answer, but the right conclusion?

Monday, July 21, 2014

Socialism a Humorous Explanition

Below is a web link if it doesn't show up right.
Web link

Sunday, July 13, 2014

The New Housing Bubble in California

Housing prices in San Marcos are about back to pre-bubble prices. A house like we rent for $1750 a month is now going for 560K. That would be about $3,000 a month to own it plus another $5,600 in property taxes. So renting costs us about $21,000 a year while owning would cost us about $41,600 a year. Notice the cost difference. If you wanted to turn the property into a rental, it wouldn’t be worth the effort at these prices.

In the past, many people said, that paying rent was just throwing your money away. Owners rationalize when the home is paid off, "they get to live in it rent free." Actually, they forgo the interest of the dollar value of the home. A paid off 560K home would generate 17K at 3% interest. So if you take the 17K and add the property taxes, of $5,600, you get $20,500. Divide that by 12 and they are still paying $1700 rent a month. We are not even talking repairs here, I've got a $7,000 repair bill to rebuild one bathroom on my rental.

The real reason for home ownership in the past; it was cheaper to own than to rent. The renter paid extra for the freedom to pick up and move when they felt like it. With housing prices up 160K in two years, that thinking has changed a bit. The funny thing for this area is that the people that bought at the height of the last bubble are still underwater after 8 years. They need 34K in equity just to pay the realtors fees if they were to sell without a loss.

In a roundabout way, the Federal Reserve and your retirement funds are what keep the real estate prices artificially high. Beginning in October, the Feds will no longer be buying the real estate paper. The estimates of the dollar value of the paper owned by them is around 2.3 trillion dollars. No big deal on this, the home loans will be paid off over thirty years and the 2.3 trillion will go to zero ---if the real estate doesn’t go back into foreclosure.

The trouble begins in October. Here is a simplification of how the present banking system handles real estate. The bank loans a home buyer 500K for a home loan. The bank then sells the loan to whomever, in this case the Federal Reserve and keeps a half percent of the loan for management fees. The bank then loans the money out again and does the same thing and gets another management fee. If the bank does this 10 times, it is getting 5% in management fees on their depositor’s 500k with little or no risk. Before the Federal Reserve and the Fannie and Freddie bail out, the loans were sold to private parties. So now, it looks as if interest rates will have to rise up about 300 basis points to create interested third parties willing to invest in the real estate note market. You ask why?--- the banks don't want to hold on to 30 year 5% paper. Will rates rise, or will the Fed throw in the towel and start buying more paper?

I think all of us can agree that the stock market has reached new highs for no good reason. A lot of hard working people have retired because they can’t find a job. Many college grads are finding out that their degree isn’t worth the money they borrowed to get it.

Our government has enabled every dreamer the right to become a failure. Buy a home, get a college education and become a part of the American dream. Buy a Lotto ticket and win. And if you can't speak Spanish, you'd better learn.

So we have a housing bubble in San Marcos, I wonder how it will end? If the government rewards failure, I guess we will get more of it; it’s tragic to think that we earned it by hard work rather than ineptness.

Saturday, June 28, 2014

The Invisible Derivative's Market Reprinted

This is a reprint from June 25, 2006, and later Aug 5, 2008 that may be of interest to some of you.

Call it gamblers insurance. The most common derivatives are Puts and Calls. If you think that Google is going to go down and you want to still hold it because of its upside potential you would buy a Put at say $375. So if Google was to drop to $200, you could "put it" to the option seller at $375. The cost of this insurance option varies, depending on the volatility of the stock. Now, if you thought Google was going to go to $1,000 you could purchase a Call at $400 strike price. If the stock rose to $600 you could exercise the Call and get the stock at the $400 dollar price or the difference between the Call price and the current value.

The figures vary somewhat, but about 90% of all options expire worthless in the U.S. Stock Market.

Enter the Gunslinger (slang term for wet behind the ears Mutual Fund trader) (never seen a real bear market in his life---there hasn't been one). This guy gets the bright idea to sell both Puts and Calls. As long as the market lumbers along the guy is raking in the coin.

