The Independent Investor: Washington, the Country's Worst Enemy

The nation has breathed a sigh of relief now that Congress has finally done what they were elected to do. The government is back in business and the debt ceiling has been raised. The damage to the country, however, will be long lasting.

Let us remember as well that the 11th hour deal between our dysfunctional officials is only a temporary solution. Congress voted to keep government open only until Jan. 15 and the debt ceiling will need to be extended once again on Feb. 7 of 2014. In the meantime, few have any faith that the bi-partisan budget talks headed by House Budget Committee Chairman Paul Ryan, R-Wis., and Senate Budget Committee Chairman Patty Murray, D-Wash., will bear fruit in the two months before the next deadline occurs.

The most recent estimates indicate that the government shutdown cost the economy $25 billion. But that's just the dollar and cents pricetag. The continued uncertainty of U.S. fiscal policy and the fear that the next time there truly will be a debt default could cost us $700 billion over the long term, according to estimates by Macroeconomic Advisers.

From California to Cape Cod, small-business owners have been hurt by the government shutdown. Over the Columbus Day holiday, for example, tourism was hurt by the closure of all the nation's federal parklands. Hundreds of thousands of mortgage applicants were held up as well since buyers could not get the information they needed from the IRS in order to close their purchases.

Retailers are in a quandary. Given the uncertainty, there is little confidence that the Christmas season will be a good one. Pessimism among small businesses, when asked about future economic activity, increased 10 percent in September and nothing about this latest debt deal inspires optimism. Yet, orders have to be filled now or it will be too late. Chances are retailers will trim their orders just to be on the safe side, reducing economic activity even further.

Consumer sentiment has been hurt badly by this circus we call Washington. In a recent trip to Provincetown, I noticed that whether at dinner, on a whale watch or just shopping around town, consumers were actively talking (and worrying) about this latest Beltway Brawl in D.C. Merchants told me shoppers were spending less and were visibly distracted.

Most recent estimates indicate that the pullback in domestic spending could impact the economy in the fourth quarter. Most economists were expecting GDP to grow in the fourth quarter by 2.2 percent, however, that forecast has been reduced to 1.6 percent. Clearly, the overall damage to the economy would have been far greater if we had defaulted on our debt.

In hindsight, the shutdown and debt ceiling debate was completely unnecessary. By now even staunch Republicans are admitting that the blame for this last bit of political insanity lies squarely with their party. Unless voters recognize this and act accordingly in the 2014 elections, we can expect that sometime soon we are all going to hit a brick wall.

The tea party element within the GOP is bound and determined to create such a crisis in this country.

Democrats should also be held accountable for their own unwillingness to compromise in years past. It is clear to me that ever since 2010, both parties have done their absolute best to hamstring this economy and keep millions of Americans out of work. Instead of coming up with bipartisan economic programs to grow the economy, our leaders have focused wrongly, in my opinion, on cutting spending, reducing debt and raising taxes all in the name of their misguided attempt to reduce the deficit.

How any of those measures would achieve economic growth or more employment is beyond me.

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: Cashless Society, Think Again

While the government shuts down and the markets swoon over the debt ceiling drama and the future of the U.S. financial system, the U.S. Federal Reserve Bank issued a new version of the $100 bill this week. Demand for the new bill is quite brisk, thank you.

To some, this may come as a surprise. After all, we all know that the world is moving inexorably toward cashless transactions. The most recent report by McKinsey & Co. found that for households with income of more than $60,000 a year, cash accounted for only 2 percent of total payments, while credit cards (both credit and debit) represented 60 percent of all retail transactions. Only 7 percent of all transactions in the U.S. are done with cash and most of those are with small amounts of money.

Between credit cards, PayPal, mobile payments and other technologically digitalized methods the death of paper currency has been predicted for years. The problem is that this particular patient never dies and is, in fact, stronger than ever. This summer the amount of U.S. currency in circulation hit an all-time high of $1.19 trillion, according to the Fed. That equates to roughly $3,800 in cash per person, if one assumes all of it is held in America, but it is not.

