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The Independent Investor: Insult to Injury
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Of course, those who just had their power restored in places like Long Island and the battered New Jersey sea coast were plunged back into despair at this new power outage. But damage is minor compared to the estimates that Sandy has wrought. The price tag is now ranging from $30 to $50 billion, but that is only a guesstimate. Losses that are insured by private companies could amount to $20 billion or more. Additional losses covered by the National Flood Insurance Program, plus uninsured losses, could boost the total to the $50 billion mark.
Normally, the estimates of property damage are usually revised upward, while those losses incurred as a result of lost business activity are revised downward. That is because businesses usually find a way to make up for lost activity. In the case of Sandy, regaining lost business activity depends on when the power is restored. In many areas, power is still not fully restored and won't be soon, thanks to yesterday's storm.
Damage totals would put the cost of Sandy far above recent hurricanes and at least equal the cost of the four hurricanes the United States suffered in 2004. But the losses are still well below the $100 billion price tag of Hurricane Katrina, although it could beat the next largest storm, Hurricane Andrew in 1992 ($46 billion in inflation-adjusted losses).
There are a lot of misunderstandings about weather-related destruction. I have read a number of articles that seem to suggest that storm damages could actually be good for the economy. Pundits like to point out that although the damage will cause a dip in economic activity in the impacted region over the short-term, the economic reconstruction involved in rebuilding infrastructure (roads, bridges, subways, railways, etc.), plant and equipment (factories, stores, housing), and goods and services could actually act as a stimulus to the economy while creating new employment.
Some of the depressed consumer spending, they argue, will simply be postponed. For example, Hurricane Sandy was responsible for a 20 percent drop in retail sales last week in the mid-Atlantic and Northeast regions amounting to $4 billion. Although some of that will surely be recouped in the weeks and months ahead because of Thanksgiving and the Christmas season, not all of it will be recouped.
What many are forgetting is that natural disasters are destroyers, not creators, of wealth. The opportunity cost that we forego in natural disasters is immense. Think of what the victims could have done with the time, money and effort they now have to spend on rebuilding. No longer can businesses, homeowners and even the government make the purchases and investments on other more productive pursuits that could have generated more jobs and a better business environment if the disaster had not occurred.
Sure, the re-building process may result in a better structure or highway than before but the costs are replacement costs, not new investment. And what value will we place on the 100-plus lives that were lost or the pain and suffering of those that are now homeless or without jobs? What about their opportunity costs?
Sandy was a hurricane, a destructive one, but there was nothing super about it. It will take those in the Northeast a long time to recover from its impact and there are precious few silver linings in this disaster no matter how deeply you look.
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: Twenty-First Century Capitalism
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Companies have been forced to get bigger just to compete successfully on a global basis. In this new big dogs-eat-little-dog's arena, governments have had to adjust rules and regulations accordingly. "Too big to fail" makes sense when you are competing globally and our government, in an effort to protect our own across a wide spectrum of sectors, has bent the rules to insure U.S. corporations' competitive position among foreign competitors.
It has also had the unintended consequences of solidifying the status quo. Competition may have heated up abroad, but by necessity, it has fallen domestically among our companies. As a result of this three-decadelong worldwide transformation, there is no such thing as a free market anywhere (if there ever was one) and capitalism, as we understand it historically, is about as different today as Dorothy's Kansas is to Oz.
For the last few years, I have been railing about the excesses in our financial markets. Those excesses, I now believe, are a direct result of this 21st Century brand of capitalism. In the old days, capitalism was about accountability, the rule of law, fair and competitive markets and compensation appropriate to the value created for society. Nowhere do we see that today.
Instead, we see a growing list of inequities wherever we turn. From immunity from the criminal justice system to the near melt-down of the entire financial system, capitalism has run amuck. An opportunity, the yellow brick road of a laissez-faire society, has plummeted. Last year, just 8 percent of students at America's elite universities (where future contacts and allies are made) come from households in the bottom 50 percent of income. Since education provides an avenue to equal opportunity there is something radically wrong with that statistic.
Just ask any small-business owner how hard it is to get a loan today, yet, Wall Street banks and big corporations can borrow as much as they want with just a phone call. If the access to capital has changed, how can would-be capitalists become capitalists? Yet, the answer, if we listen to those learned men and women to the right is much, much more of the same.
A growing chorus of voices demands we embrace this 21st century "laissez-faire" theology. They paint a picture of an economic environment in which transactions between private parties are free from tariffs, government subsidies and enforced monopolies, with only enough government regulations sufficient to protect property rights against theft and aggression. The markets, they say, will sort out distribution on its own.
I fear that direction will result in more and more wealth ending up in fewer and fewer hands. And wealth begets power in 21st-century capitalism. This kind of crony capitalism has already transformed what was once a vibrant free-market economy with a conscience into something that is far closer to the Robber Barons' duopoly or oligopoly of old.
