September 29, 2009

America – Driving Toward Third World Oblivion

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , , at 6:17 PM by Robert Barone

My predisposed thoughts about third world countries include the following: high unemployment, a growing number of government bureaucrats (who hold the best and most secure jobs), rich and poor with little or no middle class, high levels of debt, dependence on foreign imports, and a chronically weak currency.  Unfortunately, all of these characteristics are now attributable to the U.S.

The middle class in the U.S. is quickly disappearing.  Because the wealthy don’t need jobs and the poor have a plethora of government programs to fall back on, the Middle Class is hardest hit by rising unemployment.  Today’s official rate of 9.7% only tells part of the story.  The real unemployment rate, the one that also counts those who have stopped looking for jobs and those who have part-time jobs when they need full time ones, is now 17%!

Since 1978, the average private sector wage earner (supervised employees) is 15% worse off in terms of purchasing power of that wage.  Meanwhile, over that same time period, the corporate executive is 155% better off.  Americans have every right to be upset with the multimillion dollar bonuses paid to executives whose companies had to be bailed out by the taxpayers and to those who sit smugly on Wall Street believing that they are actually worth it.

Another recent study revealed that the average wage of the average U.S. worker was $49,935 in 2008.  That same measure for a federal employee was $79,197.  This gap, now almost $30,000, has increased from less than $13,000 just nine years earlier.  In addition, federal employees have much better benefits, and those benefits are guaranteed.

The average debt per capita in America is now $187,000.  If we include the entire contingent liabilities that are not counted as debt but could easily become so, this number could rise to as high as $565,000 per capita.  In 1957, this debt was only $4,000 per capita.  Sure, we’ve had inflation, but if we look at these statistics in terms of their percent of GDP, today’s debt is 2.7x what it was then.  In terms of income, American consumers owe 121% of their annual incomes, up from 60% in 1982.  My colleague likens this debt to serfdom of the Middle Ages where the serf owed more to the Lord than he could possibly ever pay back

Over the past 18 years (as forecast by Ross Perot in the 1991 Presidential campaign), our manufacturing base has been transplanted to other parts of the world (Perot’s “giant sucking sound”).  Today, like many third world countries, we import many manufactured products and parts and are now more than ever dependent on foreign oil.

Finally, by deficits that were unthinkable even two years ago, our government continues to reduce the value of the U.S. dollar relative to other currencies and gold. Since we hold our wealth in dollars, the debasing of our currency is a stealthful robber.

Is America third world?  Probably not yet.  But it appears that we have embarked on a path that will take us there in the not too distant future.  There are profound implications of these trends including a reduction in economic growth and the ability of the population to pay taxes.  The financial implications will continue to be a weakening U.S. dollar.  Investors, beware!

Robert Barone, Ph.D.

Robert Barone is a Principal and an Investment Advisor Representative of Ancora West Advisors LLC an SEC Registered Investment Advisor.  He is also a Registered Representative and a Registered Principal of Ancora Securities, Inc. (Member FINRA/SIPC).

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  Ancora West Advisors is an advisor to the Thunderbird-Tahoe.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778

September 18, 2009

The Con Game

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , at 5:17 PM by Robert Barone

I was watching Chris Matthews on MSNBC on Tuesday September 15th, and was struck by the discussion group’s commentary.  In essence, the group believed that the current economic environment was ready to improve as soon as “the folks” regained their confidence.  While I do understand that a positive mindset can help keep people from hoarding their paychecks, I also understand the real world. 

In order for people to spend more money, they have to have money to spend.   While this sounds ridiculously obvious, let’s break it down. 

 Median Household

 Here is a chart from the Government’s Census Bureau (http://www.census.gov/prod/2009pubs/p60-236.pdf, Table 1, Figure 1).   First, we can see that despite a lot of cheerleading from both political parties, we haven’t done much to address income inequalities among Americans of differing backgrounds.  Second, we can clearly see that inflation adjusted incomes have not grown since the late 1990’s.  It doesn’t take a genius to see that it will take more than confidence to solve this problem.

