Why the Stock Market is so Good when the Economy is so Bad

Posted by PITHOCRATES - March 31st, 2014

Economics 101

No One is going to get Rich by Buying and Selling only one Share of Stock

It takes money to make money.  I’m sure we all heard that before.  If you want to ‘flip’ a house you need money for a down payment to get a mortgage first.  If you want to start a business you need to save up some money first.  Or borrow it from a family member.  And if you want to get rich by playing the stock market you need money.  A lot of money.  Because you only make money by selling stocks.  And before you can sell them you have to buy them.

Stock prices may go up and down a lot.  But over a period of time the average stock price may only increase a little bit.  So if you bought one share of stock at, say, $35 and sold it later at, say, $37.50 that’s a gain of 7.14%.  Which is pretty impressive.  Just try to earn that with a savings account at a bank.  Of course, you only made a whopping $2.50.  So no one is going to get rich by buying and selling only one share of stock.

However, if you bought 10,000 shares of a stock at $35/share and then sold it later at $37.50 that’s a whole other story.  Your initial stock purchase will cost you $350,000.  And that stock will sell for $375,000 at $37.50/share.  Giving you a gain of $25,000.  Let’s say you make 6 buys and sells in a year like this with the same money.  You buy some stock, hold it a month or so and then sell it.  Then you use that money to buy some more stock, hold it for a month or so and then sell it.  Assuming you replicate the same 7.14% stock gain through all of these transactions the total gain will come to $150,000.  And if you used no more than your original investment of $350,000 during that year that $350,000 will have given you a return on investment of 42.9%.  This is why the rich get richer.  Because they have the money to make money.  Of course, if stock prices move the other way investors can have losses as big as these gains.

Rich Investors benefit most from the Fed’s Quantitative Easing that gives us Near-Zero Interest Rates

Rich investors can make an even higher return on investment by borrowing from a brokerage house.  He or she can open a margin account.  Deposit something of value in it (money, stocks, option, etc.) and use that value as collateral.  This isn’t exactly how it works but it will serve as an illustration.  In our example an investor could open a margin account with a value of $175,000.  So instead of spending $350,000 the investor can borrow $175,000 from the broker and add it to his or her $175,000.  Bringing the total stock investment to $350,000.  Earning that $25,000 by risking half of the previous amount.  Bringing the return on investment to 116.7%.  But these big returns come with even bigger risks.  For if your stock loses value it can make your losses as big as those gains.

Some investors borrow money entirely to make money.  Such as carry trades.  Where an investor will borrow a currency from a low-interest rate country to invest in the currency of a higher-interest rate country.  For example, they could borrow a foreign currency at a near zero interest rate (like the Japanese yen).  Convert that money into U.S. dollars.  And then use that money to buy an American treasury bond paying, say, 2%.  So they basically borrow money for free to invest.  Making a return on investment without using any of his or her money.  However, these carry trades can be very risky.  For if the yen gains value against the U.S. dollar the investor will have to pay back more yen than they borrowed.  Wiping out any gain they made.  Perhaps even turning that gain into a loss.  And a small swing in the exchange rate can create a huge loss.

So there is big money to make in the stock market.  Making money with money.  And investors can make even more money when they borrow money.  Making money with other people’s money.  Something rich investors like doing.  Something rich investors can do because they are rich.  For having money means you don’t have to use your money to make money.  Because having money gives you collateral.  The ability to use other people’s money.  At very attractive interest rates.  In fact, it’s these rich investors that benefit most from the Fed’s quantitative easing that is giving us near-zero interest rates.

People on Wall Street are having the Time of their Lives during the Obama Administration

We are in the worst economic recovery since that following the Great Depression.  Yet the stock market is doing very well.  Investors are making a lot of money.  At a time when businesses are not hiring.  The labor force participation rate has fallen to levels not seen since the Seventies.  People can’t find full-time jobs.  Some are working a part-time job because that’s all they can find.  Some are working 2 part-time jobs.  Or more.  Others have just given up trying to find a full-time job.  People the Bureau of Labor Statistics (BLS) no longer counts when calculating the unemployment rate.

