FedUpUSA

Archive for the ‘Investing’ Category

Today, millions of American families are extremely stressed out because they are working as hard as they can and yet they find at the end of the month they still haven’t been able to pay all of the bills.  Unfortunately, things are only going to get rougher in the years ahead.  The U.S. government has reached a terminal phase of the debt spiral that it is trapped in, and the only way to keep the system going is to print more money, borrow more money and spend more money.  But won’t this cause horrible inflation eventually?  Of course it will.  That is why so many people around the world have so loudly denounced “quantitative easing 2″.  The Federal Reserve is just creating hundreds of billions of dollars out of thin air and is chucking all of this money into the system in a desperate attempt to get it moving again.  This is also why the Tea Party movement is so angry about the record amounts of government debt that are being piled up.  When the U.S. government goes into more debt, it creates more dollars.  As the Federal Reserve and the U.S. government flood the system with new dollars, it means that there are now more dollars chasing roughly the same number of goods and services, and that is a recipe for inflation.

Fortunately (or unfortunately, however you want to look at it), most of this new money is trapped in the financial markets right now.  The first people that get their hands on all of this new money are banks, financial institutions and the folks down on Wall Street and right now they are hoarding much of it and much of it is going to pump up the stock market.

That is one reason why we saw such a tremendous bubble in commodities in 2010.  It is also a key reason why we have seen such a stock market “recovery”.

But eventually all of this new money is going to get into the hands of average U.S. consumers and it is going to start pushing the price of everything up.

Ronald Reagan once said that inflation is “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”  Ron Paul has called inflation a “hidden tax” on all of us, and that is exactly what it is.  All of the paper money that we are storing in the banks is losing a little bit of value every single day.  Over long periods of time, this loss of value becomes absolutely massive.  For example, did you know that the U.S. dollar has lost over 95 percent of its purchasing power since the Federal Reserve was created in 1913?

Unfortunately, as the Federal Reserve and the U.S. government continue to flood the system with new dollars in a desperate attempt to stimulate the economy, inflation is only going to get worse and worse and worse.

So enjoy the relatively tame inflation that we are enjoying for now.  The official U.S. government inflation rate has been hovering around 1 percent or so, but everyone knows that the official inflation rate is an absolute joke.  The government pulls different categories in and out of the inflation rate almost at will in an attempt to keep the numbers low.

One recent study that analyzed price movement of 86 products in Wal-Mart stores found that the “real” rate of inflation was approximately twice the “official” rate reported by the U.S. government.

Others are convinced that the official rate of inflation is even higher than that.  For example, John Williams of ShadowStats.com has closely studied inflation in the U.S. and he believes that it is currently hovering somewhere around 5 percent.

However, John Williams does not believe that inflation is going to stay at 5 percent for much longer.  He recently released a “Hyperinflation Special Report” for 2010 that everyone needs to read.  Personally, I do not agree with all of his conclusions and I do not believe that things are going to happen quite as quickly as he is projecting, but his overall analysis is sound.

The truth is that our financial system has now reached a terminal phase.  Just look at the chart below.  Really look at it.  How can any financial system survive debt that is rising this fast?  The printing and borrowing of money continues to spiral out of control with no end in sight.  It is hard to imagine any scenario in which we can even achieve a “soft landing”.  One way or another, this exploding debt is going to take us down…..

So are the politicians sorry that they have saddled us with all of this debt?

Well, just the other day Nancy Pelosi was directly asked this question and the following was her response….

“No, we have no regrets.”

In fact there are quite a few politicians running around in Washington D.C. that are still convinced “that deficits don’t matter” and that all this debt will never catch up with us.

Well, hold on to your hats, because this is going to be the decade when all of this debt really does start to catch up with us.

One of the ways that we are going to feel the pain is through inflation.

In the months and years ahead, wages will remain relatively stable and government entitlement payments will not increase much while prices for the basic things that American families need go through the roof.

Already we are starting to see some troubling signs of inflation.  In 2010, the price of almost every major agricultural commodity you can name shot up dramatically.  We are starting to see these price increases filter into the supermarket.  Some companies are trying to hide these price increases by shrinking package sizes.

Have you noticed this yet?  Have any of the packages that you buy regularly seemed to shrink in recent months?

