By Ken Knight, MBA

In my previous blog, I discussed the implications that social mood has over social trends and activities.  Let's discuss some more: 

Marijuana:  
The most common reason for being arrested in the United States today is for drug possession (Robert Folsom).  The average number of arrests per day in the U.S. is 1700!  This does not include drug selling which is categorized differently by FBI statistics.  The increase of usage of marijuana now stands at 13% of Americans!  And this has doubled in the last 3 years! 
If we go back in history, we find that prohibitions occur during bull markets and are repealed in bear markets.  The prohibition of alcohol occurred in 1919 (the 18th amendment). This was during one of the biggest bull markets in history at that time.  The repeal of prohibition occurred in 1932 after a dismal failure of enforcement. Social pressure brought on both movements depending on the current social mood.  These changes occurred from "the ground up", in other words, social pressure on the government to make these changes occurred.
Marijuana (mj) is in the same boat.  The social pressure surrounding the ban on marijuana came during bull markets and we are seeing the opposite during this momentous bear market.  Again the changes in law have occurred due to social pressure from the citizenry. Ironically, the recent "bear market bounce" has caused the federal government to deny any changes in the categorization of mj from a class three drug to a lesser one.  My take on the increased use of mj and the decriminalization or legalization of usage is that this is a "feel good" drug that is utilized during periods of negative mood, just as alcohol was (and is) desired by society. A number of states have referendums to legalize the recreational and medical use of mj and I expect to see this trend increase in the future.


Number of births.  
Interestingly, when society is in a slump, sex (and therefore procreation) take a back seat. In an economic slump, you are more worried about putting food on the table and a roof over your head.  Kinda puts a dent in the libido. Here's a chart of births and the stock market (Socionomics):

 You can see the "Baby Boomer" generation from the 1940's to the 1960's.  As this small bear market bounce finishes, I expect to see the birth rate to go lower.  How does this affect us?  In talking with members of the Millennium Generation (friends of my children), they are limiting the number of children they are going to have due to the costs of raising a child.  Instead of a large number of grandchildren, I only might get a handful! Grrrr!

Disease epidemics. 

There is a direct correlation between the downturn in the stock market (the economy) and societal diseases.(Exploring Socionomic Causality of Social Health and Epidemics)
Let's name a few:


Cholera:

Spanish Flu:

 

 AIDS

Ebola Epidemic:

A six year decline in Western Africa’s regional benchmark stock index preceded the eruption of an Ebola epidemic in 2014. The epidemic has killed over 11,000 people in West Africa.

 

Zika Virus:

Finally, after a 5 year decline in the Brazilian Stock Market, we now see the Zika virus becoming the latest epidemic outbreak.  

I just read that in the next 3 years, 25% of the inhabitants of Puerto Rico will have the Zika Virus!

What conclusions can we make of this?  First of all, when there is a negative societal mood, there is more poverty and a decrease in public health resources available. Alos, a whole lot of stress is put upon us as a whole.  Increased stress puts stress on our immune system decreasing our ability to fight infection.  There is also an increased amount of poverty (as in Rio Dejunero) and, as we are seeing in the reaction of our own government, there are a decreased amount of resources made available to put towards public health to fight an epidemic.  
As to recommendations, as society enters a period of heightened stress, we as individuals can try and protect ourselves by understanding what is happening and not to "stress out" to maintain a strong immune system (Alan Hall).  Remain clear of areas where there is high risk. As for using alcohol and drugs to help with mood, I leave that to your own discretion!  Mediation and surrounding yourself with positive people will help even better.

We'll talk of other ramifications of society's mood in future blogs.

Until then.
Best regards,
Ken Knight

 

By Ken Knight, MBA

No doubt you are hearing many news stories that reinforce my assertion that, long term, we are mostly in a "bad mood" swing .  As nothing goes straight up or straight down, we are in a "bear market bounce". It is interesting and educational to look at how we are influenced on so many levels because of this principle.  We are able to look back and possibly look forward to social trends that influence our tastes in fashions, what music we like, and what represents a good movie we'd like to watch, to name a few I will be discussing.  

