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Independent Investor: Enough Already!

Bill Schmick

All week the markets have hung on every word coming out of Washington. Nothing else has mattered: not earnings, not Europe's problems, not even the second coming of Christ could have distracted investors. Now that both political parties have achieved what they wanted, let's please stop the monkey business before it's too late.

Credit Suisse, a global broker/investment banker, said on Thursday that in the unlikely event that the U.S. defaults on its debt, the economy could contract by 5 percent and the stock market could lose one third of its value. Although I believe that is an extreme view, the entire mess over the debt ceiling is causing hesitation and delay among the nation's business sector.

Companies have put all sorts of decisions on hold until the crisis is resolved. That includes hiring and investment decisions that directly impact the employment rate and our economic growth. The timing couldn't be worse. The economy is just starting to recover from a soft patch caused by the slowdown in Japan's economy. In addition, our unemployment rate has recently notched up to 9.2 percent. We can't afford these shenanigans.

However, the increase in our debt ceiling is only one of an emerging two-part problem in our economy. Credit agencies are warning that unless we do something to reduce spending and the deficit, our credit rating may be reduced. Now that wouldn't be the end of the world for America, after all, Japan's credit rating was reduced early this year with little consequence. But it certainly wouldn't help the pace of our recovery nor improve the jobless rate.

As we go down to the wire, it appears that if there is to be a deal on raising the debt limit, then both parties will need to agree to disagree and postpone a big deficit-cutting plan until after Aug. 3. There is simply not enough time to hammer out a compromise in the time allotted. There will be a price to pay for a deal of that sort. The markets and the country's corporations will continue to hesitate until a deal is struck that will satisfy the credit agencies.

A compromise budget-cutting plan that cuts $2 trillion or so from the deficit over 10 years will not cut the mustard. The agencies are on record as wanting at least double that amount in order to stave off a credit reduction. The Democrats, led by President Obama, wanted a "Grand Plan" that would answer the demands of the credit agencies and put to rest the deficit politically as an election issue.

The Republicans want the opposite. They see the economy, the deficit and unemployment as the three most likely opportunities to unseat the Democrats next year. By foot dragging now, they can keep the controversy alive and hopefully capitalize on an anemic and aging recovery while continuing to ask "Where are the jobs?" If in the process either the country defaults or our credit rating is reduced they are betting Obama will be blamed for that along with the economy.

They are counting on voters to forget by election time who did what to whom in this debt controversy. I suspect their gamble will pay off.

After all, how many voters remember that the TARP Plan (just one example) was approved before Obama took office? Did you know that the huge deficit we are saddled with actually occurred during the Bush administration? Between his tax cuts and the initiation of two wars, President Bush, with the aid of today's Republican leadership, not only spent the surplus garnered under the Clinton years but wracked up $8.813 trillion in additional new debt.

The Democrats under Obama have added $1.136 trillion in the form of economic stimulus and tax cuts. Economists argue that without that spending our country would have remained in recession or possibly fallen into a depression. In addition, Obama will spend $152 billion on health-care reform and $278 billion on defense. The vast majority of the money spent on these policy initiatives won't even be spent until years in the future, if at all.

As an independent voter, I am less inclined to listen to either parties' rhetoric and instead focus on the facts. The facts are that the financial crisis, the deficit and the subsequent rise in the unemployment rate are the legacy of the Bush administration. I can applaud the GOP for belatedly realizing that they have been on a spending spree for the last decade, but don't blame others for your party's failings.

Sure, if you choose, you can blame Obama and his team for failing to generate a quick recovery, but enough already with this myth that he is the root cause of today's problems in America. As Americans, we deserve more from Washington. 

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 (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

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Independent Investor: Europe Goes the Full Monty

Bill Schmick

Full Monty: "everything which is necessary, appropriate, or possible; 'the works.'"    

— Oxford English Dictionary

A new rescue plan for Greece is being hammered out in Brussels today, Thursday. Although the details are yet to be released, it appears that the European Community is finally going for an overall plan that will do more than just Band-Aid over the debt crisis of southern Europe.

Greece, of course, is the bad boy of that continent but Ireland, Portugal and even larger economies like Spain and Italy are being added to the list of troubled nations. Up until now, the EU has grudgingly provided bailout money in exchange for economic austerity measures that have only driven these countries into deeper recessions and increased social discontent.

