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The Independent Investor: Is Krugman Right?
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A common fallacy among Americans is that Franklin Delano Roosevelt's economic policies extricated the United States from the Great Depression of the 1930s. Others, with more knowledge of those times, recognize that it was the onset of World War II and the U.S. preparation to wage that war, which truly pulled us out of that economic mire. But stripping that truth down to its bare essentials leaves us with one fact.
To pull this country out of the Great Depression, government spending had to be raised to 43.6 percent of GDP in 1943, 43.6 percent in 1944 and 41.9 percent in 1945. Only in 1946 did spending drop back to 24.8 percent. In his new book, "End This Depression Now," Krugman argues that the answer to our present economic dilemma, which he terms "a second depression," is to spend our way out of recession as we did during WWII.
As today's leading proponent of legendary, supply-side economist John Maynard Keynes, Krugman believes his mentor had it right when he advised government that "the boom, not the slump, is the time for austerity." He argues that Keynes' definition of a depression, "a chronic condition of subnormal activity for a considerable period without any marked tendency towards recovery or toward collapse," applies to our economic reality today. We are in what Keynes referred to as a liquidity trap in which an indebted private sector is so intent on rebuilding its savings that even interest rates of zero cannot tempt it to borrow and spend enough to get the economy working again at full capacity.
Sound familiar?
Of course, Krugman's ideas fly directly in the face of all the austerity rhetoric that is emanating from both political parties during the run-up to November's presidential elections. Both parties seem to believe that the only way forward is to either raise taxes on some; (or cut taxes on others) and cut spending.
In fact, raising taxes and cutting spending is exactly what Herbert Hoover did back in the early 1930s, just as the economy was struggling to recover from the crash of 1929. In my opinion, Hoover's austerity policies, like those that many conservatives are advocating today, are what drove this country from a prolonged recession into its first Great Depression.
In essence, Krugman is suggesting we increase government spending back to the levels of WWII, if necessary. Today, government in total spends around 36 percent of GDP, if you include all goods, services, cash and transfer payments. That represents over one third of all spending in this country. Clearly Krugman's answer to solving this country's woes would make government bigger while creating the most powerful economic entity we've seen since the 1940s.
In the end, we may very well do just what Krugman suggests. I don't believe the majority of Americans will consciously vote for austerity. Raising their own taxes and cutting spending that they need — especially on Medicare and Social Security - would not be in our individual interests, regardless of how well it may be for the future posterity of our children and children's children.
The two biggest concerns American voters will have as they vote this year is staying employed or getting re-employed. Worries over the debt ceiling, the deficit and America's future concern us theoretically but those issues do not impact our pocket book today. If Americans are faced with a program of prolonged austerity after the November elections, I am convinced that they will vote the responsible party out of office as soon as possible.
Under that scenario, if borrowing, spending more and ultimately inflating our national debt away is easier (and safer) than austerity, then guess what most politicians will do? If you doubt that, ask yourself who was the more popular president — Hoover or FDR? That's my point.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at 413-236-2190.
Bill Schmick is registered as an investment advisor 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.
@theMarket: Watching Thin Paint Dry
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Of course, volume shrinks during the summer months anyway. Wall Street participants take three-day weekends or vacations while finding excuses to be on the golf courses whenever possible. For many, it is a genteel, less hectic time when junior traders man the turrets and talk to their friends via cell phone.
However, Securities Technology, an organization that monitors changes in stock and derivative volume, reports that the daily volume of trading stocks is down 16.9 percent from a year ago. In June alone volume declined 9.9 percent. In Europe it was even worse with a 12.3 percent plunge last month. In addition, trading in derivative markets fell off a cliff, falling 15.8 percent from June to July worldwide. There was also an almost 30 percent drop in exchange-traded funds transactions versus 2011 as well, and this is supposed to be a growth area.
This trend is all the more disturbing since last year's volume declines were just as bad. It appears that investors are abandoning the nation's stock markets wholesale with a growing number of private and even professional investors jumping ship.
Some of the blame can be pinned on the continued presence of high frequency traders who brought us 2010's "flash crash." Last week, one of their fraternity brothers created another mini-crash of over 100 stocks that listed for well over half an hour. They claimed it was a computer glitch that cost that firm over $400 million in losses as well as its independence.
This fiasco follows closely on the heels of the multibillion-dollar derivative loss racked up by one of our nation's "most reputable" banks. It was caught speculating the wrong way in the same markets that brought us the financial crisis. In the eyes of most investors, these incidents simply strengthen the notion that the markets are nothing more than a global casino where the bets are rigged in favor of the dealers and croupiers.
Investors are absolutely correct in my opinion. The game is rigged; the banksters and fat cats get richer while the rest of us get poorer. And if this were not enough, this same one percent of the population is now busily using their ill-gotten gains to buy this year's presidential election. What the diminishing volume shows me is that there is an ongoing "buyer's strike" among investors big and small that will continue until it doesn't.
