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Fed Funds Rate July .25 0.0
Unemployment June 5.5% +.1%
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Inflation (average) June -.011% -.05%
Gold (oz) July $1,133 -$114
 
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Stocks Leap on Greek Deal -- But Why?
Jul 20, 2015

With all the German intellect and ingenuity, and all their expertise in science and mathematics, their government leaders have once again defied logic for the sake of social mediocrity. They’re going to bail Greece out – again. Why?

Greece is bankrupt – financially and ideologically – and to continue to transfer the German people’s hard earned money to fund the irresponsible Greek government is blasphemy. Why do it? Why, why, why???

By offering this new Greek deal Germany has once again agreed to dilute itself – and the Euro – to place Greece on temporary life support. Greece will fail, let there be no doubt, the only question is when.

How can I be sure?

Well, if a country is willing to sell-out its people then it’s only a matter of time until they sell-out their creditors. Am I wrong?

Consider the recent dynamic in Greece. In exchange for a new aid package of $90+ billion over three years, Greece will have to implement the tough austerity measures that current Prime Minister Alexis Tsipras ran against when he won office earlier this year. Those austerity measures were also voted down by 61% of the Greek people – and Tsipras himself – as early as two weeks ago in a nationwide referendum. The Greeks were so happy about the referendum results; it was like they won something.

But their delight was short-lived. 

This week, and in typical socialist fashion, Tsipras and 79% of his parliamentary cohorts overruled those two consecutive national votes and governed the other way by implementing tough EU austerity measures. They did this to acquire more free money.

Socialism is indeed alive in Europe, but it is not well.

How about this absurdity: Greece must receive emergency funds from the European Central Bank early Monday morning, July 20, 2015, so it can make a debt repayment to the European Central Bank on that same Monday in the afternoon.

That must make the ECB feel just great.

Better yet, Greece has absolutely no chance to repay its current debt let alone this new bailout package. Their national debt, which is already completely unaffordable to them, is $424 billion. After this bailout package their total debt will rise to $518 billion – and interest rates are poised to move higher. Their economy is just $238 billion and it is shrinking; it’s down some 33% since its peak in 2008.

The Greeks need to fix their operating model – and their creditors not only know it, but are directing it.

As part of the austerity measures the EU is requiring Greece to cut domestic spending and raise sales taxes. Their national sales tax is already 23% – which is part of the problem. Making sales taxes higher will only make their core issue (low consumption) worse (lower consumption.) Once enacted, the Greeks on the government dole – and there are a lot of them – will receive less money and pay higher prices for goods (because sales taxes have increased.)

How is that supposed to grow the Greek economy to a healthy level where they could afford to payback their debts?

Answer: It can’t.

Heck, part of the problem in Greece is their inability to collect taxes – and the reason they can’t collect taxes is because the rates are so punitively high that people can’t survive under the current system. So they beat it by not paying into it. Higher tax rates will only make that dilemma worse. 

The answer to government corruption and insolvency is liberty -- for individuals and enterprise. Market growth is about lower taxes, less central planning and spending, and less regulation. It’s about incentivizing profit, maximizing individuals, and minimizing dependence on governments and her allies.

That’s the silly part about this whole Greek thing. Germany, supposedy the smartest governing body in the Euro Zone, is advocating a losing proposition for Greece (higher taxes etc). But Greece has to accommodate, otherwise they don't get the money. And that’s what happens when you’re dependent on government. You do what they say to receive the welfare payment. Period, end of story.

And then Wall Street applauds it. And they do it while China, the world's largest economy, is unraveling. 

Even though China has implemented measures to boost growth, including tax breaks, lower interest rates, and injecting billions of liquidity into the banking system, a myriad of economic indicators remain weak. Production, along with fixed-asset investments and retails sales are down, and economic growth has been on a downward trend since 2010.—Yet their stock market was up 92% in the most recent twelve months; driven by a 500% increase in margin debt.

Then June arrived and the Chinese stock market slipped on a banana peel. After closing at 5,166 on June 12, 2015, the Shanghai Index dropped 13% in the next five trading days before ending the month at 4,277, a 17% drop. By July 8 crisis had set in, the index was off 32% (to 3,507) from where it was just one month prior.