This is the only reason why the unemployment rate has fallen.  If you add the number of people who have left the labor force since President Obama took office to the number the BLS reports as unemployed it would bring the unemployment rate up to 13.7% ((10,459,000 + 10,854,000)/155,724,000) at the end of February.  So the economy is still horrible.  No secret to those struggling in it.  And the median family who has seen their income fall.  So why is the stock market doing so well when businesses are not?  When profitable businesses operations typically drive the stock market?  For when businesses do well they grow and hire more people.  But businesses aren’t growing and hiring more people.  So if it’s not profitable businesses operations raising stock prices what is?  Just how are the rich getting richer when the economy as a whole is stuck in the worst economic recovery since that following the Great Depression?

Because of near zero interest rates.  The Fed has lowered interest rates to near zero to purportedly stimulate the economy.  Which it hasn’t.  When they could lower interest rates no more they started their quantitative easing.  Printing money to buy bonds on the open market.  Flooding the economy with cheap money.  But people aren’t borrowing it.  Because the employment picture is so poor that they just aren’t spending money.  Either because they don’t have a job.  Only have a part time job.  Or are terrified they may lose their job.  And if they do lose their job the last thing they want when unemployed is a lot of debt they can’t service.  And then there’s Obamacare.  Forcing people to buy costly insurance.  Leaving them less to spend on other things.  And increasing the cost of doing business.  Another reason not to hire people.

So the economy is going nowhere.  And because of the bad economy businesses have no intentions of spending or expanding.  So they don’t need any of that cheap money.  So where is it going?  Wall Street.  The only people who are borrowing and spending money.  They’re taking that super cheap money and they’re using it to buy and sell stocks.  They’re buying and selling like never before.  Making huge profits.  Thanks to other people’s money.  This is what is raising stock prices.  Not profitable businesses operations.  But investors bidding up stock prices with borrowed money.  The people on Wall Street are having the time of their lives during the Obama administration.  Because the Obama administration’s policies favor the rich on Wall Street.  Whose only worry these days is if the Fed stops printing money.  Which will raise interest rates.  And end the drunken orgy on Wall Street.  Which is why whenever it appears the Fed will taper (i.e., print less money each month) their quantitative easing because the economy is ‘showing signs of improvement’ investors panic and start selling.  In a rush to lock in their earnings before the stock prices they inflated come crashing down to reality.  For without that ‘free’ money from the Fed the orgy of buying will come to an end.  And no one wants to be the one holding on to those inflated stocks when the bubble bursts.  When there will be no more buyers.  At least, when there will be no more buyers willing to buy at those inflated stock prices.  Which is why investors today hate good economic news.  For there is nothing worse for an investor in the Obama economy than a good economy.



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Cash Flow

Posted by PITHOCRATES - March 24th, 2014

Economics 101

New Complex and Confusing Regulatory Policies require Additional Accounting and Legal Fees to Comply

There have been demonstrations  to raise the minimum wage.  President Obama even called for Congress to raise the federal minimum wage to $10.10 an hour.  He also wants employers to pay salaried people overtime.  There have been demands for paid family leave (paying people for not working).  Unions want to organize businesses.  To get employers to pay union wages.  Provide union health care packages.  And union pensions.  Obamacare has made costly health insurance mandatory for all employees working 30 hours or more a week.

Environmental regulations have increased energy costs for businesses.  Sexual harassment training, safety training, on-the-job training (even people leaving college have to be trained before they are useful to many employers), etc., raise costs for businesses.  New financial reporting requirements require additional accounting fees to sort through.  New complex and confusing regulatory policies require additional legal fees to sort through them and comply.