In order to address these new realities, we must first acknowledge that we are not in Kansas anymore: a hard thing for Americans to admit. The tripe we serve ourselves that some mythical form of capitalistic free-market system still prevails in this country must be squarely and honestly refuted. The idea that markets, left to their own devices, are perfect and can perfectly balance supply and demand is a bunch of hogwash. Economists might insist on that point in a theoretical world, but in the real world, markets have always been imperfect and will continue to be long after those ivory towers are smoking ruins.
George Soros, one of the premier capitalists of our age, recently wrote a shocking condemnation of capitalism in the Atlantic Monthly titled "The Capitalist Threat." In the article, Soros argues that "By taking the conditions of supply and demand as given and declaring government intervention the ultimate evil, laissez-faire ideology has effectively banished income or wealth redistribution."
He believes America's laissez-faire argument relies on the same tacit appeal to perfection as communism:
"It claims that if redistribution causes inefficiencies and distortions, the problem can be solved by eliminating redistribution — just as the Communists claimed that the duplication involved in competition is wasteful, and therefore we should have a centrally planned economy."
Soros points out that the laissez-faire argument against income redistribution invokes the doctrine of the survival of the fittest. That argument, he points out, is undercut by the fact that wealth is passed on by inheritance, and the second generation is rarely as fit as the first.
Besides, both Soros and I agree that there's something radically wrong with using the survival of the fittest, which is an outmoded theory of evolution called Social Darwinism, as the guiding principal of any civilized society, much less by the leader of the free world and the world's foremost democracy. America, wake up for God's sake!
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.
@theMarket: Stay the Course
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Unfortunately, stock markets need these periodic pullbacks. As I have written before, expect three to four such pullbacks per year of between 3-6 percent in the equity markets. It is the cost of doing business. Without them, financial markets would be just too dangerous for the average investor. And I have never met a person or firm that can trade those declines consistently and successfully, so don't try.
Now is the time, however, for a little hand holding. About now my phone begins to ring regularly with client calls. They always begin this way:
"Have you changed your mind about the markets?"
"No," I reply, waiting for the next question.
"So how much lower do you thing stocks can go?"
The real question behind that one is "How much more pain do you expect me to endure?" Clients are expressing what is called loss aversion, which is part of the Prospect Theory. This theory was coined by two Israeli psychologists Daniel Kahneman and Amos Tversky back in the '90s. They contend that people value gains and losses differently. Losses, they say, have more emotional impact than an equivalent amount of gains.
In my experience, they are absolutely right. Rarely, if ever, do I receive calls when the markets are roaring. On occasion I may receive a call from someone who is worried about how high the markets have climbed, but once again I believe the concern is more about the avoidance of loss (pain) than any giddiness based on how much the investor has made.
Now, pain has a profound effect on us humans. It can make us take irrational actions. If I think back to times in my life when I was in severe pain, all I wanted was for the pain to stop and I would do just about anything to feel better. And this statement is coming from a guy who has an extremely high tolerance for pain.
In the investment world, this aversion to losses has caused many a good man and woman to dump their holdings at the absolute worst time. Over and over again, I have seen this wholesale selling capitulation sometimes on the very same day that markets have hit their bottom.
Of course, we all know that we should never make any decisions based on emotions but we do it anyway. That's why we are who we are. I'm just asking readers and clients alike to try and be honest with their decision to buy, sell or hold. In my investment experience, the correct decision is to do the exact opposite that my emotions are telling me to do. If I can't do that, than most likely I should do nothing.
Bringing this home to today's markets, I would advise you to simply sit on your hands and do nothing. We are pulling back because third quarter earnings were a disappointment. But remember, those are earnings that have already occurred. They are not indicative of future earnings.
The elections are less than two weeks away and after that we confront the much-heralded "Fiscal Cliff." Since the markets dislike uncertainty, I would expect further volatility and declines until then. Rather than work yourself into a frenzy, just ignore the daily gyrations and keep your eye on the bigger picture. I expect the economy to strengthen, not weaken, from here and as such there are better times ahead.
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: Income Inequality: The Trend is Not Your Friend
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If left unchecked, the trend in income inequality in this country will continue to widen. It will lead to an increasingly dysfunctional economy, heightened political polarization, paralyses and a level of anger and mistrust that this nation has not seen since the Great Depression.
Income inequality, as I have pointed out, is a worldwide phenomenon brought about by a number of global trends that has transformed how economies do business. Globalization has put downward pressure on wages, especially those of low or unskilled workers. Technological change has favored highly skilled labor. Institutional and regulatory reforms have increased global competition while decreasing the bargaining power of labor. More and more unskilled people enter the labor force in countries like India and China applying even more pressure to wages worldwide. These trends have created distortions in economic growth and transformed economic systems and markets among developing and emerging nations.
Something similar happened during the 1930s but for different reasons. As the world's economies first faltered and then suffered massive downturns, trade embargos sounded the death knell for many economies. As a result, free markets and political systems were turned upside down. In their place, ideologies such as communism, socialism and even Nazism replaced various versions of democracy and capitalism.
