Why the economy will continue to stall.

Looking for a recovering economy in the next few months? Don't bet on it.

First, there are the bond investors, with the takeover of the banks, Chrysler and General Motors by the government, do not expect many to buy bonds from any company that may become a target of the government.

Second, government debt. With the increase of government debt, do not expect any company to borrowing money with short term debt. If the economy recovers, most experts believe interest rates will skyrocket. Therefore, any company borrowing money for expansion would be wise to borrow in such a manner as to not expose them to borrowing money at a cost they couldn't repay. Therefore, companies will be shy to expand on borrowed funds.

Third, cap-and-trade. Cap and trade, if passed, will increase electricity costs. India has already said it will not impose C02 restrictions. China is also not likely too. So if a company is going to expand, if it can, it will expand to those countries. Thus reducing jobs in the U.S. and delaying or reducing any recovery.

Wealth and Investments I

What is wealth? In essence, wealth is the ability to exchange something you have for something you want. Value is what someone else will give you for your assets. If you have a stack a 100 pieces of paper, you don't know what it is worth until you try to exchange them. That stack may be napkins, $1 bills or $100 bills. If you have food on your face, that napkin may be more of use than the $1 bill. But that $1 bill could be exchanged for 20 napkins at the right place. So the value of something depends on the utility, time and place.

Money makes it easier to define wealth. But wealth is fleeting, which is why those of great wealth diversify. That painting you bought for $5 million might not fetch a buyer for $3 million. That $5 million in the bank may be devalued by inflation. That farm you own may be wiped out be a flood. Which is why those of great wealth pool their risks together. They buy insurance and sell portions of their assets to others.

A good investment is one that can be converted quickly, a liquid asset. It must have a means of establishing its value. Currency is traded frequently to establish its value among other currencies. It is easier to determine the value of a share of stock which is trading a million shares a day than a house which has only a few perspective buyers and exchanged in the frequency of years.

Is it time to get back in the stock market?

Depends on your time horizon. The stock market is at an eleven-year old low (7114.78 as I write). Because Obama plans to raise taxes on capital gains and dividends, this make stocks worth less. Obama will be in office for four to eight years. Right now the interest rates you get at the bank are very low. But the real question is where interest rates will go in the further. If interests rates increase significantly, the cost of capital increases, further putting pressure on stocks. Plus, people will move away from stocks to bank deposits (if there is anyone left to move). A few companies will fail, others will be created. But if the national government nationalizes companies, wiping out shareholder value, then other "crucial" companies are also at risk at being taken over.

Is the stock market undervalued? Has it already taken account of all the failed companies and future nationalizations? Will the business cycle go upwards in the near term? Will the increase in stock prices outpaced the return from banks?

In truth, I don't know. Massive spending by the government, the upcoming baby-boom retirement will put tremendous strains on borrowing. I expect interest rates to increase over the next few years. Inflation may also rise rapidly.

For myself, I do a little dollar-cost averaging in index funds. But I have a time horizon of 20 years, i.e. I do not expect to have to sell stocks until then. I expect the market to recover to its previous highs in that amount of time. Therefore, current stock values may be a bargain. Unfortunately we cannot depend on recent history to predict the future. The President and Democratic controlled Congress are changing the rules. Hopefully, the worst case scenarios wont last more than six years. People are fearful, and therefore are avoiding the stock market. Stocks are therefore a lot cheaper.

So, in conclusion, if you believe in the vitality of the U.S.economy and have at least a ten year time horizon, I think yes it is a good time to invest in the stock market. Buy low - sell high. But buy only if you can afford (financially and mentally) to leave it in for a long time.

A Disturbing Trend.

The last couple of weeks have given me pause. There has been a lot of talk about moral hazards and unintended consequences.

On the two extremes of humanity, the criminals and the saints. The saints and the selfless will help their fellowman without any further incentives. The criminals will take advantage of the weakness of others. The rest of us life in-between. Some may give to charity more than others, some may not return extra change. As the society is set to change once again, the question is whether the government is making a bad situation worse.

Do you feel like a chump because you worked hard, maybe scrimped, so you can afford your mortgage, and then you see the government bailing out your neighbor? Do you feel cheated because you rent. Those that own a home get a mortgage interest deduction and they get a possible increase in value later. The renter gets a receipt. Should you pay because your neighbor bought too much house? Does not keeping the price of housing artificially high make it more difficult for the renter and the poor to own their own house? Should we help them because the made a bad investment, that their house is worth less than what they paid. Do not most cars lose value the minute you drive it out of the dealership? Why shouldn't a house's value gradually decrease over time, like most everything else?