Sadly, it looks like food prices are headed even higher.  According to a recent report by Reuters, world food prices hit an all-time record high in December….

World food prices rose to a record in December on higher sugar, grain and oilseed costs, the United Nations said, exceeding levels reached in 2008 that sparked deadly riots from Haiti to Egypt.

So what are you and your family going to do if a worldwide food shortage pushes food prices up significantly?

Another place where American families are really going to start feeling the pain is at the gas pump.

Do you remember back in October when I warned you that 100 dollar oil is coming?

Well, the price of Brent crude reached 95 dollars a barrel for the first time in almost two years on Monday.

Unfortunately, there are many who now believe that the price of oil is going to go a lot higher than that.

John Hofmeister, the former president of Shell Oil, believes that American consumers will likely be paying 5 dollars for a gallon of gas by the time 2012 rolls around.

So is your employer going to be paying you much more to keep up with rising gas prices?

Of course not.

And you know what?

When the price of oil rises, it affects the price of almost everything else in the stores, because nearly everything has to be transported in one way or another.

So why is the price of oil going up so much?  Well, of course there are speculators and of course the price of oil is highly manipulated, but one of the big reasons why oil is going up is because the U.S. dollar is losing value.

The cost of other basics is going up as well.  Have your health insurance premiums gone up lately?  All over the country, horrific health insurance premium increases are being reported.

Quite a few of the readers of this column have stated that they simply cannot afford health insurance anymore and so they are now doing without it.  There are millions of Americans that refuse to go to a hospital because there is no way they can pay for health insurance and there is no way they can pay the ridiculous fees charged by our hospitals today.

Sadly, in the months and years to come millions more working American families will be pushed into poverty-like conditions by rising inflation.

Already we are seeing huge numbers of American families that are working as hard as they can not being able to afford the basics.

A year-end survey conducted by Pew Research found the following….

*51% of Americans say that it is difficult to afford health care.

*48% of Americans say that it is difficult to pay their home heating and electric bills.

*29% of Americans say that it is difficult to afford food.

Those numbers should be quite sobering for us all – especially considering the fact that jobs are becoming very difficult to get.

According to the same Pew Research study, a staggering 46 percent of all Americans say that someone in their household has been without a job and looking for work at some point during the past year.

It can be really depressing to search for a decent job month after month after month when there doesn’t seem to be any out there.

The truth is that there are 7 million less middle class jobs in America today than there were just a decade ago.

So if even one person if your family has a decent job you should consider yourself to be very fortunate.

But sadly even families where everyone is working are going to continue to be stretched further and further financially as rapidly increasing inflation steals our purchasing power a little bit more every single day.

The “good times” are rapidly coming to an end.  The greatest debt-fueled party in the history of the world is wrapping up and you should enjoy it while you still can, because the years ahead are just going to be brutal.

The Economic Collapse

Many Americans live precariously close to the edge of financial insolvency flirting with economic disaster daily.  If you casually browse mainstream articles and watch any amount of television you would think that the US still had a vibrant and strong middle class.  When we pull back the covers on the current financial situation we realize that many Americans are merely getting by and many would like to live in some 1984 Orwellian fantasy world where suddenly things are back to financial equilibrium.  43 million Americans are depending on government food assistance to get by.  But many more millions are merely living paycheck to paycheck hidden in the cellar of the headlines.  1 out of 3 Americans has zero in any retirement account (not one slowly eroding dollar).  Half of Americans have $2,000 or less which puts them one month away from needing government assistance.  With the volatile job market and turbulent Wall Street middle class Americans are feeling the once prided stability being slowly washed away.  Let us examine how retirement is now becoming more of a fantasy for many Americans.

Many Americans especially young adults realize that saving large amounts of money is a key to a sustainable retirement:

Over 84 percent of 18 to 29 year olds surveyed feel they need at least $1 million saved up in order to stop working some day.  60 percent of those 30 and older feel that they will also need $1 million saved up.  Yet the actual figures are somewhat disturbing in contrast to the perceptions of many:

Source:  Census

The median retirement account for US households is $2,000.  This is why the vast majority of retirees depend on Social Security as their primary source of funds in old age even though Social Security was never designed to be a long term pension system.  You’ll notice that the average retirement account is closer to $50,000 a year but this is heavily skewed by the top 1 percent that keep most of their funds in stock wealth.

