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The Independent Investor: Are Banks About to Get Benched?
By Bill Schmick On: 07:10PM / Thursday December 05, 2013
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Lobbyists for the big banks have been fighting to water down the so-called "Volcker Rule" for the last three years but it looks like they are going to lose this battle. Next week the U.S. government is expected to announce tighter bank regulations. It could make the financial markets a lot safer for all of us and cost the banks a bundle.

At stake for the banks are about 18 percent of industry sales, or $44 billion, generated by proprietary trading. That's a term used to describe the banking industry's practice of placing big speculative bets with their own money. During the financial crisis those speculative bets went sour and nearly drove the global financial system into a complete meltdown. We, the taxpayers, bailed them out.

In its aftermath, congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. It was a series of sweeping financial regulatory reforms that was intended to insure that certain Wall Street practices would "never again" be able to threaten the world. The centerpiece of that legislation was a rule suggested by former Federal Reserve Chairman Paul Volcker which would prohibit many aspects of proprietary trading.

Market-making is the business of using a firm's capital to buy and sell securities with customers. Sometimes they make a profit on the trade and sometimes they don't, depending on the price spread between the bid and the ask price of a security. Wall Street has been providing that service for its customers for a long, long time. It is the grease that insures liquidity in the market and without it the machine would probably freeze up.

However, over the past decade or so, the banks took that principle and ran with it, but they went a step too far. They started making bigger and bigger bets on their own and disguised them as customer hedges. They explained that these hedges were necessary to facilitate customer business when in fact the banks were simply speculating on everything from commodities to subprime mortgages.

The Volcker rule seeks to prevent banks with federally-insured deposits from making such trades that could threaten their stability (and ours).  Of course, the devil is always in the details.

Lobbyists, hired by the banking industry, argued that coming down hard on proprietary trading would severely curtail banks' and brokers' ability to provide market making for their customers. It would also put our banks at a severe disadvantage when competing globally with foreign banks that are not regulated by U.S. laws. Finally, it would deprive the sector of an important source of profit.

I suspect the last point carries the most weight within the halls of the nation's biggest banks. One would think that after their near-collapse, our banks would have learned a lesson and given up their most dangerous practices. In the past, when the financial community fouled up, they established some self-policing guidelines to avoid a repeat performance and head off government intervention.

Not this time. With nary an apology in sight for past practices, banks have stonewalled the public and government. Instead of addressing the conflicts of interest, the rewarding of dangerous trading practices by their employees and changing the culture of greed so apparent among these Big Banks, they have done the opposite since the crisis.

Readers need only recall the so-called London Whale trades that cost one of our top banks $6.2 billion in 2012. Disguised as a portfolio hedge against customer positions, the loss was the direct result of the kind of speculative betting that was so wide spread prior to the financial crisis and it continues today.

It seems clear that on their own, the banking sector is not about to change their ways. Although I hate the idea of even more government interference upon the private sector, I believe that without it, the financial sectors' speculative practices pose a threat to everyone's well-being now and in the future.

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: Secular vs. Cyclical The Big Picture
By Bill Schmick On: 10:51PM / Friday November 29, 2013
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Over the last four years, the stock market has gained over 100 percent. Some think we've hit the top, while others believe we are just getting warmed up. The difference of opinion centers on whether you think we are in a cyclical or secular bull market.

What's the difference? When you hear "cyclical," whether bull or bear, you should think short-term; a couple years at best, secular, on the other hand, can last from 5 to 20 years.

In secular bull markets, stocks rise more than they fall with any declines made up by subsequent increases in stock prices. In secular bear markets, the overall trend is down. It is a period of wealth destruction in which stocks decline more than they advance over a long period of time.

Within these long-term secular markets, stocks can perform counter to the trend for several years. These are called cyclical bear and bull markets. The period 1982 through 2000 was considered the greatest economic expansion in global history and a textbook example of a secular bull market. Yet, there were short recessions and several times when the markets declined during that period. As an example, the Crash of 1987 occurred during that secular bull market.

A secular bear market began in 2000. Yet, 2003-2007 were bullish up years followed by a devastating decline into 2009 (brought on by the financial crisis). Today's disagreement centers on whether the end of this secular bear market occurred with the lows seen in 2009.

