Categories
Economics Stock market

The risks and rewards of penny stock investing

Penny stocks are a cognitive illusion. Not the penny stocks themselves mind you, they are real. However, your chances to make money from thinly traded, low-priced stocks with little liquid assets, working capital and a lot of dreams are the cognitive illusion. In other words, although there is a chance to get rich from trading stocks on the pink sheets, stocks under a dollar OTC or NASDAQ stocks trading for nothing, in most cases, it is a mirage and I would not bet the farm on it. This would be a boring post if that was all there is to it. However, there is a lesson that can be learned from penny stock investing.

For pennies you can have fun

At one level the investing theory is sound, and people who have interest in penny stocks at some level understand the idea of financial leverage. It is the idea of trying to amplify your returns with little capital applied.

Financial leverage is a way which many great investors got rich, like Warren Buffet. However, they did not do it with trading penny stocks. They did it with more sophisticated methods. Buffets did it with Insurance., you can read my article, how insurance companies make money.

Penny stock traders have the idea that, low price equities, under a dollar, have potential for large percentage gains with even a small movement in absolute price. For example, if a fifty cent stock goes to three dollars a share that is a 600% return on your money. Even if it goes to one dollar yo double your money. In theory this is correct.

The problem is statistically the rate of return on average does not match the normal equity market. Windfall profits are the exception rather than the rule. Even if you have some play money, expect to throw away more than you will get back. However, if you have 100,000 dollars in a portfolio and you want to risk a few thousand, go ahead, but I would active leverage with options, rather than penny stocks as I think this is closer to a zero sum game.

Why penny stocks do not yield a good return on average

  • Penny stocks that are scraps in the junk heap – Stocks beaten down this far can come back but more likely they are only attractive to junk men searching through rubbish. I do not know too many rich junk men in the real world.
  • Penny stocks that are the next artificial blood – When I was in Finance in Boston I would soften hear about these wizards working on the next big thing in technology or biotechnology. They had MIT or Harvard connections. Great ideas, even noble ideas, like artificial blood, that maybe someday will be a reality, but in a 12 month time horizon or even 36 month time frame, I personally never saw any of those great opportunities perform.
  • Penny stocks that are selling air – These companies that really do not have much going on but the dreams of the eccentric behind them. I think you would better off selling air. Sure, get some fresh mountain air from the Rocky mountains and compress it and sell it to people in LA or NYC. You would make more money then 99% of the stocks I have seen trading at pennies a share. I had a tried selling stock for some home gym he designed. I never saw it come to fruition. Even I personally and working on a few products. When I have mine out the door and selling I will let you know, but I prefer not to tot my horn, until this time.

Why Penny stocks move up

  • Pump and dump – the market builds excitement, often manipulated by some individuals then they are dumped. Micro cap fraud
  • Stocks sold illegally under schedule S internationally – Chop stocks

I understand why investing in penny stocks is tempting, because earning money though working for a living is harder and harder. If you could just profit from two ten baggers, that is buy two stocks in a row, that go from one to ten dollars; with ten thousand dollars you would have a million dollars. It could be done in a year.

However, everyone wants to do that. But have such a good run with a cheap stock, is like making a hole in one on the golf course. You can not base your life on it. Better is to prefect your game in a more rounded fashion and if you do get a stock that rises to ten times for what you guy it for, be thankful. I have, but it was when I was younger and I made a fortune, only to lose most of it. It was a painful lesson.

If you want to play with a little of your risk capital I think Leaps or long-term equity options are better vehicles for leverage. The are also low.

Have I ever owned a penny stock? Sure in my 30 plus years of investing in the stock market I have owned a number, mostly at the start of my investing career. I did not buy them mind you, they were low price stocks that hit the pink sheets and went bankrupt, belly up. I was young and brash and thought buying low-priced stocks under 10 dollars would amplify my returns. I was always looking for something exotic and cutting edge.

What is the lesson we can learn from Penny stocks? – Leverage

Although most penny stock junkies will most likely never get rich they do teach a lesson. Leverage a key investing idea to amplify your returns. You can turn a small amount of investment capital into large returns. All you really need is a system of investing that does average, or even below average but consistently. Read my posts on quantitative investing and how to invest with logic.

  • It is better to have a system that is consistent and below average, but leveraged than a system than going for a home run in the market with a hot stock.
Categories
Economics

Why the US has economic problems and what you can do

US economy is not working because Americans forget what economics is about

Why is the economy not working? Let me explain economics so simple even Obama could understand, yet he will not. Nor will his Einstein advisers with wing-tip shoes and fancy degrees. I wish he would read this.

