Monday, April 2, 2018

APRIL 2018 DESERT OF THE REAL ECONOMICS INVESTMENT NEWSLETTER


THE TRUTH ABOUT TRADE DEFICITS. (HINT: THE POTUS HAS NO CLUE HOW INTERNATIONAL TRADE WORKS.) THE REAL TRUTH AIN’T SO BAD.

The Author Rob will not belabor the foolishness of a nonsensical trade war with our trading partners. (Just as the Author writes this newsletter, China announces the imposition of 3 billion in tariffs on 128US products, including pork and meat.*)  All the Author can add is that the executive branch should never be invested with enough power to unilaterally approve and pursue trade policies that Congress has not specifically approved. As cliché as this is, the Founding Fathers would roll over in their graves if they could see how the executive branch has usurped power from the legislature. But that is a topic for books and on other other days.

An article in Forbes Online from January 12, 2018, The U.S. Economy Is Booming, Which Is Why The U.S. Trade Deficit With China Grew In 2017, by Salvatore Babones, provides a good description of the US trade deficit with China and Hong Kong, and why the numbers present a positive picture, not click bait for economic nationalists.

The 2017 trade deficit with China and Hong Kong (part of China but often considered separately because of its advance Western-like economy) will likely reach $320 billion dollars.  Writes Babones:

            That means that the final 2017 U.S. deficit with China/HKG may be up 17%-18% from the $280 billion consolidated China/HKG deficit recorded for 2016.  The official U.S. trade deficit with China reported by the U.S. Census Bureau on February 6 will be big, growing and politically messy. And it shouldn't worry anyone at all.

For a mature and growing economy, a trade deficit signals that there is more capital flowing into the economy than is going out. * *In essence, international investors are betting the money on the US economy. As Babones states, “international investors are looking for a piece of the action in the world's more advanced, most dynamic mature economy.”

The trade deficit must be offset, much in the style of double-entry accounting, by the “current account.” And because there is more capital flowing into the US economy than flowing out, this must be offset in the current account, which of necessity must book a deficit.

FROM A TRADE DEFICIT PERSPECTIVE, THE TRADE IMBALANCE WITH CHINA IS ONE OF THE LEAST OF OUR WORRIES

China is engaging in a massive international development campaign. It seeks to link China with ports in Southeast Asia, South Asia and Africa. It will also develop rail lines that will link China with Central Asia, Eastern Europe, France and the Netherlands.

This ambitious project, or more properly, a series of projects, is called the “One Belt-OneRoad Initiative,”  or OBOR. There are two elements to this plan. One is the “Belt,” or high-speed rail. In that sense, it is similar to the China-Pakistan economic corridor. The “Road” is a series of modernized ports to accept massive amounts of container ship cargo.

There are many justifications for these projects. Political scientists and foreign policy analysts see it as an attempt to increase Sino political reach. Economists see several things. The initiative establishes many potential markets for China’s economy. And if the projects are successful, it will be an effective solution to China’s massive industrial overcapacity. And bringing this overcapacity online will assist China to bring more people from its depressed rural areas into thriving economic cities.

There is another angle. These projects, especially high-speed rail and shipping, are an attempt for these served by OBOR to adopt Chinese standards. There are many ways to look at the ascension of China. One is to adopt counterproductive tariffs, engage in trade wars, back out of international agreements and reject current plans such as the Trans-Pacific Partnership. This will only accelerate the ascension of China as the dominant world economic power. And we must also remember that declining world powers that do not effectively adjust to their new diminished status are more dangerous than wounded wolverines.  Get the hint?

Desert of the Real Strategic Investments has already launched five investment products this year and were are far oversubscribed. So it may be a month or two before we announce the launch of our new products***

WE MAKE AND ENFORCE OUR OWN STANDARDS IN THE DESERT OF THE REAL!

*As the Author is a vegetarian, anything that hurts the animal flesh production industry is welcome.

* *For a weak third world economy, a large trade deficit signals a different status, a country that is struggling to make balance of trade-of-trade payments. But that is not the case with the mature and growing US economy. 

***Or overcome comedy writer's block.

Tuesday, March 6, 2018

MARCH DESERT OF THE REAL ECONOMICS INVESTMENT NEWSLETTER


February 2018 was a month of declines in the S&P 500 and the Dow Jones Industrial average. The NASDAQ, however, closed about at the same level that it began the month.

Losses today (March 1) were substantial as the president announced that he would put a 25% tariff on imported steel and 10% on aluminum. This decision is utterly ill advised and will likely trigger a trade war. How big that trade war will be maybe more a matter of one man’s ego than appropriate trade policy. The subtext that trump is hoping that his base will hear is that he was getting “tough” with China. Sorry folks, but China is not even in the top 10 list of steel importers. Canada is the largest steel exporter to the US, followed by Brazil, South Korea and Mexico.  