Now, as our incomes have stagnated, and most recently declined, our debt burdens have grown.  Let’s take a look.  According to the Federal Reserve (http://www.federalreserve.gov/releases/g19/hist/cc_hist_mt.txt), total consumer credit outstanding in January of 1999 was $1,441,928,000.63.  In July of 2009, that same number had reached $2,457,553,000.71.   To clarify, consumer debt is up a whopping 70%, while incomes have remained flat. 

The talking heads would have us believe that we just need to be confident and spend money to get this recovery back on track.  There is no structural problem in the economy, only a lack of belief in the next great boom that is right around the corner. As our incomes are going down, we are told to take on more debt.  Remember, the Government has spent trillions of dollars that we will have to pay back in order to shore up the nation’s banks.  These banks are then supposed to loan us money to revive the economy.  Think this through.  We have been forced to take on debt, to help banks, so that they offer us more debt.  Meanwhile our personal debt has grown 70% and our incomes are flat. How is more debt going to solve a problem caused by too much debt? 

Keep in mind, foreclosures keep on hitting record highs.  Delinquent credit payments are also at record highs.   If people can’t afford their monthly payments, then it is logical to assume that they don’t have extra money to spend. 

The reality is that the economy won’t be healthy until the deleveraging process is complete.  It has just begun.  The deficit spending both prolongs the process and makes it worse.

According to Chris Matthews and the MSNBC talking heads, the solution to our problem is to regain confidence and take on more debt to spend on clothes, cars, and entertainment.  Responsible people wouldn’t give this advice to a friend or co-worker, so why are the talking heads giving it to all of us?

Matt Marcewicz

 

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778 

September 15, 2009

An Explanation of the Diverging Prices of Oil and Natural Gas

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , , , , , , , at 5:46 PM by Robert Barone

Some in the business media, including the morning host and hostess on CNBC’s Squawk on the Street, admit to being confused by the seeming contradictory price movements of oil and natural gas.  This is an explanation of that divergence.

The price of natural gas can be approximated by the price of UNG, the symbol for the U.S. Natural Gas Fund, LP, a fund that attempts to mimic the price of natural gas in the U.S.  The fund’s price peaked on June 23, 2008 at $61.90 (per millions of BTUs).  By February 18, 2009, its price had fallen to $17.42, a 72% decline.  Prices continued to decline and reached a low on September 4th of $9.08 (for an 85% decline from its peak) before settling at $10.59 (an 83% decline) on September 11.

Meanwhile, the closing price per barrel of oil peaked at $145.31 on July 3, 2008, fell 76% to $34.67 by February 18, 2009, but has since risen significantly to above $70/bbl, closing at $71.31 on September 11.  Oil currently costs about four times the price of natural gas for the equivalent amount of energy.  Since both are energy resources, and in some industrial applications, are substitutes for one another, how can these prices show such divergence?  This, of course is the dilemma of the host and hostess of Squawk on the Street.

The answer lies in the nature of the markets in which the commodities trade including the deflationary forces in the U.S. domestic economy and the inflation wreaked on the U.S. dollar holder by the devaluing U.S. dollar worldwide (see The Inflation/Deflation Debate – a Reconciliation posted to this blog on September 1).

On August 27, Time discussed the domestic nature of America’s natural gas business (As Oil Explodes, Why Natural Gas Prices Stay Low).  The U.S. produces 90% of what it consumes with much of the remaining 10% being imported from Canada. Natural gas production is up because of the roaring economy and rising prices of energy two years ago (there is a time lag between new drilling and actual production and distribution).  At the same time, gas using industrial production in the U.S. is down nearly 13% both due to the recession and cooler than normal weather patterns this summer, both of which have reduced the demand for electricity (fired by natural gas power generating plants).  The falling price of natural gas is a symptom of the deflationary spiral gripping the domestic U.S. economy. Because this is one of the few commodities that is purely influenced by the domestic economy, the value of the dollar in international trade has, so far, had very little influence on natural gas prices.