  • The simple answer is this: Americans have to build a better mouse trap to compete with countless legions of hungry, educated and clever capitalists in the emerging markets who are lean and ready to do economic battle with US citizen Joe Blow who is looking to politicians to solve the mess.
Economics is ground up not top down, if politicians understand this we will all be better off in the USA

The solution is not a top down industrial policy that wise men (yeah right) in Washington choose. That is, which industries including banking and real estate, to develop, help, bail out or steer. The solution is to let the markets work, and people with their own innate intelligence and creativity will find the solutions to their personal economic issues. I mean can you imagine if the government ran Apple, what the company would have turned into? The solution to economic problems large and small will always be this. To let the markets work. The result of unintended consequences of aggregate economic activity created by individuals acting on their own enlightened self-interest.

Everything else is gobble goop analysis.

Economic challenge to the reader

What is so hard about that to understand?  I defy anyone to counter me on this point. Anyone at all can give their best shot as to why capitalism does not work and if there is a better way. Just leave a comment. I gets hundred of readers to this website daily so there has to be one person that can come up with something better for an economic solution.

Think of yourself as a consumer

As a consumer I will always try to buy the best product on the market for the lowest price. Americans as individuals, not as a country mind you, need to figure out how to provide services and goods of better quality for a lower price. It is that simple.

And before you hem and haw about unfair trade, if trade is unfair then use it to your advantage. For example, manufacture a product in China and import it here with your quality control, design and marketing. If the economy is unfair, find the way it is unfair and use it to your personal advantage and this will create wealth for those around you.

  • Economics is not top down but bottoms up, it always has been. Government’s roles is to protect your personal liberties so you and I can find the best way to solve our own problems.

The basis for the free market solution to the US economic problems

  • From Adam Smith and enlightenment thinkers you have the idea that individuals acting on their own enlightened self-interest will bring society on aggregate to a higher level culturally and economically than other social economic model. The USA will be a better place to live socially and economically.

From the Austrian economics we learn about value What is valuable?

  • The human mind is what determines what is of value. The human mind alone. Something is valuable because you think it is. Period, end of sentence. This is illustrated in the diamond water paradox and answer the question why Karl Max was wrong. It also answers why a stock is worth what it is priced.
  • I will pay for something based on what I think it is worth. This is so obvious that even a child could understand it.
  • Value is determined subjectively by the human mind.
  • To paraphrase Shakespeare ‘There is nothing valuable or invaluable, but thinking makes it so’.

What is the role of the market?

  • The market though the price system orchestrates valuation between people who demand goods and people who supply goods. Consumers and producers are coordinated. Is there a better way to do it? No, because non-price rationing results like seen under communism where people had to stand in line for eight hours for a loaf of bread. The shop workers had a sense of power and entitlement, and no one was happy. My family lived through this surreal experience.
  • Yes, you can make exceptions to the market allocation system of course. Public goods like the environment and help for the poor. But even with these, the market system can help. I have always said in a rich society like we live in we can help the poor.

I am not an economic evangelist for capitalism. What I convey is simply the way economics works and how to jump-start the US economy. This includes returning prosperity to the middle class. That is reduce the burden of government so you and I can find our own solutions. People have been lulled to think the burden of government is light, it is not, your income would be over double what it is now if the markets were free.

How can America recover? Americans need to read books by Adam Smith and other economics like: Carl Menger 1840-1921, Ludwig von Mises 1881-1973,F.A. Hayek 1899-1992. After they as individual understand how economics works, spend the time thinking about the better mouse trap. The government needs to reduce the heavy bonds and burdens placed on US citizens that prevent this from happening.

Categories
Economics

What works with job creation in economics

In a time when the manufacturing of downward arrows that are inserted in economic graphs are the only sector of the economy that is booming, it is worth to be reminded what works in economics and what does not.

Basically if you watch this video you will understand what does not work with job creation. This video is not economics 101 some boring academic research video. It conveys a clear message in pretty funny video and can be applied to economics as a whole I highly recommend you watch this as pictures speak a thousand words.

The creation of jobs with the goal of full employment is what does not work. We all need jobs, but why must someone help us get one? Why must as a society we have a goal of 100% employment?

What is the best way to create jobs Mr. President?

What effect does just creating a job for the sake of employing people have on the person or the rest of society?

