“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com:http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

I trust everyone had good holidays!  For the New Year, I have decided to try monthly blog updates.  These will occur in the middle of each month. 

THE RISING DEFICIT

If you recall, over the past year we established that the causes of the rising U.S. deficit were split pretty evenly between an increase in spending and a decrease in tax rates.  We have also seen that neither of our political parties is willing to truly address both issues.  So we are unlikely to see any meaningful solution, at least not until the elections.

GOOD NEWS on UNEMPLOYMENT?

The U-6 unemployment rate dropped 1.2% from September 2011 through December 2011.  But there is another government number that does not support this improvement at all!  The Bureau of Labor Statisticshttp://www.bls.gov/news.release/pdf/empsit.pdf  shows September age-16-and-over employment/population as 58.4% versus December at 58.5% – virtually unchanged!  Since the workforce is 64% of the population, you would expect the drop in unemployment would be matched by an employment/population gain of 0.8%.  But the gain isn’t there!  In fact, the employment/population rate has been very stable for over two years.  And that has been during a period of high stimulus, including the extended unemployment benefits and the tax holiday regards social security withholding, which added an annual $350 billion into the economy last year.  

A good part of the perceived improvement in the unemployment rate is due to the labor-force-size calculation, which can be affected by people coming in and out of the labor-force.  Both the labor force size drop and the drop in employment rate can be seen very clearly in the chart labeled “Civilian Labor Force Ratios” on Page 28 of the graphs found inhttp://www.richmondfed.org/research/national_economy/national_economic_indicators/pdf/all_charts.pdf.  The employment rate dropped dramatically in 2008 and 2009, and it hasn’t recovered one iota since!

Without the continuance of current stimuli, which is only approved until the end of February, the economy will likely slow and drive up unemployment.  Republicans now have the spotlight on them.  Do they approve what some call an added tax by reversing the tax holiday regards social security?  And do they play the bad guys by ending the ever-continuing extensions of unemployment benefits?  The current depression is not yet as visible as The Great Depression.  One reason is that 99 weeks of unemployment checks are being sent to 10 million jobless Americans.

HOUSING  

A recent WSJ article noted that some big investors have turned bullish on the housing market in the past quarter.  These include the likes of hedge funds run by SAC Capital Advisors, Blackstone Group, and Goldman Sachs Group.  These prestigious groups are out of their collective minds!  Unless the time-tested concept of supply and demand has suddenly become invalid, there is no way this is going to happen.  Perhaps the reason for their bullish view on housing comes from the fact that housing prices have pretty much dropped to their historic inflation-adjusted price levels.  Or, maybe they believe that unemployment has turned the corner and everyone will be getting a job next year and immediately buying a house!  NOT GOING TO HAPPEN!

Let’s first look at housing supply.  Over 11% of U.S. homes are empty, and the U.S. real estate market is about to be hit by another surge of bank repossessions according to RealtyTrac.  And new home sales are unlikely to take off with all the existing homes on the market, some at greatly reduced prices due to foreclosures.

Now let’s look at housing demand.  Per Family Matters: Multigenerational Families in a Volatile Economy from Generations United, as of the end of 2009, the number of multigenerational households (three or more generations) in this country was nearly 5 million higher than in 2007.  That likely means that demand for homes has gone down substantially in two years.  Morgan Stanley projects some 7.5 million more foreclosures over the next five years.  Some of these foreclosed people will rent homes; but many will go into apartments or move in with relatives, further lowering the demand for single family homes.

CONSUMER SPENDING and SAVINGS RATE

Consumers broke out their credit cards for the holidays and spent!  Per Reuters, consumer credit surged 10 percent in November, its biggest jump in a decade.  But increased holiday spending was not universal.  As reported by Thomson Reuters, elite stores like Nordstrom and Macy’s had over 6 percent sales increases; Saks and Dillard’s had over 4 percent.  On the other end of the spectrum, some stores like Fred’s and Kohl’s actually saw same-store sales decline in December.  Increased sales were apparently led by the more affluent portions of our society, consistent with what we have seen with the growing wealth disparity. 

Not only did consumers use credit cards to drive up spending, they have also reduced their saving rate in the recent few months.  After dropping their savings rate to near zero before this downturn started, consumers then recovered the rate to 8%.  But now, their savings rate is back down to 3.5%.  They can’t go much lower, which means they can’t keep using this as a way to increase their spending!  And if the tax holiday regards social security is not extended, the average consumer will no longer have the extra $1,000 per year to spend!

WEALTH GAP

This whole issue of wealth disparity isn’t going away.  According to a recent poll published by the Pew Research Center, nearly two-thirds of Americans believe that the wealth gap is the greatest cause of tension in America.  And that includes 55% of Republicans.  This may become a major issue for Republican front runner Mitt Romney who is portraying this as just a President Obama ploy of encouraging envy and class warfare.   Romney may be completely misreading the electorate.

THE EURO 

I have yet to see any scenario, other than additional delaying tactics, that show how the Euro is going to survive without losing countries like Italy and Greece.  And it isn’t just the excessive amount of debt of these countries.  These countries are not willing or able to cut spending enough to make a difference.  And, even if they do, austerity will just lead to slower economies with less tax income and higher debts.  Many people in countries like Greece don’t even own up to their own responsibility for the problems.  They blame it on banks, on Germany, on the wealthy, etc.  And Germany doesn’t want to eat Greece’s debt because they think that the Greeks are lazy and just living too luxuriously.  Sort of like listening to Democrats and Republicans argue about the U.S. economy!

IRAN 

It seems like we are heading to some sort of major event with Iran this year, with perhaps Iran blocking oil shipments or Israel/U.S. bombing Iran’s nuclear facilities.  Either one will hurt all nations’ economies and will perhaps bring the world closer to war. 

RENEWABLE ENERGY

Germany is leading the way!  Per the Associated Press, “Chancellor Angela Merkel’s government passed legislation in June setting the country on course to generate a third of its power through renewable sources — such as wind, solar, geothermal and bioenergy — within a decade, reaching 80 percent by 2050, while creating jobs, increasing energy security and reducing harmful emissions.”

Apparently the U.S. has no need for “creating jobs, increasing energy security and reducing harmful emissions.”  

PRESIDENT OBAMA

Although it seems a little late, President Obama is finally making some small steps in addressing both costs and jobs.  He is suggesting merging some governmental agencies to reduce redundancy, with a resultant reduction of people.  The people reductions will come through attrition, not layoffs.  On the job front, the President is talking to companies who have brought back jobs to the U.S.  President Obama is proposing tax breaks for such companies while removing tax breaks for those that outsource jobs to other countries.  Why wasn’t he talking to such in-sourcing companies a year ago rather than dealing with the likes of Jeff Immelt, the CEO of GE, who could be the poster child of outsourcing?

These small steps by our President may help get him reelected.  But his steps are baby steps compared to the huge strides this country needs to keep us out of a depression.

SUMMARY

Real unemployment has not gotten better and is likely to worsen as the U.S. moves away from stimulus.  Housing prices will continue to drop because of all the homes already on the market and those coming on the market with continuing foreclosures.  Current increased spending by consumers is temporary, enabled by increased debt and decreased savings, both of which are near their limits.  If the tax holiday regards social security and unemployment benefits are not extended, spending and the economy will slow.  And the breakup of the Euro or some major actions related to Iran are likely to be the triggers that finally cause this whole house of cards built on a foundation of debt to crumble.  And it will likely be this year; or next year at the latest.