Canada promised today to retaliate against this ill-advised policy.  Some countries are threatening to target specific US industries and swing states. For example, a high tariff on Wisconsin cheese will hurt a state that trump won. Bourbon is also a target. And American agriculture is a fat target for trade actions.

It was also reported that trump is considering a tariff on European cars out of little more than spite. Or maybe because he cannot have a shooting war against another country, he can get his little hands busy with his trade war.

THE FED CHAIRMAN IS CALMING SOME NERVES

New Federal Reserve Chairman Powell spoke before a Senate committee. All indications are that the Fed will follow the path of three predicted rates hikes this year. This is the number of increases that the market is discounting.

STILL…many think that the dogs of inflation will soon be let slip. And the unemployment rate of 4.1 is extremely low. Still, wage increase pressure is not causing the pot to boil over.  In fact, the low employment rate may mask the major problem of poor employment. In fact, one in four jobs are low-wage jobs, meaning that median earnings are not enough to bring a family of four out of poverty.  In some states, mostly southern states, one in three jobs is a low-wage job.

Nationally, 4.1 is a low unemployment rate. But in at least a few places, the labor market is over-boiling. The unemployment rate in Elkhart and Lagrange counties is probably around 2%. But never fear, these areas will fall hard when the next recession comes. These are boom or bust economies. These bell weather counties lead the country, into and out of, a recession.

In fact, the shortage of workers in these counties are causing restaurants to close down for a day or cut hours.

SO HOW IS INFLATION CALCULATED?

The Consumer Price Index (CPI) represents a “market basket” of good s that is continuously tracked.  From the changes in CPI, inflation is determined. Never mind that many economists think that the CPI fails to capture baseline inflation, it is what we work with. Many contracts are pegged to the CPI so monthly and yearly price increases are determined by the CPI.

The CPI takes into effect many factors. First, it excludes the volatile price of gas and food. Secondly, it makes “hedonic adjustments” to durable goods based upon improvement in manufactured goods. A hedonic adjustment captures the improvements to a good based upon technological improvements over time.

Think about a personal computer. In 1996 a decent desktop cost over $1000. These state-of-the art boxes had less computing power than a recent Android phone. So over time, the Bureau of Labor Statistics, the government agency that tracks the CPI, has adjusted the price based upon the improvement of the product. A computer is not the only durable good that can be hedonically adjusted. Consider a Blue Ray player. Twenty years ago they likely cost more than $200. Now you can get a far better player for $40-50. So when the CPI is calculated, these product improvements will be baked into the formula.

Below is a graph of price changes in goods with hedonic adjustment for features, functions and technical improvements.  It tells quite a tale. 


Services that have skyrocketed in price are healthcare services and college tuition. Healthcare, as we know, is an American train pile up. So this is no surprise. College tuition increases as states withdraw tax support.  But we will save these topics for other days.

More enlightening are consumer goods, especially technologically products.  New cars, clothing and household furnishings are unchanged. Automobiles keep improving in performance, reliability, safety and durability. The next old schmuck that tells me cars were better built in the 60’s,70’s and 80’s, should get a kick in the ribs. Cars of that era are junk relative to what is manufactured now.

Cell phone services have decreased 50%. No surprise here. The cost for minutes in the 1990s were confiscatory compared to today.  Software also has much greater functionality today. But the product that I find most interesting is televisions.

Televisions, per the graph, cost dramatically less. Some of this has come from cost reductions gained in technology and the manufacturing process. But a lot of it comes in the form of the hedonic adjustment. Twenty years ago, rear projection screens were the top technology. Now, $200 can get you a decent set for the bedroom. One-thousand dollars can get you a magic carpet sized convex TV that looks more real than reality.

Next month, we may have a better handle on where inflation is going.  And in next month’s Desert of the Real Economics Investment Newsletter, we will take a look at some solid arguments that the current CPI greatly understates inflation.

MORE BREAKTHROUGH TECHNOLOGICAL PRODUCTS FROM THE DOTR

Continuing on the successful investment products already launched by the Desert of the Real Economics Strategic Investments, March brings us our newest product, Robbing Hoods Free Online Trading Platform.

Currently, there is an online trading app called Robinhood.com. It is a free, online trading app that allows users to exercise simple stock and ETF transactions. It is targeted at Millenials, who are apparently to cheap to pay for anything. One way that Robinhood makes money is interest on unsettled funds. (It takes stock trades three days to close so there is a pile of money out there waiting patiently.)

