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The Independent Investor: Europe Follows the U.S. lead
By Bill Schmick On: 05:23PM / Thursday September 04, 2014
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The European Central Bank has lagged behind both the U.S. and Japanese counterparts in their efforts to stimulate the economies of the European Union. Today, they attempted to address that fault before Europe sinks into a recession.

Both bond and stock market investors have been anticipating additional stimulus for several weeks. ECB President Mario Draghi did not disappoint. He said the bank would begin purchasing asset-backed securities and covered bonds, which are investments based on loans to corporations and residential mortgages. The hope is that others will now also jump on board and buy them too.

If that occurs, then European banks would have the courage to make more such loans knowing that the central bank and others would be there to buy them. The thinking is that if it worked in the U.S., it should probably work in Europe.

The ECB also cut its benchmark interest rate to just 0.05 percent and the deposit rate (what European banks pay to keep their money in the ECB) to minus 0.2 percent.They stopped short, however, of actually buying government debt, at least for now.

The ECB reduced its forecast for economic growth this year to just 0.9 percent while lowering its inflation expectations to 0.6 percent. Some economists think that is still too optimistic. As of August, the EU’s inflation rate was 0.3 percent, far below the targeted rate of just under 2 percent.

The ECB has only one job and that is to manage inflation. A slide in inflation (0 or below) can be just as bad as an inflation rate rise. Deflation, rather than inflation, appears to be the greatest fear of officials in the EU. In a deflationary economy, it becomes much more difficult for governments, businesses and consumers to service their debt payments. Investment falls and so does spending. This downward spiral becomes extremely difficult to break.

Japan is a textbook case of what happens to a country caught in this kind of cycle. For over 20 years, Japan has suffered from low to negative growth, falling exports, declining wages and jobs and negative interest rates.  It has taken massive amounts of monetary stimulus, combined with government spending to break out of this cycle and the jury is still out on whether they will succeed.

The European Community, however, is a union of competing interests and it is difficult to arrive at a consensus among 18 members. It is one reason why the ECB has lagged behind its brethren banks around the world in supporting its economies. Although the ECB has conducted a low-interest rate policy, it has stopped short of more aggressive programs such as employing their balance sheet to buy vast amounts of debt in the financial markets. However, today it appears European officials have reached a moment of truth. Cutting interest rates alone has not been able to turn around the situation so even the foot draggers among the EU have finally agreed to more drastic measures.

Most observers would agree that Germany has been the loudest voice in opposing any bond buying actions by the ECB. However, today's actions set the stage for even more stimulus in the months ahead. Let's hope it works.

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: Baby Boomers and Retirement
By Bill Schmick On: 05:28PM / Friday August 29, 2014
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The nation's work force has experienced some traumatic events over the past five years. Between the financial crises, global competition and the slow pace of domestic economic growth, is it any wonder that employment in the U.S. is not what it should be? Yet the biggest challenge of all may be right around the corner as the Baby Boomers retire in droves.

From 1946 to 1964, there was a boom of baby making in this country. A total of 76 million Americans were born during those 19 years. Now those Americans are between the ages of 50 to 68 and are eyeing the prospect of retirement in the near future.

Think of it: Nearly one quarter of all Americans alive today will be leaving the labor force in the years to come. In their heyday, this demographic group shaped much of what this country is today. They lived through the greatest economic boom in our nation's history. They spent more, consumed more, bought more homes and by the late 1990s, had pushed the labor force participation rate (the share of Americans who have a job or who are looking for one) to record highs. By 2003, 82 percent of Baby Boomers were in the labor force. But times they are a changing.

Every month, more than a quarter million of us are turning 65 years old. The share of those 55 and older who are working or looking for work is beginning to fall dramatically. We didn't really notice this change until now because the financial crisis and subsequent recession put many Boomer's retirement plans on hold. Only 10 percent of Boomers had decided to retire by 2010.

Since then, however, the financial markets have come back and so has American's retirement savings accounts. Older workers are deciding to retire as portfolios increase and their confidence in the future gains ground. In the last four years, that Baby Boomer retirement figure has jumped from 10 percent to 17 percent while their labor force participation rate has just hit a 36-year low in 2014.

Over time this trend will have some profound implications for the economy. Retirees, for example, contribute less to the growth of an economy than active workers. Retirees do not produce anything. They also spend much less than they did when they were working. What's worse, the retiree community in this country has little savings. Over 31 percent of Americans have no savings at all. That means a fair amount of Baby Boomers will need to depend on others, such as government or family to support them.

All this is measured by what economists call "the dependency ratio." It is the number of people outside of working age (under 18 or over 64) per 100 adults. Adults are classified as those between ages 18 and 64. The idea is that the higher the ratio of young or old in a given population, the more difficult it is for those of working age to support these dependents.

The good news is that the dependency ratio has been improving in this country in recent decades, from 65 in 1980 to 61 in the year 2000. But the trend is beginning to reverse. By 2020, we will be back up to 65 again. And by 2030 it will be 75. But it could be worse.