Does bailing out your neighbors mistakes make it more likely that these mistakes will be repeated by others?

Deflation, Inflation?

Recently there has been talk in the media about the dangers of deflation in the coming environment. But the electronics and computer industry have been facing deflationary pressures since its inception.

What should the correct level of inflation/deflation. I always assumed a 1-2% inflation rate would be best. But in fact is a very difficult topic. Money is in essence a substitute for work. We exchange our labor for money. Is the value of the labor of the person making your sandwich worth any more yesterday, today, or tomorrow. In some sense the value disappears once the sandwich is eaten. But what is the value of the laborer who built the Roman roads and bridges that last a thousand years?

The news media says the problem with deflation is that it causes people to delay purchases because they can a better deal later on. Eventually causing a slow down of the economy as more and more people delay purchasing things. But the computer industry has faced this pressure, as each year newer items are both better and cheaper. The news media forgets that there is a utility in possessing an object now. The question for the consumer is the utility of possessing the object now worth the possible savings that can be achieved in future.

Of course the savings of a deflationary environment for the consumer may be offset by the lost of wages by the worker and the lost of interest revenue by the saver. Deflation favors the worker who saves in the past, inflation favors the worker of the future.

On the Poor

A continuation of a discussion started in http://commonsensejoe.blogspot.com/2008/12/global-warming-cap-and-trade.html

"
MsAnthrope has left a new comment on your post "Global Warming: Cap and Trade":

Native American's have a saying " Do not judge a man until walked a mile in his moccasins." So until you have worked two jobs just to barely eat, keep a roof over your child's head, and shoes (NOT $100 sneakers but corrective shoes for a birth defect) on their feet then don't tell me about what the poor should do.

"


There are many types of poor. Some are temporary due to unfortunate circumstance. Some because they do not plan ahead. How many people live on credit cards and pay-check to pay-check, yet still take an expensive vacation every year? Or bought houses bigger than their needs?

I applaud than man who has two jobs to take care of his needs. That is the type of person who should be benefiting from government programs as food-stamps He may be benefiting from medicaid. But if he earns too much, his medicaid is withdrawn, making it impossible to improve his and his family condition.. If they government allowed him to earn more with a gradual reductions of benefits, both him and society would be better.

There was a case of a New England state, where women would take home work to earn extra income. They were paid on a piece basis. They could work on their own time, between watching the children and doing chores. But the government calculated that the were being paid less than the minimum wage. So they prevented the women from doing this work, thus depriving women of extra income with no option to replace that income.

Look for price increases in the future.

Obama and the Democrats plan to raise the minimum wage to $9.50 an hour by 2011 and indexed for inflation after that.

Poll Result: Taxes and Fairness

Is it better to:

Lower taxes to achieve more money 71%, (5-2)
Raise taxes to achieve "fairness" 28%

Well I guess there is still a lot (28%) of envy out there.

Expect More Layoffs

With an Obama win almost a certainty, corporate executives are already planning more layoffs to offset the expected tax increases. It is possible that most of the job loses will occur even before he takes office.

Greed -The falling economy.

As we approach a world-wide recession let us not forget that is was caused be greed. From the Chinese toys and milk producers who destroyed their industries trying to make a few more cents. To the Florida condo investors, buying to flip and not to own. From the executives of Country Wide and all the other banks who sold/bought home loans without evaluating the properties or the owners. To the millions of consumers who buy everything on credit. To the OPEC nations which allowed oil to go to $140 a barrel.

Relatively cheap energy is the foundation of the modern economy. When the OPEC nations allowed the price to skyrocket pass $80 a barrel they were setting up the world economy for a fall. Although they made money from their oil in the short run, they are now losing more in the asset values of the stocks they bought with the oil money. Like Matha Stewart, who saved a few thousand from insider-trading but lost millions, the OPEC nations are now experiencing the results of their short-term thinking.

Good Times Ahead?

The euro is trading at $1.28, close to what the original mark was supposed to be at $1.18. Oil is under $67. Gold is down to $725 an ounce. In times of trouble to world comes to the U.S. The stock market is falling, but the volume is around 1 billion versus 3 billion shares traded daily. The Dow is 8500, fire sale prices for those who can wait 5 to 10 years.

Are we near a market bottom?