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 50.  The current P/D of 50 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 48% to get down to its median P/D and drop 66% to get to my own entry target P/D. 

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com:http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

THIS WILL BE MY LAST BLOG UPDATE! 

I will leave this site up a few more weeks for comments. But I remarked several times that I didn’t want to just be a score keeper as our economy goes into a depression, which I now believe is irreversible.  In the past, I tried to get some enthusiasm going for a boycott on Chinese goods to bring back jobs to the U.S., but I failed.  I tried to get some interest on tariffs on Chinese goods; but not only are we not putting on any tariffs, the currency imbalance between the Chinese currency and the dollar remains almost as strong as ever.  I tried to get some massive green energy program going to bring us out of this jobs problem, but the taxes required to finance this would come from the wealthy (or, as the Republicans like to call them, the “job creators”).  And that is apparently a no-no since, per “Americans for Tax Reform,” 41 senators and more than 235 House members have pledged in writing to oppose all tax increases.  So we (our Congress) feel that the wealthy were not wealthy enough thirty years ago, and we want them to become even MORE disproportionately wealthy since all the tax changes that enabled the current growth of wealth are still in place.

HOW ARE MY BOOK’S PREDICTIONS DOING?

I will use this last update to look at where I think our economy and the stock market will be going in the next year or two.  I will use “The Great Depression of Debt,” Chapter 5, (“What This Depression Will Be Like”) for relative baseline quotes, both to show how well my predictions are going and what I may have missed.

“The government will either have to raise taxes or borrow even more money to stay solvent.  If the government tries to reduce spending by shrinking the size of the government bureaucracy, the resultant increase of people out of work will also slow the economy.”  Well, we are choosing the latter – austerity is the game we are about to play.  In 1937 we tried a similar austerity plan, and unemployment jumped from 14.7% in 1937 to 19.0% in 1938.

“Companies have been optimizing bottom lines rather than investing for future businesses…Companies will respond to any slowdown with layoffs to lower their expenses, and they will implement price increases in an attempt to maintain profits (and their executive salaries).”  We are seeing that even with a slow economy, inflation is running at a 3.5% rate.  There is no reason prices will not continue to rise, and the Fed’s actions on money creation is just going to exacerbate inflation. 

“The number of people giving up on making house payments is skyrocketing…banks have been forced to foreclose on homes and sell them, causing a glut of homes on the market and a deflation of home prices.”  Many experts, such as Robert Shiller, believe that home prices may drop another 25%.  This will cause even more homeowners to be underwater on their mortgages, and more people will stop making home payments.  This will drive additional foreclosed homes on the market.  This problem is a long way from being over and will continue to be drag on the economy.  When home prices drop, even people not in danger of losing their homes begin to reign in their spending because they feel poorer.

“President Bush and Israel may decide to bomb Iran’s nuclear facilities before Bush leaves office.”  Well, Bush didn’t do this.  But bombing these facilities is certainly becoming closer to being a reality and this would definitely upset the balance in the Middle East and in world markets!

“The birth rate will go to zero…No one will want to bring a child into the very tenuous economy that will be gripping the United States.”  Well, it hasn’t got down to zero yet.  But the births in 2007 were 4.3 million, 2008: 4.2 million, 2009: 4.1 million, and 2010: 4.0 million.

“By 2013, people in the United States will have given up.  Unemployment will be over 15%, and the stock market will be down over 60% from its early 2008 price level…The debt problem will slowly diminish because, with inflated dollars, both the consumer debt and the government debt will seem smaller, and they will be paid down with dollars worth far less than they are now.”  I still stand by these predictions.

“There will be cries to go back to the gold-backed dollar.  Young people will rebel en masse against the debt that is being left them…Environmental concerns will take a back seat to getting industry running.  The exception will be the heavy government support for renewable energy sources.”  I was doing well until that last sentence!

“Protest groups will have a new and powerful means to rally forces against the government.  The internet will be used to coordinate protest marches and other mischief.”  We have yet to see the full power of this.  Move-on is planning to back people running for government to nullify the effect of the Tea Party.  And Occupy Wall Street is certainly calling attention to the fact that many in our country feel that the government is being run for the betterment of the rich and powerful with little concern for the average person.

WHAT DID I MISS?

1)      The Euro Crisis

When I wrote my book there were many that were saying that people should abandon the dollar and flee to the Euro.  Now, people are fleeing the Euro.  And this crisis will not end gently.  Sometime in 2012, the Euro countries will no longer include Greece or Italy!  And U.S. banks and others are going to be hit badly.

2)      The Tea Party

The Tea Party’s success in stopping any new taxes is going to make the depression far worse than it would have been otherwise.  They have taken away a valid option for the economy and stifled any hope of compromise.

3)      Gold!  My suggestion on being out of the market and buying TIPS was quite good, but nothing like the price rise of gold.

WHAT TO MONITOR

1)      Will unemployment benefits be extended and the tax holiday regards social security withholding be continued?  If not, Roubini, the chairman of Roubini Global Economics, predicts the “fiscal drag will be $350 billion, 2.3% of GDP,” in 2012.  I actually think that Roubini is being optimistic, which is unlike “Dr. Doom!”

2)      Can Bernanke pull a miracle out of his hat?  The Fed, unlike Congress, is trying to fight the coming depression.  QE3 may include the Fed buying problematic mortgage backed securities from the banks in an attempt to free up money for new mortgages.  But I believe that this will be too little too late.

3)      Is President Obama willing to risk impeachment by going around Congress to spend on additional stimulus?  The president could reference some esoteric emergency regulation that would enable him to spend for the well-being of the economy.  But he would have to do a massive stimulus this late in the game, and the resulting jobs must be self-sustaining, not things like road paving.

4)      The elections.  President Obama will likely be reelected NOT because he has been a good President but because the Republican candidates are so problematic!  The real question is whether our economy is so sick by then that people will realize that “the just say no” Congress people should be kicked out and replaced by people willing/able to think and compromise.

THANKS TO ALL

Thanks to all of you who have purchased my books or have been following this blog.  Good luck to all of you in the coming years.  With a little luck and a lot of monitoring of personal expenses, many will get through this depression with a limited amount of hurt.  We as a country will survive; but we will come out of this a poorer and more humble nation!

Warren Brussee

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com:http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

TWO OPPOSING VIEWS: Austrian versus Keynesian Economics

There are two diametrically opposite views on the economy that are driving many of the votes in Congress.  I have neither the knowledge nor time to explain both of these views in detail, but with two short paragraphs I can probably cover more than most of our politicians really understand.

AustrianSchool.  Central banks are evil and cause all recessions/depressions by periodically creating too much paper/electronic money which then causes boom/busts.  Central banks should be disbanded and we should go back to a gold standard. Austrian economists reject empirical statistical methods, natural experiments and constructed experiments because people and their actions are too complex to fit into formulas.  Austrian theories are not presented mathematically. They rely mainly on verbal arguments based on self-evident axioms. Laissez-faire is the best way to run an economy.

Keynesian Economics.  Well-meaning actions by multiple firms can sometimes cause the economy to operate below its potential, with high unemployment, etc.  This requires policy responses by the public sector, including monetary actions by the central bank and fiscal policy actions by the government to minimize the economic swings.  Keynesians believe that the solution to the Great Depression was to stimulate the economy through a reduction in interest rates and government investment in infrastructure.  Mathematical models and statistics are used extensively in Keynesian economics.