Is it any wonder that the financial sector continues to lay off thousands and thousands of well-paid Wall Street types? Their business is shrinking away to nothing. Before long all that will be left are the billionaires and their firms. Poetic justice would be a scenario in which they are left trading against each other with the same insider information bought and paid for from the congressmen and senators in their back pockets.
But enough criticism, let's focus instead on buying the dips. There is a dearth of news coming out of Europe and America between now and the end of the month. That gives traders plenty of opportunity to move markets whenever and however they want. For you, that may mean another chance at picking up some equities at cheaper prices, so stay vigilant.
Bill Schmick is registered as an investment advisor 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: Mars Is Only The Beginning
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The purpose of this Mars mission is to perform a highly sophisticated scientific analysis of the Red Planet around the Gale Crater. Curiosity, the one-ton robotic rover, is loaded with an army of scientific instruments including high resolution cameras, infrared lasers, microscopes, X-ray spectrometer and even drills for retrieving samples of the surface for further analysis. If history is any guide, NASA probably has a host of other tools that are newly developed proprietary secrets that will trickle through the economy sometime in the future.
Scientists at NASA believe Curiosity (about the size of a Mini Cooper automobile) will remain operational for at least a year. Of course, the public and the media will be looking for answers to the really dramatic questions. Was there life on Mars and when? Are there vast deposits of mineral wealth just waiting to be scooped up from the surface? Even more exciting, could there be new and potentially valuable substances heretofore unknown to man that could be successfully exploited?
While answers to these questions may keep Americans interested, I suspect that the real payoff will come from the technology that went into developing and executing the mission. One only needs to look back at how much economic value was generated by the Apollo moon landing and other space programs to understand my point.
From 1962 to 1972, America spent roughly $16 billion (inflation-adjusted) a year on the space program. I remember watching on television (along with millions of other Americans) as Apollo 11 touched down on the moon's dusty surface on July 20, 1969. It was that landing and subsequent other manned missions to the moon that inspired an entire generation of school kids to become scientists and engineers.
Those are the men and women who have given us untold wealth in the form of the technology we enjoy today. Beyond that, a partial list of technological benefits of the space program include micro circuitry, endless software innovations, miniaturization, a vast array of sensor technologies (used today in everything from medicine to transportation) advancements in telecommunications, precision manufacturing, instantaneous global communication, radar mapping, GPS, and the materials science that developed most of the materials that surround you. The economic benefits of those advancements are incalculable. Suffice it to say that the return on $16 billion/year was huge. America would not be the leading economic power of the world today without the space program.
Unfortunately, in this partisan era of spending cuts, NASA's planetary science efforts budget will be cut by 20 percent next year with further cuts expected in the coming years. Much of this money will come out of the agency's Mars program, which will see its funding fall from $587 million this year to $360 million in 2013 and then to just $189 million in 2015. I think that is a mistake.
Consider that less than two months ago just one of our "most reputable" banks threw away over twice the entire Mars budget by speculating in the same kind of derivatives that gave us the financial crisis of 2008. Even if that bank's bet had paid off, its economic benefit to this country would have been insignificant compared to the potential technological advances generated by the Mars Science Laboratory.
As I write this column, new revelations point to trillions of dollars in losses by the rigging of interest rates by this nation's banks (among others). Yet, our politicians nickel and dime NASA's budget to show how fiscally responsible they are. Where are our priorities?
I am one of those Americans who believe that if we don't invest in science and space exploration, the human race will eventually cease to advance as a species. It confounds me that with all the technological breakthroughs generated by past space programs the question of funding space exploration is even raised. What am I missing here?
Bill Schmick is registered as an investment advisor 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.
@theMarket: Get Ready for More Stimulus
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Actually, this week's sell-off was simply another buying opportunity for those, like me, who are convinced that additional easing is in the cards. How can I be so sure?
The U.S. Federal Reserve in the minutes of its FOMC meeting this week, acknowledged that the economy and unemployment was a disappointment. They said it "will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions."
So it doesn't take rocket science to figure out that most of the recent economic data is quickly moving from bad to worse, but the real kicker is the unemployment rate. Despite Friday's welcome gain of 163,000 jobs, the overall rate ticked up to 8.3 percent. That was not an anomaly. The number of new jobs created over the last few months has been falling and this week's number does not appreciatively change that. That, my dear reader, should really concern the Fed. To me, I'm betting the Federal Reserve Bank is going to act. Evidently the markets agree since stocks soared after the unemployment data was released.
Next, we move to European Central Bank President Mario Draghi. After last week's comments that he would "do whatever it takes" to defend the Euro, investors immediately expected him to launch some new bond–buying program this week. When that failed to happen, markets sold off.
I have often reminded readers that prior to accomplishing anything significant in European financial policy; a consensus needs to be built among at least the largest players in the European Union. That does not occur in a week. Draghi is looking for ways to reduce Spanish and Italian sovereign bond rates that will also enlist the cooperation of Germany, France and other nations. He will accomplish that because in the end all the key players have shown that they, too, will defend the Euro with whatever it takes.