With each payroll an employer has to pay state unemployment tax.  Federal unemployment tax.  Social Security tax (half of it withheld from each employee’s paycheck and half out of their pocket).  Medicare tax.  And workers’ compensation insurance.  Then there’s health insurance.  Vehicle insurance.  Sales tax.  Use tax.  Real property tax.  Personal property tax.  Licenses.  Fees.  Dues.  Office supplies.  Utilities.  Postage.  High speed Internet.  Tech support to thwart Internet attacks.  Coffee.  Snow removal.  Landscaping.  Etc.  And, of course, the labor, material, equipment and direct expenses used to produce sales.

The Problem with Guaranteed Work Hours is that there is no such thing as Guaranteed Sales

The worst economic recovery since that following the Great Depression has created a dearth of full-time jobs.  In large part due to Obamacare.  As some employers struggling in the worst economic recovery since that following the Great Depression can’t afford to offer their full-time employees health insurance.  So they’re not hiring full-time employees.  And are pushing full-time employees to part-time.  Because they can’t afford to add anymore overhead costs.  Which is hurting a lot of people who are having their own problems trying to make ends meet in the worst economic recovery since that following the Great Depression.  Especially part-time workers.

Now there is a new push by those on the left to make employers give a 21-day notice for work schedules for part time and ‘on call’ workers.  And to guarantee them at least 20 hours a week.  Things that are just impossible to do in many small retail businesses.  As anyone who has ever worked in a small retail business can attest to.  You can schedule people to week 3 weeks in advance but what do you do when they don’t show up for work?  Which happens.  A lot.  Especially when the weather is nice.  Or on a Saturday or Sunday morning.  As some people party so much on Friday and Saturday night that they are just too hung over to go to work.  Normally you call someone else to take their shift.  Then reschedule the rest of the week.  So you don’t give too many hours to the person who filled in.  In part to keep them under 30 hours to avoid the Obamacare penalty.  But also because the other workers will get mad if that person gets more hours than they did.

The problem with guaranteed work hours is that there is no such thing as guaranteed sales.  If you schedule 5 workers 3 weeks in advance and a blizzard paralyzes the city you may not have 5 workers worth of sales.  Because people are staying home.  And if no one is coming through your doors you’re not going to want to pay 5 people to stand around and do nothing.  For with no sales where is the money going to come from to pay these workers?  Either out of the business owner’s personal bank account.  Or they will have to borrow money.  It is easy to say we should guarantee workers a minimum number of work hours.  But should a business owner have to lose money so they can?  For contrary to popular belief, business owners are not all billionaires with money to burn.  Instead, they are people losing sleep over something called cash flow.

Cash Flow is everything to a Small Business Owner because it takes Cash to pay all of their Bills

To understand cash flow imagine a large bucket full of holes.  You pour water in it and it leaks right out.  That water leaking out is expenses.  The cost of doing business (see all of those costs above).  A business owner has to keep that bucket from running out of water.  And there is only one way to do it.  By pouring new water into the bucket to replace the water leaking out.  That new water is sales revenue.  What customers pay them for their products and/or services.  For a business to remain in business they must keep water in that bucket.  For if it runs out of water they can’t pay all of their expenses.  They’ll become insolvent.  And may have no choice but to file bankruptcy.  At which point they’ll have to get a job working for someone else.

Cash flow is everything to a small business owner.  Because it takes cash to pay all of their bills.  Payroll, insurance, taxes, etc.  None of which they can NOT pay.  For if they do NOT pay these bills their employees will quit.  Their insurers will cancel their policies.  And the taxman will pay them a visit.  Which will be very, very unpleasant.  So small business owners have to make sure that at least the same amount of water is going into the bucket that is draining out of the bucket to pay their bills.  And they have to make sure more water is entering the bucket than is draining out of the bucket to pay themselves.  And to grow their business.

