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The Independent Investor: Japan's Defense Dilemma

By Bill Schmick
iBerkshires Columnist

Japan is an island nation surrounded by countries who have expressed hostile intent in one form or another over recent years. It is also faced with turning around an economy that until recently was mired in a decades-long malaise. The launching of the Izumo, a 19,500-ton aircraft carrier, last week may be Japan's answer to both problems.

Japan boasts the third-largest economy on Earth and yet it is one of the few remaining countries that has no standing army, navy or air force. War, as a means of settling international disputes, is outlawed under Article 9 of the Japanese Constitution written into law (under U.S. insistence) on May 3, 1947. However, Japan (under U.S. occupation at that time) was allowed to maintain a "self-defense force."

During the Cold War, the U.S., in desperate need of armed allies, quickly realized the folly of its ways but couldn't get the Japanese to drop Article 9 and re-write their constitution. Since then the United States has had the responsibility (and the cost) of maintaining a nuclear umbrella over its island ally and surrounding seas. It has been a good deal for Japan, although to be fair, after the nuclear holocaust in Hiroshima and Nagasaki, the vast majority of Japan's population was adamantly opposed to war and to re-arming their nation at any cost.

Times have changed, however, and those that suffered Hiroshima have given way to a new generation. A generation who have grown up by first being threatened by a hostile Soviet Union, then the People's Republic of China and two generations of maniacs in North Korea. Disputes over the sovereignty of various islands, islets, rocks, fishing grounds and energy fields have pitted this nation against countries that could mount an offensive expeditionary force or launch a wave of ballistic missiles at a moment's notice.

At the same time, the United States has made it clear that we can no longer afford to act as the world's policeman. Budget cutbacks in defense, including the 10-year cuts agreed to under the sequestration, have underscored the declining defense role of the U.S. toward Japan going forward.

Now I'm sure there are at least some readers out there who are going to take exception to the idea of re-arming Japan although where were they when Germany re-armed? Pacifists, World War II veterans, most liberal thinkers and even a large number of Japanese will be dead-set against the idea. Fair enough, but at the same time all of the above also applaud the reduction in U.S. defense spending. You can't have it both ways.

Prime Minister Shinzo Abe, a longtime supporter of re-arming Japan, has announced plans to revise Japan's pacifist constitution. At the same time, Japan's top general is calling for a big increase in military spending. But "big" is a relative concept when Japan is only spending 1 percent of their GDP on defense each year since 2002 compared to almost 4 percent in the U.S.

One of the main criticisms of Japan's present efforts to turn around their economy is that their past premier position as the world's exporter can't be resurrected. By initiating a U.S.-style stimulus program, their currency may decline, but critics argue that no matter how low the yen falls, Japan's bread-and-butter product operations have already been shipped overseas. Their plants are now in Europe, South and North America and elsewhere, blunting the impact of yen currency declines. Japan not only needs to boost their economy but they need to do so by re-inventing themselves. In my next column I will examine how that could come about.

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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@theMarket: To Taper or Not to Taper?

By Bill Schmick
iBerkshires Columnist

Will the Fed taper? If so, when will they taper and by how much? No one knows and because the markets just abhor the unknown, it is why the stock market declined this week. Pay no attention to these histrionics.

The simple fact is that markets need to consolidate, especially in a bull market. Of course, that doesn't sell newspapers or keep you tuned into the television when you should be out enjoying the weather. It is August, people are on vacation, and those who are not are bored to tears. Fretting about will they or won't they passes the time and if you are nimble you might make a little money off the angst in short term trading.

Listen to me: markets discount the news once, not twice, and especially not three times. From May 22 through the end of June, the stock market discounted the Fed's announcement that they planned to taper their stimulus program if and when they felt it was appropriate. It doesn't matter whether they taper in September, by the end of the year or next year. It doesn't matter by how much. All that matters is they will and that the market declined by over 7 percent as a result.

The present pullback in the market is about hitting another record high, (last week the S&P 500 Index breached 1,700) and is now consolidating those gains. End of story. There's nothing more to it than that, so why don’t we all move in and stop rubber-necking.

Instead of fretting over what is happening in the U.S., readers should be paying more attention to Europe. If you haven't read last week's column "Europe is Recovering" access my blog www.Afewdollarsmore.com and have a read. In a nutshell, Europe's recession is coming to an end led by Germany, the powerhouse of the continent. That recovery after the longest recession in years will be similar to the U.S. experience. Unemployment will remain stubbornly high while the economy will grow but at a moderate base.

Values in Europe lag those in the U.S. stock market. In my opinion, those who invest now and are prepared to wait will see some hefty returns over the next few years. There are many who still doubt that an anemic recovery in Europe won't help stocks much, but they said the same thing about the U.S. market back in 2010 and look what happened here.