Let's look at some:

Fashions:
Have you ever heard of the "Hemline Index"? Back in the 1920s, the economist George Taylor conceived the hemline index that says the skirt hemline is correlated with the economy (and thus stock market prices). "In times of decline, the hemline moves towards the floor (decreases), and when the economy is booming, skirts get shorter..."(The Big Picture).  If we go back in history we see that this is pretty much substantiated.

 1920's

1930's Depression:

  1940s War Style Joan Fontaine and Olivia De Havilland –



  
1950's Starting to come up!

1960's
Wow!

 1970's

 1980's

 1990's
Kind of a mixed bag.  Confusing fashion like the period.

 2000's again confusing.

2015, they're coming down again.

There ya go!

Okay.  How about music.
I'll give you the music and you tell me the mood:

"The Charleston"  1927

"Stormy Weather" by Ethel Waters 1933

 "She loves You" Beatles 1964

"No More Mr. Nice Guy"  Alice Cooper 1973

"Wild Side" Mötley Crüe  1980 

  "Like a Prayer" - Madonna   1990

"All I want to do (Is Have Some Fun)" Cheryl Crow 1995

My research for our current time period is all over the place, from "Toxicity" System of Down (Nu Metal) 2005

to

"Me Too" Meghan Trainer (Nu Bubble Gum?)  2012

Get it?

Okay next:

Movies:There is a mixture of all types of movies during time periods. But mix, frequency and popularity are mainly influenced by mood:

1931 - 1933
The Mummy
Dr. Jekyll and Mr. Hyde
Frankenstein
Dracula
King Kong

1960's
Halloween
Night of the Living Dead
Texas Chainsaw Massacre

Horror movies during bull markets are derivative, comical, hokey, and silly.
1948:
Abbott and Costello meet Frankenstein.

Heroism, adventure family fare and fantasy are mainstays of a bull market.   In 1937, Disney released Snow White and the Seven Dwarfs, during a roaring bull market.
1960's bear market? No Disney movies!
During the 1970's bear market, The Texas Chainsaw Massacre was made along with The Exorcist, The Omen, and Halloween.
In the 1980's Disney produced The Little Mermaid, Beauty and the Beast, Honey I shrunk the kids, among others.
The 1990's continued the upbeat theme with The Lion King, Aladdin, and of course, Toy Story!
As we approach the late 2000's into 2010's, movies have gotten darker:
Shutter Island, Pacific Rim, Zombie Diaries, Abraham Lincoln: Vampire Hunter (really!), The Cabin in the Woods, and Sinister.  Even comebacks of previous bear markets make a return: Dawn of the Planet of the Apes and Jurassic World made their day-view.
Lately we've had a mixed bag of movies.  I believe this is due to the "bear market bounce" we are experiencing that has a somewhat positive mood with undercurrents of negative mood:
Negative:
The Revenant
The Hunger Games - Mockingjay 
Terminator Genisys 
But on the Positive side:
The Good Dinosaur
Minions
Ted 2
I expect that as we continue to change our mood swing lower after the bounce is done, the number of dark movies will far outweigh the happy ones!

As I have mentioned, there are many aspects of society's trends based on mood swings.  Here's some things to think about until next time.

What do you suppose happens in bull and bear markets?

The design (shape) of automobiles. 
Legalization of marijuana.

Baseball and basketball ticket sales.
Pro wrestling attendance statistics.
Number of births.
Number of Nuclear explosions.
Fitness and health 
Religious participation.
Disease epidemics. 


I'll review these in a later blog.  Again, fascinating stuff!

Until next time.  

Best regards,
Ken Knight
 



 


 

By Ken Knight, MBA

I'm back.  It's been quite a week politically and with more to come!  According to the Gallup Polls, Hillary Clinton was the most admired woman in the world for 20 times including this past year!      Donald Trump was seen as an astute business man who was well respected.  He was rated number 3 on last year's list- Posted December 6, 2015. (Gallup):

 

Now they are vilified as liars and very dishonest!  Their approval ratings are both below 45% (Huffington Post).  These are the lowest numbers in recorded history for presidential hopefuls.   So what happened?  Yes I know that a lot of facts have come out that helped change peoples minds.  But the rancor and vitriol tell me that there is a deep underlying tone - the change in social mood that has brought out the worst in everyone.
I previously listed differences in attitudes between the "good" and "bad" times.  we certainly aren't in the "good" category!
Here's what I posted in my first blog:

