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The Independent Investor: Holy Cow

By Bill SchmickiBerkshires Columnist

While shopping for my Memorial Day cook-out last weekend, I experienced a lethal dose of sticker shock. Steaks, roasts, spare ribs, pork loin, even ground beef were commanding prices that were a good 5 to 9 percent higher than they were at the start of the year.

Unfortunately, it appears prices will go higher still in the months ahead. Here's why.

Remember the Drought of 2012? The results of that dry period are still having repercussions on food prices today. Back in July of that year this is what I wrote: "If one looks at just the price of corn in the United States, which has increased in price by 38 percent since June 1, it is not hard to predict increases in processed food prices by the winter. Since other staples, like soybeans and wheat, are also wilting in the heat there could be a domino effect across the board for all kinds of agricultural products."

That domino effect had an interesting and long-lasting impact over the short and medium terms for all sorts of food stuffs including beef and pork prices. This was my advice back then.

"It might surprise you, however, that the prices of beef, poultry and pork might actually decline in the short term. That's because livestock producers would rather send their herds to slaughter now than face the increased costs of feeding them in the future. Out West, (today's potential Dust Bowl) many ranchers have simply run out of range land that could support their herds. As this new supply of livestock is dumped on the market, prices should ease a bit before heading up, so plan accordingly. The best strategy would be to stock up now and freeze for the future."

I hope you took my advice and have a very big freezer.

Fast forward to today, almost two years later, and we find that meat prices have seen almost record monthly increases across the nation. As a result of the drought and the subsequent livestock slaughter that followed, the U.S. now has the lowest cattle numbers since 1951.

Inventory continues to decline. At some point ranchers and farmers will begin to rebuild their stock as prices continue to move higher. But there is no quick fix because it takes at least 18 months for a calf to become market ready. Some experts estimate it could take up to three or four years before the nation's herds are back to what they were before the drought.

As for pork prices, the porcine epidemic diarrhea virus is a major cause of reduced pork production. The virus has now spread to 26 states with devastating effect. The pork industry lost almost 8 million animals, mostly piglets, to the disease over the last year. As a result, the USDA is expecting a 2.3 percent decline in overall pork production for 2014. In the meantime, most food analysts are expecting the consumer to pare back on meat purchases and substitute chicken in their diets. It is much cheaper per pound and mush easier to increase production. It would only require six months or so to meet added demand.

However, I am betting poultry prices will see some price inflation as well. As for meat, it appears that higher prices are going to be with us for the foreseeable future.

And there may be more bad news for U.S. consumers. Analysts are betting that the return of El Nino this year, somewhere between August and October, will have a negative impact on certain crop yields.

El Nino, readers may recall, is a climatic phenomenon caused by warm waters in the Pacific Ocean that can trigger ferocious rain and flooding in some areas while drought in others.

In the past, this weather event has caused devastating crop losses. In turn, this has resulted in huge and sudden price spikes, especially in soft commodities like sugar, coffee, cotton and cocoa. The last "super El Nino" was in 1997. That year, from Florida to California, there were storms, tornadoes and mudslides.

The bottom line is that you can expect food prices across the board to keep climbing.

So welcome to America, a land where there is no "official" inflation, unless you need to eat, consume gasoline, buy clothing, rent space, put a child through school or pay medical bills.

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: Can it be this simple?

By Bill SchmickiBerkshires Columnist

Financial gurus have come up short in explaining exactly why interest rates are going down, and not up, as everyone expected them to do. The same thing is happening overseas. What gives?

Pundits have been trotting out the same old reasons for why rates are declining. Slow-growth economies in North America, Europe and Japan have persisted this year, much to the surprise of everyone. So central banks worldwide are maintaining an easy-money policy, which is driving all interest rates lower. That is at odds with the Fed's view of economic conditions.

If you recall, back in May of last year, the Fed announced that the U.S. economy was gathering so much steam that they had decided to begin tapering their $85 billion a month stimulus program beginning in January of this year.

Interest rates spiked higher as the bond market anticipated not only the end of stimulus but higher economic growth as well in 2014. The Fed was right, but only in the very short term.

The fourth quarter GDP hit 4 percent. But then the economy fell off a cliff.

