Wow the Dow recovered 400 points in 2 days. The gloom sayers are wrong again. Who got out of the market 2 days ago when the Dow went below 18,000? Remember, the market goes up and the market goes down but in the long run the market will keep going up in a free market economy like ours. Many know-it-all commentators tonight are predicting an up market if Hillary wins and a down market if Trump wins. What do they know? Here is what I’ve heard finance gurus on TV say: Trump may fire Yellen and may start a trade war that is why the market may drop quickly at the hint of a Trump victory. Price of gold may also rise quickly according to them. On the other hand, according to them, a Hillary victory will stabilize the market and cause less volatility because Hillary’s administration is a continuation of the Obama administration’s policies which has brought sluggish growth, stable dollar and stocks will keep going higher. These finance gurus know as much as you and me.
Blog
Stay Healthy and Fit as you Age
STAY HEALTHY AND FIT AS YOU AGE
Do not act on any information in this blog without talking to your doctor.
If a doctor goes by my family health history it would be easy for him to conclude that I only have a short life to live. My paternal grandfather and ALL my paternal granduncles died of either heart disease, heart attacks or strokes. Many of them died in their forties and fifties. My paternal grandmother and most of my paternal grand aunts died of diabetes also at a relatively young age, in their fifties and early sixties. My father’s side of the family was always plagued with elevated triglyceride, high cholesterol levels and hypertension. My mother’s side of the family was plagued with asthma, emphysema and chronic pulmonary diseases. None of my grandparents, grand uncles and grand aunts died of old age.
Because of my family history and also due to my ignorance, in my first 30 years of life my diet consisted of low fat, low protein and high carbohydrates. For breakfast I ate bread, pancakes, donuts, muffins, cereals, waffles, bagels and cakes. I avoided eggs (because they have high cholesterol content), bacon, sausages, butter, cheese, ham and steaks. For lunch I loaded up on pasta, bread, rice, French fries and all types of starches you can imagine. My dinner consisted mostly of different types of starches and vegetables with very little meat (because they are high on cholesterol). My annual check-up just a few days shy of my 30th birthday revealed that I had hypoglycemia and my doctor recommended that I change my diet. I must have misunderstood him because the way I changed my diet was to add on more meat to my diet without easing off on my sugar and starch intake. The result was disastrous. I gradually gained weight and the result of my blood test a year later confirmed that whatever I was doing was not working. I had elevated cholesterol and triglyceride levels, my glucose was high and my blood pressure was consistently 170/90. It was only then that it became clear to me that my doctor’s advice was for me to reduce carbohydrate intake—not necessarily to increase protein. It was extremely difficult to heed my doctor’s advice. I am the type of person who can consume a 1.5 quart container of Breyers vanilla ice cream in one sitting. Oftentimes I even added vodka or brandy to it. But just the same, chances are if I opened a 1.5 quart container, it did not make it back to the freezer.
My day of reckoning came when I went to San Francisco, California for a 2 day conference. My flight was scheduled to depart at 3pm from Newark airport. I worked for a tour operator so I often travelled first class for free. I planned to forgo lunch to take full advantage of the perks, the in-flight first class meal and free adult beverages. I had a big corn muffin at my desk about 8 that morning and around 10am, someone brought out a big cake on the occasion of an office mate’s birthday so I took a big piece of the cake. I was hungry when I got to the airport at 2pm but I said to myself I could bear it for another half hour until boarding time. I don’t know how it is now since I have not been in first class for quite some time but back then, the airline crew pampered first class passengers and served them alcoholic drinks as soon as they were seated. We had priority boarding and by the time the last passenger boarded, I had already consumed 2 glasses of champagne. Before the plane moved I finished three more drinks, 3 shots of Chivas and gobbled up an assortment of appetizers. When the plane started moving, the flight attendants cleaned up and folded back our tray tables. As the plane was taking off, I felt a little nauseous and could not wait until the “fasten your seat belt sign” was turned off. I had a window seat and the seat next to mine was empty so I was able to quickly get up and run towards the lavatory. The next thing I remember I am lying down the aisle and I am hearing a woman’s voice on the PA announcing “if there is a doctor on the plane please come over…” I soon realized I passed out on my way to the lavatory. A stewardess has loosened my belt, unbuttoned my pants and held me down when I tried to get up, saying “stay on your back sir, the doctor is coming”. Soon the doctor was examining me while I was lying on the floor and asking me questions. “Do you have any medical conditions? Why do you think you passed out?” I calmly replied, “I have hypoglycemia and I think I had too much to drink with too little to eat”. “You should take a return flight as soon as this plane lands. You need a full examination”, he concluded. The stewardess helped me up and got me back to me seat. “Do you have pain in your chest?” she asked, pointing to her own chest. “No, why? And where are my glasses?” I replied with a puzzled look on my face. “They’re in your shirt pocket, you took a nasty fall”. I took my eye glasses out of my pocket. They were bent out of shape and I had to twist them back into shape so I could wear them. I felt better two hours into the flight after eating the first class meal the airline served. I refrained from any alcoholic drinks and only ordered diet coke, tea and coffee. I started feeling soreness in my chest area so I went to the lavatory to check it out. When I unbuttoned my shirt I noticed a 2 inch by 2 inch welt in the middle of my chest. I also noticed a bruise on my forehead just above my right eye. The locations of the injuries led me to conclude that when I lost consciousness, I must have fallen forward, bumped my forehead on the back of an empty seat then my chest hit the armrest. I learned two important lessons from this eye opening experience. First, when you become unconscious you will feel no pain. There must be something in our brain that disconnects the pain receptors. A protective mechanism that protects us from pain. Second, I was not healthy.