The reason retirement is slipping through the fingers of many like sand is the disjointed income equality in the country that has grown in the last decade.  If we look at income growth it has been heavily tilted at the top:

Source: Census, Chart: Wikipedia

There has been virtually no real income growth for most Americans.  The real significant wage growth over the last 50 years has occurred at the very top 10 percent of income earners in the country with this inequality accelerating in the last bubble decade.  What is more important is that 75 percent of Americans largely depend on a job as a primary source of income which seems rather obvious:

Source:  Federal Reserve

If you examine the chart closely, it is only the top 10 percent that really benefit from a buoyant and thriving stock market.  As we have mentioned earlier 1 out of 3 Americans has zero, nada, or zilch in their retirement account.  The movement of the stock market is like watching the score of a football game where the outcome means nothing to the individual.  Yet the problem is that Wall Street has taken the one item that was stable like a rock for Americans, housing and turned it into another commodity to be gambled and speculated against.

The share of income flowing to a smaller and smaller group of Americans is draining the life blood out of the middle class:

“From 1950 to 1989, nearly 40 years of data the top 1 percent earned roughly 7 to 8 percent of all the nationwide income.  Today it is inching closer to 20 percent, a figure resembling the massive income inequality seen during the Great Depression.”

Even within the top 1 percent the difference in incomes is striking:

This kind of income inequality is coming at the cost of the middle class.  Banks and the financial press would like you to believe that this isn’t the case but just look at how far your dollar is now going.  If you are fortunate to have a retirement account it is likely you don’t have the gambling devices of options, hedges, and other items that are largely new casino devices for Wall Street.  Most Americans are comfortable with income discrepancies but not at these levels and not when much of the gains are based on bets that hurt the overall economy.

The problem as many are now seeing is the financial sector is largely rent seeking by pilfering the future of many middle class Americans.  The banking system extracts wealth by devaluing the US dollar, by charging interest or fees on retail banking, and ultimately suckering many Americans to dump money into a stock market that is operated like a casino.  Washington Mutual, a once popular bank used to offer free checking for life.  JP Morgan Chase took over Washington Mutual in a government shotgun wedding.  Now, Chase is looking to extract $10 to $12 per month merely for having a checking account.  Of course they’ll waive this if you have $5,000 saved in a handful of their accounts.  Look above again.  1 out of 3 Americans have no savings so how will this be accomplished?

As we mentioned Social Security is largely becoming the retirement account default of many Americans.  Yet the growing number of beneficiaries is now putting strain on the system:

The above chart will only continue to show expansion.  Where will all this money come from?  We have a smaller workforce with the young that are already having a tough time saving any money in this economy.  Many of the good paying jobs of today require a college education and college has largely entered its own student loan bubble.  Many of the future middle class are merely trying to service their own massive debt even before they begin their careers.  To save that $1 million will become a daunting task moving forward.  Also, if the Federal Reserve has its way $1 million 30 or 40 years from now may not be much.

With 17 percent of Americans unemployed or underemployed many are simply looking for that next paycheck let alone planning for a retirement where they can sip margaritas in some picturesque beach location.  Wall Street has pilfered the pockets of the middle class through bailouts for their reckless gambling and incredible excess.  Many Americans now understand this yet the current political class is merely interested in protecting the established plutocracy by pillaging the American village.  Most Americans are becoming exhausted by both political parties and their pandering to Wall Street that provides a revolving door of money, jobs, and connections.

The younger generation is seeing their ability to grow their net worth diminishing:

This figure has only dropped even further in the last few years.  Retirement was once thought of as a place where one would reach a comfortable existence after many years of hard work.  Not an extravagant lifestyle but one in where a home was paid off and enough money came in for food and daily necessities.  But now with Wall Street turning housing into a giant commodity and stripping bear the employment base of the country; many are wondering if retirement is even an option especially when the stock market is at the same level as it was one decade ago.

Ultimately what needs to happen is to get money out of politics and to split up commercial and investment banking.  The answer is obvious but the plutocracy is relentless in keeping this game going as long as possible.  As this continues, retirement will continue to look more and more as a fantasy to millions of Americans.

