Posts Tagged Economics

GLOBAL DIVERSIFICATION CAN REDUCE PORTFOLIO RISK!

As is often the case, during the Global Financial Melt-Down, which began in 2008, excess global cash flowed to the US Dollar.  The dollar is widely perceived as the strongest reserve currency, and the US Economy as, by far, the most liquid.  Some cash did flow to other reserve currencies—the Euro, Pound Sterling and Yen–as well. But, when it comes to significant market swings, the US is the only economy that can accommodate large currency movements, both on the in-flow and the out-flow.

In the intervening eight years, since the Recovery began, a large portion of that flight money has recently been transferring–both to other currencies, and other markets. In this blog post, I would like to suggest a somewhat simplified process for investors to add one more element of diversification to their investment portfolios—global investing.

Regardless of where you live, most people have their money primarily invested in their home country.  They are more familiar with the companies, and to negate any concern for foreign exchange risk.  But, it is worth noting that the European and U. S. economies each have only 25% of the world GDP.  So, by diversifying the geographical range of securities, the overall investment risk can be reduced.

There has been a huge shift of investment transactions, at least in the U. S., out of actively-managed securities, and into either exchange-traded funds or indexed mutual funds.  Some $1 Trillion has been added, mostly to ETFs, over the pst year alone.

Since ETFs are based on indices that rarely change, the expenses are quite minimal.  Also, a number of economists have demonstrated that the stock markets are quite  irrational.  So, why pay to beat the markets when few managers do so, at least not on a consistent basis.

Diversification is one of the most basic concepts of portfolio investing.  Distribute the risk among different types of securities:  stocks and bonds; large companies versus small; both dynamic “Growth” as well as more stable “Value” companies; and invest in securities in, at least, several different industries.  Global investing just adds one more dimension in the overall diversification process.

Although I have readers from a number of different countries, the overwhelming number are from America.  Since ETFs are available on the stock markets of many nations, foreign readers may modify these idea, as you wish.  My basic approach is still to suggest adding that global dimension to your existing portfolio.  Also, even though you might only care to expand your focus, say to your local region, the benefits will still ensue.

I would first consider some type of global developed markets ETF, such as one that replicates the EAFE (Europe, Australia and the Far East) Index (Symbol: EFA).  I have also added a Pacific-excluding Japan Index (EPP), since that is the fastest growing region of the world.  And then, I have added a Diversified Developing Markets ETF (EEM).  You might prefer different ETFs for these ideas, prefer to add more to Europe or Latin America, or individual countries.

To research for yourself, and I hope that you do, I would suggest two web sites as places to start.   Obviously, there are many more ETFs and many more web sites. Those two sites are: iShares, by BlackRock, and Stock-Encyclopedia, which provides a wealth of knowledge on exchange-traded funds. Whatever you do, be sure to check the “Fact Sheet”, which provides a good summary, and get used to checking the ones that you do invest in, on a regular basis.

 

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WHEN WILL WE GET AN UPDATE ON THAT INFRASTRUCTURE PLAN THAT DONALD KEEPS SAYING WILL BE THE MOST “HUGELY” GREATEST EVER?

Michael Bloomberg characterized Donald Trump quite accurately, when he referred to him as “A Con (Man)”, at the Democratic National Convention, last July.  Trump’s initial Infrastructure Plan, which he revealed last October, was just another version of Corporate Welfare.  It was a complete scam at the time and, although he keeps touting it in his current rambling monologues, he seems afraid to reveal what changes have been made, if any.

Prior to November’s Election, economist Peter Navarro, who is now a Special Advisor to the President, and Wilbur Ross, Trump’s Secretary of Commerce, had drafted a Plan, which, seeming to explain it, appeared to be intended more to obfuscate by using obtuse numbers and financial illusions.  There seemed to be no attempt to explain it so the average American might understand it.  Their final analysis, released on October 27, 2016, was titled: “The Trump Private Sector Financing Plan”.

The gist of Trump’s Infrastructure Plan, as far as I can see, can be explained from what is cited, in four paragraphs, on Page 4.

1.  “For infrastructure construction to be financeable privately, it needs a revenue stream from which to pay operating costs, the interest and principal on the debt, and the dividends on the equity.”  This quote seems to suggest that only projects, with revenue streams—toll roads, bridges, tunnels, etc.—would be included.  Side road repair, clearing impassible waterways, environmental clean-up, obsolete levies, etc. wouldn’t.