Say the Dow has a bad day and drops 300 points. It seems like a big move, but since it is a measure of 30 stocks bought way back in 1910, multiply the 300 point drop in value by the Dow divisor (0.123) and you get a real dollar loss of $36.90 on the Dow. Divide that by the 30 Dow stocks and you get $1.23 per stock. If that were to happen, no big deal pay out to the Puts exercised. Notice, you only get burned on the Puts OR the Calls NOT BOTH in any one point in time. I stress the words "Point In Time."

The Derivatives Market is bigger than our stock market. One analogy used the comparison of an elephant to a mouse; here is a graph from one source that puts it at 35 trillion dollars.

Graph courtesy www.gold-eagle.com. [postnote:The graph is somewhat dated, present figures suggest around 55 trillion.]

Now suppose the Dow Jones drops 1000 points. Then by some miracle the market comes back to even at lunch time. Then, it soars up 1,000 points by the close. The gunslinger gets hit going down and nailed again when it goes up (the double whammy). He would be selling Calls like crazy while the market is going down trying to recoup losses from his naked Puts, then as the market heads north he gets eaten alive by the Calls he wrote earlier.

We only picked one market; there is the bond market, the commodities market, and foreign exchange markets, to name a few. At this point, the gunslinger is in a situation that looks like the kiddy game Whack a Mole, where you have a hammer and hit the head that pops out of one of many different holes. The model turns into a real mess, when you realize that there are thousands of Mutual Fund Managers that will all be playing this game in real time. Naturally these different markets will be doing different things. The word "panic" comes to mind.

My suspicion with Mutual Funds and IRA's, is that when you specify how you want your portfolio invested, they are not moving your money from one investment to another, they are purchasing a derivative to satisfy your demands of asset allocation. This leaves them free to pursue the line of investment they feel most confident with.

So much for "what ifs," the Derivatives Market is a Fantasy Land; the playground of hedge funds and mutual funds. Where will it end? My best guess, somewhere between Ab Surdum and Ad Nausea (no, they are not towns in Iraq).

Sunday, June 22, 2014

Nest Egg Inflation

As I get older, retirement seems further off in the distance. Inflation is nibbling away at my savings. But there are bigger problems that lie hidden just beneath the surface.

The Robert Reich movie "Inequality for All," talks about the 1% getting richer and the middle class getting poorer. On the one side, the middle class still earns the same amount, but it doesn’t go as far anymore. This is called inflation, but a better description would be government printing of dollars. If we look at the rich getting richer, one item eludes people, the increase in wealth doesn’t mean that they now spend more, it most probably goes into a bank account. These extra dollars are not sloshing around in the economy, they have been absorbed into what could be labeled a “wealth sponge.” The excess of printed dollars is effectively removed from circulation.

On top of that, we have many people approaching retirement squirreling dollars away in their IRA’s and 401K’s. Many people believe that Congress enabled these retirement plans to help people save for retirement. That concept was a great vote getter, but the real reason for these plans was to increase the money available for Congress to borrow.

In two years’ time, my mint flavored Altoids have increased in price from one dollar to three dollars. The dollar double cheeseburger at McDucks is now $1.69. On Reich's documentary, he interviewed a guy making 12 million a year, and the gentleman pointed out that he only needs three pairs of blue jeans a year. So we can’t depend on the rich to stimulate the economy, and at the same time, I’ve cut down on double cheeseburgers and Altoids. Put it another way, the burn time on retirement funds has halved.

People today, are not saving for retirement like they used to. The silver foxes are starting to withdraw their retirement dollars, while the young question the concept of even saving money. Why put it in the bank at one percent when you can get a new car instead? Interest rates this low almost demand that you satisfy your urge for immediate gratification.

If we go back to Bernie Madoff, we stumble upon another problem not considered. All of his investors were rich up until they were advised he was broke. It's amazing how an excel spread sheet and a LaserJet printer can give an investor the appearance of a fabulous monthly statement, while in reality they're dead broke and clueless of the fact.

The real feat of accomplishment, is the 14 trillion dollars borrowed by the US government. It was sucked out of the financial system in a span of 10 years. This money was deposited in the banks when interest rates were 8% and higher. What happens now, when the baby boomers retire and start to withdraw their nest egg dollars? What happens if there are no new dollars coming into the system to replace the ones withdrawn?