So when I got back home, I immediately called my PCP and related my experience on the plane. He ordered different types of tests for me which were done over the course of 2 months. These included, blood work, electrocardiogram, nuclear stress test and glucose tolerance test. He concluded I was pre-diabetic, I had hypertension and elevated cholesterol. So, at the age of 32, my doctor put me on Lipitor to lower my cholesterol and a beta blocker for hypertension. And he threatened to put me on diabetes medication if I fail to shape up. To make a long story short, I struggled for 7 years, gradually gaining weight, experiencing palpitations, extreme fatigue, drowsiness at around 3pm, insomnia and sleep apnea. I am only 5’8” and weighed almost 200 Lbs. If I walked only a few blocks or climbed the stairs I had trouble catching my breath. My life changed when my son who was then in high school asked me, “Dad, why don’t you walk around the yard instead of spending the entire day in front of the television?” The rhetorical question hit me like a lightning bolt. The next day, I walked around the yard for 15 minutes just to show my son that his dad is not a lazy bum. Then each day, though I struggled, I picked myself up and walked a few more steps until I started jogging, then running a mile then 2 miles a day. I got my old bike repaired and started riding it for long periods on weekends, sometimes for 3 hours. Although I lost 10 pounds quickly due to the physical activity, I was not able to take control of my diet until I accidentally came across a book entitled “Protein Power” by Drs. Michael and Mary Eades. Two statements (paraphrased) in the book became etched in my mind, “The body does not need carbohydrates…” and, “…fats in the absence of carbohydrates are good…” Since I secretly love fats anyway, I resolved to give the diet a try. I followed the high protein diet by eating 2 eggs and bacon for breakfast, broccoli and fried chicken or a burger with no bun for lunch and chicken, fish, pork chop or steak and leafy green vegetables for dinner. After 15 days on this “protein power diet”, what a surprise! I lost 15 pounds! The best part is that my blood work taken 1 month after I started this diet showed my cholesterol, triglycerides and glucose all went down close to normal levels. My blood pressure was consistently much lower than normal for 3 months so my doctor took me off the hypertension medication. I continued taking only the Lipitor.
That was 15 years ago. I have an occasional craving for sweets and starches and on those occasions, I make an exception and still consume a 1.5 quart container of Breyers vanilla ice cream in one sitting just to get it out of my system. But generally, I remained faithful to the diet and only consume less than 35 grams of carbohydrates a day. I feel much stronger today, physically and mentally than 20 years ago. My weight is down to 165. I kept up with walking, jogging and running at least half an hour every day. In fact, I stopped taking Lipitor 2 years ago but did not tell my doctor. Thank God my blood test readings are still all normal even without taking any regular medications. My doctor keeps telling me, “Continue doing whatever you’re doing….”, so I continue eating eggs, bacon and steaks. I have so much energy that I now go to the gym thrice a week for strengthening and conditioning.