The communist tried that 1917-1989. It did not work. The Keynesians tried that in the 1930s and in 2008 and it was counter productive proportionally to the job creation pressure applied.

Many people think the biggest tragedy of communism was the poverty it created. It was not. It was the misapplication of human capital. That is bright young budding minds and old minds aspiring to better themselves, talent and skills being applied to something that was not their calling. Living below your potential in a world where jobs are created for you, not the creation of your own inspiration.

But to simply to employ people does nothing to allowing humans to strive and better themselves to be the best they can be.

The stifling of expression of human freedom. I am a libertarian leaning not a hippie, but if someone is destined to be an artist or hipster poet, let them be and let the market determine their worth and if people are willing to accept the costs and benefits of this, than hey it works. If they understand that the marginal product as demanded by others, there is no problem.

My take on it is there is something artificial in the market it withholding back the budding entrepreneurs from creating the American dream for the US economy. What is artificial? Job creation programs by the government.

Politicians talk of job creation

When the President talks of ‘job creation’ know this is a code word for ‘suppressing human creativity and expression’. Sure times are not the best but, ‘did you Mama ever tell you life was going to be easy’? The government is not some nipple for everyone to feed from.

  • How do you create jobs? Government’s role should be to maximize personal liberties and let the markets work. Further a leader should inspire people to change people’s attitude towards life, not put hope in job creation. That is get the message out there that you can do anything you put your mind to. There are no judgements here, nor rights or wrongs of how to make a living. If you want to be an artist or musician or a stock broker or physical therapist or work in a coffee shop or eccentric entrepreneur, you can do it.

 

 

 

 

Categories
Economics

Is capitalism ethical

In our genes are is encoded from the beginning of evolution the idea of survival of the fittest. When humans were becoming modern between 200,000 years and 50,000 years ago in Africa, only the strong survived. This is found and imprinted in our DNA . However, people have extend this idea of Darwinism to the economic arena of competition in the market place. They have accused capitalism as being predatory.

The question is, is this an accurate portrait of capitalism and the way we really interact in a modern human setting? Is capitalism is a moral and valid option for an enlightened society? Is a free market a good market?

As we have evolved, in our genes is not only encoded the survival of the individual but also the survival of humanity. Therefore, when individuals are given economic liberty, they generally gravitate to a greater good. Even if the greater good results from unintentional consequences of self-interest actions.

Our basic genetic equipment also includes the capacity of putting oneself in the situation and thoughts of others. It is in this and similar aptitudes of social behavior and the very great capacity of our species rests – Alfred Gierer Director of Max Planck Institute.

Humans evolved based on a survival of the fittest code, but not only. Further, as we continue to develop, this code  becomes less important. What is important and genetic research confirms this is, creativity, communication and cooperation.

If the human race is to survive, reptilian predatory genes need to yield to creative, communicative and cooperative genes in our species. Nature knows this even if humans do not. As resources grow scare and populations increases nature is pruning our DNA by allowing the creative and cooperative to proliferate and further differentiate our genetic material over simply the aggressive and strong.

Therefore, my thesis that positive human economic behavior in a free society is generally deeply ingrained in our being human.  I believe humans are innately good. Free economics create unintentionally positive outcomes.

When given freedom in economics, like in a capitalist model, generally people will bring good to their lives and those around them and society as a whole will be better off.

Evidence why capitalism is ethical

The same can be said about capitalism and economics. Think of your workplace today.

  • Most of your day-to-day work life activities are a series of boring but important cooperation and communications with your coworkers.
  • New clients are won often on strategic partnerships, contacts and business relationships.
  • Creative ideas like thinking of the next big thing (Facebook and Netflix) or a cure to lower back pain will yield greater profits than squeezing out another 1% of market share from your competition. Innovation and entrepreneurship is rewarded in capitalism.
  • Economics is not zero sum game. Generally markets are organically growing and new markets arise. Think of the search engine market and the number of new users coming online abroad everyday.  Economic trading is a Win-Win a mutual benefit of two parties operating on arm’s length transactions, is what trade is about.
  • Philanthropy – An economic love of humanity – From Bill Gates to Warren Buffet to the Rockefeller foundation philanthropy is a positive outcome of capitalism. Sergey Brin’s ethos of ‘do not harm’ + ‘do good’.  Read about the morality of capitalism from a co-founder of Wholefoods. If this type of example continues I hope the world will be a better place.