It's kind of like the government selling 14 trillion dollars worth of tickets to the latest movie and the theater only seats 2,000. There is no problem until you decide to see the movie.

inflation has had 40 years to ravage your nest egg. As you run out of funds in retirement, your kids will try to help you out and will come to the conclusion that you just didn't save enough. They will grow up wiser--- When it comes time for them to retire, they can use their government Social Security checks to pay off their government student loans. ---Why do I get the feeling that I'm missing something here?

Sunday, June 01, 2014

The Computer Age, The New Brick Wall

Computers have changed the way the world works beyond imagination. Just as in the early 1920, the industrial age transformed the United States from an agrarian economy to an industrial one. The 80% farming the land in 1910 didn’t give up willingly, but the number of farmers dropped drastically as the Great Depression progressed. That was the “New Age” of; incandescent lighting, the telephone, electricity, the airplane, radio and the automobile. This new technology was going to make life better, and that was 1929. And it did for some.

Our present economy is in bad shape. Raising the minimum wage is not going to make better hamburger flippers, minimum wage jobs are already filled to beyond capacity. People need to realize that the work place has change dramatically with the introduction of computers, many jobs are gone for good. Try going to the Unemployment office to file a claim; you have to get on a computer and fill out the forms, and god help you if you can’t type. Just entering your data for a claim yourself, eliminates about 4 people that use to work in the unemployment office; the receptionist, the data collector, the interviewer, and the guy to match you up with a job. Type in your claim and the computer will search the data base and print out possible job positions and at the same time, determine if you are eligible for unemployment.

People without computer skills are the new frontier of unskilled laborers. Surprisingly college grads also enter into the unemployed mix. Many field have no jobs waiting for them, this includes lawyers, dentists, and health care techs. There are jobs in those field, but not tens of thousands of them. Colleges don’t guarantee jobs, they only enable the student to pursue the career selected. It is not their fault that more people will graduate this year as lawyers as there are people already practicing law.

Then you have middle management who have lost their jobs because of the computer revolution. One worker with the right software can now replace twenty people. Many people over 45, even with retraining, can’t expect to receive half of what they were previously earning--it probably took them 10 years to get to their present pay level. So they collect two years of unemployment and retire early at age 62.

This new age of technology has caught everyone flat footed just like it did in the roaring 1920’s. You could even go back to about 1906 when the mechanical calculator went into production and discover that the hundreds of thousands of accountants employed by the banking industry disappeared overnight. One person with a calculator replaced 80 workers.

Jump forward to today. The internet supplies us with many services we used to pay for. With Google, you can fix a washing machine, replace a garbage disposal or replace the brakes on your car. You can sell odds and ends to the rest of the world from the comfort of your own home.

Computer technology has made all sorts of tasks simpler and easier to accomplish. So it’s not surprising with all of the software, around, entrepreneurs have figured out that it is more cost effective to move simple repetitive jobs overseas. So in effect, we have a double whammy, a new work paradigm that revolves around computers, and an out sourcing of jobs that can be done cheaper in the third world.

The frustrating thing about the new technology is that you can spend a whole day on the phone trying to get a live person to talk to. And when a real person answers, you'll discover that you're talking to someone in India with an extremely limited English vocabulary; -- which proves you can work in this country without even being here. Theoretically a person in Hong Kong could robotically flip hamburgers in the US at 40 cents an hour---That has to be easier than flying a drone half way around the world and launching a stinger missile into Afghanistan. Let's see, I'll have one drone-burger, hold the onions and the missile.

Computer technology is the future. The trouble is, it's has transformed the labor market without telling anyone, leaving many people ill prepared or too old for tomorrow's jobs.

Monday, May 26, 2014

Federal Reserve "Saves" the Real Estate Market

The Federal Reserve bailed out of the banks, Freddie and Fannie a while back. Just before the real estate bubble burst, houses were sold for big bucks. The seller got the cash from the banks and the buyer got the house, which they gave back to the bank. Notice in a real estate transaction, the buyer normally will over a span of 20 to 30 years, pay back the loan with interest. At this point, the bank has an insurance loss on the home. It’s worth a couple of hundred thousand less than what the bank loaned money on.