The hostile trading inspired communist central planners to implement radical new market controls. In addition to suspending several stocks from trade, China regulators forbade many brokerage houses and other enterprises from selling stocks, and established a pseudo hedge fund to purchase stocks and inflate prices. The measures slowed the spiral and helped stocks regain their footing; the Shanghai ended the week of July 17 at 3,957 – still 500 points off the central government’s target value of 4,500 – but still down 23% from its peak.  

So the government measures provided an initial 400-point stock rebound – that’s good, right?

Local entrepreneur and business owner, Li Jun, said it best, "The more the government intervenes the more scared I am."

Imagine how the Greeks feel knowing that the German government is dictating their future.

One of the greatest American misnomers is that Wall Street is run by a bunch of rich, white, Republican capitalists. So not true. Wall Street is owned and operated by a bunch rich, white, liberal Democrats who lean socialist. That’s why they applaud big government bailouts like what just happened in Greece. After all, someone will have to sell all that new debt – and who better than them, right?

A free-market capitalist would deplore the Chinese action and sell-out at the first opportunity. Imagine getting stuck in a depreciating asset and risk jail time for sabotage if it was sold before the government said it was okay to do so. Who wants to operate in such a market?

Wall Street, of course, who still has a ton of their clients’ money invested in China.

When the establishment is the problem – People are the solution. Government and Wall Street can never provide the long-lasting wealth that drives individual Free People to succeed.

Case in point: the U.S. government has invested 35% of GDP over the last five years to produce a meager 2% growth per year. That poor performance will most certainly affect the future of Social Security – and like in Greece, benefits will be cut. That’s what governments do. They tax, spend, and create waste – and when they get into trouble again they raise taxes and cut social welfare programs. That’s what governments do, time and again. They are the consummate underperformer.

And right behind them is the Wall Street establishment with their gluttonous appetite for mutual funds. Mutual funds are nothing more than socialized investment products: they take investor capital and spread it around the market as they see fit. They create large bureaucracies of investments that offset gains from high performers with low producer losses, which in the end return lackluster performance that benefits the bureaucracy more than the constituent.

If the Wall Street establishment was indeed full of free-market capitalists their business model would look much differently than it does today. They would educate investors how to invest successfully and then open their markets to them.

But no, instead they convince investors that they are too stupid to invest on their own and then force them into a basket of mutual funds because of it. Dependence, in any form, is a losing proposition. Only dependent consumers purchase products that consistently produce below-average results. And that's what mutual funds are -- below-average products.  

That’s Wall Street for ya’.

Compare those two establishment venues, government and Wall Street, to my 15-51 method, which has produced a stunning 125% gain over the last 5 years, or 25% per year. See below.

 

7-17-15a

The performance trendlines for most mutual funds is way below the gray line shown above (the Dow Jones Industrial Average), and the long-term trendline for Social Security is negative. 

The only way to maximize your investment returns is to minimize the establishment's impact on your nest-egg, and maximize your role in the investment process.  

Step 1:

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ShieldThe road to financial independence.

Happy 4th!
Jul 04, 2015

It’s hard to believe that LOSE YOUR BROKER NOT YOUR MONEY was published four years ago today. Below are the results for the portfolio detailed on page 162 versus the major market indexes since publication.

 

4 Year Gain

15-51 portfolio        101%

DJIA                           39%

S&P 500                   55%

 

7-2-15a

 

Happy 4th!

 

ShieldThe road to financial independence.™

 

 

Stay tuned…

Stability or Storm?
Jun 14, 2015

The prices for stocks and gold continue to oscillate to nowhere. Both the Dow Jones Industrial Average and gold are flat for the year. While those two benchmarks haven’t produced any growth so far, stock market strength via the 15-51 Indicator has gained a respectable 5%. See below.

6-12-15a

Now that may not look like much, but 5% in a no growth market is five times better than the average. It also might not look like much because of the way the chart is scaled, starting at 15,000 and topping out at 23,000. That’s for a reason to be shown a little later. The point to takeaway here is that all stock market indicators appeared to have based at a top value, and seem unable to build higher valuations. That’s because the economy can in no way substantiate them.

In the same vein, gold has based at a bottom valuation and seems unwilling to move significantly lower than its current value (the GLD is at $113.) Gold’s low valuation base can be seen more clearly in a chart with a longer timeframe. See below.

6-12-15b

All of these trend lines have really flattened out over the past several months. Flattening trend-lines can be perceived two ways: as stability, or as the calm before the storm.