Today, the U.S. has fewer residents over 65 years old than most other developed nations. By 2050, about 21 percent of our population will be 65 or older, compared to more than 30 percent in Western Europe and 40 percent in Japan. And as luck would have it, Baby Boomers are retiring at the very time their children are hitting their prime work years.

These "echo-boomers" are an even larger demographic group in size than the Baby Boomers. Many of them can't wait until we old fogies retire and open the professional work-place pipeline to their advancement. Some economists believe our reticence in embracing retirement has just led to lost opportunity for the young. In any case, more and more of us will be stepping aside in the years to come.

At the very least it will mean a sea change in how and who grows the U.S. economy for the foreseeable 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: Financing ISIS
By Bill Schmick On: 05:26PM / Thursday August 21, 2014
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Outgunned, outmanned and outfinanced, terrorists should be logically on the losing end of any combat engagement. And yet,   they exist and sometimes flourish despite the odds. Much of their success can be attributed to cash, the life blood of any army, and their increasingly sophisticated method of raising it.

Terrorists today would like you to think that they thrive because their cause is just. It plays well with the foreign media but the truth is that they have developed a sophisticated global fund-raising system that utilizes everything from Internet appeals to directly tapping into some country's defense budgets.

The Islamic State of Iraq and Syria (ISIS) is a great example of how modern terrorism finances revolution. Take their recent rape of Syrian resources. ISIS targeted and captured Eastern Syria because that's where the nation's oilfields are located. In the name of revolution, the conquerors were soon exporting oil to the world and spending the proceeds on munitions.

Like locusts, ISIS minions then spread out throughout Syria gathering up and smuggling out of the country antiquities and other treasures for even more money. In just one Syrian region alone, they netted $36 million by selling a boatload of 8,000-year-old relics. But it was in Iraq where they really hit the jackpot.

As town after Iraqi town was annexed in their drive toward, Baghdad, the capital, ISIS rolled up an increasing cache of money, supplies and American-made equipment including arms, ammunition and assorted vehicles. In invading Mosul, Iraq's second-largest city, their operatives pulled off the largest bank heist in modern history, netting the group over $400 million. Most experts believe ISIS has amassed roughly $2 billion in their war chest while continuing to write a new page in terrorist fund raising.

ISIS has also expanded the use of the Internet. They have learned the value of social media from groups such as al Qaeda. They are now using various internet sites to raise awareness and contact individual donors. Those who contribute are kept informed of their donations at work via progress reports on special operations, body counts and new advances by revolutionary fighters.

Funny enough, ISIS owes its existence to America's allies in the Middle East. Specifically, Saudi Arabia, Qatar and Kuwait have been funneling donations to the group in their bid to blunt the resurgence of Sunni-led forces in the region. They have argued that the U.S. failure to oust Assad, Syrian's strongman, left them no choice but to support those forces in Syria that could oppose the regime.

The Sunni-Shiite sectarian war has forced almost all the countries in that region into feuding religious camps. The U.S. objective of promoting peace and stability in the region is definitely on the back burner among these nations. The terrorists have tapped those sentiments and developed a financial pipeline through Turkey or Jordan into Syria that is worth hundreds of millions in donations, especially from Kuwait.

Kuwait, where this kind of activity is still legal, acts as an assembly point for money throughout the Gulf States from charities, religious groups, fund raisers and even raffles. The effort is so widespread that U.S. officials have charged that their country's minister for justice and Islamic affairs is a major terrorist financier. It appears to make little difference to that government or its people.

So in a roundabout way, our energy dependence on that region has spawned much more than higher prices at the gas pump. It has and still is oil money that supports terrorists, whether we are fighting ISIS, al Qaeda or a hundred other militant groups. The longer we wait to gain energy independence, the longer the problems of terrorism will continue to plague us.

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: Beware the Russian Bear
By Bill Schmick On: 05:05PM / Thursday August 07, 2014
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Twenty-thousand Russian troops are massing along the Ukraine border. Wednesday, in retaliation for another round of Western sanctions, Vladimir Putin imposed sanctions on certain U.S. and EU imports. And yet the markets barely registered the event. Are investors a bit too complacent?

Price action in the stock market would indicate that global investors believe both sides are bluffing. Putin is simply playing a game of chicken, pundits contend, betting Europe and the U.S. will blink first. They seem unperturbed that the hardware being deployed by the Russians on the Ukrainian front could roll back all the hard-won gains of the Ukrainian government over the past few weeks in a matter of hours.

As for Putin's economic trump card — an embargo of energy exports to Europe this winter — no one believes it will happen. And here's where financial people, especially free market types like those who reside on Wall Street, sometimes get it wrong. They believe that no one would shoot themselves in the economic foot simply for political gain.