Over in Asia, Japan (another long-term favorite investment of mine) has been going through a period of consolidation that I expect should continue into the fall. Both the Nikkei Index as well as the Japanese currency have experienced huge moves since last November. A period of consolidation is almost a text book requirement before further advances (in the case of stocks) and declines (the yen) can be expected.

August is traditionally a disappointing month for U.S. investors. Stocks usually trade aimlessly in a listless fashion. My advice is to simply ignore the headlines and gyrations in the stock market this month. September will be time enough to take the measure of the markets for this coming fall.

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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The Independent Investor: A Nation of Minimum Wage Workers

By Bill Schmick
iBerkshires Columnist

Recently, the minimum wage in America has been the subject of much debate. Proponents of increasing the wage argue that people holding those jobs can't possibly make ends meet. Those against it contend that by doing so even more people would be priced out of the work force. Why should you care?

After all, minimum-wage workers are usually younger folks who work part time or after school. Today, just about 4 percent of all hourly-paid workers receive the minimum wage and only 2 percent if you count all wage and salary employees. That is still quite a lot of people, but when you break down those who are actually supporting a family on minimum wage, the numbers decline even further.

Consider that over 63 percent of minimum-wage workers who would gain by increasing the minimum wage are second or third earners in a family that overall is making well above the poverty line, according to the U.S. Bureaus of Labor Statistics (BLS). A full 43 percent of minimum-wage workers, according to the BLS, live in a household that is earning over $50,000 a year in income.

Bottom line: it appears that half of the minimum-wage work force are teenagers and young adults (under 25). Spouses and children of wage-earners providing a second and third income to a household account for 63 percent. As the minimum wage increases, this segment of the work force would be even more likely to seek entry-level jobs to supplement household earned income. As such, they become an even larger percentage of this wage group and will tend to "crowd out" those in poverty who truly need these jobs.

Advocates of raising the minimum wage (to above $10/hour) claim that by doing so we would create 140,000 new jobs, which would contribute $32.6 billion to our GDP. I find that rather hard to believe given that so few wage earners are getting the minimum wage. So, why do I still advocate raising the minimum wage?

Last year I wrote a three-part column on "Inequality in America" revealing that the U.S. ranks last among developed nations in income equality throughout the world. Since then, this country's divide between the haves and have-nots has widened. As such, anything that can shift the playing field in favor of the middle-class, if only in a small way, is a step in the right direction.

Forty percent of U.S. workers make less today than what a full-time minimum-wage worker made back in 1968 when adjusted for inflation. And those of us that do have jobs work harder and longer hours than ever before with fewer benefits. While the rich get richer, our real wages have continued to decline. Rather than pay out benefits or raises, the trend among American corporations is to hire part-time workers.

There are many reasons why this country is experiencing severe dislocations in the work force. Recession, a mismatch of skilled workers in certain sectors, American attitudes toward acquiring the new skill sets necessary today for a well-paying job, overseas wage competition pressures, technological change, lack of education, etc. But while this country sorts out these issues, there is nothing wrong with at least re-distributing some of the wealth via the minimum wage.

God knows, Corporate America is not going to do it themselves.

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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@theMarket: What's Not to Like?

By Bill Schmick
iBerkshires Columnist

This has to be the most-hated stock market rally in history. No one trusts Wall Street or the stock market and just about everyone is looking for an excuse to sell. There isn't a day that goes by without some lionized Wall Street sage predicting the top of the market. That's why it will continue to go up.

An informal survey of recent communications from clients and readers reflects that nervous attitude. Here is just one such missive.

"Dear Bill," began this client email I received on Monday, "interesting article in Barrons, predicting a bear market being imminent. I see this guy has a good track record. Thoughts?"

Over the last six months I have received dozens of similar queries. I won't start to worry until everyone throws in the towel and becomes bullish. In the meantime, enjoy the ride.

This week the Fed said all the right things. They reiterated their position that until the economy begins to grow at a satisfactory rate they will keep the money flowing and remain committed to their stimulus policies. The latest data shows an economy that is still growing at a sub-par rate while employment is improving modestly. Friday's employment number was a bit of a disappointment, gaining just 162,000 jobs, well below that magic 200,000 jobs a month number that we need to make a substantial dent in the nation's unemployment number.

This is absolutely the best news for our Goldilocks' market (if not for the economy and employment). As long as the porridge called data is neither too hot nor too cold, stocks will continue to climb on back of the Fed's easing policies.    

Technically, many indexes are reaching new, all-time highs. The S&P 500 Index cracked 1,700 for the first time in history this week with many technicians pointing to 1,750 as the next stop. Small cap indexes have been leading the markets higher and are now in uncharted territory. The transportation index, which many Dow theorists believe is critical to confirming new highs in the Dow, is on a tear and is itself at a new all-time high. What's not to love in these numbers?

