The Crazy Market You Are Invested In (Part 1 of 2)
Is Your Retirement At Stake?
Have you been reading the news? Just today I heard that Delta Airlines took a 7 billion dollar loss in this first quarter of 2008 and they are not the only ones losing their shirt. General Electric shares fell the most in 2 decades on April 11th after reporting a 12% fall in the first quarter. UBS, the biggest of any bank in the world, took a $37 billion loss from the subprime crisis. Defaults of credit vehicles based on subprime mortgages have risen from $54 billion at the beginning of this year to a current total of $170 billion.
How does that make you feel? Let’s take a step back from the news and see what is really going on, OK? Why, because it is your retirement that is at stake.
Let’s pick up the story with the cost of housing. The cost of housing in many areas has not just inflated, but it has been blown up by speculators buying and selling each others houses. Are you one of the geniuses who is making big money by buying a condo before it is built, then flips it to another investor who keeps it until it is built, then flips it to a professional couple who intends to stay for 2 years and sell at another huge profit to still other buyers… everyone is getting richer – so you believe – as long as prices continue to rise.
But the real story is Americans are getting poorer! With less that 20% of U.S. workers now in employer pension plans and with Social Security typically replacing less than 40% of pre-retirement income, personal savings has never been more important – and yet, few people save any money.
Savings rates have never been lower, we are talking about zero savings for the average American. Are you average? Of course not, but still you are lumped in with the lumpen crowd. The low savings rates, coupled with large deficit financing by Asian banks to the U.S. economy is dangerous for the U.S., but it is even more dangerous for both you, your staff and your patients.
37% of your patients do not have any savings of any kind. 11% of all Americans have retirement savings of $250,000 or more. Yet, people are forever focused elsewhere, there is the crisis in healthcare, in our moral values, in the Middle East or in the media. There is usually little any one of us can do about those things, and if left alone, those things generally take care of themselves in their own way.
Unlike these issues constantly being shown to us by the media, lack of savings is the greatest crisis facing the country that you can do something about, and it is personal. It is your retirement we are talking about!
Or, like so many others, you can just complain and hope things work themselves out. Until now, you weren’t going to put an extra dime into your savings when real estate prices were going up at 10% per year and the Federal Reserve continues to give money away at rates below real inflation. Eventually, however, things that must happen sooner or later will happen. Of course, that is when you will have wished you had saved your money. Now that we are already here, where things that must happen are already happening, let’s take a closer look at how we got here.
Savings, like manufacturing is one of those early American virtues that were once part of the American economy and culture. But now, all this seems to have been exported to China. The Chinese now make our products and do our saving for us. They save more than 25% of their income. And with all that savings, the Chinese are thankful to us for giving them a place to invest it. Go figure!
Let’s figure, OK?
In traditional America, people save. Their savings are borrowed by business interests to build new factories and new consumer items that are sold at a profit which creates new jobs, higher incomes, more purchasing power and savings, etc.
How does that make you feel? Let’s take a step back from the news and see what is really going on, OK? Why, because it is your retirement that is at stake.
Let’s pick up the story with the cost of housing. The cost of housing in many areas has not just inflated, but it has been blown up by speculators buying and selling each others houses. Are you one of the geniuses who is making big money by buying a condo before it is built, then flips it to another investor who keeps it until it is built, then flips it to a professional couple who intends to stay for 2 years and sell at another huge profit to still other buyers… everyone is getting richer – so you believe – as long as prices continue to rise.
But the real story is Americans are getting poorer! With less that 20% of U.S. workers now in employer pension plans and with Social Security typically replacing less than 40% of pre-retirement income, personal savings has never been more important – and yet, few people save any money.
Savings rates have never been lower, we are talking about zero savings for the average American. Are you average? Of course not, but still you are lumped in with the lumpen crowd. The low savings rates, coupled with large deficit financing by Asian banks to the U.S. economy is dangerous for the U.S., but it is even more dangerous for both you, your staff and your patients.
