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Have Questions? Our consultants are available to help you with
any financial question. We can also provide in-depth
consultation concerning any financial issue facing you. We can
help. Please contact: Best-Financial-Advice.com
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consultation concerning any financial issue facing you. We can
help. Please contact: Best-Financial-Advice.com
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On Job Creators, Uncertainty, Regulation and
the Politics of Blame….
(Sept 28, 2011)
We are over a year away from the Presidential election,
but we are already in full campaign mode. If one thing is
true in American politics, it’s that political survival trumps
any other concern. Yet the economy continues to sputter
and the country’s deficit problem remains largely un-
addressed and unresolved. We do hear about the likely
causes and proposed cures for these ills, but are any of
them really on the mark?
The Republican mantra this political season appears to let
the “job creators” free from the “job destroyers”. The
destroyers are the Democrats and the regulators, who
have such a tight grip on the neck of business, they say,
that they just can’t break free to hire another individual.
You would think that business regulation had just started in
2008. We hear of the “uncertainty” of the business climate,
as if there hasn’t always been uncertainty in the depths of
every business cycle. We hear of the increased costs of
hiring given Obamacare. Yet the plan has not even been
implemented yet, for the most part, so how can that be
costing so many jobs already? Weren’t health premiums
already spiraling out of control over the last 25 years?
Of course, even if one accepts that marginal increased
new regulation is a bad idea in these tough economic
times, you have to suspend disbelief to assert that on an
aggregate US basis, regulation is a significant delineating
factor in the continued weak growth and employment of the
economy. Yes, there are specific cases of seeming
overreaching and excessive bureaucracy over the past few
years, but they are a drop in the bucket in the overall
economy. And I suppose our near total financial collapse,
and many other economic problems * made worse by lax
oversight over the past 25 years would have shown us
what the cost of too little regulation in the economy is, but
maybe not.
The reality is no administration can have much effect on
an economy. They don’t control the business cycle. They
don’t control the money supply. They don’t control world
events. They can affect tax and fiscal policy, but these
alone don’t affect the economy very much, especially in
the short run. It’s debatable if they a positive effect,
whether they tax and spend more or less.
Now, there is no shortage of hypocrisy from the other side
of the aisle either. Obama doesn’t want to accept blame for
the economy’s failings, but he wants to pretend that his
stimulus plans will work. First, on his most recent proposal,
whether you believe the projects proposed are worthwhile
or not, or will be handled efficiently, the plan is simply not
on a scale that could move the needle on the economy, in
any case. Even if it were a very productive use of public
money, and I believe the payroll tax reduction and other
features are good policy, it’s not going to significantly
affect unemployment. $450 billion spent over ten years is
the proposal.
The US annual GDP is almost $15 trillion. If 20% of the
plan is effected this year, then we have $90B of stimulus,
or potentially adding 0.6% to the economy. Of course, it’s
more complicated than this and the total effect could be
less or more. The point is that Obama is claiming that it will
have a significant impact when he should know that it won’
t, even if it worked the way he says it will. Obama’s speech
in front of an Ohio bridge was simply a beginning
campaign photo op. We can see the campaign to come
next year, using that photo, saying, “Leading the Charge
to Create Jobs”.
Of course, many have negatively criticized whether his
past plan ($780 Billion 2009 plan) was the most productive
use of public funds to jumpstart the economy. I believe
they are largely correct. Those funds went to a variety of
things, whether to retain teachers in the states, or for
various health related grants to the states through HHS.
While those funds may have been needed in many cases,
no economist thought that those funds were used for pro
growth policies. More than a few have commented that
those stimulus funds seemed as much a payoff to his
organizational (unions and public employees) than a
serious attempt to jumpstart the economy. Yet the rhetoric
was if it was a very productive way to stimulate the
economy.
I believe the current proposal is a good start to help the
economy. What we need are comprehensive pro growth
policies coming out of Washington. To the extent that any
government policies can help propel the economy, those
are the type that will show the world that the US is open for
business. Check back here in the near future to learn what
those policies need to be to get our economy back on
track.
Back to Top
_________________________________________
the Politics of Blame….
