Beware The Ides of April

Over 2,000 years ago, Julius Caesar was warned by a soothsayer to beware the Ides of March. Today, DeutscheBank warned the financial world of the Ides of April. Greece is running out of money and could default on its government debt as early as April 9.

It's no surprise for anyone who can do non-Common Core math. Greece was going to default sooner or later because its debt levels are higher than its GDP.

It's similar to a household that brings in $100,000 a year, but has $115,000 in credit card debt.

Although the default process will be painful to Greek citizens and the country's creditors, it needs to happen. No country, corporation or citizen can borrow and spend their way to prosperity any more than a barfly can drink his way to sobriety.

After every boom, there comes a bust. What goes up must come down. Laws of economics, finance and mathematics can't be broken without consequences.

If some people think that so-called “American Exceptionalism” is a Get Out of Economic Jail Free card to avoid the same fate as Greece; well, they're sadly mistaken.

The Petro-Dollar system (or the backing of the dollar with oil after Nixon closed the gold window in 1971) has propped up King Dollar on the global currency throne for four decades. And it allowed the US to borrow, spend and print money like Charlie Sheen banging 7-gram rocks of crack cocaine in his Hollywood mansion.

With the Petro-Dollar system going away, the US will have to (literally) pay for its economic and financial sins. The dollar will devalue even faster, with high – and possibly hyper – inflation in the not-too-distant future.

When will these financial chickens come home to roost? I have no idea.

That's because there's so much manipulation and intervention in financial markets around the world. Central banks and governments have kept this fiat-based fantasy going with the financial equivalent of duct tape and baling wire.

What fueled most economic growth around the world – and the cause of our current malaise – is too much borrowing and debt. Speculation, greed and Wall Street PR launched the Dot.com Boom, and the Echo Boom in stocks and real estate in the mid-2000s.

But debt to an economy works like booze and drugs for a long-term addict. At first, the highs are great and the hangovers aren't too bad. But over time it takes more and more of the drug to get the same high... or increasing levels of debt to get the same financial “high” in stock market and real estate values.

The drug and financial addict both come to the same place: They know that if they keep taking the drugs, they'll soon be dead. But if they stop taking the drugs, the short-term sobriety shock could kill them – even though it's the healthier option in the long run.

That's where America and most Western countries are today: Heavily dependent on debt, with the same difficult choice as the addict. 

Only time will tell how much damage a Greek default will inflict on the Western financial world. I believe one thing is certain: After this Greater Recession/Depression, Americans will have a much healthier respect for debt than before. 

Did The Swiss National Bank Signal The End of The Euro?

Earlier today the Swiss National Bank removed the "cap rate" of 1.2 Swiss Francs per Euro, which sent Swiss stocks into a tailspin and the yield curve on bonds was crushed to negative interest rates nine years out. It was a swift and decisive move that took markets and traders by surprise, but given the extreme weakness in the Euro, it the was the best move going forward for the Swiss Franc and economy.

The European Union (and Euro currency) were a Keynesian central planner's wet dream in the late 1990s. They had the grand vision of all the nations in Europe under the same currency, working together in parliament holding hands and singing Kum-Ba-Yah.

But like all Keynesian theories and delusions, they never quite work out in reality like they do in the college textbook. While countries in Europe share the same continent, they don't share the same fiscal or other values. And with this big difference and clash in cultures virtually doomed the Great European Experiment from the beginning.

Northern European countries like Germany are more industrious and fiscally responsible. Even 90 years later, Germans still remember the effects of hyper-inflation on its people in the Weimar Republic, and don't want to run up high deficits or high inflation. Southern European nations like France, Italy and Greece are more free-spending and have no problem charging up a storm on the national credit card while they party and drink Ouzo on the beach.

The southern nations like this arrangement because the northern ones were financing their profligate spending. And this won't continue for much longer. But first, a little backstory - what happened in the past that led to this decision?

Back in September 2011, the price of gold was surging higher to $1900/ounce... the US Dollar was rapidly losing value... and Eurozone countries were in big-time financial trouble. So for the "greater good" of the EU, Switzerland pegged the Franc to the Euro - and for all intents and purposes just surrendered its sovereignty to the EU.

Why did they de-couple the Franc from the Euro now?

The European Central Bank (ECB) will meet on January 22nd, where they will probably announce their version of Quantitative Easing (QE), or Money-Printing Gone Wild. The SNB looked at what the ECB planned to do, and decided they wanted no part of this monetary insanity.

There's also the possibility of the "Grexit" (Greek exit from the Euro), and Germany does not want to see the 21st century version of the Weimar Republic. Look for the Germans to make their break from the EU soon if Mario Draghi puts the printing presses into overdrive.

That's why this decoupling may be the beginning of the end of the Euro.





