It’s time for a jubilee

Seems like our world is going to hell in a corona basket.

I remember at the end of 2019 all my friends were saying they were never so glad to see a year end. 2019 was a miserable year. Now, most of us would prefer to be back to 2019. A recession that looks like it will become a depression and COVID-19, which may kill a million or more of us, seems like the beginning of the Armageddon that so many so-called Christians are looking forward to. Perhaps that’s why many of them were cheering Trump’s suggestion that everything go back to normal on Easter Sunday.

On that last point, I was going to make a blog post just on that, but I can’t possibly restate any better what so many others have already said about Trump’s unbelievable narcissism. Trump wants us to die so he can get reelected. The smart ones though are going to take a pass and will keep sheltering in place and obsessively washing hands and surfaces. I know we are. Evolution is not called “survival of the fittest” for nothing. For those happy to place emotion or devotion to an insane leader over rational behavior, well, you’ll be one of hundreds of thousands of candidates for the 2020 Darwin Awards. Clearly you weren’t reading my blog, but don’t say I didn’t warn you.

So rather than restate what so many others have already said, let me talk about something that isn’t being much talked about: the way our economy works appears to be crumbling. What do I mean by that? I mean the way we have been running an economy where the rich continue to get richer, the poor more desperate and in debt, and our government more dysfunctional is ripe. It’s not only not working, it’s not working badly for us. We are ripe for revolutionary changes. This upcoming depression (which it looks likely to be) should make us anxious for another New Deal.

It won’t look quite the same as the New Deal and hopefully any depression will be short lived. But our economy is loaded to the maximum with debt. Pretty much everyone, except the rich, holds it. That’s individuals and corporations, made possible by low interest rates since the Great Recession. The Federal Reserve’s recovery plan is to cut interest rates to zero or even lower, trying to coax us to take on even more debt. That’s because they don’t have any other tools to use. Trying to grow out of a depression based on taking on more debt that we already couldn’t afford doesn’t sound very sound to me. It feels desperate, as if we are desperately trying to keep the rules of our old sinking economy alive. The so-called $2T recovery bill signed into law today is an attempt to keep this hamster wheel turning.

I don’t think this will work. First, look how long it took us to emerge from the Great Recession. When we did emerge, our growth rate was always anemic. You’d be hard-pressed to find any quarter where our GDP increased by more than three percent annually. Our economy was like an overloaded subcompact running on three cylinders trying to merge onto the Interstate. It took a long time to get up to highway speeds. And while we technically recovered, we never really felt we recovered because we never fundamentally solved the problems that got us into it in the first place. The half-hearted attempts by Democrats in 2009 and 2010 were not nearly enough.

In fact, we went back and made the same stupid mistakes all over again, such as getting rid of much of Dodd-Frank banking regulation that was supposed to prevent it from happening again. The fundamentals of our recovering economy were never sound, but were propped up by low interest rates which had the side effect of causing markets to rise. Companies used cheap credit to buy back their own stocks, inflating their stock prices to surreal levels. The bubble would have burst anyhow; the coronavirus thing just made the hole gaping instead of possibly manageable.

What would really make the economy roar back when this pandemic is contained is a big haircut to a lot of creditors. Because an economy can’t roar back if overleveraged people have no cash to buy stuff. What we really need is a jubilee. This is where we force creditors to wipe their debt slates clean.

Take, for example, student loans. Last I checked, there were about a trillion dollars in outstanding student loans, owed by people the least able to pay them back. Desperate for an education instead of flipping burgers for forty years, they didn’t have much choice but to pay usury interest rates for educations whose costs were vastly inflated. Let’s declare all that debt insolvent. The creditors will scream, but a lot of people will have money to spend again on things that matter like food and housing.

It could be done for lots of debts. Write off, say, 25% of mortgage debt on housing purchased for up to $500,000. Wipe out 50% of credit card debt. If you want to encourage thrift, revert the debt if more is incurred over the next five years.

And tax the rich. They’ve been bleeding the rest of us dry for too long, in the process allowing infrastructure and services to degrade. Institute Elizabeth Warren’s proposed 2% wealth tax. Raise rates just to where there were for rich households during the Reagan Administration. Tax dividends the same as ordinary income, or higher. Make work pay again.

