"It isn't so much that hard times are coming; the change observed is mostly soft times going." - Groucho Marx
All eyes are on the United States debt ceiling debate. This is just smoke and mirrors. If anyone out there really thinks that the United States will not raise the debt ceiling in time to stave off a default then they must be from another planet. No United States congressman or senator would throw their political career in the toilet by forcing a default. It is not going to happen. Not yet anyway. Whether the compromise will be enough to calm the jitters of the market is another debate entirely but for now all this smoke is covering up the real problems scattered around the globe.
I have discussed Europe in my previous blogs, but it is becoming abundantly clear that the only way forward in Europe is a dramatic write-down of sovereign debt. This will cripple the German, French and Swiss banks and could set off another round of financial contagion. To be honest I do not see any other way out and the longer that the European leaders dither about the solution the more pronounced the fallout. To me this is a time bomb that will explode at the worst possible moment.
The next major issue is China. Growth there is slowing at an alarming pace and it appears that the real estate bubble in China has finally burst. Banks are now scrambling to remain solvent and this is feeding into the economy in general. There are reports that manufacturers are unable to fill orders as they cannot access the money previously promised from bank lines of credit. As China is or was the only bastion of hope in the globe this is big news. Watch out if it gets worse as those sovereign Chinese investments will need to be repatriated to help offset some of the problems on mainland China.
The United States stock market appears to be overvalued. I know that based on historic levels of price to earnings ratios it is low, but when you compare the current price to earnings ratio in a low interest rate environment, the valuation metric is actually high. A "normalizing" of the price to earnings ratio extrapolates to roughly 20 from the benign level being reported of 13 and this is worrisome. Particularly when you match this against the high levels of earnings.
Company earnings are extremely high. This is a factor of many things but two major causes of this are the unlocking of working capital as a result of slower growth and the low interest rate environment which is throwing billions of dollars down to company bottom lines. This is not sustainable and therefore I expect that going forward company earnings will slow dramatically. This will have the negative effect of increasing the current price to earnings ratio further and will show that the market is overvalued and due for a correction.
Another signal is that company insiders are selling stock of their own companies at an alarming rate. The latest report is that sellers outnumber buyers by 7,900 to one. Not surprisingly this is an all time high and does not bode well for the future. If anyone knows about the future of a company earnings and its prospects it is the insider.
The final issue for the market is that it is now being almost exclusively driven by the high frequency traders. These companies buy and sell millions of shares so fast that they are occurring our in cyberspace. Stocks cross so fast that the computers running the markets are unable to capture these trades which are therefore occurring unregistered in cyberspace. If and when all of these traders head in one direction watch out below. Combine this with weak underlying fundamentals as described above and you have a situation that could make the flash crash seem mild.
Economic weakness persists in the United States. It was recently reported that temporary employees are now at a higher percentage of total workers than during the great depression. A lot of this could be attributable to a change in the style of work but certainly not a statistic that points to strong consumer spending in the near term. Housing is stuck in the doldrums and recent changes to the laws have increased the number of strategic walkouts. These are people that decide not to keep the extra house or the investment property because it is a drain on cash flows so they just walk from the property and stop paying the bills even if they can manage to afford it. This strategy is effective in wiping out debt to the homeowner but will keep the price of properties depressed for years to come.
I am afraid that I do not see any silver lining at present and as such I cannot recommend investing anywhere else other than in cash or if you have the stomach for volatility then you can try gold or silver. Once in cash research my company on http://www.fixedratedeposits.com/ and earn a decent return on that cash while waiting for something to change for the better.
Wednesday, July 27, 2011
Thursday, July 14, 2011
Greece and the United States
It is my last day in London and then I am back to the sunny shores of San Diego. It has been a marvelous trip and I must say that my son now has the same love for London that I do. One day I look forward to bringing him back here to share in a few pints at my favorite pubs but for now I am just enjoying showing him all the magnificent historical sites that London has to offer.