Reading these two obviously simplified explanations, a couple of things stand out.  First, the general mistrust of scientific methods by Austrian followers explains why there seems to be a lot of disbelief in science in general by these people, which include many of the Republican presidential candidates.  This includes their doubts on man-caused global warming and evolution.  It also explains why there is little room for discussion between the two opposing views and why there is such vehemence by the Austrians against the Fed, especially Bernanke because he is a strong Keynesian.

SPEAKING OF BERNANKE!

If Ben were following a list of things he could do to irritate  the Austrians, especially people like Ron Paul, he would not be doing much different than he is already doing.  To further drive down interest rates from their already historic lows, the Fed is doing the Twist where the Fed sells short term securities and buys long term Treasuries.  He is also buying up mortgages from banks to give the banks more cash for lending.  And, he is going crazy on money creation!   Per the Federal Reserve, for the last 13 weeks ending Oct 31, 2011, the M2 money supply has been increasing at an 18.8% seasonably-adjusted annualized rate.  Now THAT is money creation!  Per Austrians, that excessive money creation is guaranteeing future inflation.  And indeed, our current annual inflation rate is already 3.9% through September.  That is the highest it has been since the middle of 2008!

MY FEELINGS!

Congress, no matter what the Deficit committee comes up with, seems determined to make large cost cuts to get our deficit under control.  They seem to want to follow an Austrian view of no more stimuli; let the economy work things out on its own.

Since most of the likely cost cutting measures involve job reductions, this will certainly exacerbate the unemployment problem.  Also, it is unlikely that extended unemployment benefits will be continued.  Nor is the Social Security Withholding Tax Holiday likely to be extended.  And earlier stimulus is winding down. Savings rate reductions, which have been giving the consumers more spending money, are likely to bottom out in February.   States are cutting people to get their budgets under control.  And the European Euro crisis is not going away and is likely to explode within months.  All of these events are very likely – sort of a perfect storm!  And the Fed’s actions are not going to be enough to counter Congress’ direction.

An alternative approach to our economy is to realize that we have the wealth in this country to fight this slowdown.  If we take taxes back to where they were perhaps 30 years ago, recover some of the $6 trillion excess wealth that flowed to the top 5% over the last 40 years, and bring our troops home and put them on our borders, we would have enough additional income and saved costs to enable us to heavily invest in self sustaining jobs, like clean renewable energy.  We could then grow our way out of our problems with lower unemployment and a higher GDP.  But alas, the chances of any of this happening are about zilch!  We are choosing to let our economy slide into a depression without a fight!  The Austrians are going to win!

HOW DUMB DO THEY THINK WE ARE?

Per CNN Money, the top five executives at Fannie Mae received $33.3 million in 2009 and 2010, while the top five at Freddie Mac received $28.1 million. And each company has set pay targets of as much as $17 million for its top managers for 2011.  That’s a total of $95.4 million which will be coming from taxpayers who have been keeping the mortgage finance giants alive with regular quarterly cash infusions.

But Fannie Mae and Freddie Mac executives may have finally reached the tipping point.  Congress is considering legislation to put strict limits on pay at the two firms.  But I am SURE that there will be some legislators claiming that we should not be setting salary limitations.  They will claim that we need to pay those wages to get the required talent!

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 49.  The current P/D of 49 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 47% to get down to its median P/D and drop 65% to get to my own entry target P/D.

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com:http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

WHY THE ECONOMY FEELS WORSE TO WORKERS THAN 9.1% UNEMPLOYMENT

The Official unemployment rate is 9.1%.  The broader U-6 unemployment rate is 16.5%.  Both of those numbers are understated because since the year 2000, 3.1% of the population (which equates to a 4.7% reduction in the workforce) has dropped completely out of the workforce for various reasons.  So, realistically, these two numbers should be 13.8% and 21.2%.

But an additional sinister change has been happening that gets far less publicity than a small change in unemployment.  Companies have been reducing real wages dramatically!  Per a recent article in The NY Times (http://www.nytimes.com/2011/10/10/us/recession-officially-over-us-incomes-kept-falling.html), when I correct for any change in workers per household, real individual wages have fallen 4.9% in the last 4 years (since the start of the recession).  In fact, the rate of real wage decline has actually increased since the recession was declared officially over!

Since from a workers’ standpoint these reductions in real wages have about the same overall effect on their economy as an equivalent increase in unemployment, let’s do a pretend.  Imagine the attention this would be getting if the U-6 unemployment number was 25.3%, which is the above number plus the effect of the 4.9% real wage reduction.  This would be approaching Great Depression type numbers!  This is what workers sense and what their purchasing power actually feels like!  That is why we are starting to see widespread unrest, as is being expressed by the Occupy Wall Street movement.

Wall Street has not felt this effect because companies actually gain by real wages falling.  And sourcing to other countries has enabled companies to keep profits high despite the negative effect on current and former employees.

WHERE ARE CONSUMERS GETTING THEIR SPENDING MONEY?

Americans spent 0.6 percent more in September, three times the increase from the previous month.  So where are they getting their money if real wages are dropping?  They financed the gains from savings, dropping the savings rate down to 3.6%, the lowest level since Aug 2008, the start of the recession. (http://ycharts.com/indicators/personal_saving_rate#startDate=10/31/2001&endDate=9/30/2011&zoom=).  You can see the recent trend in savings rate: June 5.3%, July 4.5%, Aug 4.1%, Sep 3.6%.  At this rate, we will be down to the 2005 low of 0.8% by February, 2012.

This sounds like the same kind of scenario that caused me to write my first book on the coming Depression.  There is a brick wall that consumers are going to hit on drawing down their savings rate to support their lifestyle.  And this time there is no housing ATM to go to for additional funds.  Consumers will literally have to go into existing savings or reduce their lifestyle.

I believe that, given all the concerns of having enough to retire or pay their kids’ way to college, that consumers will cut down on their spending, further slowing the economy.  At that point companies will start feeling the effect on their profits, and by the middle of 2012 (at the latest) the market will start to fall.  Of course, the Fed may come to the rescue again with QE?.  But each one of these Fed “rescues” becomes less and less effective; so any positive effect of the Fed is likely to be short-lived.

We now have two economies.  The economy sensed by Wall Street is still doing reasonably well, with corporate profits holding their own or rising.  The other economy is that felt by the middle class and by the poor.  Their alternative economy is really sick.  But right now, the Wall Street economy is driving Congressional actions.

EDITORIAL ON THE OCCUPY WALL STREET MOVEMENT

I have visited several times with our local contingent of this protest.   I took along my dogs, including a beautiful 120 lb. Newfoundland which attracted a lot of people and enabled a lot of very casual conversation.  Dogs do that!  Here is what I found on these visits.  The protestors included a broad mix of people that seemed to represent overall society, with the exception that probably few Republicans were present.  Some of the people were educated, some not.  Age was diverse, but with the young being predominately the 24 hour people.  Some protestors were driven by personal needs (they couldn’t get a job); others were driven by some sense that there was a major problem with our society, with disproportionate wealth among the favored few being identified as a key component.  Some were there just because that is where the action was.  But the majority had some defined motivation.

Most of the people did not seem to be naïve.  They knew that this protest must continue for a long time to have a lasting effect; nor did the protestors pretend to have a simple solution to our economic problems.  They just felt that with all the lobbyists and money influencing those in government, the ordinary people had not had a voice.  They just wanted to be heard and hopefully have an effect.