(Sept 28, 2011)
We are over a year away from the Presidential election,
but we are already in full campaign mode. If one thing is
true in American politics, it’s that political survival trumps
any other concern. Yet the economy continues to sputter
and the country’s deficit problem remains largely un-
addressed and unresolved. We do hear about the likely
causes and proposed cures for these ills, but are any of
them really on the mark?
The Republican mantra this political season appears to let
the “job creators” free from the “job destroyers”. The
destroyers are the Democrats and the regulators, who
have such a tight grip on the neck of business, they say,
that they just can’t break free to hire another individual.
You would think that business regulation had just started in
2008. We hear of the “uncertainty” of the business climate,
as if there hasn’t always been uncertainty in the depths of
every business cycle. We hear of the increased costs of
hiring given Obamacare. Yet the plan has not even been
implemented yet, for the most part, so how can that be
costing so many jobs already? Weren’t health premiums
already spiraling out of control over the last 25 years?
Of course, even if one accepts that marginal increased
new regulation is a bad idea in these tough economic
times, you have to suspend disbelief to assert that on an
aggregate US basis, regulation is a significant delineating
factor in the continued weak growth and employment of the
economy. Yes, there are specific cases of seeming
overreaching and excessive bureaucracy over the past few
years, but they are a drop in the bucket in the overall
economy. And I suppose our near total financial collapse,
and many other economic problems * made worse by lax
oversight over the past 25 years would have shown us
what the cost of too little regulation in the economy is, but
maybe not.
The reality is no administration can have much effect on
an economy. They don’t control the business cycle. They
don’t control the money supply. They don’t control world
events. They can affect tax and fiscal policy, but these
alone don’t affect the economy very much, especially in
the short run. It’s debatable if they a positive effect,
whether they tax and spend more or less.
Now, there is no shortage of hypocrisy from the other side
of the aisle either. Obama doesn’t want to accept blame for
the economy’s failings, but he wants to pretend that his
stimulus plans will work. First, on his most recent proposal,
whether you believe the projects proposed are worthwhile
or not, or will be handled efficiently, the plan is simply not
on a scale that could move the needle on the economy, in
any case. Even if it were a very productive use of public
money, and I believe the payroll tax reduction and other
features are good policy, it’s not going to significantly
affect unemployment. $450 billion spent over ten years is
the proposal.
The US annual GDP is almost $15 trillion. If 20% of the
plan is effected this year, then we have $90B of stimulus,
or potentially adding 0.6% to the economy. Of course, it’s
more complicated than this and the total effect could be
less or more. The point is that Obama is claiming that it will
have a significant impact when he should know that it won’
t, even if it worked the way he says it will. Obama’s speech
in front of an Ohio bridge was simply a beginning
campaign photo op. We can see the campaign to come
next year, using that photo, saying, “Leading the Charge
to Create Jobs”.
Of course, many have negatively criticized whether his
past plan ($780 Billion 2009 plan) was the most productive
use of public funds to jumpstart the economy. I believe
they are largely correct. Those funds went to a variety of
things, whether to retain teachers in the states, or for
various health related grants to the states through HHS.
While those funds may have been needed in many cases,
no economist thought that those funds were used for pro
growth policies. More than a few have commented that
those stimulus funds seemed as much a payoff to his
organizational (unions and public employees) than a
serious attempt to jumpstart the economy. Yet the rhetoric
was if it was a very productive way to stimulate the
economy.
I believe the current proposal is a good start to help the
economy. What we need are comprehensive pro growth
policies coming out of Washington. To the extent that any
government policies can help propel the economy, those
are the type that will show the world that the US is open for
business. Check back here in the near future to learn what
those policies need to be to get our economy back on
track.
Back to Top
_________________________________________
How Low Can the Stock Market Go?
(Aug 22, 2011)
We’ve seen some rocky times in the stock market
lately. Up one day. Down the next. The stock market
has declined over 10% in the past month. Whenever
the market is in a downward spiral, people wonder,
“How low could this possibly go?”. It went down over
50% from it’s high to low in the financial meltdown
aftermath through early 2009. It went down 90% in the
depression. How far can it go down now?
If a nuclear war started tomorrow, or some other
equally catastrophic event, how much would the stock
market decline? What would prevent it from losing
100% of its value? What would prevent it from losing
80% of it? I think the 80% scenario is certainly
possible under certain conditions. Let’s take a look.
