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The Independent Investor: Play It Again (Uncle) Sam
By Bill Schmick On: 04:39PM / Thursday September 26, 2013
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In just four days, the continuing resolution financing the federal government expires. Two weeks later the nation's debt ceiling will also need to be raised. If any of this sounds familiar, it should because these political dramas have become almost a yearly occurrence.

Technically, we have already reached the debt ceiling back on May 19. Since then the U.S. Treasury has utilized what they call "extraordinary measures" to remain roughly $25 million below the debt limit of $16,699,421,000,000. I guess the government might find a way to keep paying its debt beyond Oct. 15, but only for another week or so.

As for a government shutdown, the political theater this year has reached new heights. With mere days left before the deadline, Democrats and Republicans have embarrassed themselves by voting on budget bills that both sides know will never see the light of day. So how bad could it get if these two issues are not laid to rest?

Those on Social Security, Medicare, Medicaid, unemployment insurance and food stamps should rest easy. Nothing will happen to those "mandatory spending" programs. Services that required the protection of property and/or human life (air traffic control, prisons, border security, and veteran's hospitals are examples) would also be spared.

Discretionary spending, however, would be savaged. Things like visa applications, national parks, airport security lines and anything else that involved the services of the hundreds of thousands of furloughed government employees would suffer.

But before you panic, consider a few facts. Since a new budgeting process was established by congress back in 1976, the U.S. government has shut down 17 times. Both Presidents Carter and Reagan each weathered six shutdowns during their administrations with the longest lasting 2.5 weeks. The longest shutdown in our history was during the Clinton administration. That one lasted three weeks.

At their worse, these shutdowns caused some mild inconvenience but had no lasting effect on the economy, the financial markets or Americans in general. Within a month of their resolution even those most affected found life was back to normal.

A failure to raise the debt ceiling, on the other hand, could prove to be quite dangerous. It would mean that America's bills would go unpaid. The nation's debt holders and private service providers would suffer the most. Congress has increased the debt ceiling at least 90 times in the last century and 14 times from 2001-2013 in order to avoid this consequence.

It was only in 2011 that the Republican Party determined that the debt ceiling was fair game in partisan politics. Those threatening a debt showdown are also hoping that the stock market will panic and interest rates across the board will rise sharply (as they have done in the past) as when this issue last surfaced two years ago. They are treading on dangerous territory, in my opinion.

There has been only one time in history that the U.S. has defaulted on any of its debt since the 18th century. Investors in U.S. Treasury bills set to mature on April 26, 1979, received notice that the U.S. Treasury would not make its payments on maturing securities to individual investors. The reasons were many: a congressional stand-off over increasing the debt limit, an enormous number of small holders of these Treasury bills and a breakdown in the word-processing equipment used to prepare checks.

That temporary default only affected a tiny portion of investors holding a miniscule amount of our debt. The immediate impact was to raise the interest rate on Treasury bills by 60 basis points equal to sixth-tenths of one percent. It was a one-time permanent increase in the cost of borrowing to this nation. It increased interest payments by $12 billion. Imagine the impact of a default on the entire $16 trillion of our debt.

Our "leaders" have no idea what their petty squabbling could do to this country's future deficits, debt obligations and debt ceiling. Although I believe that both sides are simply using the debt ceiling as a bargaining chip, the ramifications of even a small default would be mind-boggling. The cost to us would easily equal the whole of our present deficit and make the price tag of Obamacare look like chump change in comparison. I only wonder how our politicians failed to see that two years ago and again today.

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: The Droning of America
By Bill Schmick On: 05:28PM / Thursday September 19, 2013
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Whether you call them unmanned aerial vehicles, remotely piloted aircraft or simply drones, these remote-controlled devices are expected to become a big business both here and abroad over the next decade. The question is whether this new technology will impact our lives in ways we are willing to accept.

The worldwide drone market in 2007 totaled $3.7 billion. This year revenue estimates have over doubled to $7.5 billion, with the U.S. accounting for two-thirds of those sales. By 2022, it is expected to top $11 billion. The military has accounted for much of that spending with drones accounting for an estimated 31 percent of our military aircraft fleet.

