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The Independent Investor: The Drought of 2012
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Naturally, those who farm for a living would beg to differ since they are watching their livelihood shrivel on the stalk or vine daily and if the dry spell keeps up they too will join the ranks of a growing list of U.S. counties (over a thousand today) that are applying for federal disaster relief.
Over 60 percent of the country is in the grip of the worst drought "since the late 1950s," as the media is billing this weather event. And as droughts go, "you ain't seen nothin' yet." In the '50s, for example, the state of Texas suffered a seven-year dry spell that was so bad that children born in 1951 grew up with no knowledge of rain. Dust storms that turned day into night were so powerful that they stripped the paint off of license plates.
Of course, nothing in modern-day American history compares to the drought of the 1930s. As the new decade began, the country was still grabbling with the aftermath of the 1929 stock market crash. At the same time, the U.S. experienced two dry years in a row in 1930-31, especially in the East. As the economy faltered so did the rain and by 1934, 80 percent of the country was in a drought and a depression.
Anyone who has read Steinbeck's "Grapes of Wrath" has a general idea of how bad a drought can get. Scientists believe the period of 1933-1940 was the worst drought in North America in 300 years. Dust storms, especially in the Great Plains, were daily events and by 1934 it was estimated that 100 million acres of farmland had lost most or all of the topsoil to the winds.
It was at that time, after weeks of storms that the mother of all dust storms hit the nation (Black Sunday, April 14, 1935). Sixty mph winds spread the grit and dust from the Great Plains all the way to Washington, D.C. The term "Dust Bowl" was coined a day later by the Associated Press to describe conditions in the Great Plains. I provide this history lesson for a reason.
History often rhymes. There are some similarities in both the economy and the weather today compared to the 1930s. We experienced a crash in the markets in 2008-2009 brought about by speculation and a credit crisis and are still struggling with the aftermath just like we did in 1929-1930. Today, like then, we worry over this country's huge deficit, out-of-control spending, high unemployment rate and slowing economy. Events are eerily similar to what transpired in the U.S. in the early '30s.
Droughts cause dislocations in the economy whenever they occur. They exasperate existing economic conditions. In this country if you look at the pattern of 20th-century droughts, they normally occur every 20 years, so we are overdue for this dry season. Aside from the predictable impact on food prices, droughts create a chain of cascading secondary effects from lost agricultural jobs and businesses to higher utility costs and other industry costs in the developed world to population displacements and political unrest in emerging markets.
If one looks at just the price of corn in the United States, which has increased in price by 38 percent since June 1, it is not hard to predict increases in processed food prices by the winter. Since other staples, like soybeans and wheat, are also wilting in the heat there could be a domino effect across the board for all kinds of agricultural products.
It might surprise you, however, that the prices of beef, poultry and pork might actually decline in the short term. That's because livestock producers would rather send their herds to slaughter now than face the increased costs of feeding them in the future. Out West, (today's potential Dust Bowl) many ranchers have simply run out of range land that could support their herds. As this new supply of livestock is dumped on the market, prices should ease a bit before heading up, so plan accordingly. The best strategy would be to stock up now and freeze for the future.
I guess the best that can be said of this drought is that it has a way to run before it can compare to the worst that Mother Nature has thrown at us in the last century. It will most certainly cause more drag on the economy, increase the deficit through federal relief assistance to farmers and put pressure on the unemployment rate.
Under that scenario, is it any wonder that the markets are expecting more stimulus from the Fed? Barring that, I guess we should all brush up on our rain dancing.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: The Dollars & Sense of Losing Weight
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The statistics are some of the most accurate in the American medical community. Overall, 35.7 percent of the adult population and 16.9 percent of our children are obese. If you add in those Americans who are merely overweight, then two-thirds of this nation are on the road to higher health costs, a shorter life and a miserable life style.
Obesity-related illnesses cost us $179 billion annually, with obese Americans spending 42 percent more per year for medical care than the non-obese to treat everything from Type II diabetes to heart disease. Breaking that down into individual dollars and cents, it costs $4,879 for women and $2,646 for men every year in various costs associated with being overweight or obese.
It means that obese women pay nine times more and obese men pay six times more in associated costs than do individuals at a healthy wright. Besides the obvious individual health costs associated with this American epidemic, there are also work-related costs that you may not realize.
A study by Duke University concluded that it is costing business $73.1 billion annually in absenteeism, work productivity and other costs for obese, full-time employees. Lost productivity alone is costing us $12.1 billion a year, which is twice as much as the medical costs. It works out that it is costing business $16,900 per capita for females and $15,500 for men in the 100 pounds overweight category of worker.
Other non-medical costs include wage loss, higher premiums for life insurance, short-term disability and disability pension insurance, sick leave (obese men miss two more days of work than healthy men) and early mortality.