Catastrophe happens; on the one hand you might
have panic selling where the fear of losing it all grips
the market. On the other hand, there is always a
constant real demand for assets, financial or
otherwise. That is, money has to go somewhere, even
if it sits in a cash account at a bank. Even in bad
economic times. Even in times of crisis. Whether it’s
in a checking account, money market account, stock,
or goes for the purchase of a physical asset, money
has to go somewhere. If you purchase a physical
asset, that money affects the price of that asset. If you
purchase the any financial asset, even the safest one
because there is a crisis will provide a buffer to its
price. Collective action of this kind provides one lower
limit for the price of securities.
One way to look at the potential degree of a future
stock market decline is to look at the past money
flows out of the stock market and the accompanying
dip in stock prices during previous crisis. If we take
the full year 2008 as an example, (a good year to
measure full year money flows during an extreme
market downturn), we see that the net outflow from the
stock market into cash (money market instruments)
from all other funds was $750 billion. This was about
12% of the total beginning year equity market value,
yet the Dow lost 25% of its total value by year-end. So
we see a broad relationship between the outflow and
the price decline of the market. This is just a rough
proxy of the connection, but we can calculate ballpark
figures of what would happen to prices if a bigger
crisis, and a larger stock market outflow occurred.
At the same rate as above, a 30% outflow to cash
would result in at least a 63% drop in the Dow. In
practice, I believe the Dow to go even lower because
the relationship of outlows-to-cash to lower Dow price
will become even more extreme as the markets go
down. The question might really become what are the
likelihood of a crisis that would scare investors
enough to cause a 30% or more outflow from the
market. How much more will sit in cash accounts
under which circumstances. Of course we know the
price drivers are more complex than this, but the
money flows are a big driver, especially in the short
run.
Here’s another way to look at what would provide a
floor for stock market prices in a crisis. It is an
approach akin to value investing principles. While it
has merit IMO, I believe it only truly applies to
economic or market downturns, where rational
investing is still taking place, as opposed to true
crisis, where it may not be. During these downturns,
the flight of money will go to “value”, or “income”
stocks, primarily of large well capitalized stocks in
staple industries. Money will come out of high growth,
non-essential product industries, or speculative
stocks. But the money will largely stay in the equity
market.
One key aspect of the price floor buffer provided from
these value companies is that they provide a steady,
relatively high dividend yield. For instance, a stable
value company may provide a 4% dividend while a
speculative tech stock may pay none. So the 4%
company becomes a relative haven for money
because investors know that they will get a stream of
cash back out into the future. That dividend cash
becomes a near proxy for selling equities altogether.
Since these companies core businesses fare better
in poorer economic conditions, and they throw off
cash, money flocks to them during these times. This
provides the demand for a price floor for this part of
the market.
Speculative stocks, and those stocks that are not
profitable, or close to being profitable, would have a
much lower possible bottom. So a typical broad
relative price scenario relationship might be that if the
value stock goes down 10%, the speculative stock
may go down 20% or more.
A third angle for predicting a stock market price floor:
the crisis event happens. Money flows out of stocks
into cash and equivalents. The period just after this
produces a dynamic that brings some of the money
back into stocks. The money goes into interest
bearing instruments such as money market securities,
Treasury bills/bonds and safe corporate bonds.
However, this pushes the yield on these securities
down. You see this in the current markets. Yields on
the ten-year treasury bonds have gone from a high of
3.6% in early April down to 2.0% today. The yield has
dropped 0.8% in just the month of August. Those
looking for the security of their principal may not care.
At some point investors must consider what they want
to earn on their money and what the risk is to do so.
Reevaluation of the stock market, especially at post
decline valuations, will show forecasted total stock
returns too much higher than 2% for investors to
ignore, and the money will start drifting back into the
stock market, establishing a floor for the decline.
Back to Top
_________________________________________
(Aug 22, 2011)
We’ve seen some rocky times in the stock market
lately. Up one day. Down the next. The stock market
has declined over 10% in the past month. Whenever
the market is in a downward spiral, people wonder,
“How low could this possibly go?”. It went down over
50% from it’s high to low in the financial meltdown
aftermath through early 2009. It went down 90% in the
depression. How far can it go down now?