37% of your patients do not have any savings of any kind. 11% of all Americans have retirement savings of $250,000 or more. Yet, people are forever focused elsewhere, there is the crisis in healthcare, in our moral values, in the Middle East or in the media. There is usually little any one of us can do about those things, and if left alone, those things generally take care of themselves in their own way.
Unlike these issues constantly being shown to us by the media, lack of savings is the greatest crisis facing the country that you can do something about, and it is personal. It is your retirement we are talking about!
Or, like so many others, you can just complain and hope things work themselves out. Until now, you weren’t going to put an extra dime into your savings when real estate prices were going up at 10% per year and the Federal Reserve continues to give money away at rates below real inflation. Eventually, however, things that must happen sooner or later will happen. Of course, that is when you will have wished you had saved your money. Now that we are already here, where things that must happen are already happening, let’s take a closer look at how we got here.
Savings, like manufacturing is one of those early American virtues that were once part of the American economy and culture. But now, all this seems to have been exported to China. The Chinese now make our products and do our saving for us. They save more than 25% of their income. And with all that savings, the Chinese are thankful to us for giving them a place to invest it. Go figure!
Let’s figure, OK?
In traditional America, people save. Their savings are borrowed by business interests to build new factories and new consumer items that are sold at a profit which creates new jobs, higher incomes, more purchasing power and savings, etc.
In modern neo-conservative America there is no savings, and hardly any factories have been built in the last 20 years. Mind you, there have been lots of shopping centers built. Go figure; how can this be if the per hour jobs pay little more than they did 30 years ago in real terms, and yet American purchasing power is seemingly increasing more than ever? WRONG!
Have you been noticing that America is borrowing unprecedented trillions of dollars from foreigners, a sum that is reflected in the huge budget and trade deficits.
How then, can American live so well? Some argue that the amount of personal savings is understated because it does not take into account the increase in housing values. True!
But, these increasing housing values do not increase America’s wealth; it is simply money flowing into the seller’s pocket from the buyer’s pocket. Elevated home values do not add to the national saving rate unless the seller saves the money – which is generally not the case. They generally go out and buy something with their easy money. In the new economy, people (not Americans) save to get rich, we, consume and get poorer, yet hardly notice.
China, over there, is where people make the things we buy and don’t buy the things we make. American households are rich and buy a lot. Chinese households are poor and buy little. Only 42 percent of the Chinese GDP is for consumption, in America its 71%.
The deception that led to this false sense of security was from our own Federal Reserve who set the key lending rates below inflation and misled everyone beginning back in 2001. The dollar I knew in my childhood is worth 1/10 today. And yet, despite this fraud, the U.S. economy has done no better than Europe. It’s true Americans earn more and spend more…but that is because they work more! Even so, Europe saves more and has less debt. Bully for Europe and the Euro too, as we have seen against the fall of the dollar.
But nationwide homes have grown by 30% since the 1980s, you say. And how did they do this? By the Fed making it possible for lending institutions to extend such a long ropes of credit to the common everyday American, that sooner or later, as all things come and all things go, they will surely hang themselves in debt. And this is what is going on today!
A baby born into America in 1913 came into the world with nothing and he owed nothing. Today, a baby born into America owes approximately $40 Trillion in debt, about $130,000 for having a heartbeat. Such is our democracy, even the unborn get their share of our debt and our politicians are more than happy to stick it to them.
The total value of all assets in America is only about $50 trillion, about $40 Trillion are in current debts, add in future government liabilities and America is broke. When people do not pay their debts, they do not pay them, but the debts do not cease to exist. They are merely paid by the creditor. American debt can be paid in three ways: the currency can be devalued, the currency can be made less valuable through inflation, or the debt can be simply refused. The U.S. doesn’t have to refuse its own currency; after all, it is the worlds reserve currency, that’s like Imperial currency.
