The Independent Investor: The Elephant in the Room

Mid-term elections are less than two weeks away. Issues, for the most part, have fallen by the wayside as pure politics runs amuck. No wonder voter turnout is traditionally so poor in this midterm madness.

Republicans are running against an unpopular president and are expected to sweep both houses of Congress. All they have to do is keep the focus on President Obama while mobilizing their die-hard base.  That strategy appears to be highly effective so why worry about mundane things like issues? After all, if voters don't care, why should they?

Both parties' campaigns are now dictated by whatever voters are worrying about on a day-by-day basis.  The fear of an ebola pandemic plays well, while the ISIS terrorists are always good for a sound bite or two. The minimum wage, the Affordable Care Act, the economy; these are all given short shrift while the most pressing challenge of this generation barely receives a mention. I'm talking about income inequality.

Despite gaining over 2 million new jobs in the last year or two, income inequality has widened in the United States and is, in fact, accelerating. Our country now finishes dead last in income inequality when compared to all developed nations. The U.S. actually trails Mexico, Chile and Turkey (all emerging markets) when it comes to an equitable distribution of wealth among our citizens.

As this disgraceful and dangerous wealth gap widens, shouldn't we be looking to our lawmakers in these mid-term elections to address this problem? Unfortunately, that's like asking the fox to guard the henhouse.

The average wealth of a congressman is now above $750,000. In the Senate, it's even higher, at $2.6 million. That wealth is distributed among both parties. John Kerry, for example is worth $231 million, while Diane Feinstein, claims $69 million in assets and Frank Lautenberg is worth $85 million to name a few. Clearly our representatives are part of the problem.

The failure to address income inequality in this country is not confined to one or the other parties. Democrats are just as anxious to ignore the problem as are Republicans. It may surprise you that income inequality is actually higher in Democratic-controlled districts than in Republican ones. In the 35 districts with the highest income inequality in the country, Democrats represent 32 of those districts.

These 35 districts share some similar traits. They contain small, enormously wealthy elites surrounded by impoverished neighbors. Most are situated within urban areas such as Washington, Boston, New York, Chicago and Philadelphia. Here are some examples.

Income inequality in New York's 10th District, represented by Jerrold Nadler, a Democrat, is about equal to Haiti. Nancy Pelosi's California District 12 ranks on par with Bolivia. John Boehner's Ohio District has the same income inequality as Nigeria and Paul Ryan's Minnesota District 6 is as bad as Burundi's.

It gets worse. Our elected representatives have actually exacerbated the income inequality problem over the last 20 years. Two decades of federal spending and expanding regulation by both parties have spawned a growing elite class of federal contractors, lobbyists and lawyers in the D.C. area. Over $100 billion has been funneled into this area since 1989. Is it any wonder that 10 of the capital's surrounding counties in Virginia and Maryland place in the top 20 counties nationwide in household income? Manassas Park City, Craig County, and Bath County, all in Virginia, placed within the top 10 counties nationwide that ranked among the highest in income inequality in the nation.

At this point, about 15 cents of every dollar of the federal procurement budget stays in the DC area. That amounted to $80 billion out of $536 billion in 2010. Think of the monumental transfer of wealth that is occurring from 98 percent of taxpayers to fewer than 2 percent of the U.S. population. Those in the top 5 percent of income in our nation's hometown make 54 times the money that the bottom 20 percent receives.

All of this is being conveniently ignored by those campaigning for your vote. So when you pull that lever in November, remember these are the people you will be voting for - regardless of political party.

As the rich get richer, your share in the nation's wealth and income is falling lower and lower. Do not be swayed by the fear mongers. Ask yourself if voting for these clowns is in your best self-interest and that of America's generations to come. I sincerely doubt it.

If you want to keep up abreast of my most up-to-date articles follow me @afewdollarsmore or on Facebook at billsafewdollarsmore.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: OPEC's Oil Ploy

Over the last four months, Americans have received an early Christmas present. The price of oil has dropped precipitously, benefiting both corporations as well as the consumer. But that could be a two-edged sword for this nation.