The demand for oil, too, has fallen with worldwide recession.  But, the U.S. imports a majority of its needed oil, so, unlike the price of natural gas, the price of oil will be influenced by the value of the dollar vis a vis other currencies.  The following table shows the change in the value of the dollar between the February 18, 2009 low in the price of oil and September 12, 2009 relative to the U.S.’s largest trading partners (as measured from January through July, 2009) and some other significant currencies.

Country

% of Trade among top 10 Currency Value per $, 2/18/09 Currency Value per $, 9/12/09 Percent Change
Canada

25.7%

$.7969

$.9289

34.5%

China

21.2%

$.1465

$.1467

0.1%

Mexico

17.9%

$.06876

$.07482

8.8%

Japan

8.7%

$.010854

$.010985

1.2%

Germany

6.9%

$1.2653

$1.4593

15.3%

United Kingdom

5.7%

$1.4237

$1.6688

17.2%

South Korea

4.1%

$.0006884

$.0008193

19.0%

France

3.9%

$1.2653

$1.4593

15.3%

Netherlands

3.1%

$1.2653

$1.4593

15.3%

Brazil

2.8%

$.4377

$.5528

26.3%

Total

100.0%

Weighted Avg.

15.2%

excl China

19.2%

Australia

$.6420

$.8637

34.5%

New Zealand

$.5118

$.7053

37.8%

Ireland

$1.2653

$1.4593

15.3%

Russia

$.02783

$.03258

17.0%

The top ten trading partners account for about 63% of U.S. foreign trade.  The trade weighted average change in the value of the dollar since the low in the price of oil on February 18th is 15.2%.  If China is excluded (because they peg their currency to the dollar), the trade weighted average is 19.2%.  Add in other significant currencies, and we can be pretty well assured that the dollar has declined about 20% in value since February.  [Alternatively, the U.S. Dollar Index (USDX), a composite of six currencies (Euro 57.6%, Yen 13.6%, British Pound 11.9%, Canadian 9.1%, Swedish Krona 4.2% and Swiss Franc 3.6%) has fallen 14.5% from its peak in March through September 11th.]  Thus, if the dollar hadn’t declined in value, then we can be pretty confident that today’s oil price would be at least 20% cheaper, or around $57/bbl instead of $71+.  In addition, there is no doubt that the price of oil has been bid up by investors/speculators who see oil as a hedge against a devaluing U.S. dollar.  How much is speculation is not known, but surely the price of oil would be significantly below $57/bbl if the speculators were not playing.

The price of natural gas, a purely domestic commodity, clearly reflects the dire demand/supply economic conditions in the deflating U.S. economy.  The price of oil, being an international commodity, reflects worldwide demand/supply (not quite as dire as in the U.S. alone) plus (when speaking of oil in terms of dollars) a significant dollar devaluation, and investor speculation of continued dollar weakness.  In the end, the U.S. consumer is paying inflated prices for oil and imported products due to deficit spending practices in Washington D.C., while the domestic economy reels from continued abhorrent job losses, an overextended consumer, and the prospect of fairly imminent confiscatory new taxes.

Robert Barone, Ph.D.

The mention of companies and commodities in this article should not be considered as an offer to sell or a solicitation to purchase commodities or any securities of the companies mentioned.  Please consult an Ancora West Investment Professional on how the purchase or sale of securities and investments can be implemented to meet your particular investment objectives goals.

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778.

September 8, 2009

Labor Day 2009

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , at 7:47 PM by Robert Barone

“Capital is only the fruit of labor, and could never have existed if labor had not first existed.       A. Lincoln.”