Many investors tend to be a bit myopic in looking at the prospects of the U.S. market. Given that it is the largest stock market and economy in the world it is an understandable mistake. I urge readers, however, to pay attention to what is also happening in economies overseas. In recent columns, I have called your attention to the growth story now unfolding in Japan, but don't ignore the prospects for a European turnaround.

The world's central bank's stimulus policies are finally starting to boost the growth prospects of many nations. This will have a larger and larger impact on the global marketplace where one nation's growing economic health will bootstrap growth in other nations. The last time this happened in the 2003-2007 period, Chinese growth acted as a locomotive for the rest of the world.

We may be entering another such period, only a new engine could be based on the expanding economy of Japan, the European Union as well as the United States. In that kind of future economic environment investors want to take a longer term approach to the stock market. What’s not to like about 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.

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The Independent Investor: Congressional Farm Bill Is a Disgrace

By Bill Schmick
iBerkshires Columnist

There were times in the past when farmers needed the government's protection. There may even be a limited need for it today, despite the good times many in agriculture have enjoyed in recent years. However, nothing can justify the travesty that congress has offered the taxpayer in its new five year plan for agriculture.

Lawmakers largely voted along party lines (only 12 Republicans voted no along with all of the Democrats) for the bill that dropped food stamps from the farm bill. That left "austerity-minded" Republicans to approve a new spending program that will cost taxpayers $195.6 billion over the next ten years. But, hey, says the Tea Party, we're saving you close to $800 billion by cutting out food stamps, right?  

That vote should come as no surprise since the GOP body, in my opinion, is simply taking care of its own. You see, 24 Republicans sit on the House Agriculture Committee, which oversees this country’s runaway farm welfare program. Total government farm payments to the districts of those 24 congressional reps come to more than $1 billion/year.

However, unlike the 46 million Americans that receive food stamps (who are earning less than $32,000 annually), the benefits of the congressional farm bill (around 80 percent of the money) accrue to a group of people with incomes way above the national average. As an example, net farm income is expected to reach $128 billion this year. That's the highest level in real terms since 1973. And while 12 million Americans endure unemployment, farm income overall exceeded $92.5 billion in 2010, a 34 percent increase from the year before.

Don't get me wrong. I am not talking about the small farm homestead you drive by on your way home. Although they make up almost 90 percent of the farm population, the median farm operator household consistently has a net loss from farming activities.

"Most farm income is concentrated in households associated with commercial farms, which represent 10.3 percent of the farm population," according to the U.S. Department of Agriculture.

However, that same 10 percent representing large farms and agricultural cooperatives have been getting 73 percent of all government subsidies for decades. That has amounted to billions of dollars in direct payments. Commodity farmers, for example, who grow corn, soy, wheat or cotton, are given $5 billion/year, whether they actually grow those crops or not.

Don't be fooled when congress claims they are reforming agriculture by eliminating the direct payments program, which they created back in 1996. The politicians are simply replacing that program with a $9 billion expansion in crop insurance. They argue that since farming is a risky business, the taxpayer should pick up 62 cents of every dollar the farmer pays to insurance companies to safeguard against crop failure due to droughts or floods. But today more than half of the insurance policies taken out in that sector are revenue insurance (guaranteeing big farms a minimum price) rather than weather risks.

To make matters worse, there are no caps on how much farmers can receive from this insurance subsidy program. Today, crop prices are close to their historical highs. Big commercial farmers can basically lock in those high prices by taking out this insurance, effectively hedging against a price decline in their crop and we the taxpayer get to pay for it in high prices for our food and paying the majority of insurance premiums.

The government's system of agricultural price supports makes no sense at all. Take sugar, as an example. Sugar is 50 percent higher than anywhere else in the world because our government sets a minimum price for that commodity. In order to maintain that price the USDA may have to buy upwards of 400,000 tons of sugar, costing you and me $80 million in taxpayer dollars just to keep the price of sugar artificially inflated.

So why is it, you may ask, that milk prices would actually spike higher if subsidies on that product were removed? The problem is not in the price of milk, it is in the costs to produce it. The climbing costs of feed in recent years (feed prices are kept artificially high by our farm program) make producing milk a losing proposition. If it were not for the fact the government subsidizes dairy farmers, farmers would be forced to jack up the price of milk to as much as $6 a gallon in some states.

Our farm bill is archaic. It has all the waste and inefficiencies that marked the Soviet-era central planning debacle that ultimately destroyed the agricultural sector in Russia. It is therefore interesting to note that the party that professes to abhor socialism, government interference in the private sector (food stamps, etc.) and additional spending has done a complete about face when it comes to the high-powered lobbying of a handful of corporations and their own self-interests.

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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