Stocks are indicating a no growth condition for the economy – or at best a growth rate that can’t substantiate higher stock valuations. Rightfully so. And while stock indices might appear stable, they are actually waiting for a trigger to move. Call it a calm before a storm. And where is that storm brewing? 

The bond market.

In an article entitled, Bond Yields Hit 2015 Highs Across Globe (June 10, 2015), the Wall Street Journal reported that Germany’s 10 Year yield has moved over 1% one percentThat’s big news, right?

Quietly, U.S. yields have also moved higher. Exactly two months ago the U.S. 10 year was at 1.85%. Today it’s at 2.4%. That upward move matches the 30% increase German yields have experienced. And though yields are rising, they still have a ton of room to go higher.

That’s that proverbial risk in bonds that has been mentioned in these blogs repeatedly, and most recently in, Just Ask the Greeks. Heck, you don’t have to be a rocket scientist to know that when global yields are just one point off their zero-percent bottom that they have no choice but to move higher.

When yields rise bond values fall.

And because yields have an infinite amount of space to move higher and just a point or two to move lower, bond values have and infinite amount of space to move lower and just a smidgeon of space to move higher. That’s what makes bonds such a high-risk proposition at this point in the cycle.

And why have yields moved so swiftly recently?

The world bond markets are reacting to the possibility of a major Greek default, again. And why hasn’t their problem gone away? Because the Greeks haven’t changed their operating model. They continue to burn bailout money without remedy. Every time a new agreement is reached between their creditors the problem temporarily goes away and global markets relax. Once the latest tranche of bailout money depletes, risk of default resurfaces and markets freak out – again.

A Greek default will most likely be followed by its departure from the Euro, and that will throw markets into a real tizzy.  Bond values, which run in an opposite direction of yields, are already erratic.  But investors haven’t seen anything yet. The chart below is on the same exact scale as the first one shown in this blog. This will help differentiate the perceived stability in stocks and gold versus the volatility in bonds. As stated previously, yields have been forced low via quantitative easing (QE). As a result of this prolonged artificial stimulus they have yet to find a natural base.

6-12-15c

So here is what you have right now in the markets. Stocks and gold are flat and bond values are plummeting. Even so, bonds are not low here; and even though they are correcting doesn’t mean it is a time to buy them. They are high. And the reason they are high is because yields remain at historic lows.

The concept of Buying Low and Selling High doesn’t purport to doing so blindly. Bonds are correcting, indeed, but they are still high with much room to move lower. The same is true with stocks; they are high and have more room to move lower than higher.

Commodities that run contrary to monetary value are still low. That is to say that gold is as much of a buy at these levels as bonds are a sell. But like all investments, decisions to invest now in those kinds of markets must be long term in nature.

To put it plainly, these are the worst types of Market conditions to make money in. Everything is high risk, be it short or long term. The reason for that is the combination of extremely high valuations and a fragile underlying economy. And that won’t change until Market conditions change.

For investment, investment profit comes much easier when it is easy to make money in the marketplace – when unemployment is decreasing, labor participation is increasing, and wage growth is robust. That’s the way it goes.

Until then keep an ample amount of powder dry. It's cloudy out there and a storm is due.

Stay tuned…

 

ShieldThe road to financial independence.™

Just Ask the Greeks
May 18, 2015

There is a lot of confusion surrounding the bond market and yields, and there is one misnomer I feel compelled to address. A recent Wall Street Journal article entitled, U.S. Government Bonds Rise; Foreign Investors Pile into Auctions (May 14, 2015) highlights a common misconception about bonds. The author attempts to explain the recent pop in yields by citing strong demand for a recent 10 Year auction. They’re up 28% since their January low. See below.

5-15-15a

But strong demand doesn’t cause yields to rise – it causes them to fall.  Recall that quantitative easing (QE) created new and additional bond demand in order to keep yields low – which it did. If the premise that strong demand causes yields to rise were true, QE would have raised yields not lowered them.  

Bond values fall when yields rise.

The article’s author opines, "Many investors see the [bond] selloff as a correction…They don’t expect bond yields to rise sharply given the tepid economic growth outlook …" To qualify his stance the author quotes a senior portfolio manager at Invesco Ltd. who said, "We still believe there are structural headwinds to the global economy," then the author adds, "which would contain a rise in bond yields."—And that’s the great misnomer.