Economists would have us believe that the Polar Vortex is to blame. I expect when the first quarter is finally revised for the final time we will have experienced a minus sign in growth for the first three months of the year. No question that the prolonged season of cold weather hurt the economy, but by how much? No way was that decline all weather-related, in my opinion.

Through it all, the stock markets have refused to go down, despite the slowing economy, cautionary earnings and revenue forecasts by corporations, the Ukraine, and any other bad news.

We are in an environment where new highs in stocks are reflecting an expectation that economic growth will not only continue but accelerate. Historically, when the economy gains momentum, interest rates rise and the stock market goes up. When the economy weakens, the reverse happens. So, my dear readers, either the bond market has it wrong or the stock market does.

What or who is the fly in this particular ointment? My guess is the Fed has a lot to do with this.

Think back, what happened when our central bank announced the first quantitative easing plan, known as QE I. The economy gained ground, the recession faded and the stock market took off. When the Fed announced the end of that program, the economy slowed, and stocks plummeted. So the Fed announced QE II. The process was repeated: stocks up, rates down and economic growth. By the end of QE II, the bond market and corporate America had learned a thing or two about central bank stimulus. They learned to anticipate.

Corporations began to pull back their investments. The bond market headed lower, bracing for more sluggish growth and a possible recession and stocks headed lower. Enter QE III. But by then, even the Fed realized something had to change. So they changed the game plan.

As QE III was about to sunset, Ben Bernanke, the Fed chairman at the time, extended QE III indefinitely. He promised that the stimulus would continue until the economy was able to stand on its feet again without assistance that unemployment needed to drop to at least 6.5 percent and that short-term interest rates would stay low out to 2015.

The stock market took off and the economy gathered steam once again. Fast forward to today. QE Infinity is winding down at a rate of $10 billion dollars per month. By the end of the year the Fed plans to end their stimulus program entirely. It has already been cut in half, year to date. The economy has slowed from 4 percent in the fourth quarter to 0–to–negative in the first quarter. The data seems to indicate it is slowing still. The bond market's low interest rates are indicating the same thing.

So something has to give. If bond players are right, (and they tend to get it right more often than stock jockeys) then we can expect even slower growth in the months ahead. Might the Fed reverse course if that were to happen? The consensus says no, but consensus tends to be wrong fairly often. In the meantime, what in the world is the stock market doing at record highs?

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: Potholes Take Center Stage

By Bill SchmickiBerkshires Columnist

Can you count the number of potholes you hit or narrowly avoid every day? Do they make your blood boil, teeth clench and trigger a choice euphemism or two during your commute? Unless the Highway Trust Fund (HTF) receives a $302 billion injection of funds this year, it could get a lot worse.

And I'm not just talking about potholes. More than one in nine bridges in this country is structurally deficient. At least 66,405 (11 percent of the total) are in sad shape and these are not out-of-the-way covered bridges that are rarely used. Americans have taken over 260 million trips over these derelict spans. They are simply accidents waiting to happen, like the one last month in Mount Vernon, Wash., or the I-35W collapse in Minneapolis that killed 13 people back in 2007.

President Obama is pleading with Congress to work with him in developing an infrastructure plan that would fund a four-year transportation program. It will not solve our infrastructure problems, but it will help. So far there has been little appetite by legislatures to embrace the concept. If they fail to act, the highway fund will run out of money by August or September.

Historically, the nation's transportation infrastructure has been financed by a gas tax of 18.4 cents established in 1993. In hindsight, that has been woefully deficient in keeping pace with the number of vehicles that use our roads today. The problem is that raising the gas tax or requiring corporations to pay more for infrastructure (an Obama suggestion) will probably not fly in an election year. So, instead, Congress will do what it always does, kick the can down the road by coming up with a stop-gap funding scheme.

If you have ever had the opportunity of driving on the Autobahn, you might ask how the Germans have managed to keep their highways in fabulous condition while keeping maintenance required down to a bare minimum. The answer, my dear reader, lies in the American past.

Back in 1919, a little known War Department publicity stunt organized a 72-vehicle convoy that journeyed across America. It required two months to make the trip. The roads west of the Mississippi were so bad that the convoy averaged a mere 6 mph for the 3,200 mile excursion. Along for the ride, was a young lieutenant colonel named Dwight Eisenhower. It affected him profoundly.