Admittedly, international demand for American currency started to decline about the time the Euro was introduced back in 2002. It was a period of political stability, economic growth and financial stabilization but all that changed in 2008. The global financial crisis triggered renewed demand for our banknotes and still continues today. In times of crisis, the American currency still offers foreigners the safest haven for their savings.  And many Americans evidently feel the same way.

Our $100 bill, featuring the likeness of Benjamin Franklin, is the most widely sought after note of all. We have been printing more of these "Benjamin's" than any other denominations over the past 20 years  The most recent Fed statistics show that as of Dec. 31, 2012, there were 10.3 billion $1 bills in circulation, 8.6 billion $100 bills, and 7.4 billion $20 bills, followed by $5, $10s, $50s and $2s. A little more than 75 percent of the worth of all U.S. currency worldwide is in $100 bills.

The use of smaller denominations has plateaued, reflecting the use of alternative methods of payment for day-to-day transactions. In contrast, the demand for $100 bills is growing. It appears that in times of fear both domestic and foreign holders are eager to keep a stack of $100 bills under the mattress or in safety deposit boxes as opposed to in bank or brokerage accounts. And let's not forget the black markets, criminal syndicates, drug cartels and tax evaders, all of whom use cash extensively and for them, the bigger the bill the better.

The new $100 bill is long overdue. It was supposed to reach your local bank two years ago but there was a problem with the new security measures imbedded within the bill. The new note has several features that will make it easier to authenticate, yet more difficult for counterfeiters to copy. (The paper is made right here in the Berkshires, too.)

Although less than 0.01 percent of all U.S. currency in circulation is counterfeit, it still totals as much as $95 million and most of it is in $100 bills. Most countries use special Swiss presses (sold only to governments) to print their money.  So it is difficult for common ordinary crooks to forge our currency. However, rogue countries, such as North Korea, can acquire these presses and have been known to print U.S. bills, especially the $100 bill, which law enforcement called "Super-notes."

Some countries , most notably Belgium, France, Canada, the U.K., Sweden, Australia and the Netherlands, have neared the point of effective cashlessness. That makes the banks happy since they spend billions per year processing, storing and guarding that paper. Governments also like it. The annual cost, for example, of minting U.S. currency is $219,240,000.

But I suspect that cash will continue to be useful for any number of people in a great many places. And that’s not necessarily a bad thing. Psychological studies indicate that when we use physical notes and coins, we spend more sensibly. While cash may not be "king" anymore, I think the feel of a little cash in the pocket makes one's day a little bit brighter, don' you think?

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: Week One of Obamacare

In the face of a government shutdown, computer glitches and a mountain of confusion, Obamacare made its inaugural debut this week, so far, so good.

The federal government's new health insurance website went live on Tuesday and promptly crashed as did the state of Maryland's site for enrolling Americans under the Affordable Care Act. The glitches also included a computer jam on the District of Columbia's site as well as a delay in the plan for small-business owner's enrollment. Experts say to expect even more foul ups.

So why do I say this is all good? The reason the Federal site crashed was because of the overwhelming interest in the exchanges. Within three hours of its opening, the national healthcare.gov site had one million visitors. Overall, 4.7 million visitors accessed the site on the first day. That is five times the number of users that have ever visited Medicare.gov. On that first day over 190,000 people called the federal hotline on information about Obamacare. In California, Colorado, Connecticut, D.C., Florida, New York and several other states the response has been gratifying and completely unexpected as well.

For all its complexity, with most of its details still misunderstood by the majority of Americans, and the active resistance by some states and political parties, the demand to enroll has been overwhelming.

It is too early to predict whether Obamacare will really succeed, but it seems to me that the idea of electronic insurance exchanges is an idea whose time has come.