 

QE4 Could Start Sooner Than We Think

With the recent plunge in crude oil prices and the Russian Ruble, along with the decline in the US stock market, I wonder if the Fed regrets its decision to temporarily stop Quantitative Easing. It was the right decision in the long-term because the federal government and investment markets have become addicted to easy money, just like a chronic alcoholic or drug addict.

However, I don't think this will be the end of QE because so many individuals, companies and governments depend upon high asset prices and low interest rates. The federal, many state governments and big corporations need low interest rates to keep borrowing as cheaply as possible. Based on the most recent "Cromnibus" bill, it's obvious the federal government won't cut back on spending anytime soon.

Many publicly traded companies such as IBM sold bonds to raise cash and buy back stock so their earnings would look better. Even a slight increase in interest rates would be bad for the bottom line of many firms who did this "financial engineering."

The federal government wants to keep consumers spending as much as possible, which is based to a large extent on easy credit. Low mortgage rates have fueled the Echo Boom in residential real estate, and now sub-prime auto loans up to 84 months are available for car buyers.

The Federal Reserve is being diplomatic and coy about if (or when) it will raise interest rates. I don't think the Fed can or will raise rates unless they're absolutely forced to - just like Russia's central bank was forced this week into an emergency rate hike to 17%. The FedHeads have painted (or more like printed) themselves into a corner with all this easy money and low rates.

Jim Rickards has said he thinks we'll see QE4 in 2016. That would give the economy a pre-election boost and increase Hillary Clinton's chances to win the Presidency. However, I don't think the Fed or FedGov can wait that long if the stock market goes significantly lower. The ultimate collateral backing financial paper assets is the investing public's confidence in those assets.

That confidence is somewhat fragile right now, and the Fed will do everything it can to maintain that confidence in US financial markets. I don't think it can afford to wait too long to intervene if things go south. That's why we I believe we could see QE4 a lot sooner than the experts think.

Why China (Still) Has A Big Financial Edge On The United States

A common theme you hear in financial and mainstream media is how China's economy is slowing down. I believe this theme is being promoted to make American investors feel better about our struggling economy.

That's why reality TV is popular nowadays. When you watch the adventures of Honey Boo-Boo, Mama June or other reality stars - and see how messed up their lives are - you don't feel so bad about your life, even if things aren't going well.

We hear that China is overbought, overbuilt and has lent too much money to commercial borrowers. Given certain media reports, these premises are probably true.

You may have seen the 60 Minutes report on China's "ghost cities," where large developments were built that didn't have any commercial or residential tenants. Obviously, these kind of projects were designed to provide jobs for workers and stimulate economic activity. Not to provide returns for investors.

Even with this and other internal challenges that China faces, it still has a big advantage over the United States in one key area: Debt. There's a Bible verse that says, "The borrower is servant to the lender." To refresh your memory, China is the lender and the United States is the borrower of about $1 trillion in Treasury debt (officially).

While China may have a lot of internal debt that companies and individuals owe lenders, it's the largest holder of external debt of any nation on earth. The U.S. owes the most external debt to foreign investors of any country in the world.

While the Federal Reserve used this borrowing to stimulate the US economy, and consumers bought a lot of Chinese-made electronic and other goods... the Chinese did something much wiser with their money: They bought assets - and a lot of them. All around the world, but especially in the US. And there seems to be no end in sight for these Chinese asset purchases.

In September of 2013 a Chinese company bought Smithfield Foods, the largest pork producer in the United States, for a reported $4.7 billion. The following month another Chinese company bought one of the best commercial buildings in New York City - One Chase Manhattan Plaza - for $725 million.

Chinese are also one of the biggest foreign buyers of real estate in Los Angeles, New York City, and even Detroit.

But the largest and most noticeable asset the Chinese have bought is physical gold. According to Jim Rickards' recent Twitter post, Russia is buying hundreds of tons of gold... the Chinese are buying thousands of tons of the barbarous relic.... while most Americans could care less. Rickards adds, "Someone's right, someone's wrong."

In case you haven't figured it out, boobus Americanus who buys high-priced real estate, big screen TVs and smart-phones isn't right. These manipulated, depressed prices for physical gold and silver won't last forever. Go to your local coin or metals dealer, Amagi Metals or Colorado Gold and get as much gold and silver bullion as you can reasonably afford.

We're starting to see a shift in demand from financial paper assets to the tangible variety. It's only going to accelerate in the months and years to come. Don't get left behind, position at least part of your finances wisely and take action today.

Why Twitter Is A Bad Investment, Part II

In my last post, I briefly explained why Twitter stock isn't a good investment.

Any business that hasn't turned a profit after eight years isn't doing something right.

I want to 'drill down' into the details of Twitter's financial statements and reveal more disturbing trends. Let's start with the income statement.

