Europe: Ice Skating Uphill.

Europe, as we know, is in deep trouble.  Debt is the obvious reason, but the more perplexing problem is how it got out of control.  The main problem is excessive borrowing and now it is at a point where the largest economies in Europe cannot produce enough income to pay down their debts.  In short, everyone is broke. 

So, what is the solution?  Obviously, cuts need to be made as well as taxes need to be increased to help bring the debts under control.  The problem with the solution is that the public is saddled with bailing out their home governments, while the governments are at fault.  Deficit spending must become a thing of the past and surpluses must be run as often as possible.  Otherwise, debts will continue to rise and countries will begin to default on interest payments and cause a trickle down effect that will throw the world markets into a tailspin. 

The US looks at Europe as a tragedy, but we should be weary of the fact that we as a country will be in the same boat if our financial management continues down the path we are on.  Currently, spending cuts are the only real answer to righting the ship.  Increasing taxes is not a viable option, with the present state of the economy, as the American public needs as much disposable income as possible to help pay down their debts and pump some money into the economy. 

Another major issue that could benefit the country in the long term is rewriting the corporate tax code.  The corporate tax code offers too many loop holes for major corporations to skirt paying taxes.  The corporations either sit on this money or reinvest it into the company in the form of research and development or issue it as dividends to attract more buyers of its stock, therefore raising the stock price. 

Originally, the primary reason for these loop holes in the tax code for corporations, was to give them more of their profits to invest in job creation.  Unfortunately, that plan has backfired as the large corporations are not using the tax code advantages they have to create jobs.  Small, privately held businesses create 75% of new jobs currently.  Until the tax code is rewritten and spending is reduced in the short term, the American public will ultimately have to deal with heavy tax increases to help control the increasing national debt. 

The American public needs to take care of what they can control.  Pay down your debts, increase your savings and prepare for hard days ahead.  Things will almost surely get worse, before they get better.  Italy is a primary example of where we are heading as a nation financially. 

Occupy Wall Street- Problem or Not?

Occupy Wall Street is now two months old and what has it accomplished? On the positive side, it has spread throughout the world to some fifteen hundred cities and it gives a face to the unemployment issues our country is facing. On the negative side, there have been hundreds of violent crimes commited by people participating or criminals using the encampments to their advantage as an area that is hard to police. When we see demonstrations like this (picketing, sit-ins, etc.), we have to wonder if this is the most effective way to produce the desired change.

In order to engage the desired change into becoming a reality, you have to understand the opponent. The opponent of the 99% is Wall Street and the rest of the remaining 1%. The opponent, being super wealthly, value money. Rather than standing around with signs and chanting about how unfair the wealth gap is and how Wall Street is made up of a bunch of crooks, you should do something to affect their cash flow.

According to Forbes, the top 400 income earners in the United States derived a vast majority of their income from dividends paid from their stock holdings. Since we know this about the 1%, then we need to ask ourselves how to change their dividend windfall. Dividends are paid from retained earnings. If the revenue and profit fall for a company, the company will tend to reduce or cut out the dividend completely. This will in turn reduce the dividends paid out to stock holders. If the dividend is reduced, some holders of that stock tend to reduce their holding of that stock or sell their entire position. This inturn will increase the supply of shares for sale and thus driving down the stock's price.

Now, on to Wall Street. Wall Street earns money from the trading of shares on the market. Each time a stock is bought or sold, Wall Street makes money. Therefore, the more volatile the market (high volume of shares trading) the more money Wall Street makes. The largest stock traders are the institutional traders (mutual funds, hedge funds, etc.). In order to limit the amount of shares they can move around, you have to limit the amount of money flowing into these funds. Most of the money comes from 401(k) (IRA's, too) contributions. If you stop funding your 401(k), then the money pouring into these funds will dry up and the market will come to halt as the volume of shares being traded will significantly decline. The lack of shares being traded will hurt Wall Street in the pocket. Then and only then will Wall Street actually listen to what the public is saying. Simply insulting Wall Street and milling around outside of their offices will not change anything.

If not funding your 401(k) seems too extreme and not financially responsible, then take a look at your debt portfolio. Most of the debt we are carrying (aside from our home and car) has interest rates that far exceed what we are gaining from our 401(k)'s. Look at it this way, if you invest in the market via a 401(k), you could lose money or gain money. If you instead use the 401(k) contribution money to pay off your 12% credit card debt, every dollar you put toward that debt will give you a guaranteed 12% return. Remember, paying off debt is just as important as putting away for retirement.

You have to be smart with your money. We all work for a finite salary for a finite number of years, which means the amount of money we will earn in our lifetimes is finite. The more you pay towards interest from debt, limits what you can save. The faster you pay off debt the more money you'll have left over in the end. There is one exception. If your interest rate from debt is below the interest rate you can get from a fixed interest savings account, then you should fund the savings account and pay the minimum payment on the debt.

As it stands with Occupy Wall Street, nothing is going to change. The movement is filled with unemployed people who do not know what else to do and that is sad. On the other hand, these folks may have to take a job that is beneath then once their unemployment has run out, until things improve (if they improve at all). Lastly, I firmly believe things are going to get worse in the short-term, before they get better. Hang on tight!

Cash Is King- 2011 Version

Yes, it has been a long time. We are at the half-way point in 2011 and the is my first entry of the year. I've been scratching my head for the past 8 months wondering why the market is still running as high as it is? The main reason is the internet. If you have noticed the volatility of the market over the past couple of weeks, it has been fueled mainly by rumors back and forth about the situation in Greece. The bottom line about the good and bad news about Greece is that there is no substance about the news being given. One day, the headlines will be that the EU has a "good feeling about containing Greece's debt issues", and that's all that is said. The market promptly jumps 1%. The next day, the opposite is said with as little detail and the market promptly drops 1%.

Stop listening to the news. Greece is just the first of many European countries to get bitten by the debt bug. Most of the countries in the EU back each other when it comes to debt. The problem with that is when one country cannot be helped (Greece) the burden will become too much and the weight will send the other countries in the EU tumbling like dominos. The best bet to avoid that is with the EU breaking apart and each country going back to their former currency. Each country needs to clean their own house.

While the EU is a disaster, the US isn't in much better shape. My person opinion is that the overall equity market, bond market and precious metals (silver is the exception) is overvalued. This will be an issue when interest rates come up within 6-12 months. Bonds will begin to lose value with the rising interest rates, but with equities and precious metals still overvalued, the only place they can go is into cash.

However, if interest rates do not increase, the weaker dollar will drive down US equity earnings, which will trigger a sell off into cash, since the weaker dollar will drive up precious metals and low interest rates will leave bonds high. Cash is the only destination.

Cash is the place to be now. Take your profits and sell your losers. Do I recommend going 100% cash? No, but I'd start tip-toeing out of a large portion relative to your goals and investing horizon. Currently, everything is heading downward, so have your cash ready. If Greece defaults while the EU is still intact, Europe could be heading toward a depression, which in turn will spread worldwide. Good luck, we're going to need it.