May 21, 2013

Learning to live with uncertainty’s economics

Posted in Economy, Finance, Uncategorized tagged , , , at 7:37 PM by Robert Barone

Everyone lives with uncertainty.
 
We don’t know the future, but there are times when uncertainty is more prevalent —during natural disasters or in a combat zone, for example. And during such times, one tends to avoid what would be a normal routine.
 
The same is true when there is uncertainty about the economy and economic policy. Spending patterns tend to change in these environments.
 
Consider what happened to corporate cash flows at the end of 2012. Because it was uncertain what the 2013 tax rates would be, many companies paid extra dividends before the end of 2012 and gave their employees early bonuses.
 
Today, economic policy uncertainty continues to have a dramatic impact on economic activity. Three academics, two at Stanford and one at the University of Chicago, recently unveiled a measure of U.S. economic policy uncertainty and found that uncertainty has been significantly higher than normal for the past two years, resulting in a dramatic impact on economic
growth.
 
Using this research, the Vanguard Group estimated that such uncertainty has created a $261 billion drag on the economy ($800 per capita).
Over the past two years, they say, this has reduced the growth rate of real GDP by at least 1 percentage point and by 45,000 jobs per month (that’s over 1 million jobs in the two-year period).
 
Corporate America’s cash glut
 
It is well known that there are record amounts of cash on the books of America’s major corporations. Apple and GE have more than $100 billion each; Microsoft has more than $70 billion; and Cisco and Google each have more than $50 billion.
 
But because much of this cash has remained offshore for tax reasons, it is not available for investment or job creation here in America. Despite its huge cash hoard, Apple recently borrowed $17 billion to pay dividends to its shareholders and to repurchase stock because its offshore cash is subject to significant taxation if repatriated to pay for these transactions.
 
A dearth of capital expenditures
 
In the past five years, the rate of growth in U.S. corporate capital expenditures has been the slowest in at least 50 years. The tax code and other issues surrounding fiscal policy, including the debt and deficits, and regulatory issues like Obamacare keep corporations from investing,
expanding and creating jobs in America.
 
Uncertainty, regulations and part-time employment
 
The most recent headline (U3) unemployment rate was 7.5 percent (April). In the Household Survey, the number of people employed grew by 293,000, which appears to be quite positive (that number was a negative 206,000 in March).
 
Unfortunately, of those 293,000, 278,000 were part-time jobs. Because the U3 unemployment measure counts part-time and full-time jobs equally, the unemployment rate appeared to decline in April from its reported 7.6 percent level in March.
 
But the U6 unemployment measure, which assigns different weights to part-time and full-time jobs, rose to 13.9 percent from March’s reported 13.8 percent. To confirm the movement to part-timers, the average workweek declined 0.3 percent in April.
 
Should we be concerned that 95 percent of the jobs created were part-time, or is this just an anomaly?
 
I’ve seen reports that because of Obamacare, Taco Bell, Applebee’s, Denny’s and Olive Garden are moving some employees from full- to part-time status. And, the state of Virginia, the city of Long Beach, Calif., and Youngstown State University have mandated that their part-time workers cannot work more than 29 hours per week, thus saving them millions of dollars
in potential Obamacare costs. Consider that there are still 7.5 months until Obamacare is fully implemented. Could this movement toward part-timers be just the start?
 
Uncertainty and the tax grab
 
It is no secret that every federal, state and local government is looking for revenue. The result has been an explosion of rules and regulations, and the fees and fines that go with them.
 
This is choking small businesses. The Internet sales tax is one such example. How is a small Internet-based business going to cope with more than 9,000 taxing jurisdictions, all with different and sometimes contradictory rules?
 
Can you imagine having to do such accounting, and then create a payment stream for several hundred such governmental entities per month, all of which would have the right to audit your books? Don’t be fooled. This has nothing to do with “fairness,” as is being touted. It has everything to do with increased taxation to fund government. Until such uncertainty subsides, the creation of new Internet-based small business will be stifled.
 
Conclusion
 
This growing concern —that America will not be able to achieve a long-term plan to deal with its debt, deficits and the monetization of such —has frozen the business sector like deer in the rapidly approaching headlights.
 
U.S. policymakers seem oblivious to the implications that continued policy uncertainty has on economic growth.
 
We’ve adopted European-style policies, and today our economic growth rate is what Europe had five years ago. Perhaps Europe’s negative growth rate today is a harbinger of our own future.
 
Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs.
Call them at 775-284-7778.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.

May 8, 2013

Volatility, gold on Wall Street

Posted in Finance, Uncategorized, Wall Street tagged , at 10:05 PM by Robert Barone

There are two truths all investors need to remember about Wall Street.