Much of the statistical data on how many of us are overweight or worse is derived from measuring the Body Mass Index, a cheap and simple formula to determine a rough estimate of body fat. You use your weight and height to compute a score. Those over a certain score are considered overweight and as your score increases so does the obesity factor.
Let's take me for example, for most of my adult life my weight fluctuated between 185-190 pounds. At six-foot, two, I smoked and worked out like a fiend (love those contradictions). Seven years ago, I quit smoking, stopped exercising, and subsequently ballooned in weight to 255 pounds. My BMI soared from 24 to 33. I avoided standing on the scale and hated getting my yearly physical for obvious reasons. What I didn’t know, won't kill me (yep, another contradiction).
In the meantime, my brother, who is three years younger than I and about the same height and weight, came down with Type II diabetes because of his weight. It was only a question of time before my added pounds was going to show up as serous health issues. I started back to the gym but continued to eat what I wanted. I gained even more. It was at that point, I realized that I had been kidding myself. I wasn't overweight, I was officially obese.
Almost 55 pounds later (and lighter), the years seem to have have fled and I feel better than I have in a decade. The point to this "true confessions" is that although I knew all the obesity statistics, I never considered myself anything but overweight. I suspect we are all the same until something happens that allows us to take a bite out of reality.
There is good news and bad news about the obesity epidemic in this country. The Centers for Disease Control and Prevention announced that after two decades of steady increases, obesity rates in adults and children in the U.S. have remained unchanged during the last 12 years. Either we have reached the saturation level in the population where everyone that is prone to gaining weight has done so, or that the constant drum beat of public education on the dangers of obesity has made an impact. That's the good news.
The bad news is that a recent study by the New York University School of Medicine indicates that obesity in America might be far worse than we think. The culprit is the same BMI that we all use to determine obesity. Although the BMI is cheap and the starting point for measuring a weight problem is also one of the least accurate medical tests in existence. The study concluded that the number of obese Americans may actually be much higher than we think.
The researchers believe the problem with the BMI is that it estimates rather than measures body fat. The study used two other measures along with BMI — the amount of leptin, a protein which regulates the body's metabolism and Dual Energy X-Ray Absorptiometry that tests body fat, muscle mass and bone density. Thirty-nine percent of those patients in the study who were classified as overweight were actually obese.
The bottom line is that we are killing ourselves. Our children are entering adulthood heavier than they've ever been at any time in human history. The way our food is processed, American's addiction to fast food, our increasingly sedentary life style, an aversion to pain or discipline — all have been offered as reasons for this state of the nation. It doesn't matter who or what is to blame, in my opinion. Fat is fat and until each of us understands and takes responsibility for his or her own part in this epidemic there is little anyone can do outside of food rationing. My advice is get on the scale. And take it from there.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Bad News Is Good News
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Over the past year the financial problems of Europe have been well publicized. Starting with Greece, most of the southern tier of European Union countries have been mired in recession, high debt and declining exports. Those problems have infected the entire continent, resulting in an EU-wide recession, but that is old news.
Over in Asia the story is the same. China, the economic engine of that region, has also experienced slowing growth, reducing the prospects for all its neighbors in the process. And now these problems are coming home to roost here in the United States.
Factory orders in the U.S. declined in June for the first time since 2009. The nation's manufacturing output has been one of the drivers of our own recovery but weakening demand from overseas, coupled with declining currencies in our export markets have resulted in a slowdown in U.S. output and exports.
It is not just manufacturing, overall economic numbers coming out of most sectors of our economy have shown a gradual slowdown. Investors are not only taking this bad news in stride but are actually bidding up the stock market because of it.
Readers only have to look back over the last few years to see the same kind of phenomena occurring over and over again. It usually occurs during the summer months and has a decidedly positive impact on the stock market. The answer lies in the continued government interventions in the private sector economy we have seen since the financial crisis.
Investors are now conditioned to expect governments to intercede when economies begin to slow down. There was a time in our country (as well as overseas) when periods of economic growth, interrupted by recession, was the normal give and take of free-market economies, but no more.
Today the private and public sectors are intimately joined at the hip. The Federal Reserve here at home and central banks abroad have made it their responsibility to keep their countries' economies afloat with every means at their disposal. After several such interventions, stock market investors are conditioned to view bad news as good news when it comes to the economy.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
Market participants fully expect the Fed will save them once again this summer. The economy only needs to slow enough to threaten a recession, investors believe, before the Fed will take action. Like crack addicts, we have all become addicted to these moves by the Fed. Unfortunately, their efforts, while probably keeping the economy out of recession, have done little to grow the economy.