My Budget360

The economic crisis has ushered in the end of a generation long bull market.  Most average investors ignore the fact that heavy market volatility is a sign of an unhealthy stock market.  The stock market since the lows reached in 2009 has been on an unstoppable bull run.  Yet the real economy where most Americans work and spend money has not reflected any of this irrational exuberance.  The S&P 500 has rallied 53 percent from the lows reached in early 2009 and that is including the current retracement back.  On Tuesday the stock market pulled back on data showing consumer confidence plunging from what analysts had expected.  Outside of Wall Street the economy is walking on eggshells.

If we look at S&P 500 data we find that we have entered into a new era:

The above chart highlights milestones for the S&P 500 dating back to 1968.  For the S&P 500 to double from 100 to 200, it took a slow 17 years.  From 200 to 400 it took 6 years, an incredibly quick jump.  Another 6 years after that and the S&P 500 was riding high at 800.  From 1997 to 2007 the S&P 500 went from 800 to 1,576 in the intraday high that is now far in the past.  It almost doubled yet again in a 10 year horizon.  Yet that trend has been broken.  The S&P 500 is now back to 1,041 and has pulled back to levels seen in 1998.  Does anyone really see the S&P 500 going to 2,000 any time soon?

“The stock market needs to reflect the underlying health and productivity of the overall economy and not simply the gambling penchant of Wall Street banks.”

Most of America is dealing with the new austerity that is being thrust on them from an unforgiving economy and a government that seems to be preoccupied with helping out the financial industry before setting things right with the average worker.  In other words, the middle class is being thrown to the wolves in this crisis.  The government is serving the interest of big money at the detriment of the middle class.

If we look at the volatility of the S&P 500 over the past 22 years we’ll notice two different stories.  From 1988 to 2000, the stock market enjoyed a once in a lifetime bull run.  There were virtually no negative years and some incredible year over year gains.  Keep in mind that we are looking at a 12 year timeframe on a tiny chart but this is over a decade of mental conditioning here.  If we look from 2000 to our present day, the massive amount of volatility has sent the S&P 500 to levels seen in 1998:

2008 was the worst stock market year since the Great Depression.  That is how bad that one year turned out for investors.  This large amount of volatility simply reflects a weak real economy and the recent stock market run to the peak of the mountain was super charged by taxpayer money going into large investment banks who in return went into the stock market and gambled your hard earned money.  Clearly it hasn’t done much for consumer confidence, aiding in the foreclosure crisis, or bringing jobs back.  What then did all this money really accomplish?

If we look at the VIX which looks at option trading volume and is a good sign of volatility we also see this recent stock market reshuffling:

What we can gather from all this volatility is a new paradigm has arrived.  Most popular financial books that hype compound interest always focus on a convenient 7 to 10 percent annualized gain in the stock market.  That may have been the case from 1968 to 2000 but that isn’t the case anymore.  What are you going to invest in when U.S. Treasuries are barely offering any interest and bank accounts are offering rates of 0.01 percent on savings accounts?  Your mattress would rival some of these rates.

The stock market right now is one large casino.  No real reform has taken place and that is why we see no real changes in the economy yet trillions of dollars funneled into a financial abyss.  Someone got this money but clearly it wasn’t the middle class.  The public was told that money was going to go to shore up the housing market (didn’t happen) and to keep lending to the public going (didn’t happen).  So what did happen was that big investment banks used taxpayer money and gambled to bolster their own profits.  That was basically the smoke and mirrors campaign that we have gone through.

The middle class is largely a casualty of this all.  9 out of the top 10 jobs in this country are in low paying service sector work.  We hear this rhetoric about a double dip but the middle and working class never got out of the first dip to begin with.  Who is this double dip for?  Wall Street gamblers who have funneled taxpayer money into the casino?  Must be nice for their 53 percent rally but sadly none of that is reflected in the real economy.  If we want to be happy about gambling why not talk about the person who just won the lottery last night.   Wall Street certainly won the lottery here at the expense of the taxpayers.  The collapse of consumer confidence is merely a reflection of what most of us already know.  The real economy has never recovered.