If a nuclear war started tomorrow, or some other
equally catastrophic event, how much would the stock
market decline? What would prevent it from losing
100% of its value? What would prevent it from losing
80% of it? I think the 80% scenario is certainly
possible under certain conditions. Let’s take a look.
Catastrophe happens; on the one hand you might
have panic selling where the fear of losing it all grips
the market. On the other hand, there is always a
constant real demand for assets, financial or
otherwise. That is, money has to go somewhere, even
if it sits in a cash account at a bank. Even in bad
economic times. Even in times of crisis. Whether it’s
in a checking account, money market account, stock,
or goes for the purchase of a physical asset, money
has to go somewhere. If you purchase a physical
asset, that money affects the price of that asset. If you
purchase the any financial asset, even the safest one
because there is a crisis will provide a buffer to its
price. Collective action of this kind provides one lower
limit for the price of securities.
One way to look at the potential degree of a future
stock market decline is to look at the past money
flows out of the stock market and the accompanying
dip in stock prices during previous crisis. If we take
the full year 2008 as an example, (a good year to
measure full year money flows during an extreme
market downturn), we see that the net outflow from the
stock market into cash (money market instruments)
from all other funds was $750 billion. This was about
12% of the total beginning year equity market value,
yet the Dow lost 25% of its total value by year-end. So
we see a broad relationship between the outflow and
the price decline of the market. This is just a rough
proxy of the connection, but we can calculate ballpark
figures of what would happen to prices if a bigger
crisis, and a larger stock market outflow occurred.
At the same rate as above, a 30% outflow to cash
would result in at least a 63% drop in the Dow. In
practice, I believe the Dow to go even lower because
the relationship of outlows-to-cash to lower Dow price
will become even more extreme as the markets go
down. The question might really become what are the
likelihood of a crisis that would scare investors
enough to cause a 30% or more outflow from the
market. How much more will sit in cash accounts
under which circumstances. Of course we know the
price drivers are more complex than this, but the
money flows are a big driver, especially in the short
run.
Here’s another way to look at what would provide a
floor for stock market prices in a crisis. It is an
approach akin to value investing principles. While it
has merit IMO, I believe it only truly applies to
economic or market downturns, where rational
investing is still taking place, as opposed to true
crisis, where it may not be. During these downturns,
the flight of money will go to “value”, or “income”
stocks, primarily of large well capitalized stocks in
staple industries. Money will come out of high growth,
non-essential product industries, or speculative
stocks. But the money will largely stay in the equity
market.
One key aspect of the price floor buffer provided from
these value companies is that they provide a steady,
relatively high dividend yield. For instance, a stable
value company may provide a 4% dividend while a
speculative tech stock may pay none. So the 4%
company becomes a relative haven for money
because investors know that they will get a stream of
cash back out into the future. That dividend cash
becomes a near proxy for selling equities altogether.
Since these companies core businesses fare better
in poorer economic conditions, and they throw off
cash, money flocks to them during these times. This
provides the demand for a price floor for this part of
the market.
Speculative stocks, and those stocks that are not
profitable, or close to being profitable, would have a
much lower possible bottom. So a typical broad
relative price scenario relationship might be that if the
value stock goes down 10%, the speculative stock
may go down 20% or more.
A third angle for predicting a stock market price floor:
the crisis event happens. Money flows out of stocks
into cash and equivalents. The period just after this
produces a dynamic that brings some of the money
back into stocks. The money goes into interest
bearing instruments such as money market securities,
Treasury bills/bonds and safe corporate bonds.
However, this pushes the yield on these securities
down. You see this in the current markets. Yields on
the ten-year treasury bonds have gone from a high of
3.6% in early April down to 2.0% today. The yield has
dropped 0.8% in just the month of August. Those
looking for the security of their principal may not care.
At some point investors must consider what they want
to earn on their money and what the risk is to do so.
Reevaluation of the stock market, especially at post
decline valuations, will show forecasted total stock
returns too much higher than 2% for investors to
ignore, and the money will start drifting back into the
stock market, establishing a floor for the decline.
Back to Top
_________________________________________