Brent crude, the global oil benchmark in the futures market, has declined 23 percent since its June price of $115 per barrel. Today it is trading below $83 per barrel, providing an enormous windfall in cost savings for all of us. The retail price of gasoline has dropped 15 percent during the same time period to a national average of $3.17 a gallon. Every one-cent decline in gas prices equals about a $1 billion drop in energy spending, according to economists. So we have all just received what amounts to a tax cut that has gone directly into our pockets.     

That's the good news. The bad news is that many of the same economists believe the reason prices have fallen so quickly is the deteriorating state of the global economy. Slower growth equals less demand for oil, all things being equal. As such we find ourselves with an oversupply of oil.

Now usually, OPEC, which controls the lion's share of oil production worldwide, would begin to throttle down the amount of oil produced per day. There would be meetings and all the disparate members of this energy cartel would decide what cut backs are necessary in order to prop up energy prices. This time around no such agreement is contemplated.

Instead, Saudi Arabia, the energy colossus, has been quietly telling the oil market that they would be quite comfortable with even lower prices for an extended period of time. Behind the scenes, they have said that $80 a barrel for a year or two would be just fine with them even though that level of pricing would hurt all OPEC members, and some more than others. Venezuela, for example, is in such bad shape that oil at that level would probably force the country into bankruptcy.

So what, you might ask, is the reason for this change in strategy? OPEC recognizes that a new competitor is emerging in the form of United States energy independence. Readers may be surprised to learn that the U.S. has emerged as the No. 1 oil producer in the world, even as it maintains the same spot in energy consumption. We can thank new technology, such as oil and gas fracking, for the turnabout in our energy prospects.

OPEC competitors would like to slow the rate of production here at home, thereby reducing our competitive edge. The best way to do that is by lowering prices. As prices drop certain sources of energy such as fracking and tar sands become less economical in comparison. Industry experts figure that a drop to $75 a barrel in oil would begin to curtail drillers and producers from developing additional fracking wells. The fracking industry has become much more cost sensitive since the early days of 2003. There has been so much capital sunk into the cost of expanding this output that any price change in oil impacts the bottom line much faster.

Investors are well aware of that risk, which explains why many energy stocks have dropped 25-30 percent over the last month. By keeping prices low for a year or two, OPEC could effectively gut much of the growth in energy production here at home. I suspect that is their game plan going forward.

There are other negative implications if OPEC succeeds in their plan. The U.S. oil and gas sector has added over 400,000 jobs since 2003. Some estimate that another 1 million to 2 million jobs have been created in construction, manufacturing and transportation to support our drive for energy independence. As a result, although the cost savings in energy consumption might contribute a 0.03 percent gain to GDP growth, the hit to Americas as a result of a decline in the energy sector could be far greater.     

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Why Is This Recovery Different?

The stock markets are at record highs. Interest rates are at record lows. The unemployment rate is below 6 percent and yet, most Americans are unhappy. They are not feeling the recovery. Why?

The answer to that question is complicated. But let's start with the financial crisis. Like the Crash of 1929, the events of 2008-2009 were also the result of a credit crisis. The country's financial system was on the brink of a meltdown. In the 1930s, a lot of banks went under.  That was averted this time by spending massive amounts of money to shore up our financial institutions. However, the damage was done.

We lost trust. For the first time in three generations, Americans had doubts as to the credit-worthiness of its most venerable institutions. The ensuing recession was unlike any that America has experienced since the Great Depression. When one loses trust, both lender and borrower pull back. It takes a long, long time before that trust is rebuilt.  That process is still ongoing.

Readers may recall that it was only in 1939-1940, a full 10 years after the "Crash," before this country was able to climb out of its longest downturn in memory. Some say that if it had not been for World War II it would have been even longer. I don't believe that it will take us quite that long to return to a normal economy but from a historical perspective, the present state of our economy is understandable.

