Monday, October 26, 2015

The Wealthy, The New Inflation Sponge

Common sense suggests that as the government prints more dollars, inflation should become more apparent. But here is what is happening each month: Cell phone companies are withdrawing $10 more from circulation for services, Cable Sports providers probably withdrawing from the economy $40 for every sport fan now. Figure $300 in interest to the banks for credit card interest, and another $300 for health care and car insurance. It is not being plowed back into the financial economic churn, it is being saved.

Food may have doubled in price but few notice it, everyone eats out, and those prices are out of sight. Plus if you can't cook, why screw up the food? Inflation is invisible to almost everyone.

As the wealthy get richer, their lifestyle doesn’t really increase in spending, the extra goes into the bank. Notice at this point, the money never “trickles down” to the poor people. So in effect the government prints a billion dollars trying to stimulate the economy with inflation and it goes into some rich guy’s bank account and will never see the light of day again, or for that fact circulate in the economy. I could be shot again for oversimplification, but a tremendous amount of printed dollars never make it back into the economy. We use to just have millionaires, now we have billionaires. It takes 1,000 millionaires to make one Billionaire. The sponge inflation factor is being seriously overlooked as if it doesn't exist. The way the cash has been taken out of the economy is probably what has saved the country from massive inflation so far. These people are far too rich to be able to consume at a level that would lead to product disappearing from the shelves. That is a good thing.

Poor people have no savings, they live paycheck to paycheck. Rich people, let the dollars collect. If there was a better method of delivering dollars to the poor, the economic condition of the poor would have improved years ago. An outright gift to the poor would discourage working for a living.

But what if the country stopped printing dollars? No socialism and a balanced budget. If you’re poor, the cable and the phone drop out of the equation. With welfare and Food stamps gone, you are going to work or starve, drugs become unaffordable as do credit card debts and new cars. The money taxes the rich get off of the poor are now gone. Hmmm

Let's get government salaries back into line. Why pay them more, if they are now more valuable in private sector, because of training? Let’s endure the inexperience of youth and train government employees on the assumption that if they are any good we will lose them, they will move on to private employment. Keep government wages realistic. And while we are at it, give everyone an equal 35k retirement plan. If you make more, contribute it yourself. I see no reason for a person making 100k a year get a retirement plan geared to his salary. You make more, save more, equal retirement plan for all. Of course that’s probably appears to smack of socialism, but more likely it is just plain common sense. Sadly we seem to be very short of common sense now days, it's not practical anymore, --How times have changed!

Saturday, October 17, 2015

Investment Misdirection

Most all bubbles are a misallocation of resources. We build more houses than we need, we bid stocks up to unsupportable levels. What it really works out to, at the height of the bubble the end purchasers pay too much for an overvalued item and lose everything. At the time they have comfort in the fact, that everyone is doing the same thing.

Our government has manipulated interest rates to almost zero (ZIRP). Using the rule of 72 which states dividing the interest rate into 72 yields the years to wait for your bank savings to double. Right now that is about 144 years. So if you want to invest your savings, why put it in the bank? The government is forcing people away from saving money in the bank to other forms of investment, the biggest two are the stock market and real estate rentals. Plus if the bank gives you zip on your savings, why not spend it now and enjoy it, there is no reward for saving—not in my life time or even my sons.

At some point in the future, when both the workers and the government are spending with no tomorrow in sight, there will be a shortage of product to consume. With a shortage of product, prices have to rise for those who really want to have it.

There are people saving like me for retirement, I’m 68. I just learned that by deferring my Social Security to age 70 I get to pay more for Medicare by about 50%. I can’t possibly live off of the interest on my savings. When I started saving, I was counting on a 5% interest rate at retirement. Notice who gets hurt with the low government interest rates, people who have saved money. We are not talking rich people, we are talking people that have managed to save a million dollars over a life time. At 5% interest, that’s about $50,000 a year for two to retire on until you have to be put in a rest home. Right now, that will return about $6,000 a year, not much for a life time of savings.