In summary, I eat a low carb diet, exercise at least half an hour each day, I almost always drink 2 glasses of wine with dinner, I drink at least 8 glasses of water every day, I usually get 7 to 8 hours of sleep and I go out of my way to avoid any type of stress. Stress can cause anxiety and depression and can weaken the immune system. When I’m feeling stressed out and I feel that my mind is in turmoil, I do the following:
- While sitting in front of my desk, I put my elbows on my desk, my hands on my face, empty my mind so I am thinking of nothing, which is similar to what others may refer to as meditation, hold my breath, try to tense all the muscles in my body from head to toe, then exhale. I repeat the process 3 or 4 times.
- Then I push my chair back, grasp the front of my desk and do 15 squats, as shown on the picture below. I do at least 3 sets of this exercise during the day. Squat exercises offer many types of benefits. Click on this link to find out more: http://www.beautyandtips.com/sports-and-fitness/10-benefits-of-squats-and-why-every-girl-should-try-doing-squat-exercises/
If I am home, I do plank exercises or push-ups and sit-ups, doing as many repetitions as I can. Life is good. Why not make it even better in retirement!
Why wait until retirement to explore the world?
Travel used to be unaffordable. Many Americans waited till retirement when they felt they had enough money to explore the world. Believe me, the money you will spend traveling is money well spent. By retirement age most people are not fit enough to climb up and down tour buses, let alone walk to tourist attractions to take pictures. Whenever I join sightseeing tours, I always feel sorry for senior citizens who beg the tour guides to let them remain on the bus on stop-overs requiring a short walk to a certain tourist spot.
Why wait until retirement to explore the world? Why not do it now and enrich your life and the lives of your children? Take two meaningful trips every year. Explore the national parks for at least two weeks in summer and go overseas for at least a week between November and New Year’s Day. Most companies offer a 2-week paid vacation each year, and many companies offer 3 weeks after a certain period of employment. Most companies in Western Europe offer at least one month vacation every year. Travel is easier than you think. Nowadays, you do not need a travel agent. You yourself, on your own, can book your flights, car rentals and hotels online through the following websites, Travelocity, Orbitz, PriceLine, Kayak, Expedia, TravelAdvisor.com, Hotel.com, and Bookings.com. For local sightseeing tours, I like Grayline and Viator. You can snag some “real bargains” from the above-mentioned websites such as: $125 a night at Elbow Beach Hotel in Bermuda in the month of May and accommodations at four star hotels for about $100 per night during the low season in Rome, Paris, London, Munich, Amsterdam and Geneva. Because I have been following my own advice, I have visited most of America’s 58 National Parks. My favorites are Arches, Canyonlands, Bryce Canyon, Glacier Bay, Grand Canyons, Yellowstone, Sequoia and Volcanoes National Park. I love driving so I do not mind driving thousands of miles while enjoying the scenery on the way to a certain destination. Some of the most scenic routes I’ve driven on in America are from Hilo to Kona in the big island of Hawaii; Highway 1 from Half Moon Bay to Santa Cruz; Highway 5 Sacramento to Vancouver, Canada; Highway 70 Denver to Provo; Highway 191 Crescent Junction to Bluff; Highway 89A from Lake Powell to Kanab; Lolo Pass Road from Mt. Hood Highway 26 to Lost Lake, Oregon; Highway 75 from Sault St. Marie to Mackinaw City; Skyline Drive, Shenandoah National Park; Taconic State Parkway, N.Y. State; Highway 81 from Scranton to Syracuse. Whenever time permits, I find a way to rent a car to take in the scenery and explore the countryside even in foreign countries. The most memorable road trips I’ve taken were from Puerto Vallarta to Guadalajara; London to Bristol; Chamonix to Pisa; Salzburg to Venice; Torino to Rome and Berlin to Luxembourg. I estimate that I have spent over $200,000 in travel expenses in the past 20 years. For me, this is money well spent. Travel has been good for my family and me, for our health and well-being. My children had travelled to several foreign destinations before entering high school. The priceless experiences opened their eyes on how other people outside America live, on what side of the road they drive, the languages they speak, the food they eat, and most importantly, how lucky and privileged they are to be living in America. I was born with wanderlust. As soon as I complete one journey, I am planning and looking forward to the next one. That is why I just don’t understand people who have not caught this “disease”. I have a friend who can well afford to travel but who says he does not want to go to Hawaii because “it’s too far”. There are those who fly to exotic places then sit by the pool reading a book and sipping margaritas…all day long. I have a friend who goes to Cape Cod in the summer and flies to Las Vegas in November…year after year.