What it has done is shift the seat of financial power to Washington and makes irrelevant the traditional tools for analyzing companies and markets. And along the way it has transformed the stock market into one of those roller-coaster rides usually seen only in amusement parks.
The Independent Investor: What's Libor To You?
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The London Interbank Offered Rate (commonly known as Libor) is supposed to be the collective best guesses of 18 of the world's largest global banks. They determine the interest that borrowers should be charged on any given day for short-term loans. Libor is set daily in London by the British Bankers Association (BBA), which eliminates the highest and lowest rates supplied by the member banks and then calculates an average from the remainder.
Since Libor is a benchmark rate, other loans are calculated on the basis of that rate. Most of the multitrillion dollar derivatives markets, for example, are based on Libor as are various commercial mortgages, commercial loans and consumer loans, including adjustable rate mortgages.
Some time ago I made readers aware that there was an ongoing, global investigation into the setting of interest rates by regulators in the U.S., Europe and Asia. This global governmental task force has been examining the complex trades throughout the financial capitals of the world for more than a five-year period.
This week the U.K. Financial Services Authority, the U.S. Department of Justice and the U.S. Commodity Futures Trading Commission levied a $451 million fine on one of Britain's most prestigious banks for falsifying interbank rate submissions to the BBA. These alleged deliberate bogus submissions were intended to help the bank's derivative department traders make illegal profits over an extended period of time. Regulators stressed that this was only the first of several findings that will involve some of the biggest banks overseas and in our country as well.
Some may wonder if justice is truly served by fining one bank $451 million. Although it is a lot of money, is it anywhere close to the true cost of this alleged manipulation of trillions of dollars in loans benchmarked to this all important rate? It is my understanding that many of the same characters that were responsible for the global financial crisis are also involved in this scandal.
If so, how many times will these financial thugs escape justice by simply shelling out our money to avoid the consequences of their actions? Let's face it, in the end; these fines are being paid by taxpayer money. It is the world's governments, through the central banks, that have been pumping billions into these banks' coffers. These same banks have used the money to speculate in derivatives and other markets. Now we are told they were rigging the markets as well in order to make even more profits. So, do they really care that they are fined a billion or two of those profits if they get caught in a scandal like this?
Hell no! If these allegations prove true, and the authorities haul in more of the same perps that brought us the financial crisis and its on-going consequences, I, for one, expect criminal charges be brought against these banksters and their henchman. We should all demand nothing less.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Let's Twist Again
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"Operation Twist" is the Federal Reserve Bank's third attempt at quantitative easing in as many years. It was intended to lower long-term interest rates by selling short-term U.S. Treasury bonds that it owns and using the proceeds to buy longer-dated Treasury bonds. It worked fairly well, as far as declines in long term rates are concerned, but did little for the economy or to spur additional lending.
"Twist," like QE I and QE II, was intended to jump-start the economy by adding cheap dollars to the economy thereby lowering interest rates but has resulted instead in what I call our stop-and-start economy.
As I have written before, the problem is not with interest rates. Lending rates are at historically low levels. The problem centers on getting banks and other lenders to loan those cheap dollars to those who really need it. Whether we are talking about companies or consumers, those who need the money the least find they can borrow the most. AAA-rated companies can easily refinance their debts and take advantage of these low rates. Likewise, wealthy people with a lot of equity in their homes and high credit ratings can also take advantage of low rates.
But those consumers and small-business owners with questionable credit ratings are simply unable to borrow, or if they can, the rates of interest they must pay are prohibitively expensive. This is a situation that has been with us since the financial crisis and nothing the Fed has done yet seems to be able to break that logjam.
Some critics say "Operation Twist" has made the situation worse. By driving 20- and 30-year interest rates down, the Fed has actually discouraged banks from mortgage lending. Taking on the risk of a 30-year consumer mortgage loan at an interest rate below 4 percent, for example, does not provide the banks with a great deal of reward for the long-term risks they are taking. As a result, banks will tend to ration the money they loan, only selecting borrowers on the top of the credit scale and even then cutting down the amount they are willing to lend.
Unfortunately, there are no easy answers in convincing lenders to lend. The old adage of "you can lead a horse to water but you can't make it drink" applies here. The economy is sputtering once again. The housing market is still a problem waiting to be addressed. Foreclosures, while declining, are still at historical highs. Millions of mortgage holders are still underwater and no one in Washington or elsewhere seems to even want to address the problem, let alone provide a solution that could work.
Federal Reserve Chairman Ben Bernanke has made it clear that monetary policy is not the end-all solution for saving the economy. He has repeatedly urged both Congress and the White House to do something, anything, except bicker about who did what to whom. Still, if things get bad enough, I suspect the central bank has a number of arrows left in its quiver, but it might be some time before the Fed is ready to make a move. In the meantime, good luck with getting the politicians to do anything.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