Forty years later, as the 34th president of the U.S., Eisenhower was finally in a position to do something about our road system. Starting in the 1950s, the Interstate Highway System was founded and developed 42,795 miles of roads across the nation. Once again, America showed the world what we could do when we put our mind to it. The goal was to get them down as quickly as possible.

The problem was that these roads were never built to last.

Of course, this sudden network of nationwide roads allowed the American family to enjoy cheap vacations, see the country and make the weekend drive an American pastime. Combined with fuel-efficiency gains, the ownership of cars exploded in this country.

That was bad enough, but what the planners did not count on was the massive shift by American industry from transporting goods via railroad to shipping them via the nation's brand-new highway system. Roads that were of substandard construction (although good enough to withstand the damage of 2,000-pound cars) were suddenly assaulted by convoys of commercial trucks. These rigs, weighing 80,000 pounds or more, do 40 times the damage (the mathematical equivalent) of the lighter weight cars due to a truck's weight distribution.

When roads are not properly sealed, water (ice, snow, etc.) leaks underneath the asphalt and settles in the base of the road, which is mostly compacted dirt here in the U.S. Big trucks constantly drive over these moisture spots driving the water downward causing air pockets that form over time the great American pothole.

The Germans know this, as does every engineer in the world. So some foreign engineers and governments choose instead to build extremely thick roads with solid foundations designed to prevent moisture from penetrating the underside of their structures. So why don't we do this? Because it costs more.

Obviously, in a country that groans and moans over the on-going cost of infrastructure maintenance, building better roads at higher costs is a non-starter. If we ban large trucks from our highway and bridge systems, then our roads would stand up a lot better than they do now.

Good luck trying to implement that change.

Given that corporate America uses our transportation system to help turn a profit, (rather than simply commute to work or see Mom on Mother's Day, as taxpayers do), would it not be reasonable to ask them to foot a larger percentage of the cost of maintenance? Reasonable, but probably political suicide for any elected official. I guess we will just have to settle for potholes.

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: Inequality in the Housing Market

By Bill SchmickiBerkshires Columnist

You, you said that they — What'd you say just a minute ago? They had to wait and save their money before they even thought of a decent home. Wait? Wait for what?! Until their children grow up and leave them? Until they're so old and broken-down that — You know how long it takes a workin' man to save five thousand dollars? Just remember this, Mr. Potter, that this rabble you're talking about, they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath?

— George Bailey, "It's a Wonderful Life"

The most expensive home ever sold in America occurred over the weekend in "The Hamptons," Long Island's playground for the one percent. Just a week before that a Greenwich, Conn., estate sold for $120 million. At the same time, the percentage of America's first-time home buyers is at its lowest level since 2008. What does that say about homeownership in the United States?

American income inequality is taking on an even uglier caste as it impacts the real estate market. The recovery in housing over the past two years has been highly unusual. This time around, it has been led largely by institutional investors, hedge funds, private equity firms and wealthy individuals. These astute investors, flush with the cash they had made in the recovery of the financial markets, took advantage of the 35 percent decline in housing prices and the new rental demand of 5 million foreclosed homeowners who were forced to find a new place to live.

These entities spent more than $20 billion to buy up over 200,000 homes which they rented or resold (flipped) as the housing market climbed. All-cash sales have become so prevalent that in the first quarter of 2014 almost 43 percent of all residential property sales were transacted in this way. That's up from 38 percent in the previous quarter.

At this point the big money has been made and the institutions are winding down their purchases. Wealthy individuals, second-home buyers and the occasional owner-occupant buyer, who have the cash, are entering the market. Thanks to the Fed's tapering, mortgage rates have climbed, while stricter credit standards following the crash have shut out the rest of us from any hope of tapping the mortgage market.

As the American middle-class disappears, so too will homeownership at an accelerating pace and what's worse, there is little hope for the future. Consider, for example, those young, first-time homebuyers. Rest assured that "the kids are not OK."