Whenever I travel to a new place, I like exploring the food, talking to locals even in sign language and going to the market places where locals go. I can only hope that the reader will catch wanderlust and find themselves booking trips to wonderful destinations such as Bhutan; Maldives; Goa, India; Machu Picchu, Peru; Kathmandu, Nepal; Durban, South Africa; Alice Springs, Australia; Petra, Jordan; Masada National Park, Israel; Chamonix, France; Interlaken, Switzerland; Naples, Italy. Before you leave this world, don’t you want to see the land of the midnight sun, the Alps, Pompeii, Stonehenge, the Eiffel Tower, the Great Wall of China, Taj Mahal and a phenomenon called Aurora Borealis? Think of the money you will spend as a small investment for your mind and spirit. Many years from now if you end up in a nursing home and cannot walk anymore, you might still remember those amazing trips that you took in your youth and tell stories of your wonderful experiences to anyone who would be kind enough to listen.
Consumer spending keeping the stock market up
The 3rd quarter earnings report of most of the reporting companies in the S&P 500 beat analysts’ estimates. This is due to a combination of higher sales due to more consumer spending and reduction of expenses because companies have become more efficient. This combination of more revenue and less expenses is giving many companies a healthy cash flow that should find its way into capital investments and stock purchase.
What is fueling consumer spending? It seems that Americans are resigned to a Hillary Clinton presidency and they think it won’t be so bad. There also has not been any terrible news lately. In addition to the good earnings reports, oil is holding at about $50 per barrel and copper price has been hovering around $2 per pound. The doom sayers are wrong again about the big stock market crash that they predicted would happen before the U.S. presidential elections. The BIG CRASH will happen but it will not be before November 8. Folks, it may not even happen until 2018. I see the road to the next recession as a slow bleed not a heart attack. We are due for a 10-20% correction since the last correction was in the middle of February this year. We will discuss this on the next blog. Stand by.
Elections & the Stock Market, What Me Worry?
If you have been following my articles, you know too well that I am a fiscal conservative. I had been tough on President Obama from the time he took office but I must admit that I made a lot money since 2009. Many of my readers have written me emails asking how the stock market will react if Hillary wins, if Trump wins. First of all I agree with Larry Kudlow that in the short run Trump’s tax plan of reducing individual, corporate and capital gains taxes is good for the economy and for stocks as was proven by JFK, Reagan and Bill Clinton. Reducing tax on foreign capital is also great for the economy because repatriation of foreign earnings is money that will find its way into the stock market. Folks, remember my example on the basics of the law of supply and demand which is again repeated below:
Imagine you are 1 of the 5 remaining finalists on the CBS show SURVIVOR. You have not eaten any solid food in 5 days. Jeff Probst, the host brings out a slice of pizza and gives each person $100. He asks the players to bid an amount for the slice of pizza and the highest bidder wins. Since there is only one slice, it is safe to say that each player would scramble to bid $100 for that single slice even though that slice normally costs only $2 in any fast food court because once that slice of pizza is gone, it’s gone. What if there are 6 or 7 slices? What if there are 20 slices? Then the bidders will not have to bid so much because there are more than enough slices to go around. Everyone can get a slice even with a low ball offer.
How does this relate to the stock market? Well, if billions of dollars keep entering the U.S. economy, where will it go? Investments, new business ventures, real estate and yes the stock market. Very little of it will go into treasuries, due to low interest and some of it will go into bonds. But a great amount of it will find its way into the stock market. Having said that, the polls indicate Hillary will win. Hillary’s plan to increase taxes on those earning over $250,000 and increase tax on corporations from 34% to perhaps 40-50% and reduce estate tax exemption from $5 Million to $3.5 Million will have a negative effect on the economy in the short run. In the long run, economists have long argued whether or not more money in the hands of the private sector is really better than more government spending. Will $100 million in the hands of the board of directors of Procter and Gamble really be better than giving it to welfare recipients? Procter and Gamble would probably invest the money on new equipment, increase hiring, salaries and bonuses and the recipients will spend the money thereby putting more money into the economy. Welfare recipients would probably spend the money on food and household necessities thereby putting more money into the economy. Your thoughts.
Countdown to the next stock market crash
We did it once before in 2007, we can do it again! The countdown has begun to the next bear market, a 10% to 20% correction. The Dow reached an all-time high on August 15, 2016 of 18,723. Since then it has not breached that resistance level. A 10% correction from this resistance level would bring the Dow down to 16,851 and a correction of 20% would bring the Dow down to 14,978. Friends, I do not think we will experience a correction that will breach the 52-week low of 15,451. It may breach this support level if the interest rate curve inverts which portends a recession in which case the Dow may lose 40-60% of its value.