What is not real clear here is the economic ramifications of a buyer walking away from a home and living in it for free for one to two years. The Federal Reserve is the insurance company that covers these failed loans and reimburses the banks for their loss. The original seller got 500K for the home and the Federal Reserve picks up the property. The Fed has an IOU written to itself for the amount it covered for the bank, in this case 250K plus the house itself. It now can offer very enticing interest rates to any buyer that would like to purchase the home at say $400K. Since the Federal Reserve doesn’t have to make a profit, the interest charged and the total payments over 30 years will probably cover to total cost that the Feds are on the hook to cover, 500K.

The seller got 500K when the buyer took possession. The bank was made whole with a 250K payment from the Federal Deposit insurance. That 250k was supposed to enter the market slowly over many years out of the buyers paychecks from wages earned. This was money that the homebuyer would not be able to spend on consumption because it was committed to house payments. That is no longer the case. The buyer took a walk, and the deficiency was dumped back into the market as an insurance payoff to the bank. Plus now, the ex-buyer is free to consume other things with his paycheck.

I could be shot again for my generalizations, but if we examine the real estate bubble, the house was well worth 250K pre bubble and sold for 500K. The seller made a 250k profit and the Fed dumped 250K into the banks’ balance sheet. And when you look at it, the money in the banks belongs to the savers, so everything is just terrific nobody has lost a dime. At this point you have 250k (seller profit) + 250k (FR insurance)=500K extra added to the economic market in purchasing power that no one ever even worked for. Now true, if the Fed sells the home for 400k, the 500K will come back to the Fed and we have a zero sum game, the trouble is, that date is 20 to 30 years away.

Where did all of this unearned money go? The answer is not really clear here. It is quite possible that it went into the real estate market, the stock market and IRA’s. If the banks wanted your money real bad, they would pay more than the paltry one percent interest. The one thing that is for certain, the Federal Reserve wants the highest price it can get for the real estate it manages (ergo keep interest rates low). Uncle Sam, the used car salesman, will give you the deal of the century on a used home. The lender of last resort, the Federal Reserve, has taken all risk out of the real estate market. Maybe that’s why the stock market is so inviting, no government controls.

The defaulted loans were a promise by the buyer, to surrender future earnings for the house being purchased. His labor over 20 to 30 years was going to pay for the house in a long drawn out time release program. Well, that didn't happen. The money that the seller received was his to keep. The money lost by the bank was depositor's savings and the amount was made whole again by the Federal Reserve. The sale of just one home worth 250k has blasted the financial market with 500k of money that was never earned by producing product. The funny thing is, all dollars are equal, the one you had to work for is no different than the one that was printed to cover up the real estate fiasco. Common sense suggests, that there is more money out there than there are goods to buy at present prices. And if you don't have a job, this sort of common sense is no consolation when it comes to paying the bills. But if you do have a job, it kind of explains why your paycheck doesn't go as far anymore. Two different perspectives and they are worlds apart.

Sunday, May 11, 2014

The Minimum Wage " A Tempest in a Teapot"

Listening to the radio driving home from work the other day I heard a 19 year old single mom saying she couldn’t raise her child on the minimum wage. I’d go so far to say that her wages probably wouldn’t even cover paying for day care while she worked. She had problems before she started looking for a job.

In the early 1980’s I couldn't find any work in Colorado, so I bought a lawnmower and placed an ad in the local paper. I had no trouble making lots of money, but cutting the same lawn time after time was not mentally stimulating to me, I was bored to death, but it left my winters open for skiing. My only point is that many people expect someone to offer them a job. It doesn’t have to be that way, you can create a job yourself---no job application required.

If we were to examine a small business today, employing 20 workers, at 8 dollars an hour, for 40 hours, just the payroll would be $6400 for the week. Now raise wages to $15 an hour. The employers’ budget is still $6400. He has 20 employees currently earning $320 a week. Divide that by $15 and we get a 21 hour work week. On the downside, the more productive employees will move to jobs with more hours, so in the long run, a worker who can hustle, will get the better wage. Over time the successful employer will have to pay more to keep their most productive employees. The increase in wages also changes the economic factors that determine if it is more practical to move production overseas.