It is looking as though another historical cultural country Greece is under severe pressure. The problem for the Greeks is that they really have no way out other than to cut their spending to the bone and hope that the rest of the Euro zone allows them the time to implement the necessary austerity. Without the ability to let their currency debase the only remaining option is to cut spending in order to repay their debts.
Today Moody’s issued a warning to the United States that unless they can raise their debt ceiling before the August deadline that they would cut the coveted AAA rating for the country. This seems ironic to me. If the United States votes to increase the amount that they can owe to their creditors then they will retain their rating while the Greeks have no ability to borrow more and are forced to start to repay their debts. In the interim the Greeks have had their rating cut to junk while the United States continues their day in the sun.
In the long run the Greeks will be far better off than their American counterparts but for now they are feeling the pain well in advance of the United States. A look at the nations’ debt to GDP levels shows that the Greeks are in worse shape than the United States as they owe 144% of their GDP while the US owes around 100%. So we are in effect better off, but not by much. Consider that the United Kingdom at 75% debt to GDP is already implementing austerity measures and you can see why I am amused that Moody’s would cut the rating if we do not increase the debt level. How much more debt do we have to issue to keep our rating? Should we go to 200% of debt to GDP and would that give us a AAAA rating? Obviously this is all tongue in cheek but it does make a point.
Not that there really is much choice at this stage. If the government does not come to a compromise before the deadline and the debt ceiling cannot be raised then certainly there will be mass panic around the globe. The United States has convinced the world that more money printing is needed so while the rest of the world sorts their debt problems out the United States continues to be the lender of last resort to the world. Once the Europeans have sorted their debt problems out the world will turn its attention to the United States. This is not a good situation and one that no country in the history of global economics has worked through successfully without pain.
So while the powers that be fight back and forth in political posturing it is certain that a compromise will be met prior to the deadline. The question is why are we not looking at repairing the problems rather than pushing the inevitable down the road for a little while longer? The answer is that with a presidency at stake politicians will play the game as long as it does not endanger their own ambitions. The result will be a lot of pain to the people that they represent. My only hope is that somehow we can find a leader that will lead us out of it but for now there seem to be none worthy of the task.
Certainly in this environment there is no incentive to remain in the market. Take your final profits off the table and wait out the storm. It will require patience and resolve but in the words of Winston Churchill, “We will never surrender.” With your cash look to www.fixedratedeposits.com for an excellent rate of return on your hard fought cash deposits.
It is looking as though another historical cultural country Greece is under severe pressure. The problem for the Greeks is that they really have no way out other than to cut their spending to the bone and hope that the rest of the Euro zone allows them the time to implement the necessary austerity. Without the ability to let their currency debase the only remaining option is to cut spending in order to repay their debts.
Today Moody’s issued a warning to the United States that unless they can raise their debt ceiling before the August deadline that they would cut the coveted AAA rating for the country. This seems ironic to me. If the United States votes to increase the amount that they can owe to their creditors then they will retain their rating while the Greeks have no ability to borrow more and are forced to start to repay their debts. In the interim the Greeks have had their rating cut to junk while the United States continues their day in the sun.
In the long run the Greeks will be far better off than their American counterparts but for now they are feeling the pain well in advance of the United States. A look at the nations’ debt to GDP levels shows that the Greeks are in worse shape than the United States as they owe 144% of their GDP while the US owes around 100%. So we are in effect better off, but not by much. Consider that the United Kingdom at 75% debt to GDP is already implementing austerity measures and you can see why I am amused that Moody’s would cut the rating if we do not increase the debt level. How much more debt do we have to issue to keep our rating? Should we go to 200% of debt to GDP and would that give us a AAAA rating? Obviously this is all tongue in cheek but it does make a point.
Not that there really is much choice at this stage. If the government does not come to a compromise before the deadline and the debt ceiling cannot be raised then certainly there will be mass panic around the globe. The United States has convinced the world that more money printing is needed so while the rest of the world sorts their debt problems out the United States continues to be the lender of last resort to the world. Once the Europeans have sorted their debt problems out the world will turn its attention to the United States. This is not a good situation and one that no country in the history of global economics has worked through successfully without pain.