The protesters are going to have a hard time surviving the winter, and those against this movement are betting on this.  But I sense that this movement will survive and affect the next elections.  Even without having a specific agenda, they are forcing politicians to make some sort of statement as to the protestors’ concerns.  This is being contrasted by several members of Congress, and some Republican candidates, saying that the solution to our problems is to tax the poor and middle class even more so “they pay their fair share”!  Reading virtually every public poll, these politicians and presidential candidates are out of touch with reality and suicidal as far as their political aspirations.

I encourage every reader of this blog to go and spend some time with these protestors.  Even if you don’t believe in what they are protesting, it is hard to walk away without the feeling that this is a true democratic expression of beliefs; without big money, lobbyists, and other power groups dominating.  How refreshing!

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 50.8.  The current P/D of 50.8 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 49% to get down to its median P/D and drop 66% to get to my own entry target P/D.

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com:http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

If anyone has an interest, I have a new book out, “A Step Beyond Six Sigma: Manufacturing Innovation.”  No knowledge of Six Sigma is needed to use this book.  It is a case-study-driven look at manufacturing innovation, which we need to bring back U.S. manufacturing jobs.  You can find it on Amazon.com.

DO THE “OCCUPY WALL STREET” PROTESTORS HAVE A POINT?

Although the complaints of the protestors are not clearly defined, their complaints generally have a common theme that the wealthy and powerful have taken more than their fair share, and this has hurt the economy and the majority of Americans.  Does data support their stand? Is anybody looking at this in an unemotional way driven by financial numbers?

The net Assets of the U.S. as of the 2^nd quarter 2011 are $72.6 trillion.  Between 1962 and 1983, the proportion of U.S. wealth held by the wealthiest 5% of citizens was approximately 55%.  Per the most recent 2009 data, the wealth of the top 5% is now 63.5% of the total.  That means, in current dollars, the wealth of the top 5% has gone up 8.5% of the total, or $6.17 trillion.  If that excessive wealth flow would have instead been applied to the deficit, our current $14.8 trillion federal debt would be 42% lower at $8.6 trillion. Our current national debt versus GDP is 120%.  If our debt had been reduced by the above $8.6 trillion, the current national debt versus GDP would be 70%.  This would take us back to the same national debt versus GDP we had in 1990!

The size of our national debt is being used as the reason we must cut spending and eliminate many social programs.  But is that really needed?  If we were to put taxes back to what they were perhaps fifty years ago, and maybe even take back some of the excessive flow of wealth by taxing excess assets (jet planes, Picassos, Maseratti’s, huge or multiple houses, etc.), would this not enable us to use some of the money to invest in job growth, give some relief to those underwater on their mortgages, and do some of the other things that the protestors are demanding?  The rest of the money could be used to reduce our deficit.

For those wishing to check my numbers, below are the sources for my data:

http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf,

http://www.irle.berkeley.edu/cwed/wp/wealth_in_the_us.pdf,

http://www.usgovernmentspending.com/spending_chart_1950_2016USp_12s1li011mcn_H0fH0t_US_Federal_Debt_Since_The_Founding.

Is taking back this money un-American, anti-capitalist, socialist, anarchist, etc.?  Or would it be just correcting for a system that has obviously been tainted by biased tax laws and loopholes.  After all, I don’t want to spread the wealth evenly; I just want get back to, as one commenter said, when “we used to have enough regulation that there was a healthy tension between business and government.”  For those who maintain that the very wealthy deserve the excessive wealth flow of the recent years, I ask why?  Are they working harder than they were fifty years ago?  Are they smarter than they were fifty years ago?  Or have they cleverly tilted the legislature and judicial systems to give themselves favorable tax and regulation treatment?

For those interested, I also looked at this on a household level.  For those who get headaches from data, you may want to scan through this very quickly.  Comparing average real household net worth in 1998 compared to 2011, including subtracting the applicable portion of national debt:

1998 Average Household Net Worth, in 2011 dollars including subtracting applicable Federal Debt, = $317,000.

2011 Average Household Net Worth including subtracting applicable Federal Debt= $356,000.

Here are some of the components I used to get the above numbers:

1998 Household Portion of total Federal Debt (in 2011 dollars) = $75,000

2011 Household Portion of total Federal Debt = $124,000

1998 Average Household Net Worth, not including Federal Debt (in 2011 dollars) = $392,000

2011 Average Household Net Worth, not including Federal Debt = $480,000

The above numbers include some good news and some bad news.  The good news is that this country is wealthy enough to handle our current debts without panicking – for example, there is no reason to suddenly stop all social spending or investments in jobs for the future. People around the world are correct in judging that the dollar is a safe haven – we have more than enough assets to back up our debts.

But here is the bad news.  The numbers I used above were for the AVERAGE household net worth.  And averages are very much distorted by including extremely high wealth numbers.  If I look at the MEDIAN numbers, (listing all household wealth in ascending or descending order, then picking the middle number), I get the following values:

1998 Median Household Net Worth, not including Federal Debt (in 2011 dollars) = $99,000

2011 Median Household Net Worth, not including Federal Debt = $91,000.

So, the Median Household Net Worth has actually been going down as Federal Debt is going up.  If I include the applicable portion of Federal debt in the Median Household Net Worth numbers, I get the following:

1998 Median Household Net Worth, including applicable Federal Debt (in 2011 dollars) = $24,000

2011 Median Household Net Worth, including applicable Federal Debt = $-33,000.

So the median income family would no longer be able to afford to pay off their applicable portion of the Federal Debt even if they were able to sell all their assets!

What is the obvious cause of this problem?  It is the increasing flow of wealth to the top tier of wealthy people.  That is why the earlier numbers based on averages looked okay!  We are in reasonable shape as to TOTAL wealth versus debt, including Federal Debt.  But the wealth distribution has gotten terrible, even when compared to “way” back to 1998!

In Six Sigma, the emphasis is to take out emotion and let the data drive decisions.  That is exactly what I am trying to do with the above analysis.

HERE’S THE PROBLEM

If we don’t do anything different and just keep letting things go in their current direction (or even make them worse by reducing a lot of government spending that further costs jobs), all of the above numbers related to disproportionate wealth distribution are just going to get worse.  The ordinary working people will keep losing jobs, replacing them (when they even can) with lower paying jobs.  I indicated in my last update that housing could fall another 35% without some government action (this is supported by a recent report by the U.S. Census Bureau that the number of vacant housing units jumped to 15 million in 2010, up from 10.4 million in 2000.)  We will buy more from China, and China will continue to undervalue their currency because we are afraid of a trade war.  Companies will just keep doing more things overseas and continue to play tax games to minimize their U.S. taxes.  More and more people will be unemployed for so long that they become virtually unemployable.  The proportion of people actively in the workforce will continue to decline, wasting our most valuable resource.  Social unrest will grow as the number of have-nots keeps growing.

And yet we have the financial resources in this country to actively fight all this.  All we have to do is take back some of the disproportionate gains of the last fifteen or twenty years of the wealthy and put tax structures back to where they were historically.  Some of that recovered money should be used to support investments in green energy and infrastructure that weans us from OPEC oil.  And don’t tell me about the recent solar company failure – that is an inherent risk in backing new companies.  Some will fail. But others will succeed and be our future!

JUST TAXING THE WEALTHY IS NOT ENOUGH

As I have said before on this blog, we must cut costs.  But they must be cuts that do not greatly add to our unemployment problem.  Bringing troops home and putting them on our borders is one huge possibility.