However, public opinion over the use of drones in warfare is divided in this country. Some critics look at drones as little more than murder machines given the drone's ability to indiscriminately deal death from the sky at a push of a button on whomever or whatever we choose. And the "we" is also a problem. Exactly who and under what authority are these drones attacks undertaken? The answers are mired in confusion and unresolved morality.

Supporters argue that drones have allowed the U.S. to exert targeted force almost instantly at a massively reduced cost without risking American lives. From tactics to strategy, the drone has transformed and revolutionized modern warfare. The numbers speak for themselves. Over 50 high-ranking al-Qaeda and Taliban leaders have been "neutralized" in drone attacks. Of course, no one really knows how many civilian casualties accompanied these successful "kills" in the process.

I bring up this controversy because having transformed warfare, drones are now preparing to do the same thing in the commercial space. Everything from law enforcement to border patrol, from agriculture to cinema and dozens of other applications are cropping up as drone technology becomes cheaper and more accessible.

How will these applications threaten American civil liberties, if at all? Will the government use of drones (as they are purported to have used cellphone and other electronic communications) to spy on American citizens in the name of national security? Will its use by local police forces usher in an era of police states, as some claim?

Counterbalancing these fears are the positive benefits of this new technology. Imagine the usefulness of drones in fighting wildfires, patrolling our borders, locating kidnappers, dusting crops, hurricane hunting and surveying things like oil spills, tornados, hurricanes, power lines, archaeological digs and gas spills.

The list of applicants looking to fly drones is expanding and consists mostly of universities, manufacturers and public agencies, but experts expect that list to lengthen as soon as the regulatory environment becomes clearer. The Obama administration has ordered the Federal Aviation Administration (FAA) to come up with the rules and regulations necessary to integrate unmanned civilian aircraft into U.S. airspace by 2015. The FAA is also tasked with establishing six dome-testing ranges and to fast-track requests for permission to use drones. That should jump-start the industry and lift sales to $13.5 billion in three years, according to a report by the fledgling industry trade group, the Association of Unmanned Vehicle Systems International.

The real question is whether an American bureaucracy, such as the FAA, along with a morally bankrupt Congress, will be able to craft legislation that answers both the legal and ethical issues inherent in this new and promising technology while allowing America to take advantage of this opportunity. Given their track record, I am less than hopeful.

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: Five Years After the Crisis
By Bill Schmick On: 12:08AM / Friday September 13, 2013
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The collapse of Lehman Brothers occurred five years ago this week. In hindsight, this investment bank’s disorderly failure proved to be the critical domino that set into motion economic and financial disruptions that are still with us today. What have we learned?

For starters, we've learned that some of our financial institutions have gotten too big to fail, unless we want to endure yet another financial credit crisis. We have also learned that a credit recession, unlike a normal business recession, takes much longer to work its way through the economy. Today few, if any, western economies have regained their stride. GDP growth is still far below the rate necessary to sustain full employment. What growth there is has come with a huge price tag in added debt.

These last five years have also witnessed the transfer of power from the private sector to the public sector in the ability to control and influence markets. Various central banks, wielding policy tools that were never meant to insure that stock markets moved higher or mortgage rates lower, now determine how much you make or lose on your investments on a daily basis.

It is Central bank chairmen like Ben Bernanke, Mario Draghi in the EU, and Japan's Haruhiko Kuroda who move markets today. Even Warren Buffet is small potatoes compared to the pronouncements of our central banks. I'm not criticizing those bankers, far from it, were it not for them the financial world would be in tatters, which leads us to yet another result of the Lehman fiasco.

It is clear to me that our elected officials do not have the will or the ability to deal with this on-going financial crisis. It was, after all, our lawmakers, in league with their Wall Street campaign contributors that precipitated the credit crisis in the first place. The repeal of the Glass-Steagall Act, for example, which allowed banks to re-enter the speculative side of finance, is just one of the many legislative mistakes made in the name of "free markets." Nothing could be further from the truth.