Russia makes $1 billion a day from its natural gas and oil exports to the EU. The Russian economy is on the brink of recession after 15 years of strong growth driven by higher commodity prices. GDP is slowing from 0.9 percent in the first quarter to a forecasted 0.5 percent in the second. Inflation is rising, now 7 percent, and so is unemployment. Given the economy's weakened state, the sanctions imposed by the West are having a negative effect.

Its common knowledge that Europe depends upon Russia for a full third of its energy needs. It is also true that Russia's economic growth depends upon its energy exports, which accounts for over 50 percent of all exports. An embargo would hurt Russia far more than it would hurt Europe.

So, from a financial perspective, it would make no sense at all for Russia to shut off Europe's supply of energy this winter. The problem with that logic is that Putin, backed by a cadre of hardliners, does not necessarily believe that economic concerns should be their number one priority. Recent history proves this fact.

Back in the winter of 2006, during Russia's ongoing energy squabble with the Kiev government, they shut off gas supplies. Putin ordered another Ukrainian energy embargo in January, 2009. That one severely curtailed energy supplies throughout eighteen European countries. Some nations reported major drops or a complete cutoff of energy supplies at the time. The EUs distress was simply collateral damage from the Russian's point of view in its dispute with the Ukraine.

As for the argument that Putin would not dare to push too hard, give the state of his economy, investors have an extremely short memory. In the summer of 2008, the Russian economy was weakening as well, but it didn't stop Russian troops and tanks from over-running Georgia. Putin simply blamed the resulting economic weakness on the American financial crisis.

Today, things are different. The majority of Russians approve Putin's actions. During this crisis, unlike the 2009 gas embargo, the EU is not only supporting Ukraine, but also levying sanctions on Russia as well. Annexing the rest of the Ukraine, after getting away with swallowing up the Crimea, would be a logical next step from Putin's perspective.

Given all of the above, I am far less confident than the majority of investors that this conflict will go the way we expect.

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: Why Some Corporations Are Leaving America
By Bill Schmick On: 10:01PM / Friday August 01, 2014
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In recent weeks, politicians and concerned citizens alike have decried the growing number of corporations that have opted to renounce their citizenship and move off-shore. Rather than simply playing the blame game, a better approach might be to examine the underlying cause for this growing exodus. 

Taxes, as you might imagine, are the crux of the matter. It is true that U.S. corporations pay the highest tax rate in the world at 35 percent. It is an often-quoted statistic but not entirely accurate. The effective tax rate is more like 25 percent when all the deductions and allowances are accounted for. Nevertheless, that number is still high and many corporations fear it is going to grow larger in the years ahead.
 
The United States also insists that companies pay that same rate on income that was made overseas by its subsidiaries and repatriated home. In comparison, many countries tax only domestic profits, (those that are made in-country) while ignoring profits made overseas in countries like Ireland where tax rates are much lower.
 
As a result, some companies have resorted to a legal maneuver in which they merge with a foreign company or declare that its U.S. operations are now owned by its existing foreign subsidiary. By taking advantage of this tax loophole, a company can then shift reported foreign profits outside of American tax jurisdiction. As a result, they are only paying taxes on profits that are made in the United States. The rest of their worldwide income is repatriated to their new legal address in their new foreign domicile with little or no tax burden.
 
This is an especially appealing option to many technology and drug companies because much of their profits are derived from intellectual propriety like patents. If they transfer those patents overseas (and they do) a major portion of their profits becomes tax free. 
 
To be clear, these companies are still paying taxes here. They are not moving jobs or production overseas. They are free to keep their top executives in the United States and most do! Bottom line these so-called “inversions” are nothing more than a change of address, a new mailbox that now resides in a foreign country. 
 
Despite the furor these inversions have caused, we are not talking about many companies. Only 41 U.S. corporations have reincorporated in lower-tax countries since 1982, including 12 since 2012. Eight more are planning to do so this year. The U.S. Treasury estimates a decline in tax revenues of some $17 billion over a decade. That’s not much. What worries the politicians is that the pace may be quickening despite the Internal Revenue Service’s attempts to discourage the trend.
 
Senator Dick Durbin is working on a measure called the “No Federal Contracts for Corporate Deserters Act,” which will prevent inversion companies from benefiting from federal contracts. Others have resorted to name calling and deriding these companies as unpatriotic.
 
There is an argument that what made these corporations great was their ability to benefit from the things our government has provided - patent protection, our legal system, education, training, infrastructure, research and our ability to defend their interests from others in time of strife.  And now they are turning their back on us in the name of higher profits?
 
There was a time when we could have explained away this attitude by reminding Americans that corporations are nothing more than economic animals driven solely by the profit motive. However, the Supreme Court changed all that when they declared corporations “individuals” with the same rights and responsibilities as humans. Should we therefore expect a new level of loyalty and good citizenship from these newly-minted citizens?
 
Clearly, our tax code is a mess. In order to remain competitive in this global marketplace, this country needs to adjust corporate and individual taxes at some point. However, we all know a tax overhaul is impossible given the present state of congress. As such, we should expect more of these inversions in the future as companies fend for themselves in the absence of action by our government.
 
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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