We must also reduce imports and reignite industry in the U.S.  Correcting the currency value issue with China would help.  Economists estimate that the Chinese currency is undervalued by 25%.  Some estimates are that this undervaluation costs the U.S. over 2 million jobs.  Some in the U.S. are afraid of igniting a trade war with China.  But this is one of the few wars we could go into that we could actually win (wouldn’t that be novel)!  The Chinese have a lot more to lose than we do because the value of Chinese exports to the U.S. greatly exceeds what we export to them.

We must invest in Green energy companies that create U.S. jobs.  This will eventually help decrease the $323 billion we spent in 2010 on imported oil.  Other countries like China are investing in their energy companies, and our companies are going to be overwhelmed if our country does not help our energy development similarly.

GREECE AND THE EURO

I am not an expert on this.  But one fact can not be ignored.  The more Greece is being pressured with economic reforms, the worse their predicted future economic situation becomes, requiring ever bigger bailouts. Greece will eventually default, abandon the Euro, and go back to their own currency.  But since this will cause unknown financial chaos worldwide, the ball will continue to be kicked down the court by other Euro countries as long as possible through temporary financial bailouts to Greece.  But I believe that eventually Greece will go out of the Euro. Greece will become just too costly to save.  But I don’t know if it will be in 3 months, a year, or whatever.

THE OCCUPY WALL STREET MOVEMENT

This movement is both impressive and frightening.  This morning, when the police were going to evict the protestors, thousands had gathered to resist.  If the decision to evict them (clean the area) had not been reversed, how likely would it had been that there would have been violence?  Although those initiating these protests may be very peaceful, such protests sometimes attract those who are perhaps just looking for trouble.  Or some small spark ignites violence.  Tomorrow, similar protests are taking place at over 200 places around the country.  Let’s hope that cool heads prevail.  Honest discourse would be the desired outcome of all these protests.  And, an honest awareness of the related financial numbers!

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 47.6.  The current P/D of 47.6 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 45% to get down to its median P/D and drop 64% to get to my own entry target P/D.

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com:http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

HOUSING, A CONTINUING DISASTER

Looking at the Case-Shiller inflation-adjusted home price index, housing prices are now only 5% to 10% over their expected inflation adjusted price.  So, much of the housing bubble has already deflated.  In my book, I noted that between 2002 and 2006, the United States built about 1.5 million extra homes due the bubble-driven temporary increase in people buying homes facilitated by foolish mortgages.  Since build rates are currently about 1 million units per year below historical build rates, you would have expected that we would have made up for those excess housing units by now.  If it were only that easy!

The problem was that during the bubble, besides the new people coming into the housing market, many people refinanced or bought homes that were too expensive for their income levels, and those homes have now been or are in the process of being foreclosed.  Per the Center for Responsible Lending, foreclosure projections from 2009 through 2012 will be 9,000,000.  Assuming that these families will no longer be able to purchase a home, we will have taken approximately 9,000,000 home owners/buyers out of the market.  So, at the current lower build rate, it will take 9 years to get the balance of homes on the market back in sync with the demand.  The correction started in 2009, so it will be 2018 before the correction is complete.  And this does not include any long-term effects of lower home ownership being caused by families moving in together, unemployment, and lower wages.  Nor does it include the lowered demand because of the roughly 11 million (per CoreLogic) people who are underwater on their mortgages and unlikely to be in the market for a new home.

So, during the next seven years (minimum), we will continue to have more housing supply then demand, thus lowering prices further.  This will likely cause houses to fall in price far below their historical inflation-adjusted prices.  It will not be surprising if they go to 30% below their expected prices, as they did in the Great Depression.  This means that homes may drop an additional 35% to 40% in price.  This drop is even greater than economist Shiller’s prediction of a 25% additional drop.

I have mentioned before that predictions based on data are the most reliable.  That is why my book has been rather accurate; it was based on consumer debt and housing bubble data that were obvious to anyone that wanted to look.  That is also true for this projection of coming home prices.  Since most economists believe that you can not have an economic recovery without housing turning around, things look very bleak indeed.

Unless the government drives 30 year mortgage rates down to 3.5%, AND somehow forces banks to refinance rather than foreclose, AND enables those who already have lost their homes to get back into the home market, the above scenario will happen.  I think that because of the Fed’s actions, the lower mortgage rates may happen, and that will help the economy through increased levels of refinancing.  But it won’t help those that need it the most because, per CoreLogic, nearly 75 percent of the homeowners that are underwater are paying higher, above-market interest rates on their mortgages.  But their negative equity effectively precludes them refinancing to take advantage of the coming lower rates.

I don’t expect much action on stopping foreclosures or helping those who have already lost their homes to come back into the market.  Neither political party seems willing to take on such a daunting and risky challenge.

OUR LEADERS HAVE GIVEN UP ON STOPPING A DEPRESSION

President Obama’s $447 billion proposed jobs plan, even if it passes Congress, will create some one-year duration jobs.  This would at-most slow the deepening recession and just kick the ball down the road.  House Speaker John Boehner’s solution for the economy, which seems to be cutting spending, lowering taxes, removing regulations for companies, etc. is, in my opinion, a certain way to drive us even more quickly into a depression.  How in the world do any of those things increase demand or create more jobs?  Neither party seems to have any big programs designed to bring back manufacturing jobs or to get people back to work in long-term self sustaining jobs.

Republicans are betting that the economy will get worse and that President Obama and the Democrats will get blamed and lose the next elections.  But the President is grabbing the issue of taxing the rich, which may be a very effective tool against the Republicans.  Democrats’ calls for increasing taxes on the rich may have been bolstered by a new Congressional Research Service analysis. The Sept. 23 report obtained by Reuters concluded that letting decade-old tax cuts for the wealthy expire at the end of next year as scheduled “could help reduce budget deficits in the short term without stifling the economic recovery.”  If tax rates reverted to pre-Bush-tax-cut levels, they would bring in 4.5 percent of the 2009 national deficit, The Atlantic‘s Daniel Indiviglio writes.  Some people belittle these tax increases because the revenues are not higher.  But the budget deficit fix is NOT going to come from just one area!  And this area has perhaps the lowest risk of any.

The Republicans accuse the President of class welfare, and the President has wisely grabbed onto this and claims to be the warrior for the middle class.  The Republicans seem to be taking a risky political stand on this issue.  Nearly three-quarters of Americans say they support President Barack Obama’s proposal to tax households making $1 million or more at the same or higher rate as middle-class households, according to a recent poll from website Daily Kos. The poll found two-thirds of Republicans also support the so-called “Buffett Rule”–- named after famed investor Warren Buffett.  The report’s findings parallel the results of a Gallup poll released earlier this month, which found that two-thirds of Americans favor boosting taxes on households earning more than $200,000 per year.

Given the foolish stand the Republicans are taking on this issue and their unwillingness to acknowledge that the solution to the deficit will require both tax increases and spending cuts, which polls also show that most Americans accept, the Republicans are digging themselves into a political hole.  And given the quality of the current Republican Presidential candidates, President Obama and his fellow Democrats may very well win reelection by default.

PROTESTS AND UNREST

The “Occupy Wall Street” movement has taken to the streets of downtown Manhattan.  It didn’t get much media attention until a few days ago when nearly 80 people were arrested for blocking traffic and committing other minor offenses and a video showing police pepper-spraying a group of women flooded the Internet and TV news broadcasts.  Now the movement has been joined by celebrity activists and political activist Dr. Cornel West. Copycat groups are popping up in other big cities across the country, from Boston to Chicago to San Francisco.

New York City labor unions are preparing to support this protest, likely sending thousands more people into the streets.  The Transit Workers Union Local 100′s executive committee voted unanimously a few days ago to support the protesters. The union claims 38,000 members.

