Tuesday, November 10, 2015

“Placate the Masses” An Old Roman Game

Notice how lately the protests over citizenship and a 15 dollar minimum wage revolve around demands from people who feel they are entitled. People are not asking for $15 an hour, they are demanding it with the reasoning that you can’t raise a family on $15 an hour. Sex beer and drugs are great, the responsibility that goes with its reality, sucks.

The real problem with the $15 hour wage is a little hidden. Entry level workers need minimum skill sets. High school dropout comes to mind. For the employer, he has his choice of employees. A high school grad or better; or maybe a chick with a knock out body that likes the “late shift.”

Then if it is only part time, you’ll be working two 3 hour shifts twice a day, 5 days a week. At that point you are not making $15 per hour, maybe only $10 per hour. The employer in the past could afford an 8 hour work day at $10 an hour on the assumption that it came out ok with coffee breaks, lunch breaks and bathroom breaks. 2 hours of pay would be wasted on non-necessary busy work. By switching to part time employees, the unsupervised coffee breaks, lunch breaks and bathroom breaks, health insurance and unemployment insurance, drop out of the equation. The employee gets two three hour shifts with a 4 hour break in between, a 10 hour day with 6 hours pay.

Economics actually dictates the price for labor, by using the government’s regulations, to the employers benefit. 40 hour work weeks, demand employer health insurance, 30 hour weeks don’t. Part time employees don’t have to be paid $15 dollars an hour.

Legislation may appear to placate the masses, but in the long run it acerbates the problem. Our State legislatures are a collection of the dumbest of the dumb when it comes to practicality. The thought that a law raising wages can change the economic livelihood of people in poverty is a little bit presumptuous-- great vote getter though.

A person with two kids thinking that $15 dollars an hour will help them out, knows absolutely nothing about real life. They will know poverty for their lifetime. I have a quote taped to my desk that reads, “The easiest way to teach your children about money, is for you not to have any.”

There is this "New Age" mentality of, “I want it now!” The concept of saving over time and earning ones way to wealth appears to be a waste of time (Janet Yellen can confirm it). We are now a nation that gives money back to people willing to spend and consume. Some major car company yesterday had an ad offering 20 percent back in a cash bonus for buying a car. Are we really placating the masses; or has the game gotten out of control? Reality is not a factor as long as the consumer has a credit card to abuse. Responsibility is for losers. Hmmm 100K student loan, and 100K in credit card debt, but earn 5 percent back for all of the credit card purchases. Why save at .05 percent when you can spend and get 5% back. Am I missing something here?

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.

Monday, September 14, 2015

Obama Land

Let’s see, half of the US is for Obamacare and half is against it. Then there is half against the Iranian deal and half for it. Immigration is another 50/50 split. There is one assumption being glossed over, that it is the same 50 percent in disagreement in all three cases. Obama has stepped on enough toes to have worn out his welcome. The thing that bothers me is that he has done it with an “Air” of authority. It reminds me of a person I worked in the past that smoked cigarettes. Most people that smoke are careful to tap their ashes into some sort of ash tray. This person would have a long ash on his cigarette, give you eye contact and then with you watching, tap the ashes onto the floor with kind of a head nod, suggesting that he hit the spot he intended.

Obama has found a way to circumvent Democracy, the rule of many with the rule of the few. His Presidential edicts poison the art of compromise. We no longer have a country united, we have a country divided by argument. His inability to see the Arab Spring as a mess waiting to happen is probably his greatest failure. Egypt will recover, but Libya is gone. Syria could be fixed, Russia is sending in troops. Syria’s president may not be well liked, but he is not a religious fanatic and he has the infrastructure to keep the country running by killing those that want to upset the apple cart. We didn’t like Saddam Hussain, but he kept order in his country. The refugees fleeing want order and they do not want to be drafted into a war. It’s kind of like the people that fled Europe to colonize North America. They didn’t want to fight in other people’s wars.

Preserving order is the prime directive. You cannot give a country Democracy, it doesn’t work that way. Raising the minimum wage, doesn’t solve poverty, more education doesn’t produce better paying jobs for many graduates.

We are not going to give the rest of the world Democracy when people are willing to die to further a religion because of their hopeless condition in this life; the right to vote never put food on the table. Religion gives the poor a new option, a better afterlife (notice how there is no way to argue that).

Where to from here? There lies the uncertainty. But one thing is sure, just as you need ugliness in order to define beauty, you need an example of incompetence in order to measure success. Obama land is a measure of incompetence, we can use it as a guide of what not to do in the future.

In a lighter sense, this is probably the first US President to have a sticker from every country in the world on his luggage. Job well done Mr. Tourist! And done on our dime—go figure--a real goldbrick!

Sunday, September 06, 2015

If It Ain’t Broke, Don’t Fix It!

In the past, Saddam Hussain in Iraq and Muammar Gaddafi in Libya, had a well-paid crew of police and informants that kept the population in order. Religion was out of the mix, if in doubt, execute. The driving force was dispersal of oil money to those who could control the population. It wasn’t perfect, but it worked. For most people the difference between democracy and a dictatorship is that in a dictatorship, you have a government to blame for your predicament, where here in the US, you have a list of reasons to choose from.

In Libya today, there is big money to be made, supplying refugees with flimsy boats for a trip to Italy, which is really a travesty. Their citizens have no means to effectively fight a bunch of gangsters with guns, so they vote with their feet. It’s a little like a movie where the bad guy wins and rides off into the sunset with your girlfriend or daughter.

If a group could be found to finance an invasion of Libya with a force of 30,000 mercenaries at 25K per mercenary, (we would be talking about 1.5 billion dollars) (750 million for wages and the rest for ammunition) the need for migration would end. Upon securing the country, the invader would have about 8 billion a year from oil sales. Kind of like what the Duke of Normandy did in 1066 to England.

The thing that really bothers me is our government’s meddling in the Middle East, and not taking any responsibility for the mess created. Millions of people trying to emigrate in life rafts to escape from a country that we have freed from dictatorship???? It doesn’t sound like we are going to get a thank you note from any of them.

Tuesday, September 01, 2015

The Federal Reserve An Impotent Institution

Let’s get this straight, the Federal Reserve is about to raise the Fed funds rate by ¼ of a percent. The business television hosts are discoursing ad nausea on this. If they were to raise it 3% that might do something.

One quarter of one percent is almost too small to measure. The phrase “Canary fart” comes to mind." The Federal Reserve thinks that raising the interest rate a minuscule amount is going to change the celestial motion of the heavenly bodies?

The idea that this is discussed as a plausible item on the business shows, kind of tells you that many people have lost their true perspective of the markets. An increase of ¼ point from zero is a pittance and a joke.

As long as the Federal Reserve can dictate very low interest rates, there is no reason to save. Common sense suggests that cash stashed in your mattress is better than cash stashed in the bank. Where to from here?--- Buy Gold, Silver and Platinum, the price is right!

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.