Notice however, in the public sector, when you pay more to keep employees, you are also committed to paying the "dead wood" the same rate and there is no way to fire these bad apples. 40 years ago, civil service was a way to get experience for your future job in the private sector. The dead wood employees stayed there, at a low wage forever. Back then, there was a stigma attached to civil service employees—-loser was a polite term for them; they couldn’t get a real job. The neat thing about that era, was that the taxpayer didn’t pay extra for civil service incompetence, if you were good at what you did, the private sector had a job waiting for you at twice the pay. Things have sure changed since then.

Raising the minimum wage doesn’t necessarily increase the number of jobs available and lowering the minimum wage suggests that there might be more jobs offered but with fewer applicants applying for them. The minimum wage is really just a labor entry point, all the employer is saying is that he will train the employee and give them work experience. With the increase in the minimum wage, the worker is demanding more money for a job that takes no skills, with the thought, “I can do this until a real job comes along.”

In the fast food business, it is now practical to build a machine to grill hamburgers and I'm sure French fries won't be far behind. The entrepreneur has the option, to replace labor with machines. Robots don’t join labor unions and can work 24/7. If an automatic hamburger griller costs 100K and replaces 3 people, how long would it take to pay for the grill? At $8 per hour, about 2 years, at $15, a little more than a year. Do the math, that job will disappear.

These people picketing for an increase in the minimum wage to $15; how did they all of a sudden arrive at the “earth moving revelation” that you can’t raise a family on the current minimum wage? The graph below displays the minimum wages paid in other countries:

A school janitor today probably makes about 20 dollars an hour. Do you think that he graduated from high school and got hired for the job on the spot? I can still remember our high school janitor 50 years ago; an immigrant from Italy with a bad limp named Luigi (raising 3 boys). The school kids were cruel, they use to mimic his Italian accent and his limp. But there was a certain harsh reality that hasn't changed over time; “A high school education only prepares you for an entry job as a laborer.” Luigi worked hard to get a decent paying job and it didn't come overnight.

In today’s world, many jobs start at X amount more than the minimum wage. So raising the minimum wage increases everyone’s wages. Will the new reality reflect itself in the government Cost of Living Adjustment (COLA)? Of course, maybe we ought to create a Gullibility Index for the nation based on an inverse of the COLA value. As the COLA’s decrease, the Gullibility Index for the nation increases.

The neat thing about raising the minimum wage is that it increases tax revenues. The poor will no longer be at the poverty level and will now pay taxes and consume less welfare---Why does that sound so absurdly insane?

So with the proposed pay raise, everyone will get paid more for the same amount of work and everything we consume will cost more. Economics tells us that the minimum wage is set by supply and demand not government edict. I'm sure that we can get Congress to repeal the Law of Supply and Demand. And while we are at it, maybe Congresswoman Pelosi will introduce a bill to rewrite Newton's Third Law so we can get better gas mileage.

Wednesday, April 30, 2014

Accumulating Real Wealth

There are people out there that are fabulously rich. Usually it’s through sports entertainment or invention. But most people get rich the old fashioned way by saving. They don’t get real rich, but nobody ever has enough money no matter how much they make.

There is a conundrum here that the politicians don’t quite understand. Once you get to the “rich” level, you don’t really spend any more than a poor person. The extra goes into savings. This is where the economy is dragging. The massive infusion of Fed funds into the economy has really gone nowhere. A lot of the funds have made it into retirement fund real estate investing or the stock market. Neither of these creates very many new jobs. Real estate investing in good years returned about 21% on the investment, and in today’s market, 10 percent is a very optimistic expectation. Stocks are doing a lot better than cash in the bank, but there is the question of “Why?” The economy is not in great shape.

Then there is the time element. Given 40 years, $100 a week for 20 years at 8% and then sitting on it for another 20 resulted in a million dollars. That was the expected in the 1960’s. In today’s world a million dollars might buy two tear down homes in Los Angeles. Notice one thing, the people that started saving 40 years ago, don’t have the buying power with their savings from 40 years ago. And it is too late for them to save more now.

We are also at a point with nonexistent interest rates, why even save? There is no added value for surrendering your immediate gratification for later consumption. Buy it now!