Not one single ranking official of any of the major institutions that precipitated the crisis has ever been indicted, let alone convicted of any wrong doing. The statute of limitations for financial fraud has now run out, guaranteeing that the perpetrators of these crimes of the century will never be brought to justice. How, readers might ask, did this happen?

You see, under our legal system you can't be convicted of a crime unless you can prove intent. The Securities and Exchange Commission (SEC), which was charged with going after the bad guys, had to prove to a jury, beyond a reasonable doubt, that these top guns intended to commit fraud. Evidently, they couldn't or wouldn't.

The majority of the Dodd-Frank financial reforms, adopted with great fanfare over three years ago, have still not been implemented. This "never again" legislation has been effectively hamstrung by politicians on both sides of the aisle. These delays have been aided and abetted by the banking lobby (imagine that). As of September, just 40 percent of the provisions of this law have been finalized and integrated into law. In the meantime, several too-big-to-fail financial institutions have racked up billions in losses by transacting the same type of excessive speculative trades that triggered the subprime crisis.

So what have we learned?

If you lost your job and are unemployed, you've learned how to support a family by working part-time jobs, asking for government help or simply begging. If you kept your job, you've learned not to expect a raise no matter how hard you work, lest you be replaced for less money. Investors learned not to trust anyone on Wall Street, least of all their brokers.

However, if you are one of the bad guys you've learned that crime does pay. If you are an elected politician, you've learned that no matter what you promise, always protect your campaign contributors.

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: The Cost of War
By Bill Schmick On: 10:11PM / Thursday August 29, 2013
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Over the last two decades America has participated in three different wars and several military interventions. The economic bill for these actions has been substantial. Today, intervention in Syria is front and center. In this age of supposed frugality, why are Americans still willing to pay for air strikes on Damascus or anywhere else?

One would think that with all the concern over our national debt and deficit that taxpayers would demand an end to these incursions. Yet, Americans are still a soft touch when it comes to protecting those who appear to be victimized whether in Dachau or Damascus. Since 1990 alone, we have stood in the way of bullies in Saudi Arabia, Kuwait, Somali, Haiti, Bosnia, Kosovo, Afghanistan, Iraq and Libya.

But war has a cost and I'm not talking about the human costs. There is no dollar-and-cents price tag I can assign to death and suffering: instead, I want to focus on the economic costs of war. For example, the decadelong conflicts in Afghanistan and Iraq may cost this country as much as $6 trillion, according to a report issued in April by Harvard University's Kennedy School of Government. That would be equivalent to a tax bill of $75,000 for every American household.

That would make Iraq and Afghanistan the most expensive wars in U.S. history. In comparison, World War II cost America $3.6 trillion, which was twice the cost of World War I. Today, Harvard estimates it cost the U.S. $1 million to deploy one American soldier for one year. That is several times the cost of deployment during the height of the Cold War or WW II. Why so much?

Modern-day American warriors fly around in helicopters, cargo aircrafts and gas-guzzling armored vehicles. As a result, it takes 22 gallons of fuel to support one soldier per day in Afghanistan versus just one gallon per day back in WW II — and that conflict was global. Today's soldiers are loaded down with high-tech body armor and weapons and the most advanced electronic equipment money can buy. They have the best medical treatment of any war, anytime in our history. And afterwards, they sit down to steaks and at least three flavors of ice cream at the mess hall.

So why do taxpayers grouse about the bank bail-outs and out-of-control federal spending while condoning trillions of dollars in military spending? One reason is that government spending can be an important source of economic demand during times of low confidence and downturns. As I have written in previous columns, government defense spending can lead to the development of new technologies, generate new industries and create additional sources of demand and jobs.

Depending upon how war is funded, it can also have adverse effects on the economy. America has paid for its wars through debt in the case of WW II, the Cold War, Afghanistan and Iraq. Part of the $6 trillion in cost estimates for Iraq/Afghanistan stems from the massive interest payments we will have to pay on that war debt for years into the future.