In today's world, the internet is used as much for comparison shopping as it is for other kinds of information. Whether you are looking for an airline flight, hotel room or the best price on a television, you turn to the internet for help. For the first time in our history, we can now comparisons shop for health care.

Let's face it, applying and purchasing individual health care is a complex, confusing business, whether in the private sector or through this new government program. Health-care providers, in order to capture your business on these new exchanges, are going to be forced to be specific about what they offer and why it is better than the next guy's plan and do so in language we can understand. That to me could be the real key to the success of this endeavor.

Evidently, investors and health-care providers think so as well. Health-care stock prices are up and I have detected a subtle shift toward accepting Obamacare in the financial world over the last several months. That leaves only the Republican Party left to dissent. The tea party and its multibillion dollar backers have conducted a campaign of misinformation and deceit about the plan since its inception. They have been so adamantly opposed to Obamacare that they have been willing to shut down the Federal government in protest. That will prove to be a mistake, in my opinion.

Historically, Americans have resisted attempts by government to effect social change whether we are talking about Social Security, welfare, food stamps, Medicaid or Medicare. As late as 2006, for example, the introduction of Medicare Part D, the drug prescription benefit, was highly unpopular. However, with the passage of time people not only accept the change but come to approve it and even depend on it.

 Although the Affordable Care Act is far from perfect and in need of many revisions, it is a start in a process that I believe one day all Americans, including most Republicans, will come to accept. The trick is to stick with the idea and improve it. So far, so good.

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: Play It Again (Uncle) Sam

In just four days, the continuing resolution financing the federal government expires. Two weeks later the nation's debt ceiling will also need to be raised. If any of this sounds familiar, it should because these political dramas have become almost a yearly occurrence.

Technically, we have already reached the debt ceiling back on May 19. Since then the U.S. Treasury has utilized what they call "extraordinary measures" to remain roughly $25 million below the debt limit of $16,699,421,000,000. I guess the government might find a way to keep paying its debt beyond Oct. 15, but only for another week or so.

As for a government shutdown, the political theater this year has reached new heights. With mere days left before the deadline, Democrats and Republicans have embarrassed themselves by voting on budget bills that both sides know will never see the light of day. So how bad could it get if these two issues are not laid to rest?

Those on Social Security, Medicare, Medicaid, unemployment insurance and food stamps should rest easy. Nothing will happen to those "mandatory spending" programs. Services that required the protection of property and/or human life (air traffic control, prisons, border security, and veteran's hospitals are examples) would also be spared.

Discretionary spending, however, would be savaged. Things like visa applications, national parks, airport security lines and anything else that involved the services of the hundreds of thousands of furloughed government employees would suffer.

But before you panic, consider a few facts. Since a new budgeting process was established by congress back in 1976, the U.S. government has shut down 17 times. Both Presidents Carter and Reagan each weathered six shutdowns during their administrations with the longest lasting 2.5 weeks. The longest shutdown in our history was during the Clinton administration. That one lasted three weeks.

At their worse, these shutdowns caused some mild inconvenience but had no lasting effect on the economy, the financial markets or Americans in general. Within a month of their resolution even those most affected found life was back to normal.

A failure to raise the debt ceiling, on the other hand, could prove to be quite dangerous. It would mean that America's bills would go unpaid. The nation's debt holders and private service providers would suffer the most. Congress has increased the debt ceiling at least 90 times in the last century and 14 times from 2001-2013 in order to avoid this consequence.

It was only in 2011 that the Republican Party determined that the debt ceiling was fair game in partisan politics. Those threatening a debt showdown are also hoping that the stock market will panic and interest rates across the board will rise sharply (as they have done in the past) as when this issue last surfaced two years ago. They are treading on dangerous territory, in my opinion.

