Saturday, July 31, 2010

America's Middle Class Is Vanishing

Once upon a time, the United States had the largest and most prosperous middle class in the history of the world. But now America's middle class seems to be vanishing at a blinding pace.....

At least that is the outlook from the Business Insider which recently published 22 statistics that "prove" the American middle class is being systematically being wiped out.

Here is a brief rundown of the most alarming statistics pulled together by Business Insider:

1) 83 percent of all US stocks are in the hands of just 1 percent of the population.

2) 61 percent of Americans "always or usually" live paycheck to paycheck. This is up from 43 per cent in 2007.

3) 66 per cent of the income growth between 2001 and 2007 went to the top 1% of all Americans.

4) For the first time in US history, banks own a greater share of residential housing net worth in the United States than all individual Americans combined.

5) In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 and 500 to one.

6) The top 1 percent of US households own nearly twice as much of America's corporate wealth as they did just 15 years ago.

7) The top 10 percent of Americans now earn around 50 percent of our total national income.

8) Approximately 21 percent of all children in the United States are living below the poverty line in 2010 - the highest rate in 20 years.

9) There are now 6 unemployed Americans for every new job opening.

10) The average federal worker now earns 60% more than the average worker in the private sector.

Why is this happening? A lot of it is related to what I discussed in last week's article and the abnormal growth of the financial sector.

The growth of the financial sector and government together have, like weeds, strangled the growth in the once-vibrant sectors of the US economy. For instance, sectors like manufacturing...I have yet to see anywhere around the world a healthy economy that does not have a vibrant industrial and technology backbone.

Sadly, the elites in the government and financial sectors continue grabbing more and more of the no-longer growing US economic pie, starving the other key economic sectors.

Saturday, July 24, 2010

The Financial Sector Goes Rogue

Jeremy Grantham is chairman of the board of asset management firm GMO. He is also an astute investor with an impressive long-term track record.

And it seems he is also a keen observer of the American economy and what has gone wrong with it over the past few decades. His latest quarterly letter to shareholders is very interesting, especially considering it comes from someone in the financial industry.

In the letter Mr. Grantham argues that a disproportionate share of the US economy is devoted to financial services.

He points out that back in 1965 financial services made up only 3 percent of our nation's economic output (GDP). He says that clearly this was sufficient with the proof being that the decade was a strong candidate for the best decade economically for the US in the 20th century.

Therefore, he says, Americans should be highly suspicious of the extra 4.5 percent of the economic pie that went to the financial services sector by 2007, bringing the total to a remarkable 7.5 percent of GDP.

Mr. Grantham said this extra 4.5 percent would seem to be WITHOUT material benefit except to the recipients on Wall Street and elsewhere in the financial services sector.

He said it is a form of tax on the remaining REAL economy and would reduce its ability to save and invest for the future. He argues this would reduce the growth rate of the non-financial sector of the economy.

And indeed it has. Before 1965, the non-financial sector grew at a 3.5 percent rate per year...between 1980 and 2007, this rate of growth had slowed to an annual rate of only 2.4 percent.

Mr. Grantham didn't stop there in his criticisms. He said "This bloated financial system was also increasingly deregulated and run with increasing regard for profit and bonus payments at ALL costs."

He certainly hit that nail on the head.....

Mr. Grantham also decries the 'Age of the Trader'. The following excerpt is spot on:

"I grew up in a world where stocks and other financial instruments were traded by the client with a high degree of trust in the agent (Wall Street). Somewhere along the way, without any formal announcement of the change, the "client" in a trade mutated into a "counterparty" who could be exploited. Steadily along the way, the agents' behavior became more concerned with the return on their own capital than with the well-being of their clients."

Thus we have Goldman Sachs and other big Wall Street firms having no problem with ripping off clients and setting off "suitcase nukes" all over the globe in the form of bad mortgage bonds as long as they made a healthy profit while doing it.

Mr. Grantham argues for more regulation to rein back some of Wall Street's practices. A pity we didn't get that in the recent "financial reform" legislation passed by Congress.

Saturday, July 17, 2010

The New Global Consumers

It is the basic nature of things. Nothing or no one stays on top forever.

Look at the mighty US consumer - long the dominant force in world trade. But no longer...we've crossed an important threshold.

The US consumer has been surpassed by consumers in the emerging world. Emerging market economies now represent about 33 percent of consumer spending worldwide. US consumer spending now accounts for only 27 percent of total global consumer spending.

One example of this trend is the automobile market. China's vehicle market grew by 45 percent last year to become the biggest in the world. GM, for the first time ever, now sells more cars in China than in the United States.

The Economist Magazine said that multinational companies expect about 70 percent of the world's economic growth over the next few years to come from emerging markets. And 40 percent of the world's growth will come from just two countries - China and India.

But these two countries are not alone. Many countries' economies are growing at a torrid pace. Singapore, for instance, grew at a rate of 18 percent in the first half of 2010.

It's a great time to be an investor as we witness the history-making shift in global markets. Especially for investors who look for opportunities outside slow-growing economies like the United States.