Positive mood                                Negative mood

Acceptance                                    rejection
Adventurousness                          protectionism
Agreeableness                               antagonism
Allowance                                       restriction         
Centrism                                         radicalism
Certainty                                         uncertainty
Ebullience                                       depression
Forbearance                                   anger
Happiness                                       unhappiness    
Security                                            fear
Trust                                                suspicion

So why Trump [and Sanders]?  Why now?(Socionomics.com)  Well in times of negative mood, political correctness goes out the window!  Also, negative mood means anger and fear, both very much seen as the mainstays of their campaigns.  The pundits, who initially thought that both candidates were a joke, did not understand how polarized the country had become. Negative mood, as seen above influences the "herd" and can cause havoc with politics.  

And that is just the presidential race!  We'll be seeing individual senate and house races heat up in the next 99 days.  

Interestingly, one might ask "can the stock market predict a presidential winner?"  The answer is yes and no.  An important study was done to see if it is possible.(Socionomics.com)  Here's what I found.  It is actually possible to predict the outcome of an INCUMBENT President by what the stock market was doing.  In other words, if the stock market was in a bull market, the president was most likely to be re-elected (by a landslide).  The opposite is also true. The chart below shows the history of presidents and whether they were re-elected or not based on whether the stock market was in a bull or bear market.  The numbers represent bull market winners and the letters show bear market losers:

The only one that I can see didn't follow the pattern is George Bush senior.  Nothing's perfect.  What is not shown, because the study was done before Obama's second presidential run, is that he would most likely be re-elected to a second term because of the stock market rally:

But, regretfully, the study also showed that it is NOT possible to predict the winner if the candidates are not running for re-election!  Other studies, including the state of the economy, inflation, and unemployment rate and have also been unable to predict the winner.  I guess we'll just have to wait and see!

So the reason my first prediction of the winner of this election would not be re-elected, is because if most likely the stock market enters a severe downturn, the incumbent president will NOT be re-elected!

So don't boo, vote!

Best regards,
Ken Knight





 

By Ken Knight, MBA

A number of you have noticed that the Dow Jones Industrial Average (Dow) is making new highs.  How could that be if we are in a bear market  and how high will the Dow go?  Let me remind everyone that the Dow expressed in the value of gold (Dow/Gold ratio) is NOT making new highs. 
Since August of 2001, Gold was skyrocketing and the Dow was also going up but not as fast so up until 2010, the ratio was going down.  Since then, gold went down while the Dow kept going higher.  As you can see, we've had a "Bear Market Bounce" in the value of the Dow relative to Gold but we are far from making new highs.  You might note that right at the end the ratio is again heading lower. 
Monthly Charts:

Okay, how much higher will the Dow go?  If I knew that I'd be on the French Riviera!  But I do believe we might go to 20,000 but not much higher.  

This is based on a number of things. There is a number of periodicities or cycles to the stock market.  We've talked about the Kondratiev Wave being one.  There is also a "Presidential Cycle".  It obviously cycles every 4 years. (Trading Trends). 

Here's a chart since 1946:

Note that in year 4 of the president's term, the market rose 81% of the time. How accurate is it?  I dunno.  But a lot of people believe in it so I wouldn't discount it.  There is the Elliott Wave Principle that I've mentioned that I have been studying religiously for a few years.  I'll talk more about that in a later blog.  But it continues to point up probably until the end of the year.  

Finally there is the Dow Theory in which in which during the 1890's, Charles Dow (of Industrials Fame)  established investing parameters.  It states: "Mechanically speaking, a traditional Dow Theory sell signal is predicated on three developments: First, the (Dow) Industrial and (Dow) Transport averages must undergo a significant correction from new highs. Then, during the subsequent rally, one or both of the averages must fail to recover above their prior highs. Finally, both averages must fall below their prior correction lows."  (Financial Sense) So let's look at that:

 We've established the first and second parts; after a significant low, the Dow Industrials have hit new highs.  But the Dow Transports are really lagging! The third part of the Sell Signal is for both indexes to go below their respective lows as outlined by the lower bottom lines.  No confirmation yet.  But I'll be watching for it!  

Also remember that the Dow only has 30 stocks in it.  These are the best companies in the world!  Not all stocks are making new highs.  The banking sector is a good example.