2.   “…we are assuming that, on average, prudent leverage will be about five times equity.  Therefore, financing a trillion dollars of infrastructure would necessitate an equity investment of $167 billion, obviously a daunting sum. That means the private companies, who would cumulatively be buying complete control of the projects, including the long-tam revenue streams, will provide only one-sixth of the equity in the total Capital Structure.  But, it gets even more interesting in Numbers 3 and 4.

3.  “…to reduce the cost of the financing, government would provide a tax credit equal to 82% of the equity amount.  This would lower the cost of financing the project by 18% to 20% for two reasons.”  The true numbers will be revealed in #4.

The Treasury will provide a “Tax-Credit” for the bulk of the corporations’ Equity Capital—their investment exposure.  Keep in mind that, unlike a tax-deduction, which merely provides benefits at the tax-rate, a tax-credit is fully deductible—dollar-for-dollar—from the final taxes payable. Now, see #4.

4.  Now, here’s where it can all come together.  “First, the tax credit reduces the total amount of investor financing by 13.7%, that is, by 82% of [the]16.7%.  The elegance of the tax credit is that the full amount of the equity investment remains as a cushion beneath the debt, but from the investor point of view, 82 percent of the commitment has been returned.”  Plain as mud, huh?  Let me put those numbers into a more-understandable format:

U. S. Treasury sells $1,000 Billion to finance entire Project.

 in Project:  $Taxpayers Debt Exposure833 Billion  —  83.3%

Corporate Equity (financed by Treasury):   $167 Billion — 16.7%

Treasury absorbs Corporate Tax-Credit:       $137 Billion — 13.7%

U. S. Treasury Debt equals Taxpayer Debt:  $970 Billion — 97%

Cumulative Corporate Debt to Treasury:       $30  Billion –3%

In summary, America is literally giving away valuable revenue streams ON MONOPOLIES, perhaps in perpetuity, assumedly without any control about future prices, continued maintenance, and there is nothing mentioned which requires that American workers be used, with regard to re-construction, on-going maintenance, or the long-term operation.  Now, perhaps Donald Trump and Speaker Paul Ryan are making this more digestible; but, I sure would like to see a summary of the particulars before I hear how “hugely” great it will be, or anymore.

And as Donald always says:  “This will be Budget-Neutral.  Just trust me!”

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AMERICA IS BEGINNING TO WONDER IF DONALD TRUMP CAN GOVERN—AT ALL!

Following the Presidential Election, there has been an on-again, off-again rally in the stock market, which might have been partially attributed to Donald Trump’s victory, last November.  Generally, the stock market performs best in the first and fourth calendar quarters, most years; however, some investors might have placed too much faith in Trump’s vague promises, raising the seasonal spurt even higher.   Also, some CEO’s seem to have swooned over his proposals:  the corporate tax-rate being halved; escalating depreciation on plant and equipment; eliminating most all regulations; and the “Border-Adjustment Tax”.

As of Friday, the Dow Jones Industrial Average rose 9.3% since Trump won, and the    S & P 500 was up by 8.3%.  There was little in the way of economic activity to have justified such a surge; however, some investors may have just followed the herd instinct.  They wanted to believe!  But like any other asset, when the price rises for no apparent reason, there might come a time where it cannot sustain that psychological momentum.  Did the markets seem to sense that yesterday?

Ever since he announced his candidacy, in June of 2015, Donald Trump has been harping on two primary goals—the worthless Wall, and his vow to “…replace ‘Obamacare’: with something much better, and at less cost.  Just trust me!”  HA! Donald raised the stakes too high, before his American Health Care Act had to be pulled yesterday—for the second time—due to insufficient support from his own Republican Party!

Always the person to find a scapegoat to blame–rather than blame House Speaker Paul Ryan, or the entire GOP–Donald blamed the Opposition Party.  For a self-proclaimed “Negotiator”, how ludicrous was it to have over-sold the “certain” success of his AHCA, as he had often boasted, and then blame the Democrats…but, for what?  He was trying to tear-down a perfectly good (first-step) of a comprehensive plan that could provide Affordable Health Care for all!

Many Americans, including investors, are beginning to wonder if Trump can actually govern! He boasted, before the election, about how many things he would do, beginning “Day One!”  But so far, he has accomplished very little.  On the negative side, however, the list of his idiotic moves is a mile long!

Consider the following problems that he has been entangled in:  the failed raid in Yemen, which resulted in the death of one Navy DEAL and 24 Yemeni civilians; attacking the American Judiciary for rebuking his two Anti-Muslim Bans; his apparent desire to control the Media; threatening a pre-emptive attack on a nuclear-armed North Korea—in China’s back yard; Trump’s potential collusion with Russia, and so on!