The new aid package to be announced will be a departure from this bankrupt strategy. Instead, the EU will tackle the root cause of the issue and reduce the overwhelming debt burdens of Greece, Portugal and Ireland. It will allow the EU's rescue fund, called the European Financial Stability Facility (EFSF), not only to buy that debt but also reissue new debt (loans) at much lower interest rates. It could also extend the maturities on new loans to these countries from an average of 7.5 years to 15 years or more.

The EFSF will also be able to aid troubled banks by lending money to various euro-zone governments (who will then bail out their banks) pre-emptively. No longer will governments have to wait for the crisis to hit before doing something about it. The EFSF will also be able to buy and sell sovereign debt of any of these countries on the open market in cooperation with the European Central Bank. That should discourage rampant speculation in these instruments, which has exasperated the crisis.

These moves, which were all rejected by Germany up until now, will form the basis of the equivalent of a Marshal Plan for Europe. I believe it is the best plan yet to address the financial contagion that has been pulling down one country after another within the EU. By reducing existing debt to manageable proportions and giving the beleaguered nations breathing room to repay it over many more years, the burden becomes more manageable. No longer will Greece, Portugal and Ireland have to slash spending and raise taxes while scrambling to find a way to pay back the loans and grow their economies all at the same time.

I had maintained that it was impossible to accomplish that feat. Readers may recall that over the last year I have been writing (and hoping) that the EU would see the light. This program, while not exactly the route I would have taken, is far more comprehensive than their past plans of simply kicking the can down the road.

An important change, and one that the European Central Bank had been resisting, is the possibility of allowing a "selective" default occur in Greek government debt. How that would happen is still not clear but it might include a bond-exchange program, a write-down of some of the debt or a buy back by the EFSF of a portion, say 20 percent, of heavily discounted Greek bonds.

The markets have been wrestling with just how such a default would impact Europe's banks, which hold billions of Euros in the sovereign debt obligations of the PIGS (Portugal, Ireland, Greece and Spain). Will a "selective" default of some Greek debt trigger the credit agencies to move toward a more negative stance on EU banks? If today’s prices of European bank stocks are any indication, the markets believe that there is a plan to avoid the credit agency's wrath.

All we know at this time is that private institutions in the financial sector will be given a number of alternative methods on how to assist in financing Greece's debt now and in the future. Some of the ways this can be accomplished are debt exchanges, roll overs and/or buy backs of existing debt.

I am sure that the details will need to be ironed out and, as usually happens with a plan this large, it will be a work in progress with lots of trial and error. What is important is that Europe's leaders have finally come to understand that the theatre we have been watching for almost two years needed drastic changes. The solution to the Greek financial crisis demanded that the actors revisit the stage with a new act. This week they have responded with an economic Fully Monty. I say, Bravo!  

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 (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

Write a comment - 0 Comments       Tags: Greece, PIGS, bailout, Europe      

Independent Investor: Emerging Markets — Times Are Changing

Bill Schmick

While the investing world is distracted by the U.S. debt ceiling crisis and the on-going drama of Italy and Greece, I've noticed that a small but increasing stream of money is finding its way back into some emerging markets.  

Last year, I advised investors to lighten up on emerging markets. That proved to be the right call. The Chinese market is now below the levels last seen in late 2009. India and Brazil have lagged world markets as has Russia. But usually you want to begin to invest in these markets before their stock markets turn. Today, I think it may be the right time to start nibbling in the area. Here's why.

The increase in commodity prices was a major negative for many emerging markets, notably China, India and Brazil. Their factories are voracious users of energy, such as oil and coal and a host of base metals and agricultural food stuff. When prices of these inputs go up, combined with a fast growing economy, inflation follows quickly.

Many emerging market governments have had to contend with this problem by tightening credit and raising interest rates over the last two years. When commodity prices come down, as they have done over the past four months, it relieves some of the inflationary pressure and allows governments to loosen monetary policy a bit. That reversal of fortunes is happening at the moment.