So while the powers that be fight back and forth in political posturing it is certain that a compromise will be met prior to the deadline. The question is why are we not looking at repairing the problems rather than pushing the inevitable down the road for a little while longer? The answer is that with a presidency at stake politicians will play the game as long as it does not endanger their own ambitions. The result will be a lot of pain to the people that they represent. My only hope is that somehow we can find a leader that will lead us out of it but for now there seem to be none worthy of the task.
Certainly in this environment there is no incentive to remain in the market. Take your final profits off the table and wait out the storm. It will require patience and resolve but in the words of Winston Churchill, “We will never surrender.” With your cash look to www.fixedratedeposits.com for an excellent rate of return on your hard fought cash deposits.
Sunday, July 3, 2011
The United Kingdom
I have recently arrived for in London for a couple of weeks’ vacation with my family. It feels good to be back in the city again. I revel in its noises, smells and vibrancy. It is a city that plays home to every culture under the sun and somehow manages to impose the British culture on everyone. Along with the culture and the history is innovation and geographical positioning that has provided the country with prosperity long after its empire ended. Both of these benefits are also present in the United States but right now the two countries could not be headed down a more different path if they tried.
Currently the economy in the UK is struggling at least as much as the United States. A wander down Oxford Street and other high streets in London reveal dozens of shops offering 50% discounts or who have signs out signaling an end to business. This will result in continued commercial property woes and more banking problems. Lloyds the massive insurance and banking company recently issued a statement saying that they would lay off another 15,000 workers bringing their total to 45,000 lost jobs. Even so the government continues to cut expenditure and is set on being more austere. In response to the latest government cuts in spending there are numerous strikes happening. People do not like change particularly when it means a cut to their pay and benefits.
At present the government is trying to increase the pension age for the employees at the Public and Commercial Services. The age will be raised to 66 from 60. Furthermore to pay for the benefits and to balance this expenditure against income the government is increasing the amount that employees have to pay in to the system by roughly 3%. To me this seems reasonable. People are living far longer than they previously did so raising the age at which they will receive benefits makes sense plus the increase in the amount paid to receive the benefits is minimal.
Consider this. In the United States when the social security benefits age was set at 60 most people did not live to see 70, in fact the average life expectancy was around 65. So people on average worked the majority of their life and enjoyed five years of retirement. The program was introduced in 1935 but 75 years later the retirement age has barely moved. The early retirement age is 62 with full benefits by 67 (for most of us) but now life expectancy in the United States is hovering around 80. People are now spending more than 20% of their life expectancy retired. If we went back to the original system then the age at which people can receive retirement benefits would be raised to 73. This would repair the massive deficit in the social security budget in one easy move. It would however be political suicide but as Mr. Cameron and his cabinet are proving, it can be done. While raising the age to 66 does not completely repair the UK system forever it is a good step in the right direction.
The fallout from this though is that the UK is now dealing with strikes and the people who voted the government in are now losing faith in them. This is also a shame as there really is no easy way out of this mess and the UK government seems to be on track to make some real changes that will benefit future generations more than the current generation is prepared to admit. Taking some pain now will result in prosperity quicker and with less cost and sacrifice than waiting. The UK government seems to be set on fixing the problems through cost cutting while the United States seems hell bent on going deeper into debt to provide a short term fix while creating a far larger problem.
Until the United States can look inward and start to repair problems at home by becoming more austere it is my contention that all we are doing is plugging holes in the dike with our fingers. Eventually the banks will burst and the American way of life as we know it will be over. Hopefully the Federal Reserve and the White house are watching with interest to see how the British experiment works. Assuming that it closes the United Kingdom’s deficit without too much pain it could show the United States an alternative to their current methodology.