So basically we have a bunch of new savers looking down the road to retirement 40 years away, and reality hits them. The money in the bank is going nowhere. Whereas the old people that have saved for 40 years notice that inflation has reduced their buying power of their savings by a great amount. If your 20 years old, this concept is way over your head and makes no sense. Aggravatingly so, if you are over 65 nobody cares when you complain about inflation, you are invisible, you are an “Old Fart,”---- and what do they know.

The thing that really cracks me up lately, is all the ads for medications for the senior citizens. For the drug companies, it is a given, that old people are the target for buying these new pills that they want to sell. Take Preparation H, Cialis, and Viagra. I can’t figure out how the medications know where to go, you certainly don’t want erect hemorrhoids or a member with no sensation. But I digress.

Where to from here? We have a problem, the money not being spent by savers is squirreled away for retirement and is being eaten alive by government printing (inflation). Congress knows the syndrome, too old to complain—nothing to worry about they will die soon, so blow them off. Inflation is only a game; through time you will understand it’s consequences but until then, it will be too late to do anything about it. So grab a deck chair, and move it to another spot on the deck, give yourself that slight feeling that you are still in control.

Monday, April 14, 2014

Let Other People Work

Driving home from work the other day, I heard on the radio someone praise Obamacare, “I have been unemployed for 6 years and now I have health insurance.” For her, one less thing to worry about. You’ll probably bump into her at Walmart. She’s the one talking on a cell phone, a hundred pounds overweight, in tight stretch pants buying groceries with her EBT debit card. Of course, you might turn around and ask me, "Which one is her?" At that point, we can eliminate the "store greeter" and all of the cashiers. . . . . .

Later I was listening to some TV news program about saving for your child’s college education. I heard one parent state that he wasn’t saving for his son’s college expenses because his son wouldn’t qualify for as much financial aid. My eyes rolled on that one.

Then our "Banana Republic Presidente" stated that “We need more young people to sign up for health care, which they don’t consume much of, so the older folks won’t have to pay as much for coverage.” We have given these kids student loans that they can never pay back. Then these kids find that they have to live at home with mom and dad because they can’t find a job. How does higher education work? They give you a diploma when you graduate. Do you have to pay extra, for a brain to go with it?

College math: Graduate + new(health care -health -e) = Graduate + new car (BMW, Mercedes)
Obama math: Graduate + health care + student debt = "Rags to Riches" (indentured servant for life)

Where is the incentive to work? If you earn money, the government wants to tax it and give it to someone less fortunate. Ever hear of a lawyer suing someone that is broke? Deadbeats don’t pay traffic tickets, absolutely nothing will ever happen to them, no jail time, there is no room. And the car they drive is not registered to them; it’s not against the law to drive an uninsured car that belongs to someone else (of course they'll claim they thought it was insured after they hit you).

Getting ready to retire, make sure your savings are depleted (buy your kids a house). Then you qualify for SSI (Supplemental Security Income) and in California, it’s about $950 a month. Plus if you are a legal immigrant of retirement age, you qualify for SSI without ever having worked a day in this country.

Where to from here? There is a race on to prove how poor you are, so you can get a bigger slice of the pie. You don’t have to earn money to be entitled to a slice, but you become more entitled to a slice as you earn less. Our government will reward non productivity as long as it produces more people that vote for Democrats. The odd thing, if you go out and get a job, you lose all of those free benefits. Doesn't that feel like punishment? Who's to blame, those who provide the benefits, or those that take advantage of them?

Below is a cartoon that came out in 2008 that I really enjoyed, it gets more real with each passing day.
(Double click for a bigger picture)

Thursday, March 27, 2014

Why Even Bother to Save Your Money?

Simple question, why save money in any bank? At half a percent interest your money will double in 142 years. Wow, start saving at these terrific rates! There are people saving dollars in IRA’s and 401K’s to avoid paying taxes. Most of these people are in the 50 to 65 age bracket. The 20 to 45 age bracket are immortal and don’t even need to think of retirement, plus they pay into Social Security. So where are we with this mess? We have a government that can’t pay its bills. 17 Trillion In debt is just a number, it has no association or concept of understanding with the man on the street.