In the meantime, ignore all the wringing of hands and gnashing of teeth by the markets and their commentators. Increasingly, world markets act like children: they want instant gratification and as little pain as possible. If they don't get it, they throw a tantrum.
The Fed has a number of opportunities to announce further monetary initiatives. Although they could technically take action at any time, they normally wait for a forum of sorts to make this type of announcement. The closest is their annual meeting in Jackson Hole, Wyo., at the end of the month. But the Fed might want to wait until they see more economic data, in which case it could be September before they move. They could also synchronize their actions with other central banks. That happened in October, 2008 and again in November, 2011.
The point is that further stimulus is coming both in Europe and in the U.S. If the past is any guide to how the stock market will react, it behooves readers to be invested and stay invested until those events occur. QE II was announced in Jackson Hole on Aug. 27, 2010. The S&P 500 Index rallied 20.9 percent. The next stimulus program, "Operation Twist," was launched on Sept. 21, 2011, resulting in a gain of 21.7 percent in the S&P.
It is also noteworthy that in both cases the stock market averages experienced a "V" shaped recovery in the immediate days and weeks after the announcements. Those who were not invested already were forced to chase the markets. Experienced money managers who waited for a pullback before investing were disappointed time after time. Is it any wonder that this time investors who believe more stimuli are forthcoming are buying on any dips?
There are those who argue that because the markets are climbing ahead of the event, much of the gains will already be discounted once the stimulus occurs. "Not so," say I, as I look back to May 18, 2012, (which was the S&P low for this year). To date, the markets have gained about 7.5 percent. Let's say the markets climb another 3 percent before the end of August. If the expected gains are similar to the rallies of the last two QE's (20 percent), that would still leave another 10 percent between the end of August and the November elections. That's more than enough for me. How about you?
Bill Schmick is registered as an investment advisor 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: Health-Care Feud Continues
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"Obamacare," as the legislation has been nicknamed, was probably destined to be controversial no matter what the Supreme Court had decided. But by voting in favor of the act, by reason of Congress' power to levy taxes, simply stirred the hornet’s nest further.
Republicans have said they will try to repeal the key provision of the act after the election. They argue that since the court considers any penalty on citizens who fail to hold health insurance as a tax, then the legislation should be subject to a fast-track procedure called budget reconciliation where certain tax issues are resolved.
The GOP figures that if it can just gain a handful of additional Senate seats in November it can knock down the Act altogether on the tax issue. In any case, Mitt Romney, the Republican presidential candidate and author of Massachusetts' health-care initiative, has sworn to repeal it on his first day as president if he is elected to the White House.
From my point of view, I just can't see what is so bad about our country's fledgling steps toward universal health care. I look at health care as simply another form of insurance like home owners or auto insurance. It is a simple fact that our economic system would not function as well or not at all without certain forms of carried insurance.
Do we, for example, protest when the bank demands that we pay for home insurance as a condition of receiving a mortgage loan? Of course not, because we know that a fire, or flood or a tree could fall on our home at any time preventing us from paying off our debt, with dire consequences for ourselves as well as the bank.
The same thing applies to auto insurance. Most states require drivers to carry auto insurance. We are relieved that we do, despite the high and ever-increasing costs of carrying this insurance because we know how much those fender-benders cost. God forbid if it is anything more serious! And yet, how many times have we heard of accidents where the other driver was not covered by insurance? Not only were we angry at the driver, but at the authorities as well for even allowing that uninsured driver on the road.
Without insurance, ships wouldn't sail, planes wouldn't fly, trains wouldn't roll, and you would not even be able to move your furniture to that new home across the state. So why do we want to omit something as potentially expensive as poor health from other's insurance obligations?
Might it be possible that people do not understand that an uninsured person with poor health has the ability to inflict financial damage on everyone else in the health care system?
In our country, hospitals and other medical providers tend to give care first and then try to collect payment later. When the system winds up providing free care or is unable to collect on the bills it sends out, who do you think pays for that? You do.
Our health-care system is a for-profit entity that has to make up for the losses incurred by uninsured customers of its services. Costs are reduced either by shaving salaries and benefits of its employees thereby providing less in the way of services and/or charging you higher fees for the services delivered. In turn, you pay more through your co-pay and insurance premiums.
What's worse is that uninsured people usually wait until their medical condition is so extreme that they cannot function without medical assistance. Health issues that could have been resolved by a yearly check-up at the doctor's office are left unattended due to no insurance. These medical problems can cost literally an arm and a leg by the time the person shows up in the emergency room. Not only will the cost of treating that person be much higher than it would be, but taxpayers are likely to foot the bill for that person for the rest of their lives via welfare, disability or other aid programs.
The bottom line is that we are already paying for those who refuse to carry health insurance either as taxpayers or as health-care insurance owners. Obamacare has no impact on the vast majority of Americans who carry some sort of health insurance. As for those who really can't afford health insurance, this country's social system already covers them through Medicaid and other programs.
That only leaves those who are free-riding the system. Those who can afford to pay for health insurance but refuse. They don't even have to buy health insurance under the Act. They simply have to pay a penalty for not opting in. What's wrong with that?
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.