If Obama and Bernanke choose to ignore what is happening across the Atlantic they are missing a great opportunity. Those of you who have followed this blog for the past year or so will know that I believe that printing more money is not the solution to our problems but rather is creating irreparable damage. The UK experiment may show the United States a way to solve their problems and balance the budget. If the United States chose this option I would think that the dollar strengthens and inflation is muted. Furthermore it could be achieved while keeping interest rates low alleviating worries about the housing recovery. Therefore I hope that their egos are in check and that they learn from their cousins.
It is definitely time to remain cautious as there is no indication that the United States has any stomach to take the painful steps needed to repair the damage. Until I see signs of this the market is just too risky to justify the investment. Stay on the sidelines and earn an excellent rate of return on your cash by contact me or visiting our website http://www.fixedratedeposits.com/.
Currently the economy in the UK is struggling at least as much as the United States. A wander down Oxford Street and other high streets in London reveal dozens of shops offering 50% discounts or who have signs out signaling an end to business. This will result in continued commercial property woes and more banking problems. Lloyds the massive insurance and banking company recently issued a statement saying that they would lay off another 15,000 workers bringing their total to 45,000 lost jobs. Even so the government continues to cut expenditure and is set on being more austere. In response to the latest government cuts in spending there are numerous strikes happening. People do not like change particularly when it means a cut to their pay and benefits.
At present the government is trying to increase the pension age for the employees at the Public and Commercial Services. The age will be raised to 66 from 60. Furthermore to pay for the benefits and to balance this expenditure against income the government is increasing the amount that employees have to pay in to the system by roughly 3%. To me this seems reasonable. People are living far longer than they previously did so raising the age at which they will receive benefits makes sense plus the increase in the amount paid to receive the benefits is minimal.
Consider this. In the United States when the social security benefits age was set at 60 most people did not live to see 70, in fact the average life expectancy was around 65. So people on average worked the majority of their life and enjoyed five years of retirement. The program was introduced in 1935 but 75 years later the retirement age has barely moved. The early retirement age is 62 with full benefits by 67 (for most of us) but now life expectancy in the United States is hovering around 80. People are now spending more than 20% of their life expectancy retired. If we went back to the original system then the age at which people can receive retirement benefits would be raised to 73. This would repair the massive deficit in the social security budget in one easy move. It would however be political suicide but as Mr. Cameron and his cabinet are proving, it can be done. While raising the age to 66 does not completely repair the UK system forever it is a good step in the right direction.
The fallout from this though is that the UK is now dealing with strikes and the people who voted the government in are now losing faith in them. This is also a shame as there really is no easy way out of this mess and the UK government seems to be on track to make some real changes that will benefit future generations more than the current generation is prepared to admit. Taking some pain now will result in prosperity quicker and with less cost and sacrifice than waiting. The UK government seems to be set on fixing the problems through cost cutting while the United States seems hell bent on going deeper into debt to provide a short term fix while creating a far larger problem.
Until the United States can look inward and start to repair problems at home by becoming more austere it is my contention that all we are doing is plugging holes in the dike with our fingers. Eventually the banks will burst and the American way of life as we know it will be over. Hopefully the Federal Reserve and the White house are watching with interest to see how the British experiment works. Assuming that it closes the United Kingdom’s deficit without too much pain it could show the United States an alternative to their current methodology.
If Obama and Bernanke choose to ignore what is happening across the Atlantic they are missing a great opportunity. Those of you who have followed this blog for the past year or so will know that I believe that printing more money is not the solution to our problems but rather is creating irreparable damage. The UK experiment may show the United States a way to solve their problems and balance the budget. If the United States chose this option I would think that the dollar strengthens and inflation is muted. Furthermore it could be achieved while keeping interest rates low alleviating worries about the housing recovery. Therefore I hope that their egos are in check and that they learn from their cousins.
It is definitely time to remain cautious as there is no indication that the United States has any stomach to take the painful steps needed to repair the damage. Until I see signs of this the market is just too risky to justify the investment. Stay on the sidelines and earn an excellent rate of return on your cash by contact me or visiting our website http://www.fixedratedeposits.com/.
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