This is why business owners don’t want to hire full-time people now.  Because full-time people require a lot of cash (wages/salary, payroll taxes, insurances, training, etc.).  They’re nervous.  For they don’t know what next will come out of the Obama administration that will require additional cash.  For every time they want to make life better for the workers (a higher minimum wage, overtime for salaried employees, guaranteed hours, etc.) it takes more cash.  Which comes from sales.  And if sales are down future cash flow into the business will also be down.  Leaving less available for all of those holes in the bucket.  So they guard their cash closely.  And are very wary of incurring any new cash obligations.  Lest they run out of cash.  And have to file bankruptcy.  Which is why they lose sleep over cash flow.  Especially now during the worst economic recovery since that following the Great Depression.



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We are in the Worst Economic Recovery since that following the Great Depression because of Keynesian Economics

Posted by PITHOCRATES - February 15th, 2014

Week in Review

We are in the worst economic recovery since that following the Great Depression.  Why?  Because of Democrats.  Who are all Keynesians.  And that’s a big problem as all of our worst economic times were given to us by those who adhere dogmatically to Keynesian economics.  That school of economics that gave us the Great Depression.  The stagflation of the Seventies.  The dot-com bubble.  The bursting of the dot-com bubble.  And the dot-com recession.  As well as the subprime mortgage crisis and the Great Recession.  In all of these events the Keynesians in power followed Keynesian economic policies to avoid recessions.  And then to pull us out of recessions when their avoidance didn’t work.  Then doubling down on the things that didn’t work previously.  In particular artificially low interest rates.  Which have been around zero for the last 5 years.  And massive federal spending to stimulate the economy when the private sector wasn’t spending.  Two pillars of Keynesian economics.  Neither of which have done anything to help improve the worst economic recovery since that following the Great Depression.

This is the problem with all the ‘noted’ economists the government likes to cite.  They embrace poor economic principles.  Proven wrong over and over again.  They can come up with some impressive looking charts and graphs but their analysis is all wrong.  And the fact that we’re in the worst economic recovery since that following the Great Depression proves it better than any chart and graph.  They’re wrong.  And continue to be wrong.  Yet they provide the economic policies for our country.  Some of the greatest nonsense you will ever hear.  Things you wouldn’t do in your business.  Or in your personal life (see Student Loans Are A Drag On The Economy And Society by Josh Freedman posted 2/11/2014 on Forbes).

While loans are intended to expand college access to a broader population, the nature of risk that they entail also produces the opposite result. Low- and middle-income students worried about the consequences of taking out a loan will be more likely to decide that college attendance is not worth the risk…

Studies have found that high debt levels not only deter access at the beginning, but can also drive students away from completing college once they have already started… students who start college but do not graduate are stuck with loan repayments and no college degree. They still have to repay their loans but do not have the economic boost of a college degree to help them have enough income to cover this cost.

First of all, why is it when it comes to a college education no one ever demands that we lower the cost.  Like we do with greedy oil executives who keep the price of gasoline high.  Why is it no one attacks the greedy people in higher education that keep education so costly?

The problem is too many people are going to college for the wrong reason.  There is a reason why there is a list of the best party colleges every year.  Because a lot of these kids want to go to these schools.  Which explains why colleges in Colorado are seeing a spike in out-of-state applications.  Because these kids want to go to a college where they can party with legal marijuana.  And to make that partying easier they’re majoring in easier degree programs that the college assured these kids would provide them a comfortable living after graduation.  So they can get that profitable tuition out of these kids.  Often times paid for by these kids’ student loan borrowings.  So the colleges are misleading a lot of these kids to make a buck.  Leaving them saddled with a lot of student loan debt if they quit.  Or even more student loan debt if they stay in until graduation.  While getting a degree that can’t get them a job.

A second issue with increasing levels of student loan debt is the effect on the economy… Individuals with more student loan debt were less likely than individuals without student loan debt to purchase homes or cars.

Yes, having too much debt is a bad thing.  It reduces your disposable income.  Preventing you from purchasing a house or a car.  Yet these same economic advisors have no problem with raising taxes and devaluing the currency (i.e., printing money) to pay for all of the government’s stimulus spending.  Higher taxes reduce our paychecks.  And devaluing the currency raises real prices.  Reducing what we can buy with our smaller paychecks.  No, a Keynesian has no problem with debt at the federal level that affects everyone.  But student loan debt is just a terrible thing for those kids who dropped out of college or who didn’t get a degree that an employer could use.