Then do what we all know we need to do: make Medicare available to all. Much household debt and personal bankruptcies are due to medical costs that are out of control. Controlling medical costs frees up all sorts of money for more productive use. Institute living wages for everyone with annual increases that keep pace with inflation. Overturn right to work laws.

This is probably beyond a President Biden. But without it, I suspect a President Biden will discover what President Obama discovered: the system will work in counterproductive ways against the needs of the people instead.

Our election, if it can be held fairly, will likely put Democrats in control of government plus give them the margins needed to make real change happen. The question is whether Democrats have learned their lesson, and can institute the changes we need to make the economy work for everyone again.

If not, election 2022 will look a lot like Election 2010, and the crazy cycle will continue to repeat and move us into second world status.

Am I a financial genius?

My recent post I’m betting on a recession didn’t get a lot of reads. There was no reason it should because I was just some nobody opining that a recession was imminent who decided to make a six-figure decision to lessen the impact if it happened.

We won’t know officially if we’re in a recession for about six months, but based on four days of major stock market declines and increasing numbers coronavirus cases, it’s looking like it will arrive sooner rather than later. In fact, it may be here already, we just can’t measure it yet.

Anyhow, yes, on February 14, I moved $106,144 in my retirement account from stocks to bonds. Before it was 60% stocks, 40% bonds. After it was 40% stocks, 60% bonds. My timing was just about perfect, as markets crested about a week later.

Mind you that all this didn’t make me any money. I am still invested 40% in stocks and those took a hit. We lost money overall. But if I hadn’t, we would have lost $89,439. Instead we lost $19,249, as of the close of markets today.

Perhaps I could get lucky twice. Just maybe when stock prices reach their nadir, I’ll move back to 60% stocks, 40% bonds and reap the rewards some years later. But who knows? Growth has been mediocre across the world for years. The main reason stocks were going up at all is because of the cheap credit the Federal Reserve made available. This caused a lot of stock buybacks, which due to supply and demand pushed up stock prices to artificial highs. Perhaps we’ll never go back to peak market again.

To answer my question: no, I’m not a financial genius. No one can time the market. What I did was likely very well timed but mostly luck. I shouldn’t count on luck twice in a row.

But I can watch the fundamentals of the overall economy, and periodically make decisions like this based on my analysis. If my assumptions are sound and I buy into categories of stocks, it could work again, this time on the way up.

With markets now officially entering correction territory due principally to coronavirus scares, a recession looks a whole lot more likely. It’s the supply chain disruption caused by the virus, not to mention its impact on the travel industry that is likely to take big hits that should make it official.

I did notice that someone recently read my Riding the recession’s wave post from January 2008, before stocks really tanked that fall. Back then I explained that a recession could be perversely good for those with steady incomes and significant savings. This definitely proved true for us. During a recession, prices come down, including inflated stock prices that can often be snatched at bargain prices, providing you hold onto them until markets recover. When money gets tight, you can get all sorts of deals. Already, home mortgage rates are dropping. That, with some decline in real estate prices, might make it a good time to buy a home.

If you are retired like we are, recessions make you appreciate the value of a pension, if you are fortunate enough to have them. This makes us recession immune. The portion of our income that comes from selling retirement assets though takes a hit while the recession lasts. You just have to hope that when markets recover your portfolio won’t be too severely impacted.

They say not to put all your eggs in one basket. By moving more of our assets to bonds, I can get a predictable rate of return, albeit half or less compared to what stocks have returned recently. To supplement our income, we sell some of these bonds periodically, husbanding the declining value of the stocks in the portfolio for a better day.

Meanwhile, while I hate the suffering a recession brings, I’m glad I bet on a recession. Let’s see if it actually arrives. We won’t know officially for about six months, but if we see the unemployment rate creep up, that will be a sign. Recent high stock prices have been signaling a false economy, but that appears to be changing.

The stock buyback warning: stormy economic times are likely ahead

Remember when Trump’s tax cuts were going to put money back into the pockets of working class Americans and create more jobs for them too? Unsurprisingly, this turned out to be a load of peanut butter. With gas now around $3 a gallon, whatever new modest tax cuts trickled down to working America are probably being eaten up in higher transportation costs. As for businesses reinvesting their tax cuts in their businesses and bumping up wage rates for employees, well, there’s not much evidence of that. According to this March report from the Roosevelt Institute, just six percent of these corporate tax cuts are going to wage increases and bonuses for employees. Just twenty percent of this money is going toward capital investments that will result in more jobs.