Struggling with high college debt, low-paying jobs (if any) and high monthly rents, the younger generation has little chance of cobbling together the money needed for the 10-20 percent down payment required to purchase a home, even if they could get a bank loan. The reality is that the only borrowers most banks will lend to are those who don't really need to borrow in the first place.

Sure, prices have appreciated and in several locales, mainly along the nation's east and west coasts, sales of $1 million homes have spiked 7.8 percent over the past year. But at the same time, there has been a 7.5 percent drop in overall home buying during that same period.

One wonders who these new, all-cash buyers are going to sell these properties to in the years to come. By definition, there is only one percent of the population that can afford to buy or borrow. How many jumbo loans can banks make before borrowing dries up? Evidently, U.S. lenders are seeing the handwriting on the wall and are cutting jobs in their mortgage lending divisions in advance of further downside.

Clearly, the housing market is stalling and even Janet Yellen, the chairwoman of the Federal Reserve Bank, worries that "the flattening out in housing activity could prove more protracted than currently expected, rather than resuming its earlier pace of recovery."

As my readers know, almost all of the country's income gains from 2009 to 2012 flowed to the top one percent of earners. It is becoming clear that the same thing has happened in the real estate market. That leaves 99 percent of us who will either remain property-less or who will live in our present abode for the foreseeable future. Unfortunately for America, as housing falls prey to the growing trend of income inequality in this country, the future prospects for all of us continue to dim, especially among our young.

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: When Should You File for Social Security Benefits?

By Bill SchmickiBerkshires Columnist

Many of us yearn for the day we can retire and live the good life. However, too many Americans plan to retire at age 62 simply because that is when they become eligible to collect Social Security. That might not be a good idea in the majority of cases.

The Social Security system was intended to be easily accessible, but like so many of our government organizations, it has become a nightmare of complexity. Rather than try and understand the system, many simply retire at 62 and lose out on valuable benefits because they retired too early.

Recently, thanks to the bankruptcy of one regional hospital and another local company's early retirement incentive offers, I have been fielding a lot of questions on the subject.

For most people, it makes more financial sense to wait until you reach full retirement age (FRA) which is 66 (for those who were born between 1943 and 1954). This is especially so in low-interest rate environments like the one we have now. The simple reason is that for every year you delay filing, your monthly benefit will increase between 6 and 8 percent. That is far higher than the present rate of interest, so you are getting paid to wait.

Life is too short to wait, say some, especially if death comes at an early age. You can't predict when you will die, but if you are healthy and longevity is a trait that runs in your family, chances are you will increase your lifetime benefits by waiting. Single women will benefit more than single men simply because women tend to live an average of five years longer than men.

Married couples stand to benefit more than singles by waiting as well. As a 62-year-old spouse, you can choose to either file for Social Security based on your own earnings (if you are working) or on a spousal benefit, based on your spouse's income. However, to receive the spousal benefit your partner must have already retired. The spousal benefit is up to 50 percent of the earner's benefit. If you both wait until FRA or later you will both collect higher benefits.

As a couple, there are all sorts of strategies that could work for you. The lower-earning spouse, for example, could take benefits as early as age 62 while the higher-earning spouse waits until age 70 to file. You will need to crunch the numbers (or have a financial planner do it) to discover what's best for you.

Remember, too, that if you file for Social Security benefits before your FRA and continue to work you need to be aware of how much you earn. If your earnings exceed a certain limit, some of your benefits will be withheld until you reach your FRA. As an example, if you file at age 62, $1 in benefits will be withheld for every $2 you earn above $15,120. If you make more than $40,080, then the government withholds $1 for every $3 you earn above the limit.

If you are a two-earner couple, you have to think about your tax situation. Up to 85 percent of your Social Security income could be taxed if your modified adjusted gross income reaches a certain level. You may be in the unenviable situation where one spouse retires only to see her hard-earned benefits taxed away by the higher income bracket of the spouse.

In certain situations you may have no choice but to file at 62. You may lose your job and you don’t have enough savings to cover the bare necessities, then you may need that Social Security income just to live. For most, early retirement is really just an emotional urge to get out of a bad or boring situation as early as possible. If so, think again. You may have spent the good part of your life at that company and working a few years more won't kill you, but it may make the difference between a great retirement and one that you might regret.

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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