The real issue that has to be looked at, is that we are no longer a nation of savers, we are a nation of spenders. With both government spending and consumer spending, we will run out of product to buy not dollars. The government can print dollars, but it cannot print product, and the surplus product that will disappear, is the product that was available for purchase only because someone previously decided to save instead of consume. All of the printed money in the world cannot buy a car that was never built.

If 40 million food stamp shoppers want steak and lobster, guess what, chicken becomes a real deal.
And of course, if you want corn in your gas tank instead of in you cattle, steak becomes more expensive.
Notice one thing, almost everything mentioned has to do with government intervention. They can screw up anything and ask for your blessing at the same time.

It is very interesting growing old. Young people have no idea what I am talking about and people that are my age, nobody listens to. A little old lady the other day bought 3 hallmark cards and some expensive prescription drugs, and the total was $175. She put it on a credit card, I wonder if the balance will ever get paid off in her life time?

An FYI nugget
In today’s newspaper two different Investment funds each bought rental complexes in San Diego. A 35 unit one for 5.4 million, rents bumped up from $1,050 to $1,225, many on Social Security are moving out. Then a 208 unit luxury living complex bought for 84 million by Monogram Residential Trust of Texas projects rents on this one being built will be about $2,500 a month. The second one they paid double of what they should have IMHO. Both companies are trying to get a decent return on their investment. The only thing being overlooked is that rental returns are based on vacancy rates. You can charge any rate you desire, but the actual rental rate is determined by the rent collected over 12 months divided by 12 months. If it rents for $2,500 a month and is empty 6 months of the year, the net rental rate is $1,250 per month. The newspapers conclusion was that rental rates were rising, while at the same time in the first building everyone is moving out.

This is what made the Great Depression of the 1930's. What you wanted and expected from your investments, was not what you got. There was a disconnect that no one could comprehend.

Sunday, October 04, 2015

Vladimir Putin the Pragmatist

Syria is in the midst of a civil war and you hear stuff like “Bashar al-Assad has murdered thousands.” Kind of wonder what the headline would have been back in 1866 for our Civil War; “Lincoln murders 200,000.”
If the Russians can keep Bashar al-Assad in power, they have an ally in the Middle East that can help defeat ISIS. This guy is not jumping in a plane and leaving the country in fear of his life. Every foreign leader that our country has supported in the past is probably now living somewhere in Virginia.

In this case with Syria, the Russians offer stability and preservation of the political system. It’s not like the US where we invade and promise Democracy and then sneak out. Then we have to give refugee status to all of those who would be executed for collaboration on our exit.

If the civil war can be ended and the region becomes stable, people can move back to Syria. The present projected conditions are tragic. 4 million people are in the process of moving into Europe. When countries say that they can accommodate 20,000 over 5 years, what happens this year to the 4 million when the winter arrives? Logistically, how do you provide food and shelter on such a large scale?

Putin has a realistic approach to the problem. Stabilize Syria and get the refugees back into their own country, stem the emigration to Europe. Bashar al-Assad is not associated with a religious agenda that needs to be implemented which is a good thing.

Obama might not like what the Russians are doing, but the United States created this whole mess and if you have someone who is a strong leader that will fight, I say support them. 4 million people have a home that they would like to come back to, Political ideals like Democracy are for the idle rich, not the poor peasants who can ill afford it. Syria can come back just like Egypt.

Putin has no love for Democracy, maybe he realizes that it is a very ineffective form of government for people who are extremely poor. Move a family in Syria living on $200 a month to Europe and you find that they now need $800 per week to survive. Give the people stability and security in their own country and you recreate an economic engine for survival that will work again and revitalize Syria.

Consider Vladimir Putin as a pragmatist with a realistic solution for Syria. Of course we could step up to the plate, we already have 40 million on food stamps in this country, adding 4 million more to the program might even stimulate our economy.