This is the end of a generational bull run just like the 1920s came crashing down with the Great Depression.  Unlike that time, we have allowed the banks and Wall Street to continue to pollute our real economy with their gambling schemes.  Can you believe that no real reform has taken place?  No wonder why average Americans are displeased with both political parties and are furious at Wall Street.

My Budget360

Warren Buffett is All Wrong About Goldman – Something is Rotten on Wall Street

Shaun Rein, Forbes.com 

Vanguard’s Jack Bogle: Investors Take Heed… A Financial Crisis Is Imminent

“If we do nothing, we’re headed for a real crisis.” – Jack Bogle

Jack Bogle is 81 years old, but he still doesn’t pull any punches.

I visited him at his headquarters outside Philadelphia – and it didn’t take long before he expressed some strong opinions about Wall Street…

Jack Bogle’s Had “Enough” of Wall Street

For starters, Jack Bogle is madder than hell about the recent troubles on Wall Street. Specifically, that includes excessive compensation at Goldman Sachs (NYSE: GS : 149.32, -0.18) and speculation from the likes of John Paulson, who’s profited from contrived doom-and-gloom investments (for example, on the real estate collapse).

Citing Teddy Roosevelt, Bogle argues that “rank speculation” is bad. “If you’re adding value in society, the sky’s the limit. Bill Gates can earn all he wants, but when John Paulson makes $3 billion shorting the real estate markets, that’s enough.” (Bogle recently wrote a book called Enough.)

Bogle continues: “Wall Street doesn’t lose. Speculation on Wall Street subtracts value from our society. It’s a gamble, like Las Vegas, pitting one investor against another.”

As such, Bogle sees little value in trading or speculating by hedge funds or day-traders. He said the $6 trillion in trading by Wall Streeters every decade is a “real waste of the nation’s resources. It makes no useful contribution to society. When I came into this business in 1950, the turnover on the NYSE was 25%, now it’s 250%.”

And he was critical of Fidelity funds, a competitor, for hyping its returns and encouraging short-term trading.

I countered that speculators and traders offer a vital benefit to Main Street by raising much needed financial capital for new companies (IPOs). But Bogle, known as the “conscience of Wall Street,” would have none of it. His only hero is the long-term investor (Vanguard’s primary customer).

As founder of the Vanguard Group of funds, his investment company is famous for providing low-cost investing (the annual expense ratio of Vanguard funds is only 20 basis points). Established in 1975, the Vanguard S&P 500 Index Fund is also the largest mutual fund in the country, with a combined value of $150 billion. The Vanguard Group as a whole manages over $1.3 trillion.

But the fact that turnover has catapulted so much and the cost of doing business on Wall Street has fallen sharply is arguably something that Vanguard has contributed to. Because of the financial revolution, bid-ask spreads and commissions are at historic lows.

So how should you invest in this new era?

Jack Bogle Says to Keep it Simple… And Invest According to Your Age

Overall, Jack Bogle is optimistic about America. And while he likes President Obama, he’s worried about a looming financial crisis, due to excessive deficits and unfunded liabilities:

“He inherited most of this mess from Bush, but listen, if we do nothing, we’re headed for a real crisis.”

To solve the deficits, he urged “strong medicine” – for example, raising taxes, including a $1 gasoline tax, and reducing benefits.

From an investment standpoint, I asked Bogle about putting money into various asset classes, such as bonds, growth stocks, foreign investments, real estate and gold. Specifically, I mentioned David Swenson’s strategy and Alexander Green’s Gone Fishin’ Portfolio – both of which have proved very successful recently.

Bogle likes the idea of a simple mix of bonds and stocks. He suggested that the percentage of bond holdings should equal your age. For example:

• If you’re 30, then 30% should be in bonds, 70% stocks.
• If you’re 80, then 80% should be bonds, 20% in stocks.

But otherwise, he’s skeptical about adding real estate, gold and other exotic investments to one’s portfolio. “I don’t like the idea of complex investing, other than simple stocks and bonds.”

So if you’re looking for the cheapest way to buy a broad-based index fund, consider:

• The Vanguard S&P 500 Index Investor (VFINX)
• Or the Vanguard Total World Index Investor (VTWSX).

Finally, I asked Jack Bogle about his lasting legacy and lesson in life. He responded quickly: “Character counts. I think I’ve made the world a little bit better for investors.” Indeed, he has.