There has been only one time in history that the U.S. has defaulted on any of its debt since the 18th century. Investors in U.S. Treasury bills set to mature on April 26, 1979, received notice that the U.S. Treasury would not make its payments on maturing securities to individual investors. The reasons were many: a congressional stand-off over increasing the debt limit, an enormous number of small holders of these Treasury bills and a breakdown in the word-processing equipment used to prepare checks.

That temporary default only affected a tiny portion of investors holding a miniscule amount of our debt. The immediate impact was to raise the interest rate on Treasury bills by 60 basis points equal to sixth-tenths of one percent. It was a one-time permanent increase in the cost of borrowing to this nation. It increased interest payments by $12 billion. Imagine the impact of a default on the entire $16 trillion of our debt.

Our "leaders" have no idea what their petty squabbling could do to this country's future deficits, debt obligations and debt ceiling. Although I believe that both sides are simply using the debt ceiling as a bargaining chip, the ramifications of even a small default would be mind-boggling. The cost to us would easily equal the whole of our present deficit and make the price tag of Obamacare look like chump change in comparison. I only wonder how our politicians failed to see that two years ago and again today.

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: The Droning of America

Whether you call them unmanned aerial vehicles, remotely piloted aircraft or simply drones, these remote-controlled devices are expected to become a big business both here and abroad over the next decade. The question is whether this new technology will impact our lives in ways we are willing to accept.

The worldwide drone market in 2007 totaled $3.7 billion. This year revenue estimates have over doubled to $7.5 billion, with the U.S. accounting for two-thirds of those sales. By 2022, it is expected to top $11 billion. The military has accounted for much of that spending with drones accounting for an estimated 31 percent of our military aircraft fleet.

However, public opinion over the use of drones in warfare is divided in this country. Some critics look at drones as little more than murder machines given the drone's ability to indiscriminately deal death from the sky at a push of a button on whomever or whatever we choose. And the "we" is also a problem. Exactly who and under what authority are these drones attacks undertaken? The answers are mired in confusion and unresolved morality.

Supporters argue that drones have allowed the U.S. to exert targeted force almost instantly at a massively reduced cost without risking American lives. From tactics to strategy, the drone has transformed and revolutionized modern warfare. The numbers speak for themselves. Over 50 high-ranking al-Qaeda and Taliban leaders have been "neutralized" in drone attacks. Of course, no one really knows how many civilian casualties accompanied these successful "kills" in the process.

I bring up this controversy because having transformed warfare, drones are now preparing to do the same thing in the commercial space. Everything from law enforcement to border patrol, from agriculture to cinema and dozens of other applications are cropping up as drone technology becomes cheaper and more accessible.

How will these applications threaten American civil liberties, if at all? Will the government use of drones (as they are purported to have used cellphone and other electronic communications) to spy on American citizens in the name of national security? Will its use by local police forces usher in an era of police states, as some claim?

Counterbalancing these fears are the positive benefits of this new technology. Imagine the usefulness of drones in fighting wildfires, patrolling our borders, locating kidnappers, dusting crops, hurricane hunting and surveying things like oil spills, tornados, hurricanes, power lines, archaeological digs and gas spills.

The list of applicants looking to fly drones is expanding and consists mostly of universities, manufacturers and public agencies, but experts expect that list to lengthen as soon as the regulatory environment becomes clearer. The Obama administration has ordered the Federal Aviation Administration (FAA) to come up with the rules and regulations necessary to integrate unmanned civilian aircraft into U.S. airspace by 2015. The FAA is also tasked with establishing six dome-testing ranges and to fast-track requests for permission to use drones. That should jump-start the industry and lift sales to $13.5 billion in three years, according to a report by the fledgling industry trade group, the Association of Unmanned Vehicle Systems International.

The real question is whether an American bureaucracy, such as the FAA, along with a morally bankrupt Congress, will be able to craft legislation that answers both the legal and ethical issues inherent in this new and promising technology while allowing America to take advantage of this opportunity. Given their track record, I am less than hopeful.

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.