A number of Americans who voted for Trump have been on TV stating that they are having Voter’s Remorse.  It’s times like this when I wish that we had a Parliamentary System.  That way, just one “No Confidence!” vote would place M. P. Donald Trump, in a back-bench seat, where he belongs.  Oh, if only…!

When Trump stated yesterday that the GOP’s AHCA Plan had to be pulled, distancing himself from bad news as always, he proclaimed that the next item of business would be Tax Reform.  But there are two problems with that strategy, which he is overlooking:  a number of deep-pocketed conservative organizations, including the Koch Brothers, have come out again Trump’s Tax Plan; and the money that he was supposed to take from ACA customers was necessary to fund his large tax cuts for the Wealthiest two-percent!

Meanwhile, many institutional and individual investors are, no doubt, using this weekend to review Trump’s record—both positive and negative—and to decide what their next financial moves might be.  Additionally, many overseas investors are also considering whether the recent Trump Rally is real, or just a market bubble!  I sure wouldn’t be surprised it there is a pause, at least, in the rally–or perhaps a reversal.

 

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WILL DONALD TRUMP ACKNOWLEDGE THE JOBS REPORT WHEN IT’S NOT SO GOOD?

At 8:30 AM EST today, the Department of Labor reported Jobs Growth of 235,000 last month, and an Unemployment Rate of 4.7%, down from 4.8%.  During President Obama’s second term, Trump dismissed the favorable employment statistics as being phony.  But now that they reflect upon him–and they’re good–he chooses to boast about them.  Will he still like them when they are negative?  Time will tell!

Jan Hatzius, Chief Economist at Goldman Sachs, told CNBC-TV: “We’ve seen almost 100,000 jobs added in the construction sector in the last two months, and the warm winter, I think, had something to do with that.”  I’ve been writing this blog for several years, and one month doesn’t indicate either an economic boom or a bust.  Also, as Mr. Hatzius suggested, statistics can arrive earlier, by a month or two, or they can also be delayed.

Today’s employment statistics can, however, make life easier for Fed Chairman Janet Yellen, as the next Federal Open Market Committee’s (the central bank’s monetary policy-making arm) meeting is scheduled for next Tuesday and Wednesday.  Ms. Yellen has already signaled an almost definite rate hike.  Donald Trump, on the other hand, has been trying to exert his influence, to maintain low interest rates in order to help job growth.  But, maintaining low rates in the face of strong employment, can have adverse economic effects.

The Fed has a so-called “Dual-Mandate”—to balance price stability with maximum sustainable employment.  In doing so, it strives to balance those two goals.  If the Fed were to keep interest rates too low, in order to enhance job growth, inflation could get out of hand.  Conversely, raising rates to rein-in excessive inflation; however, would hurt job creation.

But, as Sean Spicer, Donald Trump’s Press Secretary summed up his boss’s interpretation of today’s DOL Jobs Report:  ”I talked to the president prior to this [briefing], and he said to quote him for this, ‘[The jobs reports] may have been phony in the past, but it’s very real now.’”  But, how will Mr. Wonderful spin the first negative Jobs Report, issued by his Secretary of Labor, and who will Trump blame for it?  

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NO TRUMP BUMP IN THE STOCK MARKET

Following last Tuesday night’s State-of-the-Union Address,  Donald Trump just reiterated most  of the usual things—Jobs, “Obamacare”, Dodd-Frank, Immigration, Terrorism, Regulations, Trade and Tariffs, Education, etc—which he has been talking about throughout his very short political career.   But, after 40 days in office, he has accomplished absolutely nothing, except to infuriate a majority of Americans.

If any of the promises he has made were based on non-practical ideas, Trump would have had people working on his proposals and, perhaps, even submitted legislation to Congress on a few.  For instance, if President Obama’s Affordable Health Care were really so “awful”, we would have seen a draft of TrumpCare by now.  And, if Dodd-Frank, which reined-in the banks, after they took the nation to the edge of the Financial Abyss in 2008, was so terribly bad,  wouldn’t Donald have presented an alternative plan by now?

But so far, Donald Trump seems to be spending his time:  talking and tweeting; holding Command Performance meetings at the White House with people who seemingly would rather be anywhere else; and having his photo-ops boarding and leaving Air Force One, and always with Ivanka and the grandchildren in tow.  I wonder if Trump spends more time at Mar-a-Lago now, since taxpayers are paying for it, than he did before he took office?