Labor Day, first celebrated in September 1882, is usually feted with family barbecues. As we acknowledge the end of summer this year, the American worker sadly finds himself “celebrating” a lost decade. Job growth among the private sector has been declining the past ten years. The public sector employee and the American corporate executive have left the private US worker hungry for equality.

blog jpeg

While the private sector employee is sharing hotdogs, the government worker is eating steak and the corporation executive is being served lobster and champagne.

In 2008, the average wage for 1.9 million federal civilian workers was $79,197. The nation’s 108 million private sector workers averaged $49,935. After adding benefits the difference was even more dramatic. We will not even bother to discuss the health and retirement benefits our congressional friends in Washington receive. I’m sure they are drinking champagne today on a private airplane destined for a taxpayer funded, fact finding junket. No doubt funded by lobbyists from AIG, Citicorp or Goldman Sachs.

“Excessive executive compensation has taken center stage since the government bailout of banks that began in September 2008. Americans have expressed outrage as CEOs and other executives responsible for the financial crisis have pocketed millions of dollars from bonuses and golden parachutes. CEO perks alone grew in 2008 to an average of $336,248—or nine times the median salary of a full-time worker. Meanwhile, the economy tanked for working people while many companies were bailed out with more than $700 billion in taxpayer money, as well as low-interest loans and guarantees” (Executive PayWatch 2009, AFL-CIO).

In 1965, U.S. CEOs in major companies earned 24 times more than an average worker; this ratio grew to 35 in 1978 (35 is the ratio the average Euro exec today makes) and to 71 in 1989. The ratio spurted in the 1990’s.   Since then, CEO pay has exploded. By 2005 the average CEO was paid $10,982,000 a year, or 262 times that of an average worker ($41,861). The ratio remains close to 262-1 today.  (Economic Policy Institute).

As we discussed in this column last month, Citigroup Inc., Merrill Lynch & Co. and seven other U.S. banks lost a net $81.5 billion in 2008.  Yet incredibly, they paid themselves $32.6 billion in bonuses after receiving $175 billion in taxpayer funds (report by New York Attorney General Andrew Cuomo).

Chief executive officers at 20 banks who got U.S. aid received compensation 37 percent higher than the average for leaders at S&P 500 companies. TARP recipients including Bank of America and Wells Fargo paid CEOs an average of $13.8 million last year, topping the $10.1 million for S&P 500 leaders (report released by the Institute of Policy Studies). Average CEO pay was 430 times larger than for typical workers.

Nine of the financially crippled firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008.

Bonus money for incompetent bankers at 20 times the salary for the US worker? Lobster and champagne for those that fail paid for by the US worker who shares hotdogs.

Let us not forget the disparate pay of the US soldier. We have lost 4,339 American soldiers in Iraq to date. August was a most deadly month in Afghanistan. 45 young soldiers perished, bringing the total deaths in Afghanistan to 738.

The average US soldier pay is $44,000.

1. The average CEO bonus is 8 times that amount.

2. The taxpayer aided, average Goldman Sachs bonus is 21 times more.

3. The first year pay for a Wall Street lawyer or MBA investment banker is 3-4 times that amount.

4. The pay grade of a fleet admiral, responsible for a nuclear powered $4.5 billion  aircraft carrier carrying 6500 sailors and 50 aircraft is around $130,000.

In a nation of misallocated salaries, which American above is more worthy of a bonus from the United States government?

Friday, as the official US unemployment rate reached 9.7% with 15 million unemployed, the government projects U6 unemployment (including marginally attached workers and those working part-time for economic reasons) to be 16.8% and 25 million unemployed.

To add insult to injury, The Labor Department said last Tuesday that the American worker, at an annual rate, was 6.4 percent more productive while his pay fell by 5.8 percent. His government counterpart saw a salary and benefits increase. His CEO was rewarded with a pay package 262 times his salary.