I just don’t see it yet folks, no matter what the gloom and doomers say. The interest rate curve is not flattening, the economy is sluggish and the Feds will not soon raise interest rates. But even if the Feds raise the interest rate by 100 basis points right now, it is still sustainable in this current economic climate and it will not cause a negative yield curve.
Standby folks. Those who made a lot of money in 2009 just by following my posts, will do it again when the next recession hits. Meanwhile, be happy to be earning 4-8% with your money invested in VTSAX and other S&P 500 Index funds just like many other investors. When the bear market that follows a recession hits, that is when we will make our real money.
Follow this blog and we will keep monitoring economic indicators that may cause the breach of the resistance and support levels in the Dow, S&P and NASDAQ.
Happy fishing!!!!
Living Rich & Loving It
The book I wrote, "Living Rich & Loving It" which is available on Amazon Kindle strives to develop a vision that being rich is not only about achieving financial independence. It’s about living a happy, healthy, simple, balanced and fulfilling life with minimal stress. This is a cradle to grave guide to life book. If you have goals, dreams and aspirations in life, you have a sense of direction but you still need a road map to take you from here to there. I hope this book will serve as that road map for you.
Learn how to:
- Find a job you love. If you cannot wait to get up and get to work every morning, then you’ve found the job you love. Otherwise, you need to read the chapter, “Find a Job You Love” and the chapter, “Increase Your Income with these Ideas”.
- Create a budget so that you will always have a surplus at the end of each month.
- Maximize contributions to your retirement account and accumulate more than a million dollars for retirement.
- Determine if converting to a Roth IRA or Roth 401k is right for you. Ed Slott, the IRA guru says converting your IRA to a Roth IRA is tantamount to moving your account from “accounts that are forever taxed to accounts that are never taxed”. WRONG! See Chapter, “Your Retirement Plan”.
- Never lose money in the stock market by using “The KISS Principle” and “Auto-Pilot Strategy”.
- Predict the next recession by watching the “yield curve”. It is so simple yet so effective.
- Calculate the amount of life insurance you need. Insurance brokers will hate this chapter. The answer will surprise you.
- Avoid Veblen Goods – the savings will amaze you.
- Shop around for everything. If you are struggling to make ends meet, this chapter will show you why. Learn how to save more and spend less.
- Purchase your primary residence – Pros and cons of owning vs. renting. The analysis chart shows the clear winner which will surprise you.
- Distinguish good debt from bad debt---when borrowing makes sense. Analysis table proves that some debts are good.
- Never take unnecessary risks. Don’t do anything stupid. This chapter shows that stupidity is the great equalizer in life. Doing any of the things on the list may change your life or worse may end your life in the blink of an eye.
- Stay away from rental properties. This chapter tells you why it is not worth being an absentee landlord.
- Handle emergencies without an emergency fund. The analysis chart shows why you should not have an emergency fund. The figures will astound you. This chapter also shows the reader where to get cash for emergencies once you get rid of your emergency fund.
- Never ever listen to Suze Orman that 401k loans are taxed twice. 401k loans are not taxed twice. This chapter proves it.
- Plan for college. How will you pay for your children’s college education? Read the many different ideas in this chapter on how to increase your children’s chances of getting offers from good colleges and universities. See the 9 simple steps you can take in chapter, “Planning for College”.
- Increase your income. Make more money in your spare time with these ideas. When you read the money-making ideas in this chapter, you will scratch your head and say, “why didn’t I think of that?”
- Create a document storage and retrieval system. So simple yet so effective. It will free up a lot of your limited living space.
- Implement a stress-free personal time management system. This system will organize your day and free up plenty of your time for use at your leisure.
- Store and safeguard passwords – Simple trick will help you create and remember strong passwords.
- Maximize your Social Security benefits – In light of the elimination of “File and Suspend” and “Restricted Application” strategies, the chart shows claiming strategies for 1) Single never married, 2) currently married, 3) married at least 10 years, divorced at least 2 years, currently single, 4) divorced, has remarried and currently married, 5) widow/widower, 6) surviving divorced spouse, married at least 10 years, currently single or remarried after the age of 60.
- Find the best places for retirement – Some of these retirement communities are surprising. Some viable locations have ½ the cost of living of most U.S. cities.
- Pay for nursing home and long-term care. The cost of nursing home and long term care can wipe out your entire estate. Read this chapter for solutions.