Back in August, The New York Times crunched some numbers to determine what the economy would look like coming out of a normal recession, compared to what is happening today. They found that five economic sectors out of 11 were lagging badly in this recovery. They were housing, state and local government spending, durable goods consumption, business equipment investment and federal spending. Let's examine how credit impacts these sectors.

Housing is no surprise. After all, it was at the forefront of the subprime loans financial crisis. There is a shortfall of over $239 billion in missing output in this sector. We know the reasons for this shortfall — tighter lending standards and housing prices that are still underwater from their peak. That means less jobs, fewer wage increases, a less mobile workforce since few are willing to sell their homes at a loss to relocate for a job. Bottom line: banks have a trust issue with borrowers; less borrowing, less housing, simple.

Less state and local government spending represents a $180 billion gap versus what they should be spending. The reason for the decline in spending is the absence of tax revenues and burgeoning debt burden most local governments incurred as a result of the recession. States have cut back drastically and for a good reason. They need to borrow just to make ends meet and who will be willing to lend if they are spending like a drunken sailor?  

The $178 billion gap in durable goods consumption is all about big-ticket items, many of which you need to borrow in order to purchase. Things like automobiles, furniture, appliances, etc. If you are already underwater on your house, who can afford to borrow and who will lend to you?

Corporations also have a trust issue. They are spending $120 billion less on plants and equipment than they should be because they lack faith in the future demand for their goods. Most of them can borrow all they want but they don't or if they do it is not for plants and equipment. It is for things they can control like stock buybacks or mergers and acquisitions.

That leaves the Federal government, which is spending $118 billion less than it would in a normal recovery. Because we were forced to spend so much in propping up our financial sectors, the nation's debt skyrocketed to a level that created a crisis of confidence among our politicians. The fear that the nation might not be able to service, let alone pay off these historical high levels of debt resulted in a compromise that in effect reduced spending for the next decade.

To make matters worse, none of the other six sectors that make up the major contributors to gross domestic product have been able to take up the slack. So where does that leave us? When one gets into financial difficulty, it takes a long time to repair a credit rating. It takes years, and that is exactly what has happened between borrowers and lenders over the last five years. There is no way to hurry the process. In the meantime, it is what it is.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Money & Divorce — What You Should Know

You never paid attention to the family finances. Suddenly, your spouse wants a divorce. Fortunately, it's an amicable separation and you agree to split things up equitably. Where do you begin?

The above scenario is much more common than you think since the odds that your marriage will end in divorce are about even at best. More than 50 percent of first marriages end in divorce and 60 percent of remarriages, so the statistics are weighted against a successful marriage in America. It is extremely important therefore that both spouses understand their current financial situation and what their income needs will be post-divorce.

First, think of what your immediate cash needs will be. If one of you is working and the other is not, then cash flow is going to be highly important to the unemployed spouse. In that case, the cash-strapped party will want to receive assets that one can sell easily, quickly and with the least tax consequences. This would include stocks, mutual funds, exchange-traded funds bonds and possibly Roth IRA assets. For the spouse that is working, a combination of assets makes more sense. Some might not have immediate liquidity such as a home, a limited partnership, retirement plans and certain taxable accounts.

Remember also that you may decide to split up, but that does not mean your debtors will agree to let one or the other off the hook when it comes to your liabilities. Mortgage lenders, credit card companies, the IRS and even your credit report agencies will want to know exactly who and how each party are going to honor their debt obligations. As such, it is important that before you get divorced you agree to either pay off your mutual debt or determine each spouse's responsibility for that debt. It might also be a good idea to request a credit report as well since sometimes there may be some outstanding debt that has slipped through the cracks over the course of a long marriage.

By the way, don't ignore the tax ramifications of splitting up your assets. For example, if the spouse in need of cash flow sells securities there may be taxes to pay at the end of the year. If you are going to agree to sell your home and you think you can sell it for more than the purchase price, you might want to hold off getting a divorce until after the sale. Why?