Robbing Hoods takes this free trading app to a grossly under-served community, robbers and burglars. Robbing Hoods will be a free app connecting criminals with purchasers of stolen property (fences).  It will operate much like E-bay, bringing buyers and sellers of stolen merchandise together in one seamless application.  It will operate on a distributed operating system, using the blockchain network of illicit prison cell phones that hosts another Desert of the Real Economics’ product, “Bitchcoin”. 

Using the already-existing blockchain prison network will save on hardware, software and network services costs. Robbing Hoods will be funded by interest on unsettled fencing operation sales. An ancillary benefit will be that owners of blockchain nodes (illicit prison cell phones) may learn the valuable skill of stock trading. Both our product and the criminals will benefit from this conflation.  Criminals can move up from street and gang crime to white-collar crime and enjoy all of the benefits of CNBC, Bloomberg and Fox Busiiness Network notoriety. 

SAFE AND WARM FROM THE STORM IN THE DESERT OF THE REAL





Wednesday, February 7, 2018

WHAT DO YOU CALL IT WHEN THE SHOESHINE GUY IS GIVING INVESTMENT ADVICE TO HIS BROKER?


There is an old saw that when markets are greatly overvalued, the “little guy” wants to get in on it. The Author Rob is a hundred percent behind the “little guy.” In fact, he is a little guy. And he has made a few speculative moves with Bitcoin. Made a little. Not much. The swings are so massive it is a tough speculative market.

 Bitcoin has made lots of initial investors money. Some an awful lot. But was it their prescient investing skills, or dumb luck. Likely somewhere in between.

We hear analysts telling us that bitcoin will hit $300,000 very soon. Others call it a speculative bubble. The Author believes both analyses are incorrect.

Bitcoin, although it is a ether money and exists only on a lot of servers, know has some transparency. There are some vehicles for investing in the product and not having them kick around in your wallet.  It was anticipated that funds would be launched in early 2018, but the SEC still has reservations.

Below is a link to a story about a 22-yo Kentucky man who made $770,000 on bitcoin. He bought a house and some other stuff, and started a consulting business to help others invest in cryptocurrencies.

It will stand without further comment.  

"He had invested in bitcoin almost two years earlier, so now Jacob Melin had a new house, a new truck, a new consulting business and a line of people coming into his office, trying to become wealthy as quickly as he had. One person said he expected to use a modest investment to “retire in 12 to 18 months.” Another said he wanted to use the proceeds to start a business. And a father of two talked about paying off his own student loans and buying several acres of land — all the things he did not see a chance to do with his income as a software salesman.'

“Us little guys working our butts off, we can’t get ahead,” Cedric Knight, 35, told Melin. “This is a once-in-a-lifetime opportunity to change my life.

"Knight and others visiting Melin were pinning their hopes on a new form of currency whose potential value the world was only beginning to recognize. Millions of people around the world are chasing after fortune by investing in bitcoin — which has soared by more than 2,500 percent in value in the past two years — and other digital instruments known as cryptocurrencies.'

 THERE ARE NO DEALS OF A LIFETIME IN THE DESERT OF THE REAL!

Saturday, February 3, 2018

FEBRUARY 2018 DESERT OF THE REAL ECONOMICS INVESMENT NEWSLETTER


FEBRUARY 2018 DESERT OF THE REAL ECONOMICS INVESTMENT NEWSLETTER

First off, here are links to one of the posts we have made since the January 2018 Newsletter and some brief quotes:
  
            In 2015 the Federal Communications Commission (FCC) defined the Internet as a “common carrier.” This treated the Internet as a “common carrier,” and effectively requires that Internet Service Providers (ISP) treat all content them same. They cannot block content nor charge more for certain content. 

The 2015 rule defining the Internet as a common carrier provided Net Neutrality. But in December of last year, the FCC voted, by a 3-2, party line vote, to end Net Neutrality.  They did this by changing the legal definition of the Internet from a common carrier to that of an “Information Service” and weakening content protection. … Little will change in the near term. But unless Net Neutrality is reinstated, the Internet may soon resemble Cable TV. 400 Channels and nothing worth watching.”

DRIPS ARE NOT JUST FOR WORN-OUT FAUCETS

There are numerous heuristic investment formula's. “Buy and Hold.” “Dividend Reinvestment.” “Index Funds.” “Diversified Portfolios.” “Annual Rebalancing.” All have their strengths and weaknesses. More weakness than strength for many of them.

Dividend reinvestment is a very good strategy for beginners and anyone that does not live off of the dividend streams for their income and decadent lifestyles. (Hint-The Idle Rich and their progeny [1]) Dividend reinvestment is effectively compound interest for your stocks.