Market professionals, who had been expecting a Market Boom; because, Donald Trump vowed to: put people back to work; re-build the crumbling infrastructure; cut the tax rates for everyone; de-regulate all industries; and put more discretionary income in consumers’ pockets.  But now, those investors are beginning to wonder how much of Donald Trump’s agenda is smoke, and how much is mirrors?  They are also wondering if he can even get any of his plans through a Republican-Majority Congress?

When people look at the Trump Regime nowadays, the question most frequently asked is:  Who’s in charge?  Donald Trump has demonstrated that he is certainly not a detail man, whether that means understanding the most important questions facing the nation today, or in directing his staff in carrying out those most important responsibilities.  Trump himself seems to be out more often than he is in, and most of his Cabinet and other key officers seem to be kept out of sight, and few deputies are on-board.  With forty days in, and nothing accomplished: that’s despicable!

The financial markets do not function well with uncertainty.  In fact, Steve Bannon seems to be the only key advisor in the office, and working.   And, that’s like having the fox guarding the chicken coop.  Reports from the West Wing suggest a spirit of: disorganization; disruption, incompetence and disbelief.  Even Reince Priebus, Trump’s Chief-of-Staff, appears to be lost, both in-space and in-time.  Will he be ousted soon?

I believe that this sorry picture of our Nation’s Leadership—without experience, without leadership and without a clue—is why the stock market has paused, and backed-off from the blindly upward track that it had been on for the past couple of months.  There has been more, and more, talk of a stock market pull-back; however, now it might take a “correction”, a ten percent drop, in order to adequately pass some of the false Trump euphoria out off the market.

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WE SHOULD BEWARE WHEN A FOOL CONTROLS OUR ALREADY OVER-BLOATED DEFENSE BUDGET! YES, DONALD J. TRUMP.

After I finished reading “Three Days in January”, by Brett Baier, I realized that it was a book of contrasts.  The Three Days refers to the period between President Dwight D. Eisenhower’s televised Farewell Address to the Nation, on January 17, 1961, and President John F. Kennedy’s Inauguration, three days later.  “Ike”,  had been the oldest President, at the time of his Inauguration, while JFK was the youngest.

The book is a juxtaposition of an autobiography of “General” Eisenhower, which he prefers to be called, and his efforts to convey some wisdom, to his successor.  The General had both planned for the Allied Forces Invasion of Normandy (France) in 1945, as well as commanded them.  So Ike was both a strategist as well as an experienced President, by then.  But, the young President-Elect felt strongly about his own ways.  But, three months into his Term, once the “Bay of Pigs Invasion”, in Cuba, turned into a disaster, JFK sought the older man’s counsel on a number of occasions.

President Eisenhower often reflected on the writings and speeches of another old general, our First President, George Washington.  Both presidents felt strongly that military might should be used primarily as a tool with which to Wage Peace!  Following the Revolutionary War, the Continental Army had been disbanded, and a small national army was not subsequently established until 1787.  And both men warned about the consequences of building too large of a military, lest it begin to control the nation’s policies.

In fact, General Eisenhower warned about the burgeoning Military Industrial Complex, during his Farewell Address.  Defense corporations generate profits by selling weapons systems to he Pentagon.  The corporations hire retired generals and admirals to introduce their sales staffs to former colleagues at Defense, and the companies seal the deal by making campaign contributions to members of Congress, while promising jobs in heir districts.  Oftentimes, the sales process trumps any rational need for more and more weaponry!

The difference between President Dwight D. Eisenhower and Donald J. Trump would be light years apart.  Ike, the simple Kansan, led the multinational Allied Expeditionary Force against Nazi Germany, during World War II.  And then, he led the New World Order against the Soviet Union, during the newly developing Cold War.  Trump has spent his whole life in privilege, he inherited his father’s family owned business, has he has been a lifelong huckster,  The general knows the horror of war, and the huckster thinks of it only in a frivolous manner. and as someone else’s war to fight.

Authoritarian governments:  control their national media, through state ownership or tight-fisted censorship; nationalize corporations—especially the military hardware—or bribe them into following government agendas; and they shift significant vital resources to enhance the already over-bloated Military (Industrial) Complex.  Does this seem to be Donald Trump’s game plan?

If we already have significantly more fighters, missiles, etc, than China or Russia, why should we deplete vital domestic resources to fund what is no longer necessary? And, how might that larger-than-necessary Military be used, in the wrong hands—Donald Trump’s hands?  No one tells the People that the excess is merely superfluous!