The first $500,000 in capital gains from the proceeds of a home sale is not taxed as a married couple. However, if you are single the tax exclusion drops in half to $250,000. In addition, you may have also accumulated tax assets, which are tax losses that can be applied against taxable gains over the years. Make sure this issue is examined and those assets divided appropriately.

Next to your home, retirement assets are usually a major part of any couple's net worth.

Employer–sponsored retirement plans, IRAs, even pensions can be divided and transferred on a tax-free basis as long as the rules and regulations are followed. Divison of some of these retirement assets requires both the divorce court and the plan administrator's approval.

Getting a divorce for most of us is a traumatic emotional decision but it also has a major financial impact as well. Separating emotion from the financial decisions is tough enough when the both sides are relatively civil about the decision. It can be almost impossible when the divorce is acrimonious. And I have not even mentioned the subject of children. That is another topic for another time.

In any case it is a good idea to seek out someone who can advise you on these financial matters that has an objective point of view.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Is Wall Street Responsible for Climate Change?

Monday's Wall Street sit-in by a few hundred radicals would lead us to believe that Wall Street is responsible for the present changes in the world's climate. Maybe so, but remember this, what Wall Street has done, it can also undo.

Readers know that I am no apologist for big business, the financial community or Wall Street. As for climate change, I am clearly on the side of those 300,000-plus people who participated in the People's Climate March on Sunday. The earth is in jeopardy today thanks to carbon emissions generated by fossil fuels.

The simplistic approach, preferred by this "Flood Wall Street" crowd, condemns Corporate America, Capitalism in general, and oil companies, specifically, for the global dilemma we face. The solution, they offer, is to do away with these entities with the assumption that once that is accomplished, the world shall once again be green and free. If only things were so easy.

Historically, I can understand why they blame all things business. You see, it takes a long time for climate to change, according to the scientific community. As such, we could blame the Robber Barons of the 19th century for today's ills.

After all, without a Rockefeller or Morgan(and Wall Street to fund them), there would be no oil and gas industry, nor railroads to transport these products. Of course, we probably wouldn't have computers or medical technology or a host of other things that makes up today's society either.

We could go back further still in our search for a scapegoat to the Dawn of Industrialization, but then we would have to bring Europe into the equation, specifically Great Britain where it all started. Remember, too, that it was foreign nations, not Wall Street, capitalism or America, that first developed and exploited the globe's natural resources. The world's populations ravaged the earth while mining for coal, tin, gold and dozens of other metals for centuries.

How many forests were cut down worldwide before the New World was even discovered in order to clear the way for population expansion and farming? We wring our hands in anguish today over the downing of trees in the Amazon and other locales but conveniently forget how we have all abused the environment to get us where we are today.

Some say that we need to radically change our priorities. Walk rather than drive, forsake flying and stop mining altogether. Give up fossil fuels even if it would drive the world into a global depression. Radical times, they argue, call for radical solutions.

So who wants to go first, you?

For most of us, those kinds of remedies are beyond the pale, but does that mean that we should simply continue as we are? Of course not, but let's not shoot ourselves in the foot by getting rid of the very engine of change we need to turn around this situation. The forces that got us into this mess are the ones that will get us out of it. Evidence abounds.

It is Wall Street and capitalism that is making it possible for any number of carbon-reducing technologies to flourish. Who funded and is developing the world's first, second and third electric car companies? Where are solar companies getting their backing?

Read my lips: it is private capital that will convert this generation of fossil burning vehicles into one powered by electricity and other clean technologies. Wind farms, rooftop solar panels, organic farming, solar powered utility plants, pollution controls, scrubbers, in fact, just about everything we will need to clean up the environment is either funded by or made by companies that are listed on Wall Street or soon will be.

Yes, world governments have a role in providing the incentives for companies to take a chance on new technologies. But all the governments in the world do not have the money, knowledge or technology to effect climate change. That's the job of the private sector. And as long as there is a profit to be made in cleaning up the environment, Wall Street will be happy to oblige.

So let's use it.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.