“Money should never be separated from values. Detached from values it may indeed be the root of all evil. Linked effectively to social purpose it can be the root of opportunity.”     R. Kanter

Fred Crossman, J.D., C.P.A.

September 7, 2009

Mr. Crossman is a principal of the Thunderbird-Tahoe Fund, a long/short hedge fund in formation.

The mention of companies in this article should not be considered as an offer to sell or a solicitation to purchase any securities of the companies mentioned.  Please consult an Ancora West Investment Professional on how the purchase or sale of securities can be implemented to meet your particular investment objectives goals.Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  Ancora West Advisors is an advisor to the Thunderbird-Tahoe.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778

September 1, 2009

The Inflation/Deflation Debate – a Reconciliation

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , , , , , at 4:23 PM by Robert Barone

The Treasury is on a wild spending spree with the Fed creating the money that can’t be placed at a targeted low interest rate.  Consequently, the Fed has more than doubled the monetary base in the past year.

Economists trained as monetarists are wringing their hands over the coming wave of inflation due to the excessive money creation.  After all, M*V = GDP (i.e., Money * Velocity), and since M has doubled, it is inevitable that prices have to rise (assuming that V doesn’t fall by half).  In normal times, of course, such actions would be immediately inflationary.  But, as I’ve seen so many commentators say, “these aren’t normal times”.

Let’s approach this from the demand side of things.  When jobs are being lost, aggregate income is falling.  When credit is tight and asset prices are falling, folks can no longer “supplement” their income by borrowing.  When folks are overleveraged, “disposable” income is “saved” to repay debt rather than spent on consumption.  The spending spree in D.C. will eventually have to be paid for by higher taxation which will put a further crimp on consumption.  So, on the demand side in the domestic economy, it appears that there are very powerful deflationary forces at work.

So, why the concern about inflation? The simple answer is that it comes about due to the excessive spending and debt creation in Washington, D.C., which is destroying the dollar’s value in the world.  Inflation will occur, not from the typical demand-pull of the consumer, but from the rising dollar cost of non-labor inputs into the production process.

As the dollar depreciates due to uncontrolled debt creation, then the dollar cost of natural resources and commodities demanded elsewhere in the world are certain to rise.  This includes the cost of goods manufactured outside the U.S., as dollars buy less.  At the same time, the downward pressure on American wages and incomes will continue as American jobs continue to erode.

It is important to distinguish what kind of inflation we will have.  It won’t be the “asset” inflation that we have had over the last decade (real estate and paper assets).  But it will show up as rising costs of commodities, natural resources, and energy.  On the other hand, since consumption will be on a flat to mild growth path, the profit margins of manufacturers selling in the U.S. will be squeezed as raw input costs rise but consumers balk at paying retail prices and retailers have to resort to large discounting to move inventory.  We have seen profits come in better than expected in the second quarter, almost exclusively due to cost cutting.  That’s usually good for one quarter.  So, consumer weakness along with rising raw input costs will impact the profit margins of domestic U.S. businesses.  We all know what that means for the prices of those stocks!

One must also realize that the coming inflation will not raise the value of other existing assets.  Real estate immediately comes to mind, both housing and commercial.  We have seen some stabilization in the prices of low to moderate homes, but there is little expectation that there will be any significant rise in prices anytime soon.  It also appears that high priced homes still have more downward price pressures to weather.  In the commercial sector, with the health of small business in question, rents will continue their downward trend thus pushing commercial real estate values lower.  I see no end in sight for these trends.

In the end, you can think of the inflation/deflation picture this way:  there will be inflation in the things we need/want to buy (based on rising input prices and a devalued dollar), but continuing deflation in the things we already own.  This is certainly true of real estate, and will be true of paper assets as the dollar devalues.  Some protection is available by owning some commodities (although volatile), some foreign currencies, and foreign companies, especially those with significant sales in the developing and emerging Asian economies.

Robert Barone, Ph.D.

September 1, 2009

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778.