Those who think that is the case date the new secular bull market as beginning as 2009. Although the gains have been steep, they believe the markets still have over a decade of growth ahead of us.

Others disagree. They argue that the last four years was simply a case of another cyclical bull market rally within a secular bear, like 2003-2007. Most believe that will end this year. They argue that this bear market won't be over until at least 2018.

Most of their argument rests on the passage of time. Statistically speaking, if you took all the bull and bear markets periods over the last 132 years and measured their average duration you would arrive at an average of 17.4 years. But statistics have a way of turning fact to fiction.

As another example, there has also been more secular bull years (80) than bear years (52) with the average gain of all secular bull market rallies equaling 415 percent, while the average losses of secular bear markets has been minus-65 percent.

All of these statistics are neat and clean but entirely unrealistic as an investment tool.

Consider: there were only three periods since 1877 when the duration of secular markets were even close to a 17.4-year time span and all of them have been since 1968. It is true that secular bulls provided far more gains than the bears caused losses, but the gains at times were only half the historical average.

Some of the smartest people I know on Wall Street are convinced that we have entered a new secular bull market. They are definitely a minority, but I happen to be in their camp.

After several years of worldwide governmental stimulus, both fiscal and monetary, the global economies are beginning to grow. I believe that global growth will accelerate in the years ahead.

The markets, in my opinion, are looking backward, focusing on the Fed's stimulus program.

They fail to realize that the Fed's quantitative easing has already accomplished its objective. All that's left is to let the markets begin to work on their own. That will happen early next year.

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: Averting a Future Food Crisis
By Bill Schmick On: 12:03PM / Thursday November 21, 2013
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More and more scientists, sociologists and economists are predicting a world food crisis in this century. Meeting that challenge will require another Green Revolution, but how we accomplish that is the subject of a great deal of controversy.

Between the 1940s and 1970s the world enjoyed its first "Green Revolution." It was an age of technological advances in food production. This golden age of agriculture introduced new chemical fertilizers and pesticides, better irrigation and planting methods, improved and different varieties of seeds and a new understanding of farm technology. This renaissance in farming resulted in huge gains in the amount of food farmers were able to produce globally. That revolution not only improved the diets of millions, but also saved millions more from starvation.

Of course, there was a downside to this new age of agriculture. The chemical fertilizers were found to deplete the soil of nutrients. They were also are a major contributor to water pollution. We have found out that water is also becoming a scarce commodity. New products such as Bt corn, which produces its own insecticide, and Roundup Ready crops (genetically altered food substances), were hailed as saviors of the world.

However, questions concerning the safety of these new bumper crops were raised by environmental organizations, such as Greenpeace and other consumer organizations. These groups argue that no one knows or understands the long-term effects of these genetically-altered products on humans. Demands to discontinue the use of these products ultimately resulted in a European ban of these bio crops.

As a result, many argue that pursuing further scientific and technological advances in farming is not worth the risk, given its potential impact on the environment and humanity.

Instead, they would rely on augmenting tried and true government policies, re-regulation of existing laws, more food aid and increased coordination among countries. All of the above actions are commendable, but I question whether more of the same policies can really meet the future challenges we face. So far they haven't.

Clearly, there are some obvious ways of beefing up crop production. For example, we could get rid of the biofuels boondoggle legislated by the U.S. It is a multibillion dollar misguided effort to convert corn into ethanol as a way to use less oil and gas. The process requires enormous amounts of energy, and diverts almost two-thirds of American corn production away from where it's needed — in the food chain.

"Smallholder farmers" is also an idea that has come of age. Over two billion people work on small farms in developing countries. The problem is that these potential food producers lack investment, infrastructure and technological expertise to even feed their own families, let alone their local villages.

Adding insult to injury, for decades, the U.S. and Europe lectured poor countries not to subsidize their own farmers while bestowing billions on their own farming sectors. Only recently have those misguided policies begun to change.

But for my money, my hopes lie with the private sector and profit-driven entrepreneurs. That is where the breakthroughs are occurring in clean energy and fuel-efficient cars. If there is going to be another Green Revolution, science and technology will lead it. It already is.

