The Independent Investor: Don't Fight the Fed
Now that QE II is in the bag, expect QE III, QE IV and maybe even a QE V, if that's what it takes to restore economic growth and reduce the unemployment rate to under 7 percent in this country. After the mid-term election results, I believe the Federal Reserve is all that stands between us and a stagnant, deflationary economy. I would not bet against them in this endeavor.
Most of Wall Street is expecting fiscal gridlock in Washington now that the GOP has re-taken the House but is still the minority in the Senate. That will mean little if any new initiatives to either grow the economy or drive down unemployment have much chance of passing. One exception may be a compromise on the Bush tax cuts.
If both sides can muster enough cooperation to cut a deal in extending the tax cuts before the end of the year (when they are set to expire) then we may escape an economic knockout punch of monumental proportions. Outside of that, there is not much that we should expect from the government over the next two years.
That means that only the Federal Reserve Bank, led by Chairman Ben Bernanke and his band of 12 governors, are left to wage the good fight against the forces arrayed against our economy. Their mandate, to promote low, stable inflation and a high level of employment, gives them enough latitude to do just about whatever they feel necessary to jump start the economy. It appears they are doing just that.
QE II not only says the Fed is serious about that mission but signals an intention, in my opinion, that if this one doesn't work, another one will already be in the pipeline, followed by another, and another. That is entirely believable since the Fed can and will continue to print money (U.S. dollars) until the cows come home in an effort to grow the economy, which is the only way they can reduce unemployment.
In an Op-Ed piece in the Washington Post on Thursday, Bernanke defended the Fed's second quantitative easing and stated several things that you should read as Gospel:
"... the heavy costs of unemployment include intense strains on family finances, more foreclosures and loss of job skills."
"... inflation is running somewhat below 2 percent."
"... higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
"... Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
Bernanke said next to nothing about the dollar since he did not want to give the impression that the U.S. was deliberately driving the dollar lower (although that is exactly what QE II will do). If you don't believe that just take a peek at the decline in the greenback lately. As I have said in the past, the dollar will continue to weaken as the Fed prints more and more money. A lower dollar will boost commodity prices such as gold, silver, energy, materials and agricultural food items. So ignore the naysayers who say commodity prices have run their course.
As far as the Fed is concerned, pumping more money into the economy is OK, at least for now, since the inflation rate is "a bit lower than the rate most Fed policymakers see as being consistent with healthy economic growth in the long run."
But the most important message investors should take away from his Op-Ed is his extraordinary comment concerning higher stock prices. Evidently the Fed believes higher stock prices should be part and parcel of its attempt to grow the economy. The reasoning makes sense when you consider that consumers are the linchpin of this economy. Given that our two main pillars of wealth, our tax-differed retirement savings and our homes, have taken a huge hit since 2008, any improvement in one or both of these assets should help improve our confidence and therefore our spending. That message is clear in the bullet points above.
The Fed is clearly telegraphing to investors that they want a higher stock market, and like unemployment and the economy, they will do what it takes to accomplish that goal. This message is behind the jump in the stock market this week. My advice to you is don't fight the Fed. Buy stocks.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 e-mail him at firstname.lastname@example.org. Visit www.afewdollarsmore.com for more of Bill's insights.
|Tags: Federal Reserve, Bernanke, economy, stocks|
The Independent Investor: Retire Later Rather Than Earlier
Over the last year, a number of baby boomers I know have explored the option of early retirement. Between the financial crises, the recession and the volatility of the stock markets, burnout has hit the over-60 crowd. They yearn for a less stressful life and believe that early retirement is the answer. My advice is don't do it.
The first factor to consider is whether you can afford to retire. The last two years have put a large dent in most tax-deferred savings plans. Some of that damage has been repaired, but by no means all, with most savers still down 20-25 percent from the peak value of their portfolios. All indications are that it will take several more years before the value of our investible assets fully recover.
"I still have my Social Security to fall back on," argued a 62-year-old engineer from a large Berkshire company, headquartered in the center of the county.
"Yes," I said, "but if you wait another eight years, you could pull in a heck of a lot more."
It is true that retired workers can begin collecting Social Security benefits at 62. But your benefits are reduced by as much as 30 percent if you do. Those born between 1943 and 1954 receive full benefits at age 66. The full retirement age increases gradually after that and for those born after 1960 the retirement age is now 67.