To believe that yields are tied directly to economic performance – that is, weak economies produce low yields – is complete and utter foolishness. Take Greece for example; their economy is weak, and in fact, is in recession. Low yields are extremely helpful during recessions – yet their 1o year yield is 10.5% and their two year yield is 21%. An inverted yield curve is when short term yields are higher than long term yields. That’s where Greece is today – it’s inverted – despite their economy experiencing "structural headwinds."

Instead, yields are tied directly to the associated risk of default. Greece can’t afford itself and there is little doubt that they will fink on a substantial portion of their debts – the only question is when. That’s why short term lenders are demanding more than 20% interest to lend them money. They’re weak and risk of default is high, and so are their yields. In their case, a stronger economy would lower yields, as their risk of default would lessen. Not the other way around.

To invest in bonds right now is a risky proposition at the very least. To chase higher yields from borrowers like Greece is a fool’s game – and so not worth the associated risks. And at just a couple of bips above inflation, a 2% U.S. bond is just as risky. Sure American yields can dip down lower. Heck, Germany’s 10 year yield is around .67%. Indeed, bets can be placed on lower near term yields and perhaps money can be made. But that doesn’t mean the odds favor such a position.

In fact, the opposite is true. The odds for bonds are in the house’s favor because there is more room for yields to move up than down. To put it another way, there’s more room for bond values to fall rather than rise because yields remain at historic lows. In markets such as these, investors don’t buy U.S. bonds to make money. They buy them for safety and security. They buy them to not lose everything should the world fall apart.

That’s why foreign money is flooding into U.S. bonds. The United States has the greatest system of government, the strongest middle class on the planet, and is the only country to never fink on a loan obligation. And even though the U.S. is more than 100% leveraged (that is, there is more debt than economic output) risk of default is nil. For that reason U.S. yields will remain low as long as the Federal Reserve wants them low, and inflationary pressure remains mute. The level of economic output has little to do with it. After all, yields have been low in America since the Great Recession.

It’s a different story around the world. Countries like Greece are having a hard time raising money even though they offer high interest rates. But let’s face it, twenty percent interest payments aren’t worth a hill of beans if the checks don’t clear.  Greece needs a stronger economy, not a weaker one, to attract capital at lower rates.

Indeed, economic strength would prompt central bankers to raise interest rates. Such a move would be in hopes to slow growth and thwart inflation. But that’s much different from the Wall Street Journal’s pronouncement, that a sluggish global economy will contain high yields. The only thing a sluggish economy contains is prosperity. 

Just ask the Greeks. 

Stay tuned…

Shield

The road to financial independence.™

The Fed's Misplaced Priority
Apr 29, 2015

While the markets have oscillated since my last blog their status remains unchanged. All stock markets, American or otherwise, remain near all-time highs. Here are a few Wall Street Journal headlines that can be tied to recent stock market volatility.

·        GDP Growth Estimates Tumble, Again (3.25.2015)

·        U.S. Stocks Down After Weak Economic Data (4.2.2015)

·        Fed’s Rate Decision Hangs on Dollar, Growth Concerns (4.22.2015)

·        European Stocks Tumble as Greece Crisis Roils Markets (4.17.2015)

Economic growth has been weak, uneven, and unreliable since the economy was leveraged out of recession in 2009. That’s because government stimulus programs and ballooning national debt are not ingredients to long-term growth and vitality. Instead, they are unsustainable band-aids that do little more than make things look better than they actually are.

Despite the fragile economic base stock valuations are 24% higher than they were at the peak of the housing-boom, when GDP growth was three times stronger than it is today. The word overinflated is an understatement in today’s stock markets. And how did that condition come to pass? 

Bad monetary policy.

Remember when the Federal Reserve engaged in its low interest rate policy in the wake of the ‘o8 crash? Back then easy money policies were implemented to return the American economy to growth from recession, and to lower the unemployment rate to pre-recession levels. But isn’t that where we are?—The economy has averaged 2%+ growth for more than 5 years and the unemployment rate has averaged 6.5% for more than two years – it’s currently at 5.5%.

Why hasn’t the Fed increased rates? 

Well, according to the WSJ article noted above, "the strong U.S. dollar and unsteady global economy" are the primary concerns for the Fed’s interest rate decision.

So let me get this right, America has to wait for the economies in Europe and Asia to correct before U.S. monetary policy can be normalized.—Really???