In 2011, Twitter posted a net operating loss of $127 million.... in 2012, a net loss of $77 million... and in 2013, a whopping net loss of more than $635 million on their core business of tweeting, re-tweeting and ad sales.

Now let's go to the Statement of Cash Flows - more interesting numbers here.

In 2011 they had a negative cash flow from Operating Activities of almost $71 million... negative cash flows from Investing Activities of $324 million... and had positive cash flow from Financing Activities of $480 million, all of it from the sale of Twitter stock. All of this totaled up to an increase in cash flow of $84 million.

For 2012 Twitter showed negative cash flows from Operating Activities of almost $28 million... positive cash flow from Investing Activities of over $49 million... negative cash flow from Investing Activities of $37 million... overall negative cash flow of about $15 million.

So far, so good for these two years. Then the results for 2013 get really interesting.

Adding back non-cash Depreciation Expenses and "Adjustments to Net Income" wiped out the operating loss and resulted in positive Operating cash flow of almost $1.4 million. Investing Activities weren't as good... they lost $1.175 billion on this category. However, the sale of over $2 billion of Twitter stock saved their financial bacon for the year, and gave them an increase in cash of more than $637 million for 2013.

Two questions come to mind after seeing these financial results:

1) What kind of "investments" are Biz Stone and his Twitteristas putting money into and getting disastrous results?

2) How long will it be before enough investors of Twitter stock wake up and realize the core business model sucks... and they can't rely on enough greater fools buying into the Twitter story?

If you want to buy this stock and speculate in the short-term, go right ahead.

Just realize that after eight years, Twitter only has a good-sounding story and enough Kool-Aid drinkers who believe that Social Media is the magic marketing elixir for whatever ails any business.

Good business and stock stories are a dime-a-dozen, very few of those stories pan out.

Unless Twitter figures out their business model and how to turn a profit, this company's stock will eventually hit it's long-term target price of zero.

Why Twitter Stock Is A Bad Investment

I can hear the "Twitteristas" and social media gurus hatin' on me now, saying things like:

"I've got 55,349 followers and bunch of re-tweets every day... how can this be a bad investment?"

"Look how many gazillions of people are on Twitter!"

"Dude... You just don't get the power of the Twittersphere! #doesntgetit "

I know that a bunch of people are on social media sites like Facebook, Twitter and LinkedIn. However, sheer numbers and popularity by itself doesn't make anything a good investment.

And I know that Gary Vaynerchuk owns Twitter stock. He's a successful businessman, but I don't think he's made a wise decision... and I'll tell you why.

Mark Twain said that history doesn't rhyme, but it often repeats itself.

The business tune that Twitter is playing sounds an awful lot like the companies from the Dot.Com Boom who aren't around anymore: Pets.com, Global Crossing and MCI WorldCom, to name a few.

Pets.com had a sock puppet as their mascot who was on a lot of TV shows in the late 90s. It promoted "buzz" and the dreaded "brand awareness," but in the end this wasn't enough

These companies in the Dot.Com Boneyard had a lot of PR and hype... and little to no earnings to show for it. That's exactly what I see with Twitter - especially when the company is losing $2.50/share, and over $635 million for FY 2013.

That's over a half a billion dollars, financial sports fans, and I haven't heard how they plan to make money. Sounds overly simple, but it's true: Before you decide to invest in a business, you should see if it's turning a profit.

Vaynerchuk is also a well-known social media disciple, which gives Twitter and its stock credibility. But the numbers are the numbers and the company has been in business since 2006 - which should be plenty of time to figure out how to turn a profit.

If Biz Stone and his crew can't make money after eight years, that's a big red flag from an investing standpoint.

Does Twitter have some value to conduct keyword and question research, to network and connect with like-minded people? Yes.

However, if you want to invest your hard-earned money in Twitter stock, there are plenty of better investments I can think of.

Is College Really A Good Investment?

This question ought to be top-of-mind for parents and students alike. To anyone who's paying attention, it's obvious that a college degree isn't the start of a road to riches. In reality, it's a well-publicized debt trap if a graduate has taken out student loans to pay for their education. 

Zero Hedge reported yesterday that student loan debt in America has risen to an all-time high of $1,08 trillion. New graduates are taking longer to find jobs, and many of the jobs they find don't pay as much as they expected. 

The media and universities still try and sell the story that someone with a college degree will make more money over their lifetime than someone who doesn't. While that may have been true in the 20th Century, I don't believe it's true in this century. Or if it was true, the proponents of this meme are using outdated numbers. 

In an interview with Nick Gillespie of Reason magazine, Mike Rowe (star of the TV show Dirty Jobs) says it best:

'If we're lending money that ostensibly we don't have... to kids who really have no hope of paying it back, in order to train them for jobs that don't exist... I might suggest that we've gone around the bend a little bit." 