No. 1: Whenever Wall Street is involved, markets become volatile, even unstable. Many examples exist including the meltdowns of 2001 and ’09. Last year, we had the “flash crash” and the issues surrounding Facebook’s IPO. The week of April 15 produced both the three-minute AP/Twitter meltdown (the “Tweet Retreat”), and the dramatic fall in the price of gold.

No. 2: The reason for such volatility is “greed” and “fear” on the part of the large Wall Street players. Greed can be seen in the widespread use of leverage, margin, derivatives, futures and options, all of which multiply the returns on committed capital. Once greed drives prices to heights that can’t be justified, the slightest jolt causes fear and a cascade of sell orders as all the major players, seeing leverage work against them, rush for the exits at the same time.

The recent gold meltdown, underlying fundamentals

Clearly, fear gripped Wall Street’s holders of gold on April 12 and 15. The closing price on April 11 was $1,550 per ounce. On April 15, it was $1,352 per ounce, a 12.8 percent decline. At this writing (April 27), it has recovered about half of the loss, closing at $1,462 per ounce on April 26.

Because we are talking about something that trades on Wall Street, no one can say for sure that the selling pressure is over. But there are some fundamental issues that investors need to understand regarding the yellow metal:

• Gold was not in a speculative bubble. Its rise in price since the turn of the century has been based on the fundamentals of fiscal and monetary malfeasance on the part of many western industrial nations including the U.S., the U.K., the European Union and Japan.

• The 12.8 percent rapid fall in gold’s price was not based on a shift in those fundamentals but was just a bout of Wall Street “fear.” In fact, since April 15, reports from all over the world (including India and China) indicate a massive amount of gold buying by main street consumers. The U.S. Mint sold out of its physical coins immediately after April 15. Clearly, main street knows a bargain when they see one.

• Volatility in the price of gold is nothing new. Can’t remember such volatility? Try 2008. From March 17 to 20, 2008, the price of gold fell 5.8 percent (from $1,000 per ounce to $943 per ounce). It then proceeded to fall to $710/oz. in November of that year, a 29.1 percent total drop. That is almost exactly the magnitude of the 28.2 percent fall from gold’s Sept. 2, 2011 peak of $1,884 per ounce to the recent nadir.

Gold’s historic outperformance

Yet, gold has been a spectacular performer since the turn of the century with much higher returns and lower volatility than stocks. Such performance relative to both inflation and equities is shown in the accompanying tables.

Table 1 shows the annualized returns of gold if purchased on Dec. 31, 1999, and held to March 31, April 15 or April 26 of this year. Also shown are the returns of the S&P 500 (including reinvested dividends). For good measure, I threw in the official annualized inflation rate (CPI-Gov’t), and a more realistic inflation rate (CPI — 1980) calculated by John Williams of Shadowstats.com using the 1980 CPI methodology. As you can see, gold was the asset class to hold throughout this period.

Table 1: Annualized Returns of Gold, Stocks & Inflation

From: 12/31/99 To: 3/31/13 To: 4/15/13 To: 4/26/13
Gold

13.8%

12.4%

13.0%

CPI – Gov’t

2.5%

 

 

CPI – 1980

9.6%

 

 

S&P 500

0.5%

0.4%

0.6%

 Table 2 shows the returns of stocks and gold from the stock market lows of March 9, 2009. If you were not gripped with “fear” in March 2009 (the vast majority of Wall Street players were) and you bought at the lows, you did great. However, if you bought gold then, your portfolio also performed, just not quite as well.

Table 2: Annualized Returns Since Stock Market Lows of ‘09

From: 3/9/09 To: 3/31/13 To: 4/15/13 To: 4/26/13
Gold

14.6%

9.9%

11.9%

S&P 500

23.0%

22.4%

22.8%

Table 3: Annualized Returns 12/31/99 to Stock Market Lows of ‘09

From: 12/31/99 To: 3/9/09
Gold

12.4%

S&P 500

-7.5%

 
It isn’t fair to look at Table 2 without a look at Table 3, which shows what the returns on the two asset classes were in the nine-plus years from the turn of the century to the S&P 500 lows. Note that if you held the S&P 500 during that entire period, your annual return was a large negative (-7.5 percent), while gold produced a large positive annual result (+12.4 percent).
 
 
Conclusion

The price of gold is volatile because Wall Street is involved. Nevertheless, its volatility hasn’t been as great as that of stocks in this century. The returns produced by gold have beaten inflation by anyone’s measure and have whipped the returns produced by stocks, unless you invested heavily on March 9, 2009.

Despite Wall Street’s recent tantrum, the underlying fundamentals for owning gold haven’t changed, as can be seen from the overwhelming demand for the yellow metal coming from main street consumers since that tantrum ended.

The mention of securities/commodities, such as gold, should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals.

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs. Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.