NOTE:  The International Institute for Strategic Studies (IISS), a British think tank, headquartered in London, founded in 1958, and is focused on International Affairs. It reported that the 2015 Defense Budgets, for the U. S., China and Russia were as follows: $597.5 billion; $145.8B and $65,6B, respectively. Also, 10 of the 12 remaining nations in the Top 15 are all U. S. Allies, leaving only Brazil ($24.3B) and India ($48.0B) out.

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HISTORICAL NOTE: When Dwight and Mamie Eisenhower left newly Inaugurated President John F. Kennedy, on that chilly January day in 1961, they left some papers with him.  The General had left paperwork for the new President to request Congress to re-call President Dwight D. Eisenhower back to active duty, as a General-of-the-Army (five stars).  That Bill was passed unanimously.  At the farm in Gettysburg, the red flag of a General immediately went up, and General Eisenhower was buried in his World War II uniform. This is why I generally referred to Ike as General, more so than President.

 

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WITH TRUMP’S BLESSING, WALL STREET APPEARS TO BE WRITING THE SCRIPT TO DE-REGULATE ITSELF!

Wall Street seems to have gotten its fingerprints all over Donald Trump’s plans to Repeal Dodd-Frank, and just eliminate the Department of Labor’s “Fiduciary Rule” outright.  “Dodd” was passed to rein-in the Banks following The Great Recession (4Q07 to 1Q09).  The Fiduciary Rule, on the other hand, applies specifically to Qualified Retirement Plans (IRAs, 401(k)s, 403(b)s, etc), and it requires financial professionals to place the clients’ interests ahead of the firm’s, and their own.  Shouldn’t that rule apply to all securities accounts?

Back in November, I wrote about giving our combined personal investment portfolio its first major overhaul ever, because: I have on-going concerns about what havoc Donald Trump might wreck on our Economy; and I wish to simplify our portfolio, in the event that my wife and daughter might have to take over managing it at some point.  And given Trump’s continued irrational behavior, these concerns still seem as relevant as ever.

Yale Economics Professor Joseph Shiller won the Nobel Prize, in 2013, for his empirical analysis of asset prices.  Shiller concluded that the market is inefficient, and he has suggested that passive index funds can do just as well as actively-managed ones, but without the higher management fees.  Warren Buffett, in his Letter to Berkshire Hathaway Shareholders, concurred, suggesting that an S & P 500 index fund, possibly with other stock exchange-traded funds, plus individual bonds or a bond ETF, would perform better in the absence of the management fees.  John Boggle, founder of Vanguard Funds, agrees.

In May of 2012, I wrote a post, comparing mutual funds and ETFs.  It provided a brief, but general comparison between actively-traded mutual funds and ETFs.  Given what is happening now; however, I believe that the Advantage has certainly shifted in favor of ETFs.

Here are some sources for learning more about ETFs:

The CNBC (financial channel) web site provides news, plus market statistics.   On the “Markets” drop-down box, the various global markets can be checked in real-time.  At the bottom of the drop-down, go to “ETFs” for a list, prices, performance, and trading volume of the most popular ETFs, with the Sector SPDRs just below them.

Then go to the State Street web page for SPY, and that company also distributes the Sector SPDRs.  On the SPY page, a Fact Sheet can be viewed, as well as other literature.

On the Sector SPDR page, there are Fact Sheets for each of the sector ETFs, performance and a list of all of the stocks, within each of the sectors of the S & P 500. There also is a Sector Tracker, which provides historical performance, for each sector, across various time-frames.

iShares provides a range of mostly overseas ETF, either globally, by region and for many individual countries. Some of the iShares ETFs that I used, when I wanted to put money into various overseas markets, are as follows: EFA for the EAFE (Europe, Australia and there Far East) Index of industrialized markets, EEM, for Diversified Emerging Markets, or EPP for Asia-Pacific, excluding Japan), among others.
Lastly, check the Stock-Encyclopedia ETF Guide to research any ETF, to include Fast Sheet and other research material,

There are hundreds of ETFs on the market.  If your advisor suggests one, be sure to have him/her explain why that (those) particular one(s) would be suitable for your needs.  I would suggest shying away from ETFs that invest in commodities and foreign exchange, because those markets are more oriented toward institutional investors.  Similarly, be aware that ETFs that double or triple the upside of an index, will similarly increase the risk on the downside.

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