So what are companies doing with the extra money from this enormous windfall? There is little reason for CEOs to spend most of it investing on the long-term futures of their companies. That’s because CEO compensation tends to be based on making short-term profits. These days many CEOs make far more compensation from exercising stock options than they do from a salary.

So we should not be surprised that CEOs are trying to make money the easy way instead. And the easy way is to take these windfall corporate tax cuts and buy back shares of their company’s stock. It’s good for them and it’s good for shareholders. Or so it seems. Experts are questioning if these buybacks are just artificially inflating the price of corporate stocks. One traditional measure is a stock’s price to earning’s (P/E) ratio. The higher the ratio, the longer it takes for earning from owning the stock to be used to buy a new share of company stock. High P/E ratios are a sign that stocks are overvalued and due for a correction. We are now at a P/E ratio about where we were before the Great Recession.

If it were just a handful of companies, this would not be particularly worrisome, but it’s part of a large and broad general trend among American corporations. Bloomberg reports a record $800B in stock buybacks are expected in 2018. So how are these buybacks inflating the value of a company artificially? It’s quite simple. When a company buys back its own stock, the supply of the stock for purchase diminishes. Of course as supply diminishes, price increases for any shares that are traded. If a CEO has $5 million in his company’s stock, by channeling these tax cuts and profits to buybacks, all other factors being equal the price of the stock will go up. So his $5M might easily turn into $6M. And what work had to be done? Simply redirecting these tax cuts and profits to create “buy” orders for his company’s stock.

That’s a whole lot easier than creating new products, expanding into new markets or figuring out how to run the business more efficiently. Shareholders probably aren’t going to complain when they see the value of their investments rise. Smarter CEOs will be systematically selling their stock when its price goes up, so they can capture its inflated wealth. This gives them money in the bank that can’t be taken away and shifts the risks of owning this stock to other stockholders.

Which is why these record stock buybacks really worry me. They do nothing to actually make a company more profitable in the long run and actually add to a company’s vulnerability. They allow more agile competitors (if there are any) to get a leg up on their market. That adds risks to a company’s value. Companies are essentially betting on the profitability of corporate inertia. Traditionally, this has not worked well for companies in the long run.

Stock corrections are inevitable. There was evidence earlier this year that we had reached correction territory, but markets have recovered much of these losses. For now though these tax cuts seem to be juicing the markets instead of your pocketbooks. I get the feeling that a true correction will happen sooner rather than later, in part because of the volatility of the market so far this year. This suggests there is a general nervousness among investors.

Stock buybacks though are a clear symptom of corporate greed. Greed is simply the lust for more wealth, and the truly greedy will want to increase their riches now rather than wait for improbable future profits. Congress is aiding and abetting this greed through these tax cuts in the first place, but also by removing regulations that were put in place after the Great Recession to prevent these things from happening in the future. You can see this through Trump’s attack on the Consumer Financial Protection Bureau. You can see it in recently passed legislation that will remove more higher reserve requirements on midsize banks. And you can see it in record consumer debt levels, bigger even than before the Great Recession. I believe that these large stock buybacks are another sign that this financial house of cards is moving toward another correction.

This time we can hope that it won’t be as bad as 2008. It shouldn’t, but who can say? The Trump Administration is being both being reckless and shortsighted, and Congress is fine with this. Their insatiable greed means they simply don’t care about fulfilling their primary function. The primary function of government is to be fiduciaries for the nation, making sure it is properly managed for both the short and long term. To the extent they are interested, it is to convince them that their timeworn strategies that just do the opposite will somehow work in the long term this time.

You would be wise not to take their bet. Rather than practicing greed, you might want to practice prudence instead. My take: this is a good time for less market exposure. I’m not alone. When the Treasury bill rate made it above 3% for the first time in years, it pushed up other interest rates. Many investors saw this as a sign and began moving more money into bonds for the surety of a return.

I don’t think Republican governance is going to change any fundamentals of the economy. Needless to say, I’m limiting my market exposure now and putting more money into bond funds. Maybe you should too.