Bank stocks in S&P 500:

 

Some of you might ask, well how about investing in gold?  Fagetaboudit!  Gold is a commodity and will continue to head lower over the next few years due to DEFLATION.  Remember CASH IS KING!!

So when the "Bear Market Bounce" ends, be prepared of a major selloff.  

Until next time.

Best regards,

Ken Knight

Okay

By Ken Knight, MBA

I mentioned in the last blog that we would touch on how society's mood affects things like fashions and music.  But recent events have prompted me to respond to them.

Let me start off by reiterating that social events are caused by social mood (positive or negative) NOT the other way around.  The events going on now in the country and all over the world are because the world social mood is negative, or what I call, in a bear market.  Think of the stock market as a barometer of social mood.  Especially the stock market as measured in real money (gold).  Bear markets are difficult to live through. But with the proper knowledge, life can be made more safe and financially comfortable.  That's the purpose of this blog.  

I am sure many of you are wondering "where did he get this stuff?"  Well. while studying for my MBA I became interested in the stock market and whether it was predictable.  I found an organization that was not only fascinating but prophetic.  Even a new term was created: Socionomics.  Not social economics. "Socionomics is a field of study conducted under the hypothesis that waves of social mood motivate the character of social actions."  .  (If you are intrigued by all of this go to the highlighted link: Socionomics.com. For a video presentation go to "History's Hidden Engine" Fascinating stuff!) This is very apparent today with all the violence that was hardly occurring during previous bull markets.  We saw a huge change in mood starting in 2008 that created
a number of groups expressing their anger and frustration at "the status quo"  The Tea Party, the Black Lives Matter movement, , Occupy Wall Street, to name the most prominent.  Violence is a common occurrence during bear markets.  From 9-11 to the Paris and Brussels attacks. And the wars that continue to fester throughout the middle east.  Regretfully, we'll be seeing a lot more of it. And conspiracy theories will continue to develop such as the the Birther Movement.  Politically we see a tremendous polarization between factions.  Congress hasn't functioned in a number of years. And the idea of an "outsider" taking over a political party just 4 years ago would be unheard of.  Yet Donald Trump has done it.  And Bernie Sanders, a socialist, came pretty close, pressuring the Democratic Party to move further to the left.  And don't think this will all end soon.  I predict (my first here!) that whoever wins the White House will be a one term president.  This is typical of bear markets.  Just ask Jimmy Carter!  
I previously said that I was interested in learning if the stock market and therefore social mood swings was predictable.  My answer to this is - yes, somewhat!  Can I tell you exactly when the bear will turn to a bull?  I wish!  But I have learned that somewhat is better than not at all.  The Kontradieff  Wave mentioned in and earlier blog shows 2020 as a probable bottom to the bear market.  But I have also discovered other promising studies that I am finding.  One is called the Elliott Wave Principle (I will be spending more time on this fascinating subject in future blogs one bite at a time).  It is predicting sometime in 2022.  Time will tell how accurate these predictions are.  But I can tell you that we still have a long ways to go.  We still haven't "seen the other shoe drop", that is, the U.S. stock market will follow the other markets lower around the world.  And I predict (Number 2!) that it will go lower than the last time!  

Baron Rothschild, a distinguished member of the wealthy banking family that bears his last name, is credited with saying, "Buy when there's blood in the streets." In other words, buy when no one else is buying.  Again buy at the bottom of the market sell at the top.  We're close to the top.

So again, be safe  and put your finances in order.

Best regards,
Ken

By Ken Knight, MBA

"And whether or not it is clear to you, no doubt the universe is unfolding as it should." (Desiderata).  If you haven't read this poem, do so.  It is telling us that as a product of nature, what we are going through (and will go through) is a part of nature's ebbing and waning.  The pendulum swinging both ways.  

I have been asked "what about my 401k and IRA?  How can I make them safer?"  Let's start with some more history.  As unions became stronger, part of their negotiating besides wages was a pension.  The first one started way back in 1835!  Basically, the money in a pension was put aside in a separate account that the employee would have access to at retirement.  The first ones guaranteed a certain amount of money per month for the rest of the employee's life.  This is known as a traditional pension plan. The money was invested and for the most part, continued to grow as the stock market grew.  The problem with the traditional pension plan is the employer was responsible for assuring the money in the plan was enough to pay for each retired employee.  When the stock market took a downturn, the employer had to make up the difference if the plan suffered a loss.  