- Qualify for Medicaid benefits for LTC. You do not have to spend down your savings. This chapter explains many different ways other retirees have been dealing with the “spend down” dilemma.
- Establish estate planning. How to protect your estate from estate tax and inheritance tax.
- Enrich Your Life by Exploring the World – Travel as soon as you can while you are still young. This chapter discusses why the money you spend traveling and exploring the world is money well spent.
- Stay Healthy and Fit as You Age – There are a few minor behavior modification changes that you can put into practice that will keep you healthy throughout your retirement years.
Ready to live a Rich, Happy, Healthy, Simple and Balanced Life?
Buy this book here!
Stock Market Investors, Fasten your Seatbelts
As of this writing, all of the major market averages have been declining significantly. The Dow Jones Industrial Averages (DOW) is down 400 points, NASDAQ, 90 points and the S&P 500, 45 points. If you read the headlines right after Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee today, July 21, 2010, you would think the world is coming to an end. AP prints, “STOCKS FALL SHARPLY...” while Reuters states, “OUTLOOK UNUSUALLY UNCERTAIN….” The fact is that a sluggish economy will benefit smart investors. Smart investors do not act solely on emotion and fear because they are savvy enough to know that harbingers of gloom and doom who write about the stock market, the economy and investments know just as much as Mr. Adam Monk, the stock-picking monkey who reportedly made a lot of money for those who followed his picks. Gloom and doomers quickly reverse themselves the moment the wind changes direction. It is like following the herd which is not hard to do.
The fact is that a sluggish economy will keep inflation and interest rates low making it easier for consumers to purchase. Prices of goods especially large ticket items such as automobiles, home appliances, furniture and computers will be kept in check. The price of real estate had been rolled back to a decade ago in many areas of the country. This, coupled with low mortgage rates should encourage first time homebuyers and real estate investors alike to snap up bargains. A sluggish recovery will put more pressure on this administration to rethink its goal of increasing taxes. A sluggish recovery would prove to this administration that taxing the rich and increasing entitlements is not the way to economic recovery and prosperity. A sluggish recovery means the consumer is not spending as much, as expected in a typical expansion. Hence, the consumer has more money to pay down his debt and to increase his savings. He is poised to spend. He may go out on a spending spree at the onset of any type of good news because in our culture, in a free market society, the consumer has an inherent need to keep up with the Joneses. Another important factor is that many businesses are reporting record profits but are reluctant to invest and hire due to uncertainty about taxes, Europe’s debt crisis and more government regulations. When the uncertainty goes away, the recovery may catch fire quickly and may even overheat. The European bank stress test results to be disclosed this Friday, July 22 may add to more uncertainty which may cause investors to dump stocks. But the savvy investor can look beyond the horizon.
Geithner and Bernanke know what is going on with the economy and they have the power to change things. Bernanke told lawmakers today, "If the recovery seems to be faltering, we have to at least review our options, but no further action is planned for now because the economy is still growing”. Geithner has the power to counsel President Obama with regard to taxes and he must have told Obama that the private sector does not like tax increases. I predict that this administration will take appropriate action if signs point to another recession which President Obama will have to own. He will not let this fragile recovery slide back into a recession because that would most likely seal his fate as a one-term president. To me, fixing this economy is as simple as following what JFK, Reagan and Clinton did, and that was to reduce corporate and capital gains taxes. Obama may be compelled to follow the same route if the economy appears to be sliding back into a recession and once again, that would be good for investors.
If this recovery continues to be sluggish but does not fall back into a recession, stock prices will continue to rise even though they may turn sideways some days and drop halfway to the floor other days. Yes stocks will rise and fall but they will not sink to recession level prices unless there is another recession. Economics 101 and plain common sense.
This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.
Any opinions and views expressed herein are the sole responsibility of the writer.
QE2 = Printing Money
Just as gay no longer means happy, QE2 no longer means Queen Elizabeth II. Lately, the business world has been using the term QE2 a lot. QE2 is short for the second round of the United States Federal Reserve’s (“Fed”) Quantitative Easing (“QE”). This second round of QE is estimated to total $600 billion. The first QE which was spaced out over one year, between 2008 and 2009 totaled almost $2 trillion.