Take me for example: I'm 61, born in 1948, and plan to retire sometime after 70. Why?
Well, I could tell you I love my job, (which is true) and that I also love to write. Beyond that, it does not make any economic sense for me to retire before that. For every year I postpone retirement my Social Security benefits increase by 8 percent. A 32 percent increase in benefits over four years is not pocket change.
I also plan to continue working after I start claiming my benefits. Let's say Joe planned to retire next year, at 62. He can earn up to $14,160 without paying a penalty. Any more than that, however, and Social Security deducts 50 cents on every dollar from his benefits. If Joe waits until his retirement age of 66, his earnings limit climbs to $37,680 and the penalty for earning over that is reduced to 33 cents on the dollar. If Joe were to wait just one year longer, there would be no limit or penalty at all.
Since Social Security benefits are calculated based on your 35 highest years of earnings, and many of us are in our highest earnings years right now. It pays us to continue to earn more and bump up our earnings as much as we can.
There are also advantages if you are married. Spouses are entitled to Social Security payments of up to 50 percent of the higher earner's check provided they wait until full retirement age. Since it's still a man's world, I have made more than my wife throughout our working careers. Since we both work, we can claim spousal payments and individual payments and do so at different times.
My wife Barbara is 10 years younger than me. So let's says I retire at 70 percent. She can then claim a spousal payment of 50 percent at that time and then switch to payments based on her own work record a decade later. Those payments will be much higher because she chose to delay her own retirement until she was 70.
Today's boomers are in better shape, have less physically demanding jobs and higher salaries than any preceding generation before them. By working longer, we oldsters increase the productivity of the American economy, provide the workplace with leadership and creativity and reduce the burden of Social Security deficits and the high cost of Medicare on younger generations. Putting off retirement as long as you can makes a great deal of sense both individually and for the country overall. Who knows, you may live longer as well.
The Independent Investor: Understanding the Foreclosure Scandal
This week one of my clients asked me to explain the ongoing foreclosure debacle in "plain English" as she put it. It dawned on me that there may be a lot of readers out there who would benefit from the same thing, so here goes.
The first point to understand is that homeowners can only be foreclosed and evicted by the person or institution that actually holds the mortgage loan note. That noteholder is the only entity that has the legal authority to ask the courts to foreclose and evict the mortgageholder. That note is what you sign and give to the original lender, promising to pay the loan back over 10-20-30 years. It is that note (not the mortgage) that is the important legal document.
Back in the day, before mortgage-backed securities and loan securitization, most mortgage loans were issued by your local S&L or bank. The note stayed with the local financial institution who serviced the loan, just like in the movie "It's a Wonderful Life."
Then some Wall Street rocket scientists decided to modernize that business. Since all mortgageholders are not the same and some are riskier than others, these Gordon Gekko-lookalikes decided there was a buck to be made in wholesaling mortgage loans to investors hungry for higher-yield securities. Wall Street bought these mortgage loans off the banks and bundled them into huge pools called Real Estate Mortgage Investment Conduits (REMICs). At that point, these mortgages were spliced and diced into tranches according to their risk, (among other variables). The REMICS never owned the mortgage notes, but were simply re-packaging the mortgage loans, taking a fee and selling them to others.
Investors bought these loans, which were separated into a whole range of tranches according to how much risk the investor wanted to take on. What is important to understand is that each tranche holder owned a portion of the same mortgage, rather than investor A owning my mortgage and investor B holding yours. If my mortgage defaulted and you owned a junior (riskier) tranche of my mortgage (times many, many more) then you would be hit with that loss first. If there was still some loss left over, the more senior (safer) tranche holder would take a hit as well. It was physically impossible, even if the sellers owned the notes, to divide them fractionally between thousands if not millions of buyers. So once again these mortgages (tranches) were sold but not the notes.
Imagine the complexity of keeping track of what mortgages were defaulting versus those that were not and how much loss to assign each individual trancheholder? Enter the Mortgage Electronic Registration System (MERS), which became the repository for millions of digitized mortgage notes that all the financial institutions originated from the actual mortgage loans signed by you and me. These digitalized mortgage notes were sliced and diced and rearranged once again and came out the other end as mortgage-backed securities. The problem was that MERS didn't actually hold the mortgage notes either. And therein lies the rub. Legally, the chain of title for these mortgage loans has been broken a couple of times.