So in 1978, the U.S. government, being made aware of this problem, allowed companies to continue their traditional pension plan or switch to a 401k plan which made the employee responsible for his/her investing decisions taking the onus (and liability) off the employer!  So any losses in the 401k plan is suffered by the employee not the employer. (ebri.org) Sneaky eh?

Then came the Individual Retirement Account (IRA) in 1981(Financial Ducks in a Row).  The government saw that retirees were not saving enough for their retirement.  They made it advantageous tax-wise for individuals to put away money that would be taxed at a lower rate once the individual retired at a lower income level.  This did not mean that future retirees ran out and started to invest for their retirement.  In fact, the savings rate of individuals went down (Cheat Sheet):

Because of the change in mood, people have just started to increase their savings in the last few years.  Probably a little late!  So it really did make sense to "start early for retirement". Still does.

So let's start with the 401k.  This is normally set up by the employer and an investment company that collects the money and puts it into an investment of your choice.  The problem is, there are very few SAFE choices in many accounts.  You get a choice of stocks, bonds, stocks and bonds or sometimes if you are lucky, an "interest accumulation" account. The safest obviously is the last one.  But it's not paying any interest, you say.  Well, would you rather gamble with the stock market or play it safe?  I also get asked from younger investors "but if the stock market goes down, there's lots of time for it to go back up again!"  Let's look at how well investors actually do.  
Here is a chart of the S&P 500 Index.  At the bottom is a chart of the AAII Bullish Consensus.  A company calls a bunch of investors every week and asks them "Are you bullish or bearish the stock market today?"  A percentage of bulls and bears is recorded and graphed. The theory is that if you are bullish then you buy stocks.  If you are bearish you sell stocks. It has to do with the emotions greed and fear.  If you are bullish, greed is the norm.  If you are bearish, fear is.  There's an axiom "buy low and sell high".  Well according to this chart, most investors "buy high (greed) and sell low (fear), thus doing the exact opposite of how to make money in the stock market!  And when average Joe investors are buying at the top, who do you think is selling their stock to them?  The smart ones of course!  

 Note that your average investor is bearish at the lows and bullish at the highs.  If you bucked the crowd (not give in to your herding instincts) and bought when everyone else was selling and sold when everyone else was buying...well you do the math!  
Of course the other alternative is "unless you are a professional gambler, why gamble with your money at all?"  So the alternative is to put your money in a safe alternative, the interest accumulation account.  Trust me, you'll sleep better at night!  

As for your IRA, you are a lot more flexible.  The government allows you to set up your portfolio with very few restrictions.  But for the most of you, again if you want to sleep at night (remember reading your IRA statements during the 2008 downturn?) you can invest your money in safe alternatives.  What do you suppose is the safest place to put your money?  The good old U.S. of A. government funds!  But there is a caveat here.  As mentioned previously, I expect that long term interest rates will go up as things deteriorate.  Which decreases the value of long term bonds, even government ones. So the best place to put your money is in short term government bonds.  There are a number of Mutual Fund companies that have that option, Vanguard, JP Morgan, and T Row Price to name a few. If you can't depend on the U.S. government remaining solvent, we're really in deep doo doo!  It is easy to set up an account and have your IRA money directly transferred to the new account.  
Sleep well, my friends!

Next we'll discuss the effect of bull and bear markets on social norms such as fashions and music, etc.  Think about the Monkees and Black Sabbath!  Fascinating stuff!

Best regards,
Ken Knight   

 

By Ken Knight, MBA

Brexit: What's up with that?

Before we get into Brexit and the EU (European Union) I want to reinforce a few points that I have made in earlier blogs.  First of all, remember, the "mood" of society determines the news, not the other way around. As we continue to enter deeper into a period of negative mood, we will continue to see negative news events including acts of terrorism, xenophobia, deterioration of the economy, and isolationism (building of walls and fences)(*see below). 