Bloomberg News reports that the average person does not understand the function of the Federal Reserve. Therefore, it is easy to conclude that QE is even less understood by the average person. It is my goal to unravel the mystery of QE in this article. To simplify, QE is another term for “printing money”. The Fed, which is the Central Bank of the United States, regulates the amount of money in the economy by selling and buying bonds and by increasing and decreasing interest rates to member banks. The Fed has several ways of printing money. It can issue Treasuries, i.e. notes, bills and bonds and it can also just credit itself as in this case of Quantitative Easing. The Fed simply credited its balance sheet for the amount it needs to buy bonds from banks and other financial institutions. The assets the Fed will buy with the money it credited itself are not limited to government bonds but are expanded to include mortgage backed securities and corporate bonds. The Fed’s objective is to stimulate the economy by encouraging lending. Reducing interest rates to almost nil has not worked to stimulate lending so this is the last resort for the Fed. When the Fed buys idle assets such as treasury and corporate bonds, the banks and financial institutions such as Goldman Sachs receive liquid assets on their balance sheets in exchange for idle assets thus increasing the amount of cash at their disposal. The Fed is hoping that the banks would ease up on lending and lend this new found cash to businesses and individuals. The assumption is that businesses that can borrow would use the money to increase capital investments, expand operations and hire more workers. For the banks to profit on QE, the newly found cash will have to be invested somewhere, i.e. by lending it to credit worthy borrowers or by putting the money in other investments such as into the stock market. This is the main reason of the sudden surge in equity prices at Bernanke’s announcement of QE2. The Dow Jones Industrial Averages (DJIA) increased by 11% since August in anticipation of the announcement which happened in early November.
QE2, a.k.a. “printing money”, a.k.a. “expansion of the money supply” will reduce the value of the dollar. This is basic Economics; The Law of Supply and Demand. The dollar has been losing value against major currencies since the announcement of QE2. Increasing the money supply will also increase inflation. The word “inflation” is just as mysterious to most people as any economics term although it is one of the most overused words today. To simplify what it means, imagine you are 1 of the 5 remaining finalists on the CBS show SURVIVOR. You have not eaten any solid food in 5 days. Jeff Probst, the host brings out a slice of pizza and gives each person $100. He asks the players to bid an amount for the slice of pizza and the highest bidder wins. Since there is only one slice, it is safe to say that each player would scramble to bid $100 for that single slice even though that slice normally costs only $2 in any fast food court, because once that slice of pizza is gone, it’s gone. What if there are 6 or 7 slices? What if there are 20 slices? Then the bidders will not have to bid so much because there are more than enough slices to go around. Everyone can get a slice even with a low ball offer. Let us get back to the single slice example but add quantitative easing to the scenario. 5 players have $100 each to buy up a single slice of pizza but you just happen to have a checkbook in your back pocket. Every player bids $100 but you hand over $100 cash and a $100 check. You get the slice of pizza. That my friends is how QE works. With your checkbook in hand, you are the Fed.
The Fed is hoping to stimulate the sluggish economy with its QE2 move but many economists think that the move may only spur inflation, not the growth needed to reduce the high rate of unemployment. Officials of other countries including China, Brazil and the EU were quick to criticize Bernanke’s move arguing that QE2 only serves to promote currency wars. After all, Japan’s decade long QE did not work, why should it work here? A cheap dollar is not good for foreign exporters of goods into the United States because their products become more expensive for Americans which causes higher inflation. I am of the opinion that QE2 is not a good idea. QE1 was necessary to restore stability to the banking system but I find this second round of QE as an arrogant and a largely political move. Arrogant because Fed’s Chairman Bernanke knows that the dollar is the global reserve currency so the printing of money can be done without bankrupting the dollar. Political because President Obama’s popularity will keep plunging unless the 9.6% unemployment rate is reduced. The Fed’s QE2 move seems to be calculated to substantially reduce unemployment before the next presidential campaign goes into full swing.
Finally for investors, be cautious. If you are invested in the stock market, watch the market carefully. This newly printed money will be looking for a home. Some of it will inevitably find its way into the stock market driving equity prices up. The “feel good effect” of seeing your investment or retirement account go up in value may indeed spur an increase in your consumption pattern contributing to the growth in GDP but this “feel good effect” is not a long term condition. This intervention in an economy that is slowly but surely on the way to recovery is unjustified. It may lead to the next bubble burst.
This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.
Any opinions and views expressed herein are the sole responsibility of the writer.