So we can conclude that man is a social animal and to survived as a social animal positive cooperation is a part of competition. We are not simple reptiles, even if we wanted to me. I know countless wealthy honest normal business people, establishing small firms. Economic criminals who hit the headlines we take note of but are not the rule. They could not be or economic relationships would not exist.

Keep economic liberty but punish people who take advantage of the trust of others

We can not through the baby out with the bath waters because we have rule breakers or people that exist several standard deviations from the norm in terms of greed and selfishness.

People who violate the codes of ethical human behavior in the market place are punished. Maybe not all, but many.

A human ethic combine with liberty is playing a greater role in changing the way people do business. You can have a free market, with individuals accepting the responsibility of this freedom. People who play by the rules and creative and innovate are rewarded. In this way can enlighten self-interest work.

  • Trust is the real global currency that markets are based on, and creativity and cooperation is what modern capitalism is about.
  • This is a global economic ethics manifesto

The capitalism that I am talking about is enlightened self-interest of Adam Smith, not extreme selfishness and greed, but an ethically oriented economics that is played out in the economic field. It is of course easier to think in terms of absolutes like extreme capitalism or a straight jacket on personal liberty at the expense of ‘equality’, but for a healthy functioning body of human economic behavior works better if it enlightened capitalism. This will be better for individuals and society. Adam Smith was about enlighten self-interest, not selfishness and greed.

What about the idea that a wave of greed brought on the economic crisis

The economic crisis was caused by the central bank lowing interest rated down to 1% so we could all go shopping again after 9/11. I think the movie Wall Street 2 pretty well outlined this explanation of the financial crisis of 2008.

It was caused by the expansion of public and private credit, driven by central bank policy. It was like some farmer opening the grain storage bins and when the animals rush over and bloat themselves, blaming it on animal greed.

Animals will eat until their own personal demise if they are given free access to unnatural refined stores of grains. This is what the central bank does and why we should have free market money and less government not more. This is why capitalism has a bad name, distortions in natural grazing so to speak.

It was not caused by a wave of irrational greed that grip the country, but central bank policy that opened Pandora’s box.

Politicians played up on jealousy and fear to create social and class division.

 Criticisms of capitalism are mostly unjust

Although I am an unrepentant capitalist, I take these criticism of a free market seriously and do not believe in absolutes and extremes.

  1. Not every person operating in a free capitalist society is enlightened and operating on enlightened self interest.
  2. Further, there is great injustice in the world, particularly in economically and some created by capitalism.
  3.  Lastly, even Adam Smith explained that there needs to be opportunities for people, to have a critical level of education, a good upbringing and guidance to be able to function efficiently in a free market.

However, most of these things can be solved with an understanding of  ‘public goods’ and a free market management of these things. Milton Friedman outlined a number of these solutions in his works. However, I admit not all.

Marxism rose out of  abuses of human capital, but also jealousy and resentment. Similarly, politicians in the US play with people’s emotions and turn them against the idea that people can handle their own economic liberty. I belive they can. I believe in the goodness of human nature and the human race that we are evolving to a greater level, a level of freedom

Ethical investing and consuming – what you can do?

Do you want to have a more just economic order? Instead of focusing on just on political change, first examine your own patterns of consumption and investing. For example, I will not invest in any company that even slightly feels to me unethical. No military contractors or tobacco companies or companies that pollute, take advantage of labor or part of the industrial military complex. I also do not consciously buy products from these companies. You do not have to be a peace and love Greenpeace person, but a factor in my consumption and investment patters is ethics.

My personal experience with ethics in the workplace

I have meet many times more people like jolly Mr. Fezziwig, than Ebenezer Scrooges in my professional life.

I like to think that I have generally treated people fair in the workplace. Both as an employe, a manager and employee.  I enjoyed treating people with kindness and always had a smile and good cheer in the workplace and this was a win-win for productivity but also for people’s lives.

In conclusion, my argument is that capitalism is ethical and a positive thing for humanity as I believe that humans are innately good. Given liberty they will generally do the right thing. In fact, this innate goodness is further being encoded in our genes by a nature that wants us to survive, that is the human race, just not the individual. That is why capitalism can work, but only if tempered by ethics and compassion, both on an individual and global level. Fortunately, most people have this capacity for empathy and ethics, don’t you?

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Categories
Economics

Capitalism is the best form of socialism

Libs do not understand that if you want a big middle class with a fair distribution of wealth, try capitalism. Only in free market America do we have a such large middle class with a comfortable lifestyle. Believe me, the middle class and even the poor live a relatively cushy lifestyle.