New York City Mayor Michael Bloomberg has threatened to shut down the demonstration.  I believe that he would be opening a huge bag of worms if he tried to do this.  Bloomberg suggested that the protesters are terribly misguided in terms of their policy perspective.  I suggest that Bloomberg just doesn’t understand that this protest is not narrowly focused; it is bringing together a mixed group with various agendas, but all based on the inequalities going on in this nation and how the powerful few people and corporations are not treating the general masses fairly.  Here are some news items just in the last week that feed this kind of anger:

Severance pay for fired CEO’s!  Leo Apotheker received a severance package worth $13.2 million for his 11-month tenure as CEO of Hewlett-Packard, which followed the $12 million his predecessor Mark Hurd received from HP, which followed Carly Fiorina, who got more than $21 million in severance when she left the firm in 2007.  Per The New York Times, Robert Kelly received $17.2 million in severance after being ousted from the Bank of New York Mellon.  Carol Bartz left Yahoo with nearly $10 million.  John Chidsey received $20 million from Burger King.  Baxter Phillips was awarded nearly $14 million after his company, Massey Energy, was sold.  Ian McCarthy walked away from Beazer Homes with $6.3 million.  The real culprits here are the boards of directors who continue to pay CEOs outrageous amounts of money for failure.

In the meantime, per The Commerce Department, incomes fell for the first time in nearly two years in August and consumers dug into their savings to keep spending.

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 46.3.  The current P/D of 46.3 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 44% to get down to its median P/D and drop 63% to get to my own entry target P/D.

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com:http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

TAXES ON THE WEALTHY

I imagine that back in 1962, in the President Kennedy era, there were several millionaires sitting on a patio in Texas sipping single-malt scotch.  They were discussing how much money they would have if they could just pay lower taxes.  Millionaire A said that they should start backing politicians that would create tax loopholes for the wealthy.  Millionaire B opined that this would not work because ordinary people were too smart to let wealthy people so easily siphon off even more of their country’s resources.  Millionaire A bet Millionaire B that the American people were NOT all that smart, and that purchased politicians COULD pull this off by claiming that since wealthy people were responsible for job creation, they should be allowed to keep more of their money.  It didn’t matter whether millionaires were really job creators or not!  Also, politicians could sell this dubious concept of more tax loopholes by leaning on Americans’ sense of “fairness,” that those who worked hard and made more money should be allowed to keep it.  Millionaire B noted that the country may have trouble paying their bills if this is done; but Millionaire A just laughed and said that it was okay, the country would just start squeezing ordinary people more and cutting entitlements!

Let’s see if Millionaire A has been right!  The 2011 estimated net worth of everyone in the U.S. is $58 trillion (from the Federal Reserve), and the net worth of the top 20% went from 80.9% of the wealth pie in 1962 to 87.2% in 2009.  (http://www.irle.berkeley.edu/cwed/wp/wealth_in_the_us.pdf.)  So the share of this pie for those in the wealthiest 20% went up 6.3%.  6.3% of $59 trillion is $3.7 trillion.  Our total deficit is $15.47.  If the 6.3% had not flowed to the wealthiest 20% and instead had been used to pay for the cost of government through higher taxes, our current deficit would be 24% lower.  In fact, it would actually be even lower than that because we would not have been paying as much in interest payments on our debt for past years.

Equally, let’s go back and look at actual paid corporate tax rates (not the pretend nominal corporate rate before loopholes) during that same period.  Corporations in 1962 paid actual taxes at a rate of 20.6% of total U.S. tax receipts versus an estimated 7.7% in 2010.  Total 2010 tax receipts were $2.333 trillion.  If corporations paid the same percentage tax rate in 2010 as they did in 1962, tax receipts would have been up $0.30 trillion, so our 2010 budget deficit of $1.17 trillion would have been 25.6% lower.  Other articles get similar results:http://www.usnews.com/opinion/articles/2011/05/25/to-fix-the-budget-defcit-raise-corporate-taxes.  “During the 1960s, the United States consistently raised nearly 4 percent of GDP in corporate revenue. During the 1970s, the total was still above 2.5 percent of GDP. Now, the U.S. raises less than 1.5 percent of GDP from the corporate income tax. As the Congressional Research Service put it, despite concerns expressed about the size of the corporate tax rate, current corporate taxes are extremely low by historical standards.”

Now, our budget deficit doesn’t have to be zero.  If taxes on the wealthy and on corporations would be the same percentage as they were in 1962, the budget deficit would be much lower (as a rough estimate, less than half its current amount) and NOT be at the top of everyone’s agenda.  And the U.S. would be sitting quite pretty versus the Euro and other currencies.  Sure, we would still have spending and long-term entitlement problems that would have to be addressed; but the budget deficit would not be the emergency it is now!

Remember, my 1962 comparison base was during the President Kennedy Camelot years.  These were not exactly terrible years for our country, and I don’t remember too many marches on Washington because we were mistreating the wealthy and corporations by all the taxes we were making them pay.  Nor was there a great outflow of corporations and wealthy people to other countries that some say will happen if we start closing tax loopholes.

Sadly, the only thing I can conclude is that Millionaire A in my pretend Texas conversation was right, that Americans are so stupid that they continue to let this farce of lowering taxes on the wealthy and corporations continue.  Just yesterday, House Majority Leader Eric Cantor said that this is one of those areas Republicans want to leave to voters: Tax hikes for the rich.  How extremely sad for our country that everyone is ignoring that these tax loopholes are a major cause of our deficit problem!

PRESIDENT OBAMA’S JOB PLAN

Of the $447 billion that the President proposed, the $140 billion for teachers, public safety, and construction jobs is not likely to pass muster by the Republicans.  So we will have a net $307 stimulus plan (at most) that generally creates one-year jobs.  And, even those jobs will be hard to quantify given that the economy is still down-sizing, as evidenced by Bank of America’s recent announcement that they plan to cut 30,000 jobs.

The President has no idea how to pay for these jobs.  He mentioned raising taxes on the wealthy, which certainly garnered no Republican support.  And the other areas he mentioned for financing were to be done over a 10-year period and are most likely already being considered by the Deficit-Reduction Supercommittee.  So passing this stimulus will just make the committee’s job harder. (Speaking of which, The No. 2 Republican in the Senate, Jon Kyl, says he will quit the Supercommittee if there is an effort to cut more than what is already planned from defense.  How satisfying it is to know that everything is on the table for cost cutting and that members of the Supercommittee are keeping an open mind!)

Little of the President’s Job Plan builds for self-sustaining job growth or addresses the jobs lost to low labor cost countries.  His Job Plan is mostly more of the same in comparison to the former stimulus package.

LOWERING 30-YEAR MORTGAGE RATES TO 3.75% (OR LESS)

In President Obama’s Job Speech in front of Congress, he noted briefly that he could lower mortgage rates without Congress’s approval.  This is the only chance I see of the President getting a quick but on-going boost for the economy.  The resultant refinancing will give people more disposable money for many years, and the increase in activity due to people buying and building homes will hopefully put a floor under home prices and stimulate building.  With home prices now back close to their historical inflation-adjusted level, the President won’t be just trying to keep a bubble from deflating.

Part of this lower mortgage rate action plan should be to enable those somewhat underwater on their homes to also be able to refinance.  Any price losses have already been realized, and banks should recognize that it is time to move on.  With the resultant lower mortgage payments, many people will be able to stay in their homes, reducing foreclosures.