Researchers in the Philippines and Mexico are breeding new seeds that will produce more stable crops. Crops that will be more pest and weed resistant while yielding higher nutrients. Golden Rice, for example, is a new rice seed that is high in beta-carotene, a source of Vitamin A. It was supposed to be targeted to subsistence farmers in vitamin A-deficient areas. Unfortunately, critics of genetically-engineered crops squashed the idea.

There are organizations working to modify African sorghum into a more digestible food crop. Others are producing animal-free meat as well as dozens of other food stuffs that could make a huge dent in world hunger. But those efforts are still entangled in controversy.

I believe that as worldwide hunger and famine becomes more acute, environmentalists, consumer advocates and scientists will be motivated to sit down and work together. Faced with few workable alternatives, they will succeed in developing and testing safe, highly nutritious and higher-yielding crops and other food stuffs.

Today's technology is also playing a part in this budding revolution. The FOODsniffer, for example, is a smart phone app that detects infections, toxins and genetic mutations in plant and animal samples. The VitaHerd employs a sensor that captures and analyzes the vital signs of dairy and beef cows to improve health, prevent disease and improve productivity. Another company uses computer vision to identify and eliminate weeds, which could someday replace the entire $25 billion herbicide market. Robots are now being employed to pick, prune and even plant certain specialty crops. Drones are being used to overfly crop land monitoring and identifying potential problems before they become acute.

The point is that another Green Revolution has already begun. It is simply a question of how fast it will be allowed to grow, given the obstacles. Hopefully, its opponents will soon realize that more than hunger and starvation are at stake. Many of the hungriest parts of the world tend to be the most war-torn. As the food crisis grows, so too does the threat of war. No one wants that.

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: Food, the Next Scarce Commodity
By Bill Schmick On: 04:15PM / Thursday November 14, 2013
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Recently, a leaked report from a United Nations scientific panel had some bad news for the world and consumers in particular. The scientists are predicting that climate change, coupled with an increase in demand, have set food prices on an upward trajectory for decades to come.

Readers of this column should not be surprised. Over the last several years, I have written extensively on the subject of weather, climate change and the demographic shift to higher consumption of food within the emerging markets. We have all felt the impact in our pocketbooks every week at the supermarket. What is recent and most alarming in the panel's preliminary findings is the extent by which food production will shrink and demand rise.

Through this century, the United Nations Intergovernmental Panel on Climate Change, the world's foremost authority on the subject (and winner of the 2007 Nobel Peace Prize), expects food production will decline by 2 percent per decade. They blame climate change for the decline.

They forecast that higher temperatures because of greenhouse gases will reduce crop production in tropical climates while increasing production in cooler zones. Back in 2007, when the panel's last report was released, scientists believed that any reduction in production in the southern hemisphere would be nullified by increased production in the northern parts of the globe. That is no longer the case.

At the same time, consumption demand for food is predicted to rise by as much as 14 percent each decade. This increase in demand has two parts. The world population is expected to grow from 7.2 billion today to 9.6 billion souls by 2050. At the same time, the on-going change in the economic fortunes of those living in the lesser developed parts of the world will increase demand for the quantity and quality of all sorts of food.

Places like China, India and other emerging markets, where much of the world's population lives, have seen a drastic and welcome increase in living standards, wages and consumption habits. For the first time ever, peasants-turned-factory workers and shopkeepers can afford to enrich their diets with pork, beef, chicken and various dairy products.  As salaries increase further, so will the demand for food.

Over the last few years, I have pointed out the impact of weather (drought, floods, hurricanes, etc.) in our own country on the prices of various food staples such as corn, wheat, sugar, beef and other commodities. Worldwide, we have witnessed huge spikes in all sorts of crop prices from coffee to cocoa. And don't forget that crop shortages and rising prices have already had an immediate and negative impact on the populations and politics of various countries.

Food riots in Haiti, Bangladesh and Egypt and in various countries in Southeast Asia have occurred with depressing frequency. Recently the scarcity of food has had regional implications, most notably in the Middle East. Discontent was as much about food as it was about autocratic rulers during the Arab Spring. In 2010, droughts in Russia, Ukraine, China and Argentina and torrential storms in Canada, Australia and Brazil — all major wheat and grain producers — considerably diminished global crops, driving commodity prices up. The Middle East was already dealing with internal social, economic and climatic tensions, and the 2010 global food crisis helped drive it over the edge.