  • Capitalism is the best type of social justice there is.

Look at China or Poland, the middle class is raising not because of socialism but because of capitalism.

Socialism does not produce a middle class like this. Only when people are free to act on their own enlightened self interest does the pie get bigger and all live better.

I am an expert on Eastern Europe and post socialist economies as I have lived here a good part of my adult life as well as studied economics. Under socialism there was no middle class. Yes there was a lot of equality on paper but in reality it was some sort of surreal grey dream, not good.

If you look at the Gini coefficient of counties, a measure of wealth dispersion, you will say America has unequal distribution of wealth and in Easter Europe there is a more flat distribution. Well there are lies, dam lies and statistics.

The reason is everyone is/was poor and then you have the elite. Moscow and Russia is a great study of this. You have people living in small blocks of flats and the super rich. But the Gini coefficient shows not as diverse wealth levels as the USA or the UK for example.

What is poor?

Eastern Europe is only now getting a middle class. In contrast, in the USA the ‘poor’ are not poor in my mind, they are with few exceptions living pretty nice lives.

In the USA I have even heard the poor have TV or radio and running water. Poor in Eastern Europe have no running water, no plumbing, no heat in the winter and no food and people sleeping on a floor in a one room studio in the winter with no windows. I have seen this and some of my friends almost live like this. Poor in the USA, and I lived in the south mind you, people have TV’s and radios and plumbing. Let me tell you, you do not want socialism in the USA. You do not want an entitlement state. You do not want anything but capitalism or the middle class will disappear.

Any libs out there that wants change and are anti-capitalists, be aware that you will go out of the fire and into the pan if you embrace a more socialistic state.

Do you really want to change from capitalism to socialism?

Once you set up an entitlement state you can never go back. People do not want their free milk from the state cut off. Basically the system would have to collapse for people to be free from this type of socialism. I am not saying provide no help for the poor, however, a socialism is not help for the poor.

  • If you want to tell me about the nice European social states in Western Europe, try me and leave a comment.

If you want a pie that gets bigger and bigger vote generally libertarian or Tea party small government.

If you want a pie getting smaller and smaller and people fighting over the shrinking pieces vote tax and spend democrat or Neocon republican. Within both the democratic party and the GOP there are elements of good people who want to reverse the damage of government is having on the middle class and the poor.

The middle class is being eroded because of creeping government not because of capitalism.

Categories
Economics

Treasury Vs. Federal Reserve

What is the difference between the U.S. Treasury and the Federal Reserve?

The U.S. Treasury mints the coins, while the Federal Reserve Bank controls the currency and influences the purchasing power in the economy through the use of the interest rate policy tools.

Beyond that definition, I wrote this post is to clarify the confusion circulating about the role and the raison d’être for the U.S. Central Bank and the Treasury.  

What is the difference between the Federal Reserve and the Treasury, and why is the Fed seen as both a provider of stability and a nemesis of a healthy economy?

My premise is a government monopoly on the money supply is detrimental to the economy and ultimately limits people’s freedom as it promotes the expansion and control of the state. That is, the Federal Reserve Act passed December 23rd, 1913, and later modified in the Banking Act of 1933 included a dual mandate. 

The goal of the Federal Reserve is to “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” This state goal of managing the free market opened the door to questionable new role money in the economy.

No longer was it to be a medium of exchange but a policy tool to paradoxically engineer capitalism.

The economic theory that the US central bank is based on is as out of date as the Ptolemaic model. Ben Bernanke is a defender of harmful paradigm

Role of the U.S. Treasury – What is the function of these two organizations? The correct, but non-important answer is the Treasury mints the money, including the paper currency in circulation, and collects the revenue via the IRS. The Treasury is a department of the U.S. government. Read more about the functions of the U.S. Treasury here.

The Federal Reserve bank – In contrast, the Fed is a semi-autonomous organization. The Fed is the central bank for all USA banks and a lender of last resort. The Fed expands and contracts the money supply using the more broadly defined as M2 or even M3 definitions of money. Read more here about the purpose of the U.S. central bank.

Why is the Treasury less subject to criticism compared to the Fed?

It is because the U.S. Treasury is more transparent and functional. It collects revenue, oversees the debt based on laws and the budget. It does not create the budget and debt, but the President and Congress do this. The Treasury is part of the problem but more taking marching orders from the President’s budget.

In contrast, the Central Bank secretly and autonomously sets policy that dramatically affects your life. Central Banking is not free-market economics. I am not expressing a conspiracy theory to say the centrally planned central bank royally screws things up.