Where will the new rich come from? It certainly isn’t going to come from a savings account built up over 40 years. A million dollars in 1964 was a lot of money. At 3.5 percent interest, you would have had an interest income of $35,000 and never touched the principle. That was about 5 times more than what my dad at the time made in a year, to support our family of 4. In today’s world, that million will get you about $10,000 in interest income and the principle will be completely consumed in retirement after 35 years. This assumes you can live unassisted in your own home and need very little medical financing.

From 1964 to 2004, a zero was added to the price of everything. Houses went from 30K to 300K, and cigarettes went from 25 cents to $2.50 a pack. If that wasn’t bad enough, the price of Cigarettes, steak, beer, charcoal and gasoline have doubled in the last 10 years. The schools don’t teach concepts dealing with inflation and I can see why, it’s a meaningless exercise when the student’s world revolves around sex and music and hanging out. Our government is printing dollars, a lot of them, and inflation is a concept you begin to understand with age, it is a tax on long term savers.

So if we go back to the 1920’s, the banks loaned real money and got real money back. The dollar was backed by gold. In today’s world the dollar is backed by nothing. Why should I loan $100,000 to someone for 20 years at 3 percent interest and at the end of the transaction, the 100K now has the buying power of 10K from inflation?

There does appear to be a way to avoid the inflation produced by government spending when you are projecting for retirement income 40 years away. What you really need to do is buy gold and silver. They are worthless as income generators, but they preserve your savings from the Congressional printing tax (which is a lot higher than most investment returns). Our government has joked around and thinks that the national debt will never be a problem. Call it financial irresponsibility.

Normally in an inflation driven market, real estate is the best medium to be in, but, it is nothing more than a registered tax base, a piggy bank, that can be taxed as needed by the government with no say so from you. If you’re a landlord, the government could even freeze the rent you can charge. Buy a car in California and pay 8% sales tax on drive out. Buy a home, and pay 1% real estate tax every year you own it.

From the 1900’s to the 1960’s gold was about 32 dollars an ounce. Then for the next 40 years it never went below $300. 60 years of 30 dollar gold then 40 years of $300 dollar gold kind of suggests that maybe we are due for $3,000 gold a lot sooner than we think.

The increase in the price of gold only reflects the loss of purchasing power of the dollar. My grandfather lived to be 98 and died in 1964 and he understood inflation quite well. It took me 50 years to understand why his blood would boil when he explained how a loaf a bread was a nickel when he was a kid. He knew what the government had done to him and there was nothing he could do about it. Of course at the time in 1964 I was only 17 years old, and didn’t understand why the increase in the price of a loaf of bread could upset him so much, he had plenty of money.

So if you are starting a retirement plan that spans 40 years, Gold and Silver make more cents at these interest rates. If you don’t give a damn, spend it now and enjoy yourself, the government always seems to have money for those that have none or conveniently run out. Our government wants you to stimulate the economy and buy something. That way when you grow old, you can tell your grandson how you bought a loaf of bread for a dollar when you were a kid. Come to think of it, I just paid $4.29 for a loaf of Russian Rye bread the other day (Jewish Rye would have been more politically correct but the Russian rye has a stronger flavor).

The thing to realize at retirement age, is the value of assets that are visible. The house, the car, the bank account. Your visible assets can ultimately determine what future benefits you are entitled to and the taxes you have to pay.

So what do you want to save, Dollars or Gold and Silver? The older you are the more meaningless the decision becomes; time becomes your enemy. Congress can promise the moon with printed dollars, the poor will follow and the rich will get handed the bill.

In Europe they are proposing negative banking interest rates to induce investors to build new businesses. At the same time, we can get more money back on our credit cards by spending dollars than we can by saving them in a bank. This sort logic reminds me of an incident many years ago when my young nephew was using a hammer, he accidently hit his thumb with it. He was crying and I suggested with a serious face to do the same thing to the other thumb and make them both match. He stopped crying, kind of looked at me and backed away. To this day, I think he considers me to be a few cards shy of a full deck. You have to consider the secondary implications of any logical solution. The future pain might not be immediately apparent.

Compound interest is still the 8th wonder of the world, and we can all wonder where it went!