As for Brexit, unless you have been Rip Van Winkle for the last month, Great Britain has voted to break away from the EU.  Br-Exit.  Get it?  This is what happens during a bear market.  Alliances break down.  But before that, let's go back to the beginning of the EU.  After many years negotiating after the second world war, 6 countries in Europe decided in 1979 to form an alliance and strengthen Europe thinking the whole is greater than the sum of its parts called synergy.  Its members continued to grow thinking that belonging would help each member's economy, eliminating tariffs between countries and except for Great Britain,  sharing a currency known as the Euro.  This culminated in the establishment in 1993 of the EU. All this was fine during the great bull market and the peak of positive social mood of the 1990's until things started falling apart (a turn of sentimentality).  In 2009, the EU had to start bailing out first Iceland, then Greece, Ireland, Cypress and Portugal.  Their economies were suffering and they could not pay back loans made to them to keep them afloat.  For a more detailed scenario you can read all about it in Wiki.  As mood deteriorated, the citizens of countries doing "relatively" better like Great Britain and Germany, resented having to bail out these other countries with THEIR money.  Also, recently the economies of all the countries started to deteriorate again and the people of England mostly said "That's all I can stands, I can't stands no more!" (Popeye).  Other countries such as France (Frexit!), the Netherlands, and Italy to name some who are hearing shouts from their citizens to leave the EU.  

 Included in a negative mood is xenophobia, an unreasonable fear or hatred of foreigners or strangers or of that which is foreign or strange.   That was a big selling point for Brexit.  They didn't want the flooding in or more immigrants taking away jobs from their own.  

Remember the Brexit decision and others to follow are based on deep down emotional unconscious feelings and are caused by herd mentality.  The ramifications are just setting in now by the voters.  Their Pound has dropped, their stock market has lost billions.  They kinda shot themselves in the foot (**see below).  There is also buyer's remorse setting in: "what have we done?" and requesting another referendum.  This is where the conscious catches up to the subconscious.  

So based on the above, where does this leave us?  We have our own problems.  I've tried to stay as apolitical as possible but we have kind of the same situation in our own back yard.  The Republican nominee is on the far right and the Democratic nominee has been pushed further to the left.  The contest seems to be neck and neck.  This is NOT your typical presidential race.  There is an unprecedented deep divide between factions.  This has also been seen in the Senate even causing the first "sit-in" in the House of Representatives!  

But as the song goes, "You ain't seen nothin' yet"(Bachman Turner Overdrive).  Hold on for quite a ride in the next few years.  
Stay happy and stay safe.  This too shall end. 

I've been asked by a number of people what to do about IRA's and 401k's.  We'll discuss those items next.
Best regards,

Ken Knight

*p.s. After I wrote this, the clash between the white supremacist group and protesters came on the news! (Yahoo)

**p.p.s. After I wrote this, I saw this on Facebook...Swear to God!

 

By Ken Knight, MBA

Where to stash your cash.

So have I made sense so far?  I am not making this stuff up.  First let's look at some history.  A Russian economist named Nikolai Kondratieff  in 1924 studied economic cycles and found that they repeated about every 56 years (The K Wave Report).  After publishing his work, he became one of the victims of Stalin's purge of "intellectuals" and was executed in 1930 by firing squad.  Here's his findings:

The periods can also be seen as P=Summer, R=Fall, D=Winter, and E=Spring.  How about that! All part of nature's plan.

So as we head into Winter, we need to be prepared.  I mentioned that Cash Will Be King.  Joan and I visited an interesting museum in Florida that was the original mansion of a newspaper owner by the name of Otto Lightner (Lightner Museum) who was one of the few who did well during the Great Depression, newspapers selling at 5 cents a copy.  It is a stunning example of the "Gilded Age".  In it contains treasures from around the world that were purchased at auctions during the 1930's depression at a fraction of their purchase prices from owners who went bankrupt.   

The depression of the 1930's was typical of a deflationary depression.  Will we go through the same thing?  I don't know.  But we WILL go through another downturn.  It's in the cards.  I will explain why I think so in an upcoming blog.

During the recession of 2008, and previous recessions, we saw numerous banks fail.  If you remember, the savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995 caused by the recession of the early 1980's. (Wiki).  Luckily the government's FSLIC insurance returned most of depositors' money.  That had to be done with a bankruptcy of the FSLIC and a bailout of 3 billion of our tax dollars.  When this all happens again, and I do mean WHEN not IF, banks will owe so much money that there is no way the "new and improved" FDIC insurance can pay back the losses that will be incurred by major banks that are now gambling with depositors' money.  And I do mean gambling!  There are still many banks that hold questionable mortgages and  derivatives. Here's the bad news.  The FDIC has on deposit 3.9 billion dollars.  This has to cover 6.5 trillion dollars of deposits in banks.  It actually went into the red for 1 1/2 years after the 2008 debacle (Fox Business).  You do the math.  