In the wake of the financial crash, households have been trying to deleverage, or pay down their debt so they can have a healthier financial outlook, reduce the amount of their income that they use to service their debt, and begin investing and consuming again…

A look at the data suggests that student loans have slowed down households in the process of paying down debt. Since 2008 — the peak level of household debt — households lowered their levels every type of debt except student loan debt. Student loans have continued to grow throughout this process of deleveraging.

Of course the one thing missing from this analysis is the horrible economy President Obama’s Keynesian policies have given us.  Since he became president he has destroyed some 10,948,000 jobs.  Based on the number that were out of the labor force in the January 2014 BLS jobs report (91,455,000) and how many were out of the labor force when he entered office (80,507,000).  This is why people are struggling with debt levels.  There are no jobs.  If there was a robust economy flush with jobs people wouldn’t worry about taking on debt to invest in the future.  As long as they got a useful college degree in a high-tech economy.  And not something useless like women’s studies or poetry.

But aren’t people facing poor job prospects just taking out more loans to avoid working as baristas at coffee shops that drip the coffee super slowly for no apparent reason? This does not appear to be the case from the debt data. Student loan debt has grown at almost exactly the same rate since the crash as it had been the previous five years — i.e. steadily and without fail.

Student loan credit level has been steadily rising because the cost of a college education has been steadily rising.  Again, where is the outrage at our greedy educators getting rich by loading up these kids with student loan debt for a degree they can’t use in a high-tech economy?

…the loan system allows colleges to raise prices, which causes more students to take out loans. States, facing budget pressures, have also pulled back on investment, putting even more risk on students and further increasing the need for loans.

Again, where is the outrage at our greedy educators who keep raising tuition, forcing these kids to take out more and more student loan debt?

The risk and burdens that come from forcing students to take out debt up front and pay it back later is problematic from head to toe (tassel to hem, one might say). To create a better system of higher education, we need to look at alternatives to the current debt-financed model.

So the solution is for the taxpayer to foot the bill for these useless college degrees at these party colleges?  How is that going to solve any problem?  All that will do is allow more people to go to a college in Denver where they can get high for 4 years.  And then go to work as a barista at a coffee shop that requires no 4-year degree.  How does that make anything better?  Other than get more young people to vote Democrat.  Then again, perhaps that is the only objective of Keynesian economics.  Which is why those on the left embrace these failed policies with a religious fervor.  Because it helps them win elections.  Even while they’re destroying the economy.



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A Poll of Entrepreneurs shows President Obama as one of the most Anti-Middle Class Presidents Ever

Posted by PITHOCRATES - October 19th, 2013

Week in Review

This is the worst economic recovery since that following the Great Depression.  And it’s not George W. Bush’s fault.  Despite what he did to increase the size of government.  No.  The anemic recovery is due to President Obama.  And his anti-business policies (see Not open for business posted 10/12/2013 on The Economist).

America is not producing as many start-ups as it did a decade ago and those that have been created are providing fewer jobs—less than five each, compared with an historical average of about seven. Start-ups created 2.7m new jobs in the 2012 financial year compared with 4.7m in 1999.

The financial crisis clearly bears a lot of the blame for reducing America’s stock of capital and animal spirits. But it is only a partial explanation. The decline in the number of firms going public began in 2001. And these problems are continuing to delay the recovery despite the federal government pump-priming the economy and keeping interest rates near zero.

So there you have it.  Federal government pump-priming and near zero interest rates do NOT stimulate economic activity.  As these are the bedrock of Keynesian economics then Keynesian Economics does NOT work.  This is a problem for America.  Because President Obama and the liberal left are dyed-in-the-wool Keynesians.  And why are they Keynesian extremists despite the historical record of Keynesian failure?  Because Keynesian economics empowers Big Government.  That is, Keynesian economics favors those in power.  Not the people.