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 47.4.  The current P/D of 47.4 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 45% to get down to its median P/D and drop 64% to get to my own entry target P/D.

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com:http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

TIP VERSUS THE S&P 500 VERSUS GOLD

Given the current volatility in the stock market, I thought that it would be a good time to go back and look at how my advice worked to buy TIPS rather than the stock market when the market is relatively high, which it has been since I wrote my book.  We will use the ETF for each (TIP for TIPS and SPY for the S&P 500) as metrics, including reinvested dividends on each.  First, let’s assume that someone bought $1,000 of TIP and $1,000 of SPY in July 2005, right after my first depression book was published.  With TIP, the investor would now have $1,476 versus $1,074 with SPY.  So, TIP certainly beat the market using that comparison.

But let’s look at a more realistic investment scenario, with someone investing $100 every six months starting in July, 2005.  With TIP, the $1,300 invested would have become $1,767 versus with SPY the $1,300 would have become $1461.  So again, TIP easily beat the stock market.  And this was in an unusually low inflation period.

But gold (ETF GLD) blew them both away!  A $1,000 investment in GLD in July 2005 would now be worth $3,969!  And, an investment of $100 every six months in GLD starting in July 2005 would now be worth $2874.

Although I now accept that gold is likely to continue to be a profitable investment, gold still makes me very nervous in that no one can use any baseline to determine its real value.  It is a totally different bet (gamble) than normal investments in that gold has only a fear-driven price.  Gold owners are betting that, because of over spending and currency printing, all the world’s fiat currencies are going to hell and that people will flee to gold for safety.  So far, that logic has been superb.  And I see nothing on the horizon that changes that view point.  But, two points of risk!  First is that there could be some point on GLD prices being so high that people will panic and sell in a big way, with the price plummeting?  Second, at some point countries like the U.S. will ban ownership of gold, as happened in the thirties, and will call-in-gold at greatly reduced prices and make trade in gold illegal.  There is no way the U.S. government (or any other government) is going to risk its own fiat currency because of people fleeing to gold!  But I have no idea when that call-in of gold may happen.

THE CONSUMER, WORKERS, JOBS, AND THE ECONOMY

Per an article in the AP, consumers, who drive most economic growth, spent more in July, and more in May and June than previously thought. Americans were willing to spend despite high unemployment, scant pay raises, steep gas prices and diminished wealth.    But let’s look at some additional data and see where the consumer got the money to spend and how likely it is that increased consumer spending will continue.

Per an August 5 article by Martin Crutsinger, AP Economics Writer, Americans borrowed more money in June than during any other month in nearly four years.  The Federal Reserve said that consumers increased their borrowing by $15.5 billion in June. That is three times the amount that consumers borrowed in May.  So consumers have been using borrowing as a means to support their jump in spending.  Sound familiar?

U.S. consumer sentiment plummeted to a low not seen since 1980, according to a recent survey by Thomson Reuters and the University of Michigan.  And the survey was taken before the decision by Standard & Poor’s to downgrade the nation’s credit rating!  This low sentiment does not bode well for future consumer spending!

Per an August 5 article in the Washington Examiner, the percent of adult Americans who hold jobs reached a 28 year low in July.  There is also a lower percentage of Americans seeking work.  This accounts for the unemployment rate declining slightly – people are not counted in the unemployment rate if they are out of the workforce.

Per an August 3 article in Reuters, the number of planned layoffs at U.S. firms rose to a 16-month high in July.  Employers announced 66,414 planned job cuts last month, up 60.3 percent from 41,432 in June, according to a report from consultants Challenger, Gray & Christmas, Inc.

Since the beginning of the recession four years ago, even those Americans who are working are generally working less; the typical private sector worker has a shorter workweek.  With fewer jobs and fewer hours, there is less income for households to spend.  Adjusted for inflation, personal income is down 4 percent in the last four years. Private wage and salary income actually fell in June, the last month for which data was available.

In June, the trade deficit went to its highest level since 2008, driven by a large drop in exports for the second month in a row.  The Labor Department says productivity dropped 0.3 percent in the April-June quarter, following a decline of 0.6 percent in the first three months of the year. It was the first back-to-back decline in productivity since the second half of 2008.

So consumer spending is the only thing holding the economy together.  And from the previous data, it seems likely that consumer spending will soon begin to fall.  Look out below!

IS MEDIA PRESSURE GETTING TO IMMELT, CEO OF GE?

There certainly have been a lot of negative articles about Jeff Immelt, CEO of GE.  These criticisms include his outrageous salary as he sends jobs and money overseas while sitting on President Obama’s jobs council!  But wait!  Immelt has announced that GE is pulling more information-technology positions back in-house.  GE has suddenly “discovered” that it has been losing a lot of technical capabilities by outsourcing, and that outsourcing isn’t as efficient as previously believed!  If Immelt can discover such wisdom, maybe there is hope for other CEOs like him.

WORK-IN-PROCESS

Since Congress and the President seem to have given up on job creation, I have been sharing ideas with one of the commenters on this blog to come up with some job creation ideas that perhaps we can send to the media and our representatives.  If we could create enough jobs, a lot of our debt problems would diminish with the resultant stronger economy (GDP).

Here is the current status of this work-in-process.  The commenter notes, “Venture [high risk – high return potential] capitalism is what funds creative entrepreneurialism in America and that creative entrepreneurialism is one of the most powerful forces we have to create huge volumes of new jobs. We have a privately funded venture capital industry in the U.S. that many people think does not need government assistance. Venture capitalism is reasonably robust when unemployment is low and GDP is growing healthily. However, the time that we really need it to be robust is when unemployment is high and we are at or near a recession. Unfortunately, that is the time when it is moribund.”

I like his thought: get the current venture capital industries really cooking with tax policy changes!  Do whatever it takes through creative tax changes!  Make investment in venture capital so attractive from a tax policy point of view that investors fight to take the venture capital risk that starts the money flowing!  If venture money isn’t flowing much now, you really haven’t lost much tax revenue by giving the industry a tax break. As the commenter notes, you could, in fact, create a tax policy where investors get a 100% deduction immediately and pay no taxes if they sell for a profit anytime after two or three years.  That would certainly attract investors!

As an example where this may have helped, I own stock in a company that makes batteries that recharge in less than 10 minutes, last 10 times longer than competing Li-ion batteries, work in a wide range of temperatures, etc.  But the batteries are currently higher priced than the competition mainly because of limited production volumes.  This company could not get U.S. venture capital interested, so they just sold 51% to a Chinese investment company.  I don’t think that this would have happened in a healthier U.S. venture capital environment!

This program to give tax relief to investors in venture capitalism could get support from Democrats and Republicans alike.  Even a few Tea party folks may sign on.  We would want to broaden the tax policy changes to include any venture firm that aggressively funds highly automated productivity measures such that U.S. manufacturing can compete with the Chinese on a pure cost basis and get back some of our lost business.  As I have noted, in GE we had production plants so efficient that it was not cost effective to import the equivalent product from China.  Other firms could do the same if they had the motivation.  But these reduced taxes would only be for venture or manufacturing firms that apply for them with a specific measureable automation plan that brings back lost business or creates measureable and self-sustaining additional jobs.

Unlike other tax relief programs that go on when they aren’t even needed, this program should end when we have three months of 7% or lower unemployment.  And for a venture firm to qualify for the reduced tax rate, the jobs created would have to be mainly in the U.S.