As I've explained, the key document in taking out a mortgage is the note. In order for that note to be sold or transferred to someone else (for example, transformed into a mortgage-backed security), the note has to be physically endorsed over to the next person. If it isn't, the chain of title is broken. If the chain is broken than legally the mortgage note is no longer valid. The person who took out the mortgage no longer owes the loan, because he no longer knows who to pay. In my opinion, I still believe that everyone has an obligation to repay money they have borrowed, otherwise, the entire system of credit will disintegrate.
Of course, with the number of foreclosures that have hit the nation, this issue was bound to be discovered as homeowners began to contest eviction. The banks, realizing their error, hired foreclosure mills, (legal firms that specialized in foreclosures), to remedy the problem. Accusations that these foreclosure mills actually went back and falsified documents in order to repair the broken chain of titles caught the attention of attorneys-general throughout the nation as did stories of robo-signers who were signing their names to foreclosure documents that attested that they had reviewed the loan documents when they hadn't.
In an election year, this issue has disrupted everything to do with the mortgage markets from foreclosure to new home sales. Everyone from the White House, the Justice Department, the U.S. Treasury and the Housing Departments are announcing task forces to dig deeply into this mess. In my opinion, the digger they deep the worse the true story will become so stay tuned.
|Tags: mortgages, foreclosures, crisis|
The Independent Investor: The Coming Currency War
The International Monetary Fund and its members were in no mood to agree on a unified policy of currency movements at their weekend meeting in Toronto. Finger pointing and veiled threats of retaliation were hurled at China from both American and European members, among others. Underneath all the rhetoric, I fear we are in a race to the bottom as countries vie to reduce the value of their own currencies while demanding that others strengthen theirs.
Back in early 2009, in several columns, I speculated that just about every country in the world would try to export their way out of recession. In order to do that, each country would endeavor to keep their currency as cheap as they could, thereby reducing the prices of their exports. It’s also a fact that some countries (Brazil, India, China) weathered the world recession far better than others. Critics argue that part of the reason that occurred was that these countries contrived to keep their currencies artificially low and continued to export as much as they could.
Unfortunately, today the world still grabbles with high unemployment and an economic recovery that is anemic at best. As deficits mount and governments scramble to increase the pace of growth, each country is vying to take an increasing share of a shrinking global economic pie. It is the real cause of this war of words which could soon take on a much more concrete form of expression.
China, due to its size and economic prowess, has been singled out as the main culprit in this on-going currency manipulation. Over the weekend, the Chinese resisted demands to strengthen their currency. They argued that they were already beginning to do so, but “gradually”. They warned that if their currency, the yuan, did not remain stable, it would bring disaster to China and the world.
This was seen by the United States as just more stonewalling. Unfortunately, lawmakers are meeting this week to consider punitive measures against China for undervaluing their currency. Called the “Currency Reform for Fair Trade Act," the legislation is intended to make it harder for the Commerce Department to ignore taking retaliatory actions against Chinese exports that are judged to be benefiting from a weak currency. The passage of such a bill could easily ignite a trade war where we levy duties or outright ban Chinese import A, while China retaliates by doing the same to U.S. import B.
To date, the White House has been able to short circuit any Commerce Department recommendations for any trade embargos that Congress has demanded. People such as U.S. Treasurer Tim Geithner have chosen a less strident approach in convincing other nations to compromise on the currency question. But if this bill passes the landscape could change quickly. It is just this kind of protectionist legislation that extended and prolonged our own Great Depression and that of the rest of the world in the 1930s.
However, before we cast all the blame on China, consider this: many other countries (including our own) are participating in this currency race to the bottom. The Japanese, for example, over the past month have continually intervened to slow the rise of the yen, which is hurting their exports. So far the price tag for that intervention has cost them 2 trillion yen.
Here at home, the Federal Reserve’s announcement in September that a second tranche of quantitative easing (QE II) is in the works has shaved 7 percent off the greenback’s value in less than three weeks. Last Friday, the Brazilians spent billions to weaken their own currency, the real, and over in Europe the Swiss have been doing the same for months. The euro, thanks to the PIGS (Portugal-Italy-Greece-Spain) crisis, has had its own ups and downs.
Since the dollar is still the world’s main reserve currency and it is dropping in value (as is every other currency at the same time) it makes sense that commodities have suddenly caught fire. Since commodities are denominated in U.S. dollars, their value continues to rise as the dollar declines. In a currency war where paper currencies become increasingly suspect and valueless, proxies will appear. This is what I believe is driving the price of gold to new highs. As long as world players insist on growing at the expense of their neighbors, you can expect commodities to continue to rise.