Three years ago John Dearie and Courtney Geduldig, who both worked for the Financial Services Forum, which represents America’s biggest financial institutions, came up with an inspired idea. Why not ask entrepreneurs themselves what is going wrong? Both big multinationals and established small firms have lots of representatives in Washington, DC. Entrepreneurs are too busy inventing their companies to spend time lobbying. The pair organised meetings and conducted lots of polls. Across a vast and diverse country they heard the same message from everyone they asked: entrepreneurship is in a parlous state. And everyone pointed to the same problems. The result is a new book, “Where the Jobs Are”, which should be dropped onto the heads of America’s squabbling politicians.

The first worry is over human capital. Entrepreneurs repeatedly complain that they cannot hire the right people because universities are failing to keep pace with a fast-changing job market. Small firms lack the resources to provide training and are consequently making do with fewer people working longer hours.

The problem with our educational system is that it teaches our young to become Democrat voters.  Not prepare them for a high-tech economy.  Our public schools teach our children about the evils and unfairness of capitalism while lauding the goodness and fairness of government.  Turning them from their parents who are selfishly destroying the planet with their global warming to the government.  Who is expanding further and further into the private sector to save the polar bears.  And when our kids get to college our system of higher education takes it up a notch.  Attacking the history and the culture that made America the greatest country in the world.  So our college graduates can tell you every bad thing America has ever done but they lack the math and science skills that our high-tech economy so desperately needs.  Forcing businesses to turn to immigrants for those skills.

Immigrants are responsible for launching about half the country’s most successful start-ups and producing a striking number of its patents. But the authorities do their best to drive them out of the country once they have been educated or to break their spirits on the visa treadmill…

The second problem is the complexity and cost of government. Entrepreneurs the world over complain about regulations and taxes. But America’s have lots to gripe about: in 2009-11 the Obama administration issued 106 new regulations each expected to have an economic impact of at least $100m a year. Besides this business founders suffer from the constant political uncertainty generated by a combination of ambitious new legislation, such as Obamacare, and ideological trench warfare. The Vanguard Group, an asset-management firm, calculates that since 2011 Washington’s bickering politicians have imposed, in effect, a $261 billion uncertainty tax that has cost up to 1m new jobs.

Any administration that raises taxes and issues 106 new regulations is no friend of small business, jobs or the middle class.  Therefore President Obama is no friend of small business, jobs or the middle class.  No matter how much he says that he is.  If you want to know why this is the worst economic recovery since that following the Great Depression it’s because of the Keynesian in the White House.  And the Keynesians in Congress.  That are waging a war on small business, jobs and the middle class.

The financial crisis has worsened the third problem: raising money. Over 70% of new businesses are launched using savings or assets—particularly houses. The crisis reduced the average net wealth of American households by about 40%. Business founders repeatedly mention other problems too. Venture capitalists are increasingly risk-averse. The Sarbanes-Oxley act imposes additional costs of $1m a year on public companies. Investors no longer bother with “growth stocks” because there is more money to be made in making lots of big trades in established firms. The dramatic decline in the number of firms going public since 2001 is worrying because, over the past four decades, more than 90% of jobs created by start-ups came into being after they went public…

Fixing the small-business problem should be at the top of the political agenda. Some 22m workers are either unemployed or underemployed, or have given up looking for work. If it continues to generate new jobs at its current anaemic rate, America will not return to pre-recession employment levels until 2020. The country is lucky that entrepreneurship is part of its DNA. It seems perverse to put unnecessary obstacles in the path of people whose ambition is to found businesses and hire new workers.

Yes, we should put fixing the small-business problem at the top of the political agenda.  Which the Republicans recently tried by defunding Obamacare.  And reining in out of control spending.  But as this would be a check on the growth of government the Democrats shut down the government before letting that happen.  For they will have their taxes, regulations and spending.  And the middle class be damned.  For theirs is a government of the ruling elite, by the ruling elite and for the ruling elite.



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