Dividend reinvestment plans, or DRIPS, are the single best way for a beginning investor or a small investor to build a portfolio. Many stocks have DRIPS. You can open the account by purchasing as little as a single share of stock. Each quarterly dividend is not paid directly to you, but is reinvested in more shares of the stock. And you can make more investments into the plans, often as little as $25 or $50 dollars. If you buy DRIPS in four or five companies and make monthly investments of $50, you will have $2-3,000 before you know it.

Some of the most generous DRIP stocks are those that are common consumer names. Kellogg, Clorox and Proctor and Gamble are some leaders in this category. 

DRIPS are also great ways to start children in investing. If you buy a DRIP in a familiar company, a kid can take a real sense of identity and interest in the stock and investing. So rather than asking your friends and families to send toys for your toddler’s birthday, ask them to help you set up DRIPs. (Kids at this age would rather kick screen doors or look for colorful bottles of cleaning supplies in the utility room cabinets than play with toys, so the kids are not missing out on anything.) Here is a link to a website that has access to many DRIPS.

BAYING AT THE MOON FOR MORE MONEY

One interesting investment strategy that often has above-market returns is investing is the “Dogs of the DOW. This strategy involves buying the past year’s ten highest dividend-yielding stocks at the beginning of the year. [2] The next year you rebuild the portfolio with the prior year’s ten highest dividend strategy. 

“The thesis of the trade is that these 10 stocks are quality companies with stable business and healthy, consistent dividend payment. They are temporarily unloved or have experience short-term declines due to various market factors but are likely to bounce back at some point soon.’

“Companies in the Dow have historically been very stable companies that have been able to weather economic storms. It is unlikely they are going to go out of business any time soon.”
THESE DOGS HAVE SOMETHING TO BARK ABOUT

Historically, the Dogs have beaten the Dow. According to Investopedia, between 1957 and 2003, the Dogs outperformed the Dow Industrials by about 3% returning 14.3% annually versus the Dow’s 11%. From 1973 to 1996, the outperformance was even more impressive returning 20.3% annually versus 15.8%. 

The 2018 Dog list is led by APPL, IBM and Exxon Mobile.

GENERAL ELECTRIC (GE) MAY BE KICKED OUT OF THE KENNEL

It is widely predicted that GE will be removed from the Dow. Some notable stocks removed from the Dow over the years are GM (2009), Citigroup (2009) and Sears (1999.)

MORE DESERT OF THE REAL STRATEGIC INVESTMENT PRODUCTS

Last month was an auspicious day for the Desert of the Real Economics. We launched two in a series of market defying investment products.  They were the “New LifeLotto,” and “Bitchcoin” ETPs.

This month, Desert of the Real Strategic Investments announces the following product launches:

Dogs of the Ciao. This fund will build upon the Dogs of the Dow strategy by investing in the stocks 
that have already gotten the long big kiss goodbye from the Dow.  Arriverderci  would be a better 
term for the stocks that got booted from the Dow, but “Ciao” rhymes with “Dow.” We are working
 with some thin material here, so as, Grouch Marks said in the film “Animal Crackers,” “ [A]ll the
 jokes can't be good.  You've got to expect that once in a while.”

The ETF will invest in all of these curb-kicked stocks and will rebalance the portfolio annually.  It will go long and short the stocks, so you choose between earning a little and losing a lot.  This may not be the best ETF out there, but we assure you that the SEC filings and the Prospectus will be the funniest.

Junk BONDO* Fund. This Fund is a bond fund that will package promissory notes, and retail installment payment agreements from “Buy-Here, Pay-Here,” “You Drive, You Ride,” and “We Finance” car lots, into an ETF product.  The Fund anticipates several tranches, to be based upon the strength of the underlying instruments. At this point, the tranches (classes of bond strength) will be “Extremely Doubtful,” “No F*ing Way,” and “Refer to Vito.”

AUTOMOBILES AND TRUCKS RUST MORE SLOWLY IN THE DESERT OF THE REAL!




1.   [1]  Preconception, the Author Rob applied for one of these slots as an Idle Rich progeny. He was passed over, however.  Great work if you can get it.

2.    [2]  Another take on the “Dogs of the Dow” strategy is to buy the prior year’s ten poorest returning DOW stocks.

* “BONDO” is a generic term for auto body filler compound. BONDO is used to repair scratches, dents and rust holes.  Many vehicles sold by these car lots are held together by BONDO.  BONDO is also a brand name under which the 3M company markets its auto body filler compound. If any 3M intellectual property attorneys are reading this, we are in no way attempting to disparage or genericize your product name. (Our lawyers made us say this.) And just to suck up a little to 3M, 3M, of MMM, is part of the Dow Jones average.