In the case of Korea, the war bill was paid for in higher taxes while Vietnam's costs were inflated away during the Carter years. In every case, taxpayers have been burdened and private-sector consumption and investment have been constrained by war spending. Yet, I believe the most telling reason for ignoring this most expensive of pastimes is that while the price of war is rising, it is declining as a percentage of our country's GDP. In my next column I will be addressing that concept further.

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: Japan's new frontier
By Bill Schmick On: 04:36PM / Friday August 23, 2013
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After almost 30 years of stagnation, Japan is seeking to re-gain its competitive edge. Critics argue that this island nation needs to re-invent itself if it ever hopes to find its place amid a multitude of fiercely competitive global players. The question is, how can that be done?

For any other nation, re-inventing one's self might be an impossible task but Japan has a proven track record in doing just that. As far back as the Meiji Restoration in the 19th century, for example, Japan was able to leap- frog into the industrial world by skipping the age of sail altogether. Despite the opposition of powerful industrialized nations, backed up by gunboat diplomacy, the Japanese developed a formidable steam-powered navy that was the marvel of the world.

Against all odds, Japan became a world power by the onset of World War II. After its defeat and dismemberment at the hands of the U.S. and its allies, this pauperized nation rose from the ashes once again during the 1950s. Thirty years later it was the export wonder of the world, benefiting from enormous demand for its state-of-the-art electronics and automobiles.

In my last column I argued that social, economic and geopolitical events have conspired to present Japan with both a challenge and an opportunity today. Japan faces serious regional challenges that will only grow as long as it lacks an advanced deterrence capability. In this day of U.S. budget cuts, it can no longer afford to rely solely on America to be its policeman in Southeast Asia. For Japan, however, a strong defense industry could also evolve into a lucrative export industry.

Japan's aerospace and defense industries (A&D) have made great progress since the days after the Pacific War. Today they build components for most advanced civilian aircraft while co-producing advanced military aircraft such as the F-15s. Thanks to cooperation with the U.S., Japan already has one of the most advanced missile defense systems in the world. As for ship-building, some of the biggest, most sophisticated commercial vessels in the world have been produced there for decades. Manufacturing more aircraft carriers like the recently-launched Izumo would be child's play for the Japanese.

Japan's competitive strengths are in high-technology, high value-added manufacturing and reliability in quality and scheduling. They are also skilled in industrial security and intellectual property. In addition, they excel in long term acquisition and planning, cost containment and highly efficient production capacity. All of the above skills can easily be applied to the defense sector.

By beefing up their own aerospace and defense spending, Japan can reduce military imports and increase exports while strengthening ties with its allies. It can assume the responsibility and obligation to protect its own borders and at the same time present potential enemies with a significant deterrent to further territorial encroachment. For the domestic economy the benefits could be enormous.

Typically, A&D industries hire workers with experience and education, i.e. high-quality employment for Japanese citizens, while reducing unemployment and increasing tax revenues. In addition, investment in defense tends to spur development in other industries. Japan's ability to develop new breakthrough technologies ("leap frogging") in defense can also be applied to the electronics, computing and commercial aerospace industries. In addition, the skills required to develop complex defense systems are easily transferrable to other businesses and commercial industries.

Re-arming may not be the only way, or even the best way, of re-inventing Japan but it is a viable option. Certainly, the United States government, in my opinion, would welcome such a development while other countries, with more to gain by maintaining the status quo, will express their outrage. So what else is new?

Are the majority of Japanese people ready for such a radical new direction today, probably not. But Japan is a nation of consensus and building agreement among its people will take time. In order to accomplish such a momentous and historic step, the present leaders of Japan will have to work slowly and carefully, acquiring public approval at every turn.

So far they appear to be doing just that. The new government, for example, is working on changing its arm export policies as you read this. I believe much of the ground work to move forward has already been laid behind the scenes (as is the custom within Japan). I expect we will hear a great deal more about Japan's defense sector and Article 9 in the months ahead. Stay tuned.

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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