Sunday, August 30, 2015

Red China, A Panic That Could Bring The House Down

The Chinese appear to have lost control of their stock market. In reality, the stock market is a psychological theater with no rhyme or reason. A bad day in one market can induce a world panic. Value is determined by the potential buyer’s willingness to agree on price. Is google worth 630 dollars a share? It is, if you can sell it to someone else for even more. A lot of the rest of the world is living on margin. And in our country, every rest home retiree is in the stock market—the bond market won’t pay the rent.

Our bond market is living on borrowed time. Risk is not factored into the market. Triple D bonds are not like a bra size, bigger is better. Buyers should be demanding 25% interest, not fighting each other for 7.25%. And in the past when things got really bad, the Federal Reserve would drop interest rates a quarter point time after time. Guess what, they are as low as they can go. You have to laugh when they talk about raising the interest rate one quarter point. This is not going to send people to the banks to open up savings accounts.

In times of panic, the stock market can have moments where there are no bids to buy a stock (called air pockets) and a stock can take a very large quick drop. Like 50 to 60 dollars.

And then there is the phrase, “Stocks always come back.” If you retired in 1929, were you around in 1954 when they came back? The real truth is; the stock market is an allusion of wealth without having to work for it.

Mark Faber is expecting a black swan event in world markets. I think we are fast approaching it. The bond market marches to a different drummer. It is manipulated by the Federal Reserve guarantees. The weird thing is, the Federal Reserve can buy all the bonds it desires and keep interest rates low. All it does is force investors into different investment vehicles. Real estate, oil drilling in the Midwest, and stocks have replaced bonds for interest’s rate returns.

So we have the Chinese market swirling out of control. Nobody ever claimed that a Socialist Republic had any entrepreneurial financial acumen; that would run contrary to the fabric of the socialist doctrine. They played our game using our rules and it had a good run. Now it has turned sour, like the tulip bubble, of several centuries ago. Financial meltdowns don’t destroy buildings, they destroy fortunes. One minute you are rich and the next minute you are poor. It is invisible in its speed and reach. This is what we are fast approaching. Oil goes from $110 a barrel to $40, an unexpected event. What happens if real interest rates jump to 8 percent? Of course it is not supposed to happen, but oil was never expected to hit $40. We can project what will happen in the future; the only trouble is that common sense, is not what markets run on.

China right now is like a bunch of school kids walking by a graveyard late at night. One loud noise and they’ll run like the devil is chasing them.

Sunday, August 23, 2015

Food Shortages in Africa and the Middle East

We are seeing mass migrations of people from the Middle East and northern Africa into Europe. Normally we are use to immigrants working in a country and sending money home for the family. The news reports show thousands of families with men, women and children in the boats. The driving force is the idea that any place is better than where they are coming from.

Most areas of the world support a maxed out number of people in good times. The amount of food and water is limited. Start a war, and you pretty much eliminate farming as an occupation. At that point people with guns are eagerly waiting for your harvest.

Oil used to be the great generator of income for many parts of the world. At $110 dollars a barrel, populations increased to balance the extra dollars. The drop in oil prices is like what the potato blight did to the Irish from 1845 to 1852. Populations increased because of the abundance of food and then collapsed. Starvation ensued—a million people died; plus the population of Ireland dropped 25% from emigration.

Oil has dropped 2/3’s in price. The old economic question of guns and/or butter is playing a major part in the wars around the Mediterranean. These areas in turmoil, could run out of money, food and farmers, before they run out of guns.

The Middle East oil has some logistic problems. A 500 gallon truck can only haul 12 barrels of oil. And it is very unlikely that the driver would be able to sell the oil at $40 per barrel after delivering it to a refinery or an oil tanker. Most of the oil will have to go by pipeline. How this can be coordinated in a war zone is rather mind boggling to say the least.

The one thing that we know, is that this year’s budget in most countries is probably close in size to last year’s budget. The trouble is, if oil revenues drop by 2/3’s, production has to increase to make up for the shortfall. Since guns are not a food item, look for armament purchases to drop drastically. Look for oil production to triple to cover government expenses. Net effect, more oil will be pumped out of the ground than anyone could ever need. Oil could drop to $28 a barrel.

The indirect effect of the drop in oil prices and war in the Middle East could lead to starvation on a large scale. Escape or die in place.

Wednesday, August 05, 2015

Raising the Minimum Wage

A while ago, I was in the self-serve check out at Ralphs supermarket and there was this guy waiting in the cashier line next to me. The girl managing the 4 self-serve kiosks asked the gentleman if he would like to use one of the self-serve kiosks, as it was faster. His reply, “No thank you, I already have a job.” I laughed for hours after hearing that.

The one thing that many have not realized is that the computer revolution has drastically eliminated many jobs. If it is repetitive, it is gone. ATM machines come to mind, look at all of the bank tellers that are no more. I went to Home Depot the other day and they have 6 self-serve kiosks with one worker running them. At Walmart, they had 10 of them running. Meter readers for gas, water and electricity are no more; each meter phones home to report consumption. One person with an excel spread sheet can do the work of 20 accountants. 40 years ago, a secretary had to be able to type 60 words a minute and handle a lot of printed correspondence. In today’s world, nobody even knows what I am talking about. Pull up a reply form letter on your computer, change the name, type in the email address and hit send.

The irritating thing is this, we have had a computer revolution that has change the mindset of business radically but yet Congress does not understand the future economic projection of the concept. Congress and local governments, think that setting wage standards in the USA will set the tune. The problem is, they are not even close. Profit return is what runs business. The bottom line, can a machine do the work cheaper than an employee? At a wage of $9 per hour, the answer is no, but at $15 per hour, the answer may be yes.

So don’t look for $15 per hour to solve our problems. In the long run it could create more unemployment. On the lighter side, one job is safe (as long as computers need humans), cleaning rest rooms. The sad thing, you may be over qualified for the job if you have a college degree.