Why is the Federal Reserve a failure? – Greenspan and Bernanke tried to help the U.S. economy, but fail. Why? It is because there is a flaw in the economic theory that supports the central bank. The basis of the central banking system is a theory as archaic as the Geocentric orbit theory. The underlying premise is the fallacy that the government can fine-tune the business cycle, and central planning of money is superior to free money.

The Interest rate is the price of loanable funds or money lent and saved. A centrally planned rate will not be as optimal as a market-determined rate. The centrally managed Fed Funds Rate distorts the capital structure as a form of non-price rationing. 

What we have learned is that economics is not something that can be managed top-down. Communism, Keynesianism, monetary management of the business cycle are ideas connected to central planning. It would all be better to let the markets work. Nothing is a more explicit lesson in economics than the failed economic experiments of the 20th century.

Why is the idea of the Fed creating money so bad? The central bank can, in a roundabout way, create money out of thin air. This can and does cause inflation. It exacerbates the business cycle and causes pain and suffering in the economy.

It supports a government policy of increased debt, money creation, and expansion. This is why today, the Federal Reserve is under critical scrutiny.

What is essential to know about the Federal Reserve:

The central bank was chartered: to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish more effective supervision of banking in the United States, and for other purposes

  • Logically seems to make sense, but history shows it does not work. Further, there are other logical arguments by the Austrian school of economics that would argue for free money and market forces determine the supply of money, rather than central planning of money.
  • The Federal Reserve bank has power. It controls the interest rates. If you control interest rates, then you control the world. In one day, you could push interest rates to 50% or 0%. This means it has much power. Of course, it would not do that, but it does not matter. An incorrect choice of interest rate policy, which is almost always the case, affects the world on and large-scale internationally and on a small-scale.
  • It could be argued that the Federal Reserve caused WWII. I am not joking. An over-expansion of credit in the 1920s created the great depression, which leads to the rise of opportunist dictators. How was the Federal Reserve not responsible?
  • The Fed was created in 1913 to provide liquidity to prevent financial panics, such as in 1907, which could turn into a real sector crisis. However, since the economy is complex and can not be micromanaged by turning dials and nob, this is why the Fed consistently gets it wrong. For example, the great depression, the Internet Stock bubble, the housing bubble, to mention a few. From 1836-1913 the USA had no central bank and prospered, including the American “Gilded Age” and free bank era.
  • The people who work at the Federal Reserve are well-intentioned economists. It is the idea that an economy can be steer from a top-down approach that is crazy. The road to hell is often paved with good intentions.

What is the Treasury?

The Treasury is in charge of revenue and finances. That is it. Think of the treasure like the bean counters and the Federal Reserve the wheeler and dealer bankers.

Does the Federal Reserve create money?

Yes. The Chairman of the Fed might not operate the printing press, but he expands the money supply more broadly define with open market operations. The critical point here is that the money supply is more than just paper money.

What is money?

The definition of money is as anything people use as a medium of exchange. It is as gold, or anything people want to trade with as a medium of exchange. The economic definition of money today is M1, M2 and M3, which take into account highly liquid deposits.

 What about the idea the Federal reserve makes a profit, therefore is it good?

The idea that the Fed is a profit center is again wrong. They are not guided by economic profit. They do not create anything. 

Instead, the Central bank buys and sells securities to facilitate economic stability and not with the goal of an accounting profit. In my mind, this is not a value-added organization. If there is an accounting profit from its actions, it means it takes money and ‘crowds out’ money from the private sector and gives it to the public sector. The Federal Reserve bank is evil any way you look at it.

I know that is strong language, but they have screwed things up and made millions suffer their inept policies. It has not stopped the business cycle, so it is time we abolish the Federal Reserve Bank and replace it with sound money. Sound money being optimally free money or at least replace fiat money with a gold standard.

Categories
Economics

How to fix the US economy

GOP and Democratic economic fixes do not impress me at this juncture. Why? They are about slowing the leak not fixing the hole. Anyone who understand how to solve the economic woes of the USA are nit picked and labeled as fringe. Even respected economists debate in their ivory towers while the ship is still going down. What would I do?

The US economy is a sinking ship, but need not be. It can be saved not my the government but by letting people work.