Currently, our debts are largely being paid by China who continues to give us credit because even though it is our dollar, it is their problem. Having the world Imperial currency, the dollar, means you can apparently stiff your creditors up to $40 Trillion because everyone wants US Dollars... but not if it is falling in value.
Today, our currency is falling in value because the alternative is to have all those housing loans collapse even more than they already are. It would be very unpopular to put all those millions of Americans out on the street, so, the government is currently re-writing the rules and guess what, it is issuing more currency (inflationary) and more credit to sooth this crisis. That is what it does with everything, it just creates more money to fix the problem for the short-term and then passes the ball off to the next administration, and the next generation!
You and your patients have only the most remote idea, the smallest understanding of what kind of debt obligations are being undertaken on your behalf. The Asians own so many U.S. dollars that any attempt to sell them would cause the very thing they most worry about - a drop in the value of their single biggest asset, the US dollar! Even so, back in 2002 the Euro could be bought for 86 cents, and today it’s worth $1.60.
Something else is happening too, America is getting older. The average American is 45 years old. He no longer is a young man with 60 years ahead. Something odd happens to him, even though he has less years to lose, he becomes careful. He won’t even have a cup of coffee at night before bed for fear it will disturb his sleep. He has a lot to sleep on, he has effectively 10 to 15 years to retire, and he still needs to save $500,000 and you know what, he can’t. Rather than take a chance, he typically shifts his portfolio from capital gains to income.
Over cocktails 1o years ago, all the talk was about stocks. If he got into the stocks in 1997, his portfolio in 2005 was worth about the same when he first entered the market. But in the meantime, his debts increased, his savings went down, and the cost of living rose 12%. Investors took the fall from grace during this period in good form, but now they are 8 years older…
Will 50 something investors panic out of the stock market – yes. Will they panic out of real estate – yes. Will they panic out of the habit of consumption – I don’t know. Who is going to believe he is getting poorer when property prices are still rising, and they are still rising aren’t they, or have things changed? And when he does get his money out of the market without working for it, it is hardly surprising that he spends it. Easy come, easy go. Apparently, the housing bubble has peaked the stock market bubble of 2000 based on P/E and again on irrational exuberance.
The Money Supply
The amount of money, currency in circulation has grown too, faster than in the past 30 years. It rose 20% alone in 2003 –2004. Why was it increasing so rapidly, because the Fed was trying to avoid a deflationary Japan-like slump. It has succeeded so far, through increasing real estate prices, by keeping interest rates artificially low due to the low cost of Chinese made goods, but we creep ever closer to the abyss as more and more money is made available.
So how is it that the increase in money supply happens? It works like this: the U.S. consumers spend more than they can afford buying Asian-made goods. This leaves billions of US dollars with Asian exporters who convert it to local currency through their own central banks which raises there own money supply. Thus, the US is exporting inflation and importing deflation (cheep goods). Back in the 70’s the bond traders would have noticed the rising money supply and sold their bonds causing rates to go up. But now, the rules have changed. No one notices the money supply figures it seems, because the prices for goods don’t go up as they normally would have back in the 70’s because of China. Now the central banks can create what no one thought possible back then, that you can create as much money as you want with out causing consumer price inflation because we are not manufacturing the stuff any more. The good news is that we have delayed the day of reckoning, the bad news is we have reduced American competitiveness by placing all the trade deficit money into Asian hands to invest in new factories, which is deflationary for them as new technology increases production capacity and quality, balancing out the inflationary effect of any increase in local currency. On our side of the pond, lower consumer prices has allowed the Feds to hold down lending rates lower and longer than would otherwise have been possible.
We have already seen what happened to Japan’s currency. Eventually, their domestic real estate and stock prices fell (Nikkei Dow in 1989 at 38,915.87 and today it is at 13,579.13, a 70% loss.) After 1989 Japan’s real estate prices fell for the next 13 years. Imagine if residential real estate prices were to fall in the US? At least in Japan the consumers could stop shopping, but in Japan the consumer shopping was never more than 55% of GDP, unlike in the U.S. where the consumer appetite is responsible for 71% of GDP.