China, the big dog of emerging markets, has raised interest rates five times this year. Last week, they raised them again but indicated that it may well be the last hike this year. The Chinese central bank has not changed its rigid stance toward fighting inflation quite yet, but it expects to see some lessening in the inflation rate this month. Investors have worried that all this the belt-tightening in China (and other countries) would lead to a "hard landing" for the economy, but the country reported steady growth for the second quarter coming in at 9.5 percent, only slightly lower than the first quarter's 9.7 percent growth rate.

But things have changed in the investing landscape among emerging markets. Gone are the days when one could simply buy a fund that is exposed to all emerging markets and hope to prosper. Brazil and other Latin countries, for example, are tied to the prices of the commodities they produce, so what may be good for China, may be bad for Brazil.

India, like China, has an inflation problem but seems to have a better handle on controlling inflation and imports more natural resources than it exports. Some other Southeast Asian countries such as Vietnam, Indonesia, Malaysia, Singapore and Taiwan have their own set of economic variables, although many of them still depend on China's continued growth for their own prosperity.

Korea, on the other hand, may not even be an emerging market any longer in my opinion. Latin American countries like Mexico, Peru, Chile and Argentina join Brazil in combating high inflation brought on by the very thing that is responsible for their growth, natural resources.

About the best that can be said is that as emerging markets develop, each country's particular set of circumstances can provide both an opportunity and a challenge. Gone are the easy-money days of simply buying them all and watching your portfolio go up and up as it had in the period of 2002-2007. Now it takes some homework and a bit of luck.

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 (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

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@theMarket: Jobless Number Spoils the Party

Bill Schmick

Up until Friday's disappointing unemployment numbers, the stock market appeared ready to regain the year's high all in one week. However, the ugly news that the nation hired a meager 18,000 of our unemployed dashed investor's hopes that the economy might be gaining strength in the second half.

Equities plummeted across the board, as did commodities, while Treasury bonds and gold provided safe havens for worried investors. The Republicans were quick to call a news conference highlighting the Obama administration's failure to create jobs while providing platitudes on how to get America back to work. Unfortunately, neither party has come up with anything close to effective in combating unemployment here at home.

Unfortunately, much of what ails our country's work force has little to do with the here and now. For years, unskilled jobs in environmentally unfriendly industrial and manufacturing industries have been exported overseas. At the same time the construction sector, which had absorbed so much of the unskilled labor pool, is in the doldrums.

Both the government and private sectors have exhorted America's future workers to stay in school, go to college or technical school and obtain skills that would be salable in the new service/technical economy of the country. Instead, the dropout rate has increased while our educational system has continued to decline. Older workers, for the most part, have also refused to either go back to school or acquire new skills.

Now, before we get all jumpy about one month's unemployment numbers remember that the standard deviation (the accuracy) of any one job number is plus/minus 100,000 jobs. That’s right, this week’s number may be off by as much as 86,000 and we won’t know the true figure for months!

But the string of disappointing employment numbers recently has quite a bit to do with layoffs in the public sector. Recall that there was a big spike in the unemployment rate a few months back when U.S. census workers were terminated. Now we are experiencing a new wave of municipal layoffs. Federal aid to states has declined drastically. At the same time, almost every state finds itself in debt with the need to balance their budgets. So unemployment is being fueled by layoffs among state workers with the biggest hit in the health and education areas.

What concerns me most about that is the demand by the Republicans (Tea Party) to cut spending drastically right now. Has anyone given thought to how that is going to impact unemployment and growth in the next six months? For some reason I can't fathom, the GOP believes as long as taxes remain the same everything will be fine. That math doesn't add up.

What I hope comes out of Sunday's negotiations between the leaders of the two parties is a plan to cut the deficit over the long term while continuing to stimulate the economy in the short term. You might argue that I can't have both. But what if we all agreed to cuts in entitlements such as Medicare/Medicaid and higher taxes but wait a year or two, say 2013, before putting that plan into action? At the same time, continue tax breaks this year for both corporations and individuals.

That would give the economy the breathing room to gather strength while giving all of us a heads-up on what's coming around the corner. A deal like that would give the markets confidence that Washington is doing something about the deficit while removing another stress factor (the debt ceiling) from the markets. As for the markets, I remain bullish. After a 6 percent move up in one week, a 1 or 2 percent decline would be a normal reaction.