At the least, investors should look at multinational companies such as Coca Cola. Coke now gets about 75 percent of its sales from overseas. In the first quarter of 2010, Coke reported a 20 percent increase in profits despite the fact that US sales declined. Sales in emerging markets, such as India (up 29%)and Turkey (up 18%) made it possible.

And many large emerging consumer markets remain nearly untapped. Indonesia, for instance. It has the world's fourth largest population - behind China, India and the United States - with 240 million people.

Ford just opened its first dealership there. And Heinz reports that Indonesia is a big part of why its Asian sales rose 41 percent last year.

Yet, despite all these exciting changes in the global economy, most US investors continue to snooze. They continue to have nearly all of their portfolio concentrated on the nearly-moribund US economy.

There are simple, easy ways to invest overseas through the use of exchange traded funds (ETFs). Please feel free to send an email and I will be glad to help you find some ETFs.

Saturday, July 10, 2010

Bond Funds Are NOT Safe Investments

US Treasury bonds are considered to be the safest investment in the world. However, that does not mean that they cannot be dangerous to your financial health.

Investors - frustrated by the microscopic yields on money market funds and certificates of deposit - have poured money into longer-term Treasury funds. These funds come in the form of mutual funds or exchange traded funds (ETFs).

Investors' thinking about these Treasury funds is simple...too simple.

They say to themselves: "These funds yield over 5%, which is great in this economic environment. And the bonds the funds hold are guaranteed by the US government. What's there to worry about?"

Actually, plenty.....

Even if one considers Treasuries to be free of credit risk (which is debatable), they are NOT free of interest rate risk.

When interest rates go up, bond prices - even Treasury bond prices - go down.

With interst rates so low right now, they can't go much lower...they can only go up. Despite the current complacency about interest rates not going higher for many years by most investors, higher interest rates are coming.

Higher interest rates are an inevitable result of ballooning federal government debt. Consider the following:

Over the past 18 months, the federal debt has surged from $5.5 trillion to more than $8.6 trillion.

Two years ago, federal debt was 38% of the nation's GDP or economic output. Today, it is nearly 60% of GDP. And by the Congressional Budget Office's own estimates, it is going much higher.

And that does not even take into consideration the federal government's unfunded liabilities for programs such as Social Security and Medicare. These unfunded liabilities are conservatively estimated to be in the $55-$60 trillion range.

If the economy falters, and with short-term interest rates already at near zero, Uncle Sam will surely opt to increase 'stimulus' spending even more dramatically.

This increased government debt will put even more pressure on interest rates to move higher.

One main reason for that will be that global investors will question US government spending policies and whether they will ever be paid back the amount owed to them by the United States.

Global investors may demand a 'risk premium' (aka higher rates) as they have with Greece and some other European nations. That is why all the talk in European nations currently is about austerity and budget cutbacks.

My advice to investors is that there is still time to get these ticking time bombs out of your portfolio. Please do so or you will learn to your chagrin that these are not safe investments.

Saturday, July 3, 2010

The Wall Street Reform That Wasn't

There was lots of talk in the mainstream media about how the recent financial markets reform passed by Congress was the "most sweeping change" of the financial regulatory system since the Great Depression.

What a was nothing more than window dressing.

The real sweeping change to our financial system took place over the past 20 years as Wall Street money became more and more influential in Congress.

The key piece of Depression-era financial legislation - the Glass-Steagall Act - was repealed in 1999.....

Next was the Commodities and Futures Modernization Act of 2000, pushed by Larry Summers and Robert Rubin, which legalized the most destructive financial instruments of all - derivatives.

Then there was the leverage exemption at the Securities and Exchange Commission (SEC) in 2004, asked for personally by Hank Paulson and his friends. This allowed Wall Street to turn into a casino where the gamblers could make 50-1, 100-1 bets and worse.

The new legislation fixes NONE of the major problems.....

Banks are still too big to fail...and continue to gamble with YOUR money.

Banks are still allowed to value assets and liabilities in what can only be kindly be called "mark to mythical valuations". They can also still use off-balance sheet accounting to make sure they give themselves stratospheric bonuses. All of these shenanigans continue to leave the taxpayers on the hook.

Banks are still getting trillions of dollars from the Federal Reserve and the mortgage agencies - Fannie and Freddie - again paid for by the taxpayers.

We still have the supposedly unbiased ratings agencies working for, and paid almost entirely by, Wall Street firms. In addition, the regulatory agencies which are supposed to be overseeing Wall Street still have a cozy relationship with it.

A wonderful example of this is the former chairman of the board of directors of the New York Federal Reserve Bank, which directly oversees Wall Street, Stephen Freidman. At the time, he was also a member of Goldman Sachs' board of directors.

In late 2008 the Federal Reserve ordered AIG to pay Goldman Sachs $13 billion. This controversial decision pushed AIG to the brink and taxpayers are still paying the tab for AIG's problems. At the same time, Mr. Freidman bought 37,000 shares of Goldman Sachs stock. No conflict of interest there, right?

What is a real pity is that Congress, unlike the Congress in the 1930s, did not have the guts to stand up to Wall Street and enact true financial reform.