Imagine you are a foreign holder of US dollars and you suspect that the Feds are going to start printing more money, you are not likely to wait till inflation reduces the spending power of your money. This is the situation with US dollars today, if it weren’t the world’s reserve currency and logically going to stay that way with its military dominance, it would signal a mass exodus. But America does have staying power, backed up by its military and the good news is that a 50% fall in the dollar would wipe out half the real value of the US dollar debt overseas. Good for the U.S., bad news for the individual whose savings can’t buy what it used to.
It is note worthy to wonder why corporate profits would continue to go up beyond what they have already experienced, that is, the biggest trillion dollar stimulus jolt in Federal Government’s spending history, and 25 years of falling interest rates, including 3 years of the “prime” rate below CPI levels most recently. Is there any reason to expect any more profits? Yes, they are re-writing the rules as I write this, they have doubled the central bank’s over night lending amount, and proposed new extended credit terms, further out, etc.
What happens to the stocks when corporations like Delta Airlines and GM stop making a profit? What happens when the share price goes up anyway, when investors vote for higher prices? Aren’t they all a little bit richer? Yes, they are richer compared to those non-holders of stock and, no, we as American aren’t any richer. We have merely switched our preferences, from stocks to real estate to stocks, again, and again.
The history of the stock market is one of cycles, in the 1930’s and 40”s you would buy a stock for 5 to 10 times earnings. In the 60’s you would have paid 10 to 25 times earnings followed by the 80’s when it dropped down again to 5 to 10 times earnings and we hit the latest boom in 2000 when guess what, prices were again at 20 to 30 times earnings and guess where we are headed now…
These cycles come and go, and while they may make any given individual richer, if he sells at the right moment, they do not make American society any richer. An investor who follows the crowd cannot expect to make any money towards retirement for he will get what everyone else gets.
Yet somehow, the investor thinks the markets always have to surprise us, or at least half of us or there would be no market at all. People trade their assets because one believes it will go up and the other believes it will go down. Unfortunately, both the pros and the amateurs are overwhelmingly bullish. On the other hand, there is always the man with bearish sentiment who has his reasons too, like me. In the end, the reasons for both pro and con balance themselves out and it is feelings, not a well-reasoned thought, that move the market.
Why is this? I think it relates to warfare ultimately, or being the good soldier. When in battle, everyman must give up his own thoughts – even thoughts for his own survival to lend weight to the collective action, a troop attack, to give it a chance of success. If the soldier lingers or otherwise holds back, he may increase his own chance of survival, but not the troop’s attack mission. In this case too, there is an illusion of security in numbers, even when faced with clear and present danger.
(Continued in Part 2 of 2, next month)
Have you been noticing that America is borrowing unprecedented trillions of dollars from foreigners, a sum that is reflected in the huge budget and trade deficits.
How then, can American live so well? Some argue that the amount of personal savings is understated because it does not take into account the increase in housing values. True!
But, these increasing housing values do not increase America’s wealth; it is simply money flowing into the seller’s pocket from the buyer’s pocket. Elevated home values do not add to the national saving rate unless the seller saves the money – which is generally not the case. They generally go out and buy something with their easy money. In the new economy, people (not Americans) save to get rich, we, consume and get poorer, yet hardly notice.
China, over there, is where people make the things we buy and don’t buy the things we make. American households are rich and buy a lot. Chinese households are poor and buy little. Only 42 percent of the Chinese GDP is for consumption, in America its 71%.
The deception that led to this false sense of security was from our own Federal Reserve who set the key lending rates below inflation and misled everyone beginning back in 2001. The dollar I knew in my childhood is worth 1/10 today. And yet, despite this fraud, the U.S. economy has done no better than Europe. It’s true Americans earn more and spend more…but that is because they work more! Even so, Europe saves more and has less debt. Bully for Europe and the Euro too, as we have seen against the fall of the dollar.