What would help the US economy:

  • Eliminate the income tax – This could be replaced with something else besides direct taxation, which is constitutionally questionable and a complex way to penalize the productive. Even a country like Slovakia has a better tax system with a simple, do it on the back on an envelope flat tax. Why is the USA so great? – Spending cuts and taxes
  • Balanced Budget amendment – This alone would not to anything other than make government responsible and people would feel the pain of expansion. It would eventually free up fund that are siphoned off by the government that squash free market initiative and innovation (crowding out effect). – Balance the budget
  • Eliminate the Federal reserve – Replace it with either a gold standard or free money – This would decrease monetary shocks and the government’s micro managing of you. The economy by its nature  is not something you should micro manage. The economy is me and you, not some engine that starts and stops.The Federal reserve is dangerous. –  Abolish the Fed
  • Stop being the police officer of the world – Bring the troops back home – Strengthen US defenses by shifting focus on high-tech and not WWII type military tanks and submarines and ground troops. Focus on home defense. We will be paying for these wars for the rest or our lives via government benefits. I know it is not politically correct and I come from a family of veterans (who were drafted) but war is an a waste of fertile productive young minds. These brave people could have developed great things with their youthful minds. Instead they were sitting in a desert. What a waste. We create enemies to fight. What will we do about Pakistan now? Will there not be terror units formed there? Focus on home defense.  – Military is a waste
  • Let the markets work – Zero tolerance for bailouts, pork or government waste. Cut regulation and market distortions that lead to high prices. – Free market
  • The government is not your mommy and daddy – People need to stop seeing government this way. People do and it takes money from the poor and those who need to be helped. It takes money not from the rich, who will be rich but the poor. I know it seems to be untrue but thing about East Germany compared to West German. Which was richer? Anything the government does free market does more efficiently. Just live in a communist or post socialistic country for a while and you will see what I mean. Look at UPS Vs. USPS. – Health care insurance solved

These ideas seem radical but they are not. They are simply bringing the US back to respecting the constitution and how the USA was for a good part of its history to one degree or another. What will it take? I do not know. I do not think American is doomed. However, I do not see we have any way out of this either. It seems like we will have bigger and bigger government that will not be solved by slowing and I repeat slowing the leak.

Categories
Economics

Food inflation – impact on America

Just how much have food prices increased?

  • 37% in the last year
  • 234% in the last ten years

For me that brings food prices to dizzying highs. I like to eat. I do not like it when I do not know how much this hobby will cost me from month to month.

The purpose of this post is simply to examine why food inflation is important for the Average American. At the end I also offer a solution for those who are not afriad to get their hands dirty.

The trend in world food prices is both up and just as important is more volatile

Stable food and commodity prices are  important because volatility creates uncertainly with price expectations and makes it hard to plan budgets both in business and your own household cashflow month to month. Since we have seen not just increased prices but price volatility this increases hardship on families.

  • Economics is about prices and expectations. Prices transmit information and expectations allow individuals to create plans for the future.

American is rich but the cost of groceries still affect home economics

The percentage of income spend on food indicates the relative level of wealth of a country. For example, the average American household spends 12% of their family budget on food. However,  in a country like Romania, a household might spend up to 50% of their earnings on groceries each month.

The poorest ten percent  in the USA spends about 35% of their budget on food and the richest ten percent about 7%. I am sure the diets are different.

The following video must be for one single person living in a city including dinning out as it is very different from the family of four model.

Wealthy countries feel the pinch when disposable income shrinks – Just because a country is wealthy  does not mean that food increases do not affect American households. This is because budgets and disposable income in the USA are pretty tight. People have large mortgages and fixed costs, and small increases can push people over the line. I can feel this, when I am living in the USA.  In contrast, I feel financial stress less when I live in Poland with less income.

  • The average American family of four spends about $750 a month on food. For me that seems too little actually and I question that number. However, what if it doubles to $1500 a month. I think this would push many people over the edge in terms of financial security. Food inflation is the worst type of inflation because it affects your health and can drive a family to the edge financially. I can not have a car or even be cheap on heating, but food is an absolute necessity.

My experience living in a less wealthy country with food – People in poorer countries (I am not talking impoverished) have access to locally growth and home-grown food more than countries where agriculture is agribusiness. For example, my wife’s parents have a farm, like 30% of Polish people. We get a lot of food for free from her parents farm. It is by default organic, not by plan as who has the money to spend on agribusiness chemicals. If the world had a crisis and ran out of food. I am 100% certain Poland would be fine. People grow food everywhere. Even in the city of Krakow which has a million people, there are vegetable gardens and everywhere.