Here's one more tidbit that will blow your mind!  Many European banks and Japan's banks now have NEGATIVE interest rates!  That means that the banks charge you to keep your money in their savings accounts!  Can it happen here in the U.S.?  Why not? We'll see.

Which brings us back to the question of where to put your money so it will be safe in a major downturn.  There is a company that rates the safety of banks based on how they conduct their business and how safe they are relative to their investments and mortgage holdings.  They used to provide this info for free but now charge a nominal amount.  Weiss Ratings does have a free trial period for their "Platinum Service" but also has a regular service for $4.95 a month which rates your bank and lists the most safe banks and insurance companies (yes they are in the same predicament) in your area.  You can cancel at any time. I found that my credit union and local bank both have "A" ratings.  Also it wouldn't hurt to have some ready cash on hand for emergencies.  Where to put this is up to you.  Think "safety".

I hope all this helps.  My Boy Scout motto was "be prepared"!  Or "Hope for the best, plan for the worst"(Lee Child).
Next time I'll discuss:

Brexit, what's up with that?

Best regards,

Ken Knight

By Ken Knight, MBA

The value of a dollar.

In the last blog I discussed DEflation and its impact on our economy.  The government doesn't want deflation so they tried a number of things to stop it.  First the Fed lowered interest rates to close to zero.  That made it easier for companies to borrow money to make improvements in their facilities to improve the economy.  That didn't work.  Then they flooded the market with 4.5 trillion dollars.  You remember QE1 (Quantitative Easing), QE2 and QE3.  That hasn't stimulated the economy like it was "supposed to".  The flooding of money into the markets has ended.  So deflation will continue to push prices of everything down.  That includes the price of cars, food, clothing, housing, art, and anything else of value including stocks! 

So if the price of everything is going down, what happens to the value of a dollar?  Think about it.  If last month cantaloupes cost a dollar a piece and today they cost 50 cents, what happened to the value of a dollar?  It has doubled in value!  Although this is an extreme example, it proves my point.  The value of a dollar goes up (you can buy more stuff) as prices go down.  A simple concept that is very important for our future financial well-being.  The concept is: CASH WILL BE KING!  The more cash you hold during a deflationary period, the better off you are.  When the stock market turns down seriously (and I KNOW it will) again, your "money" will lose value. If you have cash, you haven't lost money, you've gained money because its value went up (you could buy more stock at a lower price if you wanted to, but DON'T). 

I know, holding cash in a savings account or CD is paying bupkis in interest rates and everyone is complaining that their money isn't growing.  But when (and I do mean when, not if), the stock market goes down, then who will be the winner.  By the way, as mentioned in a previous blog, bonds will eventually go down also, meaning interest rates will eventually go up due to higher rates of return.  Real estate is also on the verge of another meltdown as very few changes to banking rules were made after the last fiasco in 2008.

So here's what I'm saying.  We are looking at a severe deflationary recession or DEpression in the near future, where cash will be king and, like the other deflationary periods, you will be able to buy stuff, ten cents on the dollar!  So your dollar becomes 10 times more valuable!  That's what I mean by the value of a dollar!  None of us have lived through that kind of setback but our parents did.  That's why they grew up frugal.

In the meantime, when many banks start to falter, your money might not even be safe in a savings account!  We'll talk next time about where to put your cash (besides your mattress or a tin can in the back yard)!

Best regards,
Ken Knight

By Ken Knight, MBA

DEflation, the new norm and why is this important to us?

In my first blog, I talked about INflation and by removing the link of gold to the dollar, inflation since then has been the norm.  Until now.  The government(s) want a small amount of inflation to show that productivity is improving compared to previous years.  First we need to define what we mean by inflation.
If you look it up on the Internet, it says: "Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly." (Investopedia).  But actually this is incorrect.  Inflation is actually an increase in  the amount of credit and money in society (Socionomist).  An increase in credit produces rising prices.  The amount of credit available is based on what the "mood" of society decides.  During the years of the 2000's, bankers made mortgages to anyone who was breathing, thus causing the real estate bubble that burst. The rise in credit caused prices to increase.  Prices of homes became "inflated".