But nationwide homes have grown by 30% since the 1980s, you say. And how did they do this? By the Fed making it possible for lending institutions to extend such a long ropes of credit to the common everyday American, that sooner or later, as all things come and all things go, they will surely hang themselves in debt. And this is what is going on today!
A baby born into America in 1913 came into the world with nothing and he owed nothing. Today, a baby born into America owes approximately $40 Trillion in debt, about $130,000 for having a heartbeat. Such is our democracy, even the unborn get their share of our debt and our politicians are more than happy to stick it to them.
The total value of all assets in America is only about $50 trillion, about $40 Trillion are in current debts, add in future government liabilities and America is broke. When people do not pay their debts, they do not pay them, but the debts do not cease to exist. They are merely paid by the creditor. American debt can be paid in three ways: the currency can be devalued, the currency can be made less valuable through inflation, or the debt can be simply refused. The U.S. doesn’t have to refuse its own currency; after all, it is the worlds reserve currency, that’s like Imperial currency.
Currently, our debts are largely being paid by China who continues to give us credit because even though it is our dollar, it is their problem. Having the world Imperial currency, the dollar, means you can apparently stiff your creditors up to $40 Trillion because everyone wants US Dollars... but not if it is falling in value.
Today, our currency is falling in value because the alternative is to have all those housing loans collapse even more than they already are. It would be very unpopular to put all those millions of Americans out on the street, so, the government is currently re-writing the rules and guess what, it is issuing more currency (inflationary) and more credit to sooth this crisis. That is what it does with everything, it just creates more money to fix the problem for the short-term and then passes the ball off to the next administration, and the next generation!
You and your patients have only the most remote idea, the smallest understanding of what kind of debt obligations are being undertaken on your behalf. The Asians own so many U.S. dollars that any attempt to sell them would cause the very thing they most worry about - a drop in the value of their single biggest asset, the US dollar! Even so, back in 2002 the Euro could be bought for 86 cents, and today it’s worth $1.60.
Something else is happening too, America is getting older. The average American is 45 years old. He no longer is a young man with 60 years ahead. Something odd happens to him, even though he has less years to lose, he becomes careful. He won’t even have a cup of coffee at night before bed for fear it will disturb his sleep. He has a lot to sleep on, he has effectively 10 to 15 years to retire, and he still needs to save $500,000 and you know what, he can’t. Rather than take a chance, he typically shifts his portfolio from capital gains to income.
Over cocktails 1o years ago, all the talk was about stocks. If he got into the stocks in 1997, his portfolio in 2005 was worth about the same when he first entered the market. But in the meantime, his debts increased, his savings went down, and the cost of living rose 12%. Investors took the fall from grace during this period in good form, but now they are 8 years older…
Will 50 something investors panic out of the stock market – yes. Will they panic out of real estate – yes. Will they panic out of the habit of consumption – I don’t know. Who is going to believe he is getting poorer when property prices are still rising, and they are still rising aren’t they, or have things changed? And when he does get his money out of the market without working for it, it is hardly surprising that he spends it. Easy come, easy go. Apparently, the housing bubble has peaked the stock market bubble of 2000 based on P/E and again on irrational exuberance.
The Money Supply
The amount of money, currency in circulation has grown too, faster than in the past 30 years. It rose 20% alone in 2003 –2004. Why was it increasing so rapidly, because the Fed was trying to avoid a deflationary Japan-like slump. It has succeeded so far, through increasing real estate prices, by keeping interest rates artificially low due to the low cost of Chinese made goods, but we creep ever closer to the abyss as more and more money is made available.