10% Unemployment not enough to derail recovery
When I wrote my article entitled “SLUGGISH RECOVERY, GOOD FOR INVESTORS” in July before I went on my summer vacation, many “gloom and doomers” thought I was crazy. In fact I was bold enough to predict an 11,300 Dow for the end of September. That was on July 21 when the DJIA closed at 10,120. We are not quite at 11,300 yet but the DOW closed up at 10,860 last Friday, September 24, 2010.
The direction of the market is really not hard to predict. Now that the NBER has ruled out a double dip recession, stock prices will keep going up unless there is a new recession. Yes there will be days when stocks will go up, down and sideways but investors will continue to be bullish if the economy is still expanding. 1% to 2% GDP growth is good enough to continue an upward trend in stock prices. This statement is easily proven. In the beginning of the year, many economists predicted the economy to grow 4% to 5% this year. The projection had been revised downward several times and stocks tumbled each time the lower projection was announced. The knee jerk reaction of investors is to dump equities in favor of bonds and tangible assets upon hearing a lower growth rate. Then investors become accustomed to the sluggish growth, after which they start buying stocks again. The bullish trend will not stop unless there is another recession. Even if there is negative growth in one month, 2 months or even in an entire quarter if the economy recovers again in subsequent months to show growth in GDP, the market will come back. There will be fluctuations and corrections in the market but the sophisticated investor will remain invested in equities unless signs point to another recession. At the risk of repeating myself, commodity prices are up, corporate profits are up, many publicly held corporations including numerous financial institutions have resumed paying dividends because of their huge profits, many publicly traded stocks of companies in a wide assortment of industries have hit a 52-week high. These are not signs that there is another recession just around the corner. Another proof is that inflation is back. It means that the deflationary period is gone and the economy is starting to heat up again. Foreclosures are up and housing starts are down, but this is a normal cycle after homeowners enjoyed double digit increases in home prices for many years.
The not so rosy sector of the economy is the high unemployment rate. 1% to 2% GDP growth will only make a small dent in the unemployment. We need 8% GDP growth like in the Reagan expansion years to reduce unemployment to 5%. Many economists are of the opinion that the reason for the high unemployment rate is the reluctance of small businesses to invest and expand because of the uncertainty in taxes and new regulations. I disagree with their opinion. In a free market economy like ours, the desire to make money is so intense and the chance of success is so high compared to a government controlled economy that most smart entrepreneurs will not postpone their plan for growth and expansion just because of regulations and a few percentage increase in taxes. However, I agree with Rep. Paul Ryan (R-Wisc) that keeping the Bush Tax Cuts and reducing spending will accelerate business investments. Paul Ryan who is a ranking member of the Congressional Budget Committee and Ways and Means Committee is a Reagan conservative who is touted as a rising star in the Republican Party and possible nominee for the 2012 presidential election.
Now that the “great recession” is over, it is wise to review what caused it. The NBER, a historical recorder of past events declares the recession started in December 2007 and ended in June 2009. The “great recession” was caused by the consumer who stopped spending, caused by worries of the stability of the banking and financial system, caused by massive default of derivatives issued by the financial institutions, caused by the housing bubble burst, caused by massive default of homeowners in payment of their mortgages, caused by increase in mortgage rates and high fuel prices. What could be so simple?
I went to a party last Saturday night. The state of the economy became the dominant subject of conversation because many of the guests were sophisticated entrepreneurs and economists. I found that the adage “ask 10 economists a question and you will get 10 different answers” is really true. Most of them disagreed on the state of the economy and how to “fix” the nation’s economic problems. However, the wife of the CEO of a popular restaurant chain offered her solution in the form of a question in between sips of mimosa. She asked “why doesn’t Obama give every American citizen, man, woman, child $100,000 each? If the population of America is now 350 million, wouldn’t one hundred thousand dollars for each person cost much less than the new stimulus of 50 billion dollars the Obama administration had been dangling about? “It suddenly became quite, although some of the party goers dismissed “her solution” with some condescending remarks. I quickly excused myself, went to the men’s room, locked myself inside a stall and pulled my new iPhone which has a calculator. Lo and behold, $100,000 x 350 million is indeed $35 billion…less than the $50 billion Obama stimulus package. When I came out of the men’s room I was surprised that most of the guests continued to discuss and debate her solution. A CFO of an oil refining company said her idea is great because those who deserve the money will find a way to legally take the money away from those who do not deserve it. To me, the idea of this lady, a trophy wife who is relegated to ribbon cutting ceremonies and home decorating made as much sense as ideas from her husband and the other guests.
This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein. Any opinions and views expressed herein are the sole responsibility of the writer