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 (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

Write a comment - 0 Comment       Tags: jobs, debt ceiling, education      

Independent Investor: Time Is Running Out

Bill Schmick

By now we have reached our debt limit of $14.294 trillion here in the United States. As you read this, the U.S. Treasury is already shuffling bits of electronic paper around to stay current on our nation's debt payments. By Aug. 2 even this desperate farce will have come to an end.

The Obama administration's deadline is even earlier. By July 22, there must be a deal to raise the nation's debt ceiling or else there will not be enough time to ratify an agreement before the beginning of August, when Congress begins its recess. The situation is serious enough for both parties to forgo their July vacations and work for a compromise this week in steamy Washington, D.C.

A new development has the president challenging the Republicans to work out a longer-term compromise solution to the deficit right here and right now. It remains to be seen whether the GOP will accept the challenge.

The nation's debt ceiling was first established back in 1917 at a hilariously low $11.5 billion. Since 1962, it has been raised 74 times, without a problem on either side of the aisle. So why has the debt ceiling suddenly become such a contentious issue?

Politics is the short answer. The Republican Party, which passed an increase in the debt ceiling eight times during the Bush presidency, claims to have suddenly found religion when it comes to the nation's debt. And if you believe that one, you deserve to be fleeced by the shills in Washington.

The GOP is demanding $4.4 trillion be cut from the deficit over the next 10 years. They are using the ceiling to affect changes in Medicare and Medicaid spending that would probably not see the light of day in any other circumstances. The Obama administration countered with a plan that would cut $4 trillion over the same time period without changing any of the major entitlements programs. One would think that a compromise could be worked out, but as time goes by it seems as if neither side really wants a solution. As the 11th-hour approaches, opposing politicians are milking the drama for very hour of prime time they can capture.

By now just about everyone realizes there will be major fallout from failing to pass a new debt ceiling. The most obvious and immediate outcomes would be that the U.S. would technically default on its loans, our interest rates would spike, and the stock market plummet. Even if our "leaders" had a change of heart and approved a new ceiling a day later, the damage would have been done.

It would be similar if you or your household declared bankruptcy. Although you might be able to work your way back to financial health quickly, the bankruptcy would be part of your credit history for years into the future and with it would come certain costs.

Everyone from the head of the Federal Reserve and U.S. Treasury to every elder statesmen of the economy has warned of the folly of allowing the country to default. And yet a recent Gallup poll indicates that 47 percent of Americans are opposed to raising the debt ceiling while 34 percent say they don't know enough to make a decision. I suspect that most Americans mistakenly believe that raising the debt limit will automatically mean an increase in federal spending. That's not true.

Increasing spending would require authorization by Congress. In today's anti-spending environment that kind of legislation would have few backers. But failing to increase the debt limit will immediately make the debt we owe climb higher. It would force the government to suspend interest payments on the debt we already owe. Those interest payments would continue to accrue into the foreseeable future. The same would happen to you if you failed to make your minimum payment on your credit card. So your overall debt continues to rise, and quickly.

At the same time, as a result of our default, investors worldwide would demand higher and higher rates of interest to lend to a country that had already failed to pay its existing debtors on time. The fact that we might change gears later would not mitigate the actions we failed to take when they were required. The damage has been done and we would pay for it in the form of higher rates for years into the future.

I have long since lost faith in politicians. Their actions indicate that time after time they have put their own interest above the common good. So, yes, this debate makes me nervous. I don't want to see Washington once again play with our livelihoods. A U.S. default will severely impact our car loans, mortgage rates, student loans, credit cards and a whole host of personal debt liabilities. If push comes to shove, it may come down to fighting fire with fire.

The Fourteenth Amendment states:

"The validity of the public debt of the United States, authorized by law, including debts incurred for the payments of pension and bounties for services in suppressing insurrection or rebellion shall not be questioned."

If the GOP is dead set on using the threat of a U.S. bankruptcy to wheedle spending cuts (but not tax increases) from the administration, than, in my opinion, using the 14th Amendment to raise the debt ceiling without legislation is a proper and responsible alternative. God knows, I am all for spending cuts and have been for decades, but this in not the time nor the arena to force change.

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 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

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