So how is it that the increase in money supply happens? It works like this: the U.S. consumers spend more than they can afford buying Asian-made goods. This leaves billions of US dollars with Asian exporters who convert it to local currency through their own central banks which raises there own money supply. Thus, the US is exporting inflation and importing deflation (cheep goods). Back in the 70’s the bond traders would have noticed the rising money supply and sold their bonds causing rates to go up. But now, the rules have changed. No one notices the money supply figures it seems, because the prices for goods don’t go up as they normally would have back in the 70’s because of China. Now the central banks can create what no one thought possible back then, that you can create as much money as you want with out causing consumer price inflation because we are not manufacturing the stuff any more. The good news is that we have delayed the day of reckoning, the bad news is we have reduced American competitiveness by placing all the trade deficit money into Asian hands to invest in new factories, which is deflationary for them as new technology increases production capacity and quality, balancing out the inflationary effect of any increase in local currency. On our side of the pond, lower consumer prices has allowed the Feds to hold down lending rates lower and longer than would otherwise have been possible.
We have already seen what happened to Japan’s currency. Eventually, their domestic real estate and stock prices fell (Nikkei Dow in 1989 at 38,915.87 and today it is at 13,579.13, a 70% loss.) After 1989 Japan’s real estate prices fell for the next 13 years. Imagine if residential real estate prices were to fall in the US? At least in Japan the consumers could stop shopping, but in Japan the consumer shopping was never more than 55% of GDP, unlike in the U.S. where the consumer appetite is responsible for 71% of GDP.
Imagine you are a foreign holder of US dollars and you suspect that the Feds are going to start printing more money, you are not likely to wait till inflation reduces the spending power of your money. This is the situation with US dollars today, if it weren’t the world’s reserve currency and logically going to stay that way with its military dominance, it would signal a mass exodus. But America does have staying power, backed up by its military and the good news is that a 50% fall in the dollar would wipe out half the real value of the US dollar debt overseas. Good for the U.S., bad news for the individual whose savings can’t buy what it used to.
It is note worthy to wonder why corporate profits would continue to go up beyond what they have already experienced, that is, the biggest trillion dollar stimulus jolt in Federal Government’s spending history, and 25 years of falling interest rates, including 3 years of the “prime” rate below CPI levels most recently. Is there any reason to expect any more profits? Yes, they are re-writing the rules as I write this, they have doubled the central bank’s over night lending amount, and proposed new extended credit terms, further out, etc.
What happens to the stocks when corporations like Delta Airlines and GM stop making a profit? What happens when the share price goes up anyway, when investors vote for higher prices? Aren’t they all a little bit richer? Yes, they are richer compared to those non-holders of stock and, no, we as American aren’t any richer. We have merely switched our preferences, from stocks to real estate to stocks, again, and again.
The history of the stock market is one of cycles, in the 1930’s and 40”s you would buy a stock for 5 to 10 times earnings. In the 60’s you would have paid 10 to 25 times earnings followed by the 80’s when it dropped down again to 5 to 10 times earnings and we hit the latest boom in 2000 when guess what, prices were again at 20 to 30 times earnings and guess where we are headed now…
These cycles come and go, and while they may make any given individual richer, if he sells at the right moment, they do not make American society any richer. An investor who follows the crowd cannot expect to make any money towards retirement for he will get what everyone else gets.
Yet somehow, the investor thinks the markets always have to surprise us, or at least half of us or there would be no market at all. People trade their assets because one believes it will go up and the other believes it will go down. Unfortunately, both the pros and the amateurs are overwhelmingly bullish. On the other hand, there is always the man with bearish sentiment who has his reasons too, like me. In the end, the reasons for both pro and con balance themselves out and it is feelings, not a well-reasoned thought, that move the market.
Why is this? I think it relates to warfare ultimately, or being the good soldier. When in battle, everyman must give up his own thoughts – even thoughts for his own survival to lend weight to the collective action, a troop attack, to give it a chance of success. If the soldier lingers or otherwise holds back, he may increase his own chance of survival, but not the troop’s attack mission. In this case too, there is an illusion of security in numbers, even when faced with clear and present danger.
(Continued in Part 2 of 2, next month)