Let’s correct the record to begin the discussion. The U.S. dollar isn’t getting stronger; the Euro and Yen are getting weaker, as both the European Central Bank and the Bank of Japan are in the midst of quantitative easing programs. The dollar appears stronger because the U.S. has concluded its devaluing effort via QE. Again, the only reason the dollar appears to be getting stronger is because other major currencies are getting weaker. Dollar strength is via smoke and mirror. 

And while it is true that higher interest rates will "strengthen" the dollar to some degree, and that that event will most probably hurt U.S. exports, those aren’t the Fed’s true concerns.—Instead, they’re worried about the "global economy." There is a reason for this.

Just as the former Soviet Union proved communism a bankrupt ideology, Europe is on its way to do doing the same for socialism – and Greece is the face of it.  That’s why news regarding the financial condition of Greece "roils" the markets.

Consider that the highest individual tax rate in Greece is 45% – which kicks in at just $100,000. On top of that individuals pay a social security tax of 16% and a Value-Added Tax (VAT) of up to 23%.  (A VAT is like a sales tax and excise tax rolled into one.) That is to say high earners can pay up to 84% of their earned income to their central government. Local taxes and fees would be on top of that high central rate. 

Greek Corporations are a bit luckier. They pay an income tax of 26% and a social security tax of 28% – totaling 54% to the central government – plus various other fees, licenses, and local taxes.

Because of the high tax rates Greek unemployment is a repressive 26%, and the economy has been in recession since 2009. And despite the high tax rates 20% of all Greeks live below the poverty line and the government still can’t afford them. Their national debt is 175% of Gross Domestic Product and they can’t borrow any more money.

As Margaret Thatcher once said, "The problem with socialism is that eventually you run out of other people’s money."

The central problem with socialism is that it doesn’t incentivize high output and performance. The tax structure encourages minimal effort and greater dependence on government. How could it not? When people pay an 84 % tax rate they have no incentive to earn at high levels and every bit of incentive to demand more from their government – regardless of their income level.

That’s what inspired the most recent Greek election results. 

Radical left-wing socialist Alexis Tsipras was recently sworn in as the new prime minister of Greece. Tsipras ran as the "anti-austerity" candidate, promising to eliminate EU mandated budget cuts if elected. That’s code word for higher taxes and more government spending.

High tax rates do not make a State solvent. In fact, the opposite is true.  As the population drawing off of the welfare system increases and high earners decrease a budget deficit has no choice but to ensue. Socialist governors like those in Greece then raise taxes higher, borrow more money from other nations, and make greater promises to unhappy constituents who are paying too much and getting too little. But sooner or later the spigot runs dry.

And that’s where Greece is today.

The EU is the chief financier of Greek budget deficits, and they imposed the budget-cut demands in exchange for increased funding. Lenders have that legitimate right. So it should be no surprise that a stand-off quickly followed Tsipras taking office: Greece won’t cut government entitlement spending – and because of that, the EU won’t lend them any more money. And why should they? Greece doesn’t have the money to payback what it already owes. 

Even so, there is little doubt that Greece would have benefited from the ECB’s quantitative easing effort if they played ball and moved towards fiscal responsibility – the policy of affording oneself. But no, Greece isn’t interested in that. They believe they are entitled to more – and that other nations should pay. 

Greece is proving Margaret Thatcher correct – but the proof doesn’t end there. Several countries over there are in major trouble, Portugal, Cypress, Ireland, and Italy, to name a few.

So if the United States has to wait for Greece and the rest of socialist Europe to get healthy before interest rates are intentionally increased then monetary policy may never be normalized here. And that’s the real shame; America desperately needs higher interest rates to incentivize lenders to lend – especially to small businesses. That, along with the boost in purchasing power a stronger dollar provides American consumers, would greatly help strengthen the domestic economy.

But no, the Fed’s priorities are elsewhere -- and their logic is misplaced.

As the "risk-free" rate the U.S. drives world interest rates. Higher rates in America will cause Greek interest rates to move much higher. That will make it harder for Greece to borrow additional funds (a good thing) and most certainly expedite their exit from the Euro. And Greece wouldn’t be the only one -- just the first one. So yes, higher U.S. interest rates would be good for us and bad for them.

Sadly, Europe and their failed socialist cause matters more to our Federal Reserve than the prosperity of American free-market capitalism.

And we let them get away with it. 

 ShieldThe road to financial independence.™

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