If you haven't watched the interview, it's worth 40 minutes of your time. Rowe makes some excellent points about the decades-long "you must go to college to be successful" PR campaign. Just like in politics, the best way for your candidate or issue to win is to present the case for how bad the other side is. 

His high school counselor talked to him about how going to a four-year university was the best option, and if he considered doing blue-collar work, that wasn't "living up to his potential." The same kind of thinking was promoted by school administrators, counselors and teachers when I was in high school in the mid-80s. 

I grew up doing dirty jobs on a farm and ranch, and I'm grateful for it. I got a PhD in real-world common sense, plenty of exercise, and those long days driving the tractor I got plenty of time to think. And thinking is something very few Americans seem to engage in these days. 

So let's think and analyze the premise that a college degree is a good investment for your mind and your pocketbook. What we're all told from the time we head off to Kindergarten is this: "Study hard, get good grades, get your degree so you can find that safe, secure well-paying job with your 401(k)." 

Job security is as big of a myth as Bigfoot or the Loch Ness Monster. Companies are always looking for reasons for cut employees and pad their bottom line. When American firms started to outsource jobs overseas in the 1990s, the concept of loyalty went along with it. Gone are the days when you would work with good people at a good company for 20, 30 or more years... have a nice retirement party with your friends, get your gold watch and live happily ever after. 

An equally outdated myth is that working for someone else will make you wealthy. When you work for someone else, you trade hours for dollars and make your employer more money. The way our tax code is setup, employees are the highest-taxed people around. Plus, employees don't have an option when they pay taxes, they're deducted directly from every paycheck. 

Business owners have a multitude of deductions available, and have more flexibility when they pay their taxes - on a quarterly basis or the following April 15th. With good tax planning, a business owner can drastically reduce his tax liability - even down to zero. You may think it's not fair, but that's the way the tax code works. 

For all intents and purposes, you are now a perpetual free agent. You can't depend on a company (or even a government entity) for a 'secure' job anymore. And the premise of putting money in a 401(k) so you can have a comfortable retirement is also false. Inflation will eat away a large chunk of your dollar-denominated wealth, and Baby Boomers (by law) will have to start liquidating the stocks and mutual funds in their plans in 2017.

Boomers' buying of stocks and mutual funds from 1982 to 2000 drove stock values higher; their selling will force stock and fund values lower (unless the US dollar goes into hyperinflation from Fed money printing gone mad - then the inflation will cancel out the real value of your nominal gains). 

When you graduate college and go to work for a company, you assume they're competent and know what they're doing. Unfortunately, my experience in the Dilbert cube showed me that was the exception instead of the rule. I hated having to deal with corporate politics and games in the white-collar world. 

In the blue-collar world, this happens a lot less. The focus is more on getting the job done right and on time. It's more about common sense and common courtesy, instead of sucking up to a boss or HR hack that you don't like. 

College has been sold as an institution of higher-learning, where you discover and hone critical thinking skills. Given the cognitive skills of the average American, I don't accept this premise. John Taylor Gotto, a former New York state Teacher of the Year and author of the book Dumbing Us Down, said that our current education system is based on the Prussian model. It's a system designed to create good employees and soldiers, and people who blindly follow orders, waiting to be told what to do. 

With maybe a few exceptions, college is nothing more than an extension of this Prussian-like K-12 system designed to churn out an abundance of obedient employees. Not the next batch of entrepreneurs or competitors to existing corporations. 

In the 21st century there are plenty of good-paying blue-collar jobs available - and have more career security than the white-collar variety. If you're a high school student reading this (or know one) who has an interest in becoming a carpenter, electrician, plumber or mechanic - get excited! This is a great time to have and use your skills, and the market couldn't be better. 

These so-called "dirty jobs" will probably provide more satisfaction than the highest-paying white-collar gig you could imagine. I discovered I wasn't cut out to be a Dilbert Drone, so I don't think much of climbing the corporate ladder. 

From my personal experience, I learned more about how to succeed in business from my dad and savvy business owners than I ever learned in college. The good part about college is you learn to live independently from Mom and Dad, and have some fun in the process. But it doesn't provide a lot more benefit than that. 

Here's a quick sub-8 minute video of Mike Rowe testifying before Congress, talking about his experience growing up and the skills gap we have in America between the number of available "dirty jobs" and the number of qualified workers to take them. 

Mike is living proof that you don't have to be pigeon-holed "just" into the occupation that you choose. He's a very articulate and bright guy, a former opera singer and TV spokesman for Ford. Although you may not be as famous as Mike is, you can still do a variety of things in your life. 

If college isn't the best investment for young students or adults, what is it? It's the investments you make in yourself. In my next blog post I'll reveal one of (if not the) best book I've read on how to do just that.