I see a few problems, including the short sellers and the lack of liquidity. People can not borrow money to buy stocks. If you do not have to sell for a year, it may recover most by then; but while banks all over the world are not loaning, do not expect a quick recovery. The lack of liquidity will also affect the economy as a whole. The automakers will not be selling as many cars until people can get loans. This of course will affect the income streams of the companies, and thus the value of the companies. As people lose income this will slow down the economy. That puts more pressure on the housing market as people can no longer afford their homes.

If Obama wins, capital gains taxes will increase, thus there is less reason to buy stocks, thus decreasing the value of holding stocks. The oil exporting countries are reducing output to support oil prices, delaying economic recovery. The biggest question is which companies will survive. The lack of liquidity could strangle an otherwise healthy company. Without knowing which companies will survive, it would foolish to invest in companies.

As I ponder this, I am for the first time really worried about this. I see the market bottoming out but not recovering. It is possible we may enter another great depression. People, afraid of losing their jobs, may ask for trade protection. Already we have socialized many of the banks and insurance companies. The best thing we have going for us is the FDIC insurance, so we don't lose all our money and have runs on the bank. But with a Democratic congress and a Democratic president, I fear proposals that will not be helpful to recovering the economy.

A little perspective as you watch all your wealth disappear.

On Oct 9, 2002 7285 the Dow reach a recent low, 37.8% down from the Jan 14, 2000 high of 11,723. On August 12, 1982 the Dow was 776.

DON'T PANIC

A couple of things to remember, the hedge funds are having to sell assets, putting downward pressure on the markets. Europe and Asian markets have also fallen. But so has the priced of oil, if Donald Trump is right, it might fall to $20 a barrel. Lower oil prices will put more money in the people's pockets. The dollar is at a year high versus the dollar. If you have cash, you are relative richer. If you have stocks, you are relatively poorer.
The banks are still hesitant to lend, so it will take a while for the economy to recover. If you don't think the economy will recover, I suggest you buy gold, guns and bullets. For myself, I believe the economy will recover in a few years. If you have a five to ten year horizon, you should recover the value of most of your stocks. If you dollar cost average now, you will be buying stocks cheaply.

Market jumps on Paulson plan report

" U.S. stocks soared more than 2 percent in late afternoon trading on Thursday on a Treasury plan to resolve the financial crisis.

U.S. Treasury Secretary Henry Paulson is talking about a Resolution Trust Corp-type solution to the financial crisis, CNBC reported, citing Wall Street sources.

S&P financial stocks were up over 8 percent."

In effect, all the bad and questionable loans would be backed by the government. So if your neighbor paid $200,000 for a house that is now worth $100,000, the taxpayers will pick up the difference. And since the government will want to get rid of that house quickly, the "going" price will decrease even more.

Should the taxpayers pick up the tab for bad purchase decisions?

http://uk.reuters.com/article/usMktRpt/idUKN1844149620080918

Obama's economic exaggerations

Souce Link

"Even if Obama is right that the foreclosure rate is the worst since the Great Depression, it's spurious to evoke memories of that great national calamity when talking about today -- it's akin to equating a sore throat with stomach cancer. According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure. During the Great Depression, according to Wheelock's research, more than 50 percent of home loans were in default."

Is the media hawking recession?

It seems to me that the media had been trying to convince the American public it was in a recession.

Some examples:

"Two-thirds of the 52 economists polled said the U.S. economy is in recession. Add those who believe the economy will be in recession soon, and 79% believe that the economy will contract at some point in 2008." USA Today, 4/28/2008

http://www.usatoday.com/money/economy/2008-04-28-economy-survey-recession_N.htm

"Recession is here - economists" CNN 2/5/2008

http://money.cnn.com/2008/02/05/news/economy/recession/

"Talk of the worst recession since the 1930s" -NY SUN 11/12/2007
http://www.nysun.com/business/talk-of-worst-recession-since-the-1930s/66268/

Do the Democrats understand what a recession is?

A recession is defined by two or more quarters of negative growth.


9/11: Sen Schumer (D-NY) "I think if you ask the average middle-class American, they would clearly say we are in a recession."
9/11: Sen Stabenow(D-MI) "...we are absolutely in a recession."
9/11: Sen Casey(D-PA) "...we have been in a recession."

http://www.foxnews.com/story/0,2933,421301,00.html

link2

The Bureau of Economic Analysis says the economy is in positive growth.

Gross Domestic Product (GDP)

Current Numbers:

• 2nd quarter 2008: +3.3 percent
• 1st quarter 2008: +0.9 percent