The most obvious answer to combating this coming food scarcity is to bring more land into agricultural production. In my next column, we will take a look at what is happening in the United States in response to this challenge and what players will stand to benefit the most by this trend.

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: Lost Art of the Third Reich
By Bill Schmick On: 02:48PM / Thursday November 07, 2013
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Gen. Eisenhower looks through a cache of stolen Nazi art; below, an American soldier in a church full of loot in Germany. Both images from the National Archives.

This week the art world is abuzz by the revelation that a $1.3 billion cache of 1,500 stolen artworks has surfaced in Munich. European investigators are hunting for yet a second treasure trove right now. It could be just the tip of the iceberg given the extent of Nazi looting during World War II.

Approximately 20 percent of the art in Europe was stolen by the Nazis in a determined and methodical campaign that stretched from 1937 to 1945. Through a series of German laws, the Nazis devised an art strategy intended to destabilize nonconforming cultures, especially the Jewish, which justified and regulated the legal confiscation of cultural and personal property.

The Nazis' first "purified" their own museums, galleries and private collections, establishing a standard for what was acceptable art. They defined "acceptable" as art that was essentially of Germanic origin, while labeling most modern art as "degenerate." Degenerate art of every kind was to be sold off, traded or tossed on massive bonfires at Third Reich rallies.

The Nazis exported that policy in their conquest of Europe. It was a deliberate attempt by Adolph Hitler, aided by Hermann Goering, an avid art collector, and Goebbels, Hitler's propaganda minister, to pillage the very best in what they deemed to be acceptable European art and historical artifacts (think "Raiders of the Lost Ark").

No sooner had Hitler's army crossed the border into Poland, for example, than the Einsatzstab Reichsleter Rosenberg (ERR) and Hitler's private art outfit, the Sounderauftrag, spread out conducting a systematic pillaging of 13,512 paintings and 1,379 sculptures in Warsaw alone. As the German war machine invaded and annexed country after country, Europe's art treasures flowed the other way in boxcars headed for German fortresses, castles and even underground mines and bunkers.

After Germany's defeat, the U.S. and British Monuments, Fine Arts and Archives section worked to uncover the sites where the Germans had hidden their plunder. Artworks of every conceivable form, value and size were unearthed in barns, railroad cars, in attics and even under mattresses. Hundreds of thousands of pieces, a truly priceless collection of cultural treasures, were recovered and returned to their rightful owners but much, much more has never been found.

This week's revelation of a cache of "degenerate" art confiscated from Jewish owners was actually discovered two years ago but German authorities sat on it "pending the completion of their investigation." Paintings by Picasso, Matisse and Chagall are among the collection that experts believe was part of the Nazi-confiscated art during the purification of German culture prior and during WW II.

The paintings were discovered stacked between dirty plates and cans of food in a decrepit apartment owned by the 80-year-old son of a museum curator-turned-art dealer who worked for the Nazis. The son, Cornelius Gurlitt, has disappeared without a trace. Authorities presume that there is a second cache of artworks. They believe it is a source of funds that Gurlitt has been selling off piecemeal and stashing the money in a Swiss bank account.

How much more of this plundered art exists and how much could it be worth? No one knows, but it could easily amount to more than the gross domestic product of several countries. Take the disappearance of the Amber Room as just one example. This famous room, located within Catherine the Great's summer palace, was one of the largest works of jeweled art ever made. An entire room lined with of tons of high-quality amber, accented with diamonds, emeralds, jade, onyx and rubies. During the war, it was dismantled, crated and shipped back to Germany where it was placed on display. British air attacks in 1945 forced the Nazis to once again dismantle and pack the room into 27 crates. It remains hidden to this day.

Rest assured these treasures are there to be discovered.  Who knows, in the years to come, how many will be returned to us. And for everyone discovered, the world will be that much richer.

Editor's Note: For those interested in the subject, we highly recommend 1994's "The Rape of Europa: The Fate of Europe's Treasures in the Third Reich and the Second World War," by Lynn H. Nicholas. More locally, the late Williams College art professor S. Lane Faison was assigned to the OSS's Art Looting Investigation Unit and literally wrote the book on Hitler's stolen art, "Linz: Hitler's museum and library," which is available in the college's library.

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.



     
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Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article 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 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



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