The Independent Investor: Pet Care Remains Recession Proof
Titus joined Bill's family two years ago.
This year, we will spend approximately $48 billion on our pets, vaulting the pet-care sector to the seventh or eightth-largest retail sector in the U.S. That's an almost 5 percent increase versus last year's spending, and revenues are expected to top $56 billion by 2014. What's fueling this steady growth is the 62 percent of American households who now own one or more pets that squawk, bark, whinny, meow or otherwise make their wishes known to us.
It's not simply about food bowls, water dishes and rubber balls either. Spending has expanded into new areas. Pet services, from doggie day care and pet sitting to grooming and spa emporiums, have sprung up in every city in the nation. The purchase of over-the-counter medicines, nutritional products, insurance, veterinary and other services have also fueled the startup of countless small businesses while making the larger players even larger. Even pet cemeteries are on the rise.
Internet sites have also joined the pack with blogs and websites covering everything from pet health, adoptions, food, nonprofit charities to social networking sites like "Dogster," where owners of pets can bond, exchange information and post photos of their pets.
The pet-care phenomenon is not only confined to the U.S. The global pet food market, for example, is growing strongly this year with cat treats, premium dog and cat food, and dietary and health supplements leading the charge. Brazil is the largest food market for pets behind the U.S. while India and Russia are the fastest growing countries. Euro monitor, a respected research organization, is predicting that global pet shops and superstore outlets will grow 13 percent between this year and 2014.
So what is fueling this pet-centric spending mania? Despite a struggling economy, high unemployment and a consumer who is largely on a spending strike everywhere else in the landscape, our tendency to humanize our pets supersedes all these drawbacks.
"Humanization," according to scholars (and marketers) who study the human-animal bond, is the modern tendency to see our pets as junior members of the family rather than in their traditional role as animals or beasts of burden. These fur babies have become so important in our lives that we would no more consider a serious cutback on spending for them than we would for our human kids.
In many ways this phenomenon is more a comment on how we humans have changed. Although we have our cell phones, our e-mail, our Facebook pages and a hundred other electronic means of communication, the awful truth is that we are becoming less connected from our communities with every passing day. More of us live alone, get divorced, opt out of having children, move long distances from our family and spend more time at work and less in community involvement. For many of us, instead of hugging another person, we hug our cats, dogs or iguanas.
Over 83 percent of pet owners call themselves their animals "mommy" or "daddy" and 56 percent of dog owners buy their pets Christmas presents. The biggest boost in spending is coming from empty nesters, baby boomers, who have transferred their money and attention from grown-up children to their pets.
I confess to fitting that profile. We have a 2-year-old Lab named Titus who costs us a bundle each year. We both work and until recently we dropped him off at a day-care center five days a week. We are planning a week's vacation in Maine and you can bet he will go with us. Calling around for reservations, I've been surprised at the number of pet-friendly hotels we have found. Best Western, the world's largest hotel chain, for example, now offers more than 1,900 pet friendly hotels around the world.
Now that we live in Pittsfield during the week, we have hired another pet sitter, Renee DeRagon, the proprietor of Love Us and Leave Us, who got started as a canine sitter/walker in 2006.
"I've handled over 200 different dogs over that time," she said, "and I have a steady client base now of over 100."
Renee makes a pretty good living taking our Titus and other dogs on adventure hikes for a couple of hours a day.
For those who are unemployed or looking to start a new business, you might want to look at pet sitting. Pet sitters can earn between $12 and $22 a visit with the national average at $16 an hour. In many cases, dog sitting may only involve visiting a house, give the pet a bathroom break, feeding him and maybe throwing the ball a few times. That takes half an hour tops.
If you build your clientele until you are making 10 visits a day, that's $160 a day or $4,880 a month. That's not pocket change, especially if you are out of work. There are no expenses, nor certifications required and few barriers to entry. All you need do is love animals. So far Love Us and Leave Us has been good to Renee.
"I bought a house this year and I was shocked at what I'm making this year," she said.
"I feel like a rock star in the dog world," admits Renee, who was a restaurant cook before her new career, "the dogs love me, but it is the pet owners that you need to know how to handle. This career does require good customer skills."