In contrast I do not know too many American farmers personally. Many people have small gardens but it is not the same. If there was a world side crisis, I know few people in Poland that would go without food. However, think of all the professionals in L.A., Boston or Washington, D.C. that could not fend for themselves.

So my point is, yes food price increases affect people, even in wealthy countries. In the USA when food prices go up as much as they have, people feel it. I feel it. I am no longer buying arugula, but bags of potatoes. Cans of Tuna replace Sushi. They call it ‘Hamburger helper’, but it does fine just all by itself. Is this the way you want to live? And sweating the next mortgage payment? That is not prosperity, nor the land of milk and honey.

I guess I have a pretty steep utility curve when it comes to healthy food but I still have limits. Food inflation affects me the most of any type of price volatility.

The cause of food price increases are:

  1. Increased demand world-wide
  2. monetary stimulus
  3. Supply shocks

Further, food production is being concentrated in the hands of fewer and fewer companies and regions.  I do not know if I like this.

What will I do if prices continue to increase?

You know during WWII the British had something called “victory gardens”. You can look into the history of this.

The point is not the money. It really is not. To compensate when we move to the USA for sure we will have a garden and have even considered a few chickens, even though they are pretty stinky and my wife keeps saying what if we go on vacation. The point is I like fresh food and do not want to be dependent 100% on whole food prices from large companies.

You can buy dwarf fruit trees that grow pretty fast and potatoes in all their varieties and colors grow in almost any soil. Herbs can really save you money if you growth them at home. You can do a lot in your back yard. I see people doing it in Poland. Small micro farms supplying a year’s supply of food for the family and surplus.  It is really not  a lot of work if you know what you are doing. I am trying to get my wife to do a videos about this. As I think there is a small market for food crisis videos. That is, how to live A to Z on your own and believe me Polish farmers in the village are masters at this. Yep, I married a farmer, a potato princess I joke.

My hope is the world will learn to adapt. That is increase production and supply as well as quality. I do not believe in Malthusian economics because demand tends to expand algebraically but technology exponentially. However, I would say that food problems in the world are more an allocation problem, that is some people have too much and others have nothing. This will be solved with a mix of innovation and compassion. If you want to read more about the world food problem you can go here: UN food and agriculture organization. It has good statistical data if you like numbers and graphs like I do.

 

 

 

Categories
Economics

Mixflation – Inflation plus delfation equals biflation – What?

Mixflation

Or everything you need to know about prices changes, but were afraid to ask.

Biflation or mixflation is when, somethings on the store shelves are going up in price and somethings are going down in price.  This makes sense, yawn. You might say this is a normal situation.  However, what we have now is anything but a normal situation. The difference between stable prices, with small changes in prices for individual items, and mixflation is, the latter affects the average person in a more dramatic way. It gives people butterflies when they go to the shop, like the first dip on a roller coaster you regret you got on to.  This is because although the average price level is stable,but individual items have erratic swings. This makes it hard to plan a budget, sell a home or do anything when your salary or income is near the same level year to year. The cost of goods sold are stable like a roller coaster and your in the back car.

Prices are like the weather

Consider a day that the temperature is 80 degrees and sunny out. Then a huge wind and hail storm hits and the temperature falls to 50 degrees in a few hours and the sky is dark. The average might be a pleasant 65 degrees that day, but it is too unstable outside to plan anything is it the weathers persists in this pattern. This is what Mixflation does to the economy.  I am surprised more people are not talking about prices in this way. In contrast people are trying to predict inflation or deflation.

Uncertainty and instability is hurting the economy as a lot of economics is based on expectations. Here is a great video on that sums up the uncertainty about aggregate price levels and the economy.

Housing, food and gas prices

Turning to a more concrete example, the aggregate price level could appear fairly stable with mixflation, because it is just that, a statistical average. That means as economics and policy makers look at the price level there is not much change. However, the average guy hears this news and wonders how that could be. What if he needs to sell his house and the market is tanking. What if is month to month food, gas and medical budget is increasing beyond his salary? He is in trouble.

Consider this with mixflation, what might really be happening is food prices have a quarter to quarter hike in price for several years straight. This is not good for the consumer.

While simultaneously housing prices are falling (eroding expected retirement wealth as well as pressure on those who lose their job and can not pay the mortgage. In times of slow wage growth means it is a double squeeze on many people’s pockets. It is deflation and inflation. This is in contrast with a stable price level. Again in aggregate you might not see much change in the CPI but in reality it means pain for the average guy.