Although many of the direct jobs created will be high tech, supporting jobs and resultant community jobs (restaurants, grocery stores, etc.) would run the spectrum as to skills/education requirements.

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 47.8.  The current P/D of 47.8 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 45.6% to get down to its median P/D and drop 64% to get to my own entry target P/D.

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.

“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.”  “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com:http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714

DEBT CEILING COMPROMISE

Although the details are not yet finalized, it appears that there is a probable compromise on the debt ceiling.  The Republicans gave up the balanced budget amendment (which never had a chance anyway) and in return the Democrats agreed to cuts on social programs and gave up on any increases on taxes for the wealthy or large corporations. In a NYT article, Nobel prize winning Paul Krugman calls the debt deal a catastrophe on multiple levels.  He says that it will damage an already depressed economy and will probably make America’s long-run deficit problem worse, not better.  Krugman goes on to say that, “The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further.”  Per an article in HuffPost, Aug 1, “The long-term unemployed have been left out of a deal between congressional negotiators and the White House… Anyone laid off after July 1 is ineligible for extra weeks of benefits under current law. People who started filing claims in July who exhaust their six months of state benefits in January will be on their own…Since 2008, layoff victims could receive as many as 73 additional weeks of benefits, depending on what state they lived in.”

Both sides of the debt ceiling argument ignored that fact that without job growth stimulus or a return of American jobs, the cuts in discretionary spending will lead to more unemployment and a slowing of GDP growth and related tax income, likely negating any positive effect on deficit reduction.  Both sides ignored warnings from Bernanke and other economists that massive spending cuts alone are likely to slow the economy further.  Both sides ignored the fact that the discretionary spending cuts will inflict more fiscal pain on states still struggling to recover from the recession and the end of federal stimulus spending.  Per a July 31, 2011 Associated Press article, these cuts “could mean wide-ranging cuts in federal aid to states, affecting everything from the Head Start school readiness program, Meals on Wheels and worker-training initiatives to funding for transit agencies and education grants that serve disabled children,” and, “deep reductions or changes in federal aid for health services for the needy, most notably through Medicaid.”

In both my first and second books where I predicted a coming depression, I said that the first economic hit would come when consumers hit the wall on overzealous spending, including on foolish mortgages.  We saw that effect a few years ago when mortgages began to implode and the stock market dropped 56% between November 2007 and March 2009.  I also predicted that the federal government would attempt to come to the financial rescue, even though the government was already itself bleeding financially.  Stimulus programs and quantitative easing did indeed have some effect, both on unemployment and on the stock market recovery.  But since all these government rescues were of temporary nature and did not address the root causes, they have now run out.  And the NEW government has decided, much as this country did in 1937, that cost cutting is the real solution.  Thus the current debt ceiling compromise!  And its effect is going to be the same as in 1937 – the bottom is going to fall out.

THE STOCK MARKET

The recovery of the stock market since March 2009 has been far greater than what I had predicted.  The reason is that the market no longer reflects the general economy. In the most recent quarter, the economy grew at a 1.3 percent annual rate. The growth figure for the first quarter was 0.4 percent. Combined, the first half of the year amounts to the worst six-month performance since the Great Recession officially ended in June 2009.  Yet the market has been generally flat for the year.

Since corporations are free to go outside the country for cheap products and labor, and since the tax laws actually encourage this and the hiding of profits overseas (more on that later), large corporations, their executives, and those holding large stock holdings in these companies have been largely immune to the hurt effecting the general economy.

But this immunity to the general economy will be short-lived.  Eventually the accumulative effects of all the private and coming government job losses will affect the consumer base so much that the profits of corporations that do any business in the U.S will be affected.  Consumer spending, which accounts for about 70 percent of U.S. economic activity, decelerated sharply to a 0.1 percent rate in the second quarter.  This is the weakest since the recession ended two years ago.  We will soon see a market drop like we saw in November 2007, except this time there will be no Federal government to stop the downward slide.  People in government are much too enthralled with pure cost cutting to invest in job growth or to put in measures to stop jobs going to low cost countries, so the coming depression (and market drop) will just be longer and deeper than otherwise.

Per an article in Market Watch, July 29, 2011, I may not be the only one concerned.  “Corporate insiders are selling their companies’ shares at an abnormally fast pace.  In fact, one measure of that selling activity shows insiders of NYSE- and AMEX-listed companies recently were selling at the fastest rate since data began being collected in the early 1970s, four decades ago.  On the theory that insiders know more about their companies’ prospects than do the rest of us, this is an ominous sign.”

LARGE CORPORATIONS

We have already covered how Federal, State, and local governments are financially hurting.  So is the average worker whose real wages have not grown for the last ten years and whose financial worth has dropped substantially with the drop in housing prices.  But largely due to the generous tax loopholes we have given them, large corporations are generally doing fine.  In fact, per the Financial Post, the U.S. operating balance — basically, the amount of money that the government has to play with before it hits the debt ceiling — now stands at roughly $73.8 billion. This is roughly $2 billion less than Apple’s cash reserves of around $75.9 billion!

A Reuters article noted that Microsoft reported only $445 million in taxes in the U.S.and other foreign countries, just 7 percent of its $6.32 billion in pre-tax profit.  Microsoft has accumulated $29.5 billion overseas — and that is before the impact of its last financial year.  In theory, the company has saved $9.2 billion in U.S. federal taxes.

Microsoft’s effective worldwide tax rate fell to 17.5 percent in the last fiscal year.  In their last reported fiscal years, Google Inc’s effective tax rate was 21 percent, Apple Inc’s 24 pct, and IBM’s was 25 percent.  So much for the concern of many in Congress that the 35% tax rate on corporations are making them non-competitive so the corporate tax rate must be lowered!

Nearly $1.2 trillion of accumulated U.S. corporate profits are now held in overseas subsidiaries.

RACIAL UNREST?

The wealth gaps between whites and minorities have grown to their widest levels in a quarter-century. The recession and uneven recovery have erased decades of minority gains, leaving whites on average with 20 times the net worth of blacks and 18 times that of Hispanics, according to an analysis of new Census data.  The white-black wealth gap is the widest since the census began tracking such data in 1984, when the ratio was roughly 12 to 1.

SOME GOOD NEWS

An agreement with major automobile manufacturers pledges to double overall fuel economy to 54.5 miles per gallon by 2025, bringing major under-the-hood changes for the nation’s automobiles starting in model year 2017. Cars and trucks on the road today average 27 miles per gallon.

“This agreement on fuel standards represents the single most important step we have taken as a nation to reduce our dependence on foreign oil,” Obama said, sharing the stage with top executives of the major auto makers before a backdrop of some of the most cutting-edge cars on the road.

When achieved, the 54.5 mile-per-gallon target will reduce U.S. oil consumption from vehicles by 40 percent and halve the amount of greenhouse gas pollution coming out of exhausts.  Since transportation is the largest user of oil, this makes much more sense than increasing drilling in environmental sensitive areas.  But why will it take until 2025 when the 2012 plug-in Prius is expected to do that well on mileage even when its grid-added power is depleted?

THE STOCK MARKET NUMBERS

The Price/Dividend (P/D) ratio for the S&P 500 is now 53.  The current P/D of 53 can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market.  At current dividends, the market will have to drop 51% to get down to its median P/D and drop 68% to get to my own entry target P/D.

Do not interpret the P/D ratio as a predictor of the direction of the economy.  It is a historical unemotional measure that I believe reflects whether the market is overpriced.   The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.

Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.

As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information.  Intelligent people can, and do, disagree.