Back then, Americans elected Franklin Delano Roosevelt, a scion of wealth, hoping he could deal not only with the Great Depression but the growing threat of income inequality in this country. Roosevelt, in my opinion, realized that the same trends that allowed the Nazis to rise to power and the Russian Revolution to succeed could happen here if the Great Depression and income inequality were permitted to grow.
America was already experiencing sporadic riots, labor battles and vigilante actions that were beginning to escalate. Roosevelt, against bitter opposition from what he called "organized money," instituted several social and economic reforms in an effort to reverse the extreme economic inequality of that time while attempting to jump-start the economy. He was labeled a traitor to his class and admitted that "they are unanimous in their hate for me."
Why the history lesson?
I believe this country needs something radical that goes beyond Roosevelt's New Deal, although elements of that kind of social program could contribute to a solution. But a Roosevelt-style re-distribution would be a hard sell in this country. Today, even the word "re-distribution" represents an almost un-American idea among the majority of voters.
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The Independent Investor: The Incredibly Shrinking Middle Class |
Conservatives and liberals alike extoll the principles and virtues of capitalism and a free markets system. Reaganomics remains the model and the modern-day vindication of "the economic principles of which this country was founded upon."
Free markets, if left to their own devices, so goes the American myth, can distribute wealth equitably and fairly for all. Some economists say that it is a bogus argument, pointing out that the reverse of "trickle down" is what actually happened as a result of Reaganomics over the last 30 years. The data does support that contention.
But I believe both sides are missing the point. In my opinion, the cause of income inequality today is an example of what we don't know we don't know. In this case, what we don't realize is that America's 21st century version of capitalism is far, far different from the capitalism our fathers and grandfathers enjoyed. It has vastly changed just in the last 30 years. There was a time in this country when someone willing to work hard could get ahead, finance a college education, borrow the capital to start a business and succeed. Does it still happen? Sure, but how often?
Economic and political systems change over time. Some systems, communism for example, no longer exists as a political and economic force in the world. Over the last 30 years, China's centrally-planned and run economy has been forced to drastically adjust to the new world order. Why should we think that our concept of capitalism and free markets remains the same?
But today's capitalism may not distribute wealth as equitably as before. Next week, we will make the case that today's 21st century form of capitalism is a large contributor to our growing income inequality problem.
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 Next Third World Nation
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Here's a great cocktail party question. What do Cote d'Ivoire, Uruguay and the United States have in common? Answer: all three nations have about the same level of income inequality among its citizens. For those who didn't know it, America now ranks lowest of all developed nations in terms of income distribution.
After my last column on this subject, I realized that when it comes to measuring the wealth gap, rarely do we Americans compare ourselves to other nations. Instead, we check out what our neighbors are making and if we are in the same income ballpark then we leave it at that. And most of the time we ignore the stories of multimillion dollar salaries that others make as simply a one-off event, an exception, not the rule. But times are changing.
Beginning with the Occupy Wall Street movement, income inequality has come to the forefront in our consciousness and has now become a campaign issue. So I decided to find out just where this nation's income inequality stands in comparison to the rest of the world.
As a first step, the easiest measure of determining whether a country is rich or poor is to simply add up its cumulative wealth or gross domestic product (called GDP). If you divided the number of people in a country by its wealth you get per capita GDP. The problem is that measurement falls short in determining whether a society is truly wealthy. You could have, for example, the highest per capita GDP in the world on paper, but if all that wealth were controlled by just one or two people, the society overall would be dirt poor.
In order to discover whether a society is truly wealthy, I needed to account for the distribution of wealth. I quickly discovered that most economists and sociologists use the "Gini Index," which measures how equitable a nation is in its distribution of wealth. The Gini Index or scale begins at "0" (everyone gets the same income) to "1" (one person has all the income).
I discovered that the U.S. ranks at 0.450 on the Gini Index, sandwiched between the two Third World nations I first mentioned at the beginning of the column. America ranks the lowest of all developed nations in the index. What is equally shameful is that not one state ranked in the normal range of income distribution anywhere within the developed world.
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The Independent Investor: The Incredibly Shrinking Middle Class The Independent Investor: Income Inequality: The Trend is Not Your Friend |
The ranking of your state might shock you. For example, California, at 0.466, was comparable to income distribution in Rwanda. Connecticut was slightly worse at 0.480, the same as Venezuela. Massachusetts was about equal to Mexico at 0.461. New York came in on par with Costa Rica at 0.495. New Hampshire at 0.417 equated to Cambodia while Maine at 0.428 had the same inequality that citizens of Singapore endure.
The U.S. is a great deal wealthier than all of these nations. It boasts one of the highest GDP per capita in the world, but in terms of distributing that wealth, this nation is sucking wind. No matter how wealthy we become, if an increasing share of that wealth continues to flow to the same one percent then this country is no better off than it was before. It is, in fact, worse off.
Unfortunately, researchers expect the trend of income inequality in this country to increase and maybe accelerate. As more and more of us become disenfranchised, our stake in the country and in its political system will decline. Bottom line: income inequality undermines democracy. What can be done about it? Stay tuned for my next column.
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.