Now obviously DEflation is the opposite.  When debt becomes "too" large, because of increased spending and mood change, there becomes a decrease in demand for credit putting pressure on prices forcing them lower.  This is caused by a mood swing from positive to negative.   Let's look at the example of the Chevy I mentioned earlier.  What happens if everyone is in a great mood and Harry wants to buy that Chevy.  Well, so do many others, causing a high demand for that car.  The dealer has them lining up so he can charge a higher price.  So car price inflation has occurred.  Not many people can afford to pay cash for the car so they take out a loan increasing debt.  What happens when the opposite occurs?  Less demand means a lower price.  What's wrong with lower prices you ask?  Less demand means fewer cars are sold.  Fewer cars sold means worker layoffs. This has recently occurred with the price of oil.  Everyone raved about the lower price of oil.  Except the oil field workers and the ancillary workers who support the oil industry.  They were laid off by the thousands.  There have been 83 U.S. energy company bankruptcies since 2015, with more on the way (Yahoo Finance)

So my premise is that we are entering a period of DEflation that started around 1999.  Let's look at some wholesale prices of raw commodities:
Oil:    

Corn:

Pork:

Sugar:

Coffee:

You get the picture.  For the last 6 to 10 years, prices of basic commodities have been GOING DOWN! This is the result of DEflation.  These price reductions have been subtle to the point that we haven't felt them (except for gas and oil).  The retail prices haven't really been affected but one of these days, we'll all "wake up and smell the coffee".  That is, how come we're paying $5 for a latte when the price of coffee has gone from $375 a ton to $140 a ton?  That's a price cut of over 1/2!  I assure you that day will come!

So why the INflation and DEflation?  Let's talk about credit. Credit is issued by the bank.  The person who borrows the money creates debt.  So as the amount of credit goes up, so does the amount of debt.  There is government debt (currently at 19 trillion dollars)(Wiki), there is corporate or business debt, and there is consumer debt (currently at 3.6 trillion dollars)(Federal Reserve).  Add it all up and we have one heck of a debt on our hands.  (60 trillion dollars to be exact )!   Here is a chart showing U.S. debt from 1950 to 2014.  It has actually turned down since then.

"In 50 short years, debt has gone from being a luxury for a few to a convenience for many to an addiction for most to a disease for all,” James Butler wrote in an Independent Voters Network (IVN) op-ed. “It is a virus that has spread to every aspect of our economy, from a consumer using a credit card to buy a $0.75 candy bar in a vending machine to a government borrowing $17 trillion to keep the lights on.”(RT News).

  So What happens when "the party is over?" and people stop buying and buying everything on sight with credit?

Like all other "parties" this huge bubble will eventually burst. As a matter of fact, the tide has turned.  Here's an update on the amount of consumer credit:

(Money and Markets)
  As mood continues to deteriorate, people become more conservative with their money by paying off debt and spending less. This will have a negative impact on the economy.  If you think the economy is sluggish now, just wait. 

This is occurring globally. There are also other ways of shrinking this enormous debt as we have learned from other countries.  "Italian Banks in Big Trouble"(World Press),"Venezuela is on the brink of complete economic collapse"(The Independent) , Puerto Rico, Spain, Brazil, the list goes on.  Some will claim bankruptcy and others will just walk away from the debt by defaulting.  Of course the ones holding the bag are the ones holding the loans.   And there will be no big bailouts like before.  All of this will eventually lead to higher interest rates.  The creditors will demand higher interest rates to counteract increased risk.

So what does this mean for you and me?  Beat the crowd and get out of as much debt as fast as you are able.  If you have credit card debt, pay it off.  Car loan?  Either downsize or pay it off.  As interest rates increase your payments will increase with no monetary gain for you.  Cut back on spending and start saving for a rainy day.  All hard to do but it will be worth it and it will make you feel like you accomplished something important!

So if the price of everything starts going down, what happens to the value of a dollar (in your pocket)?  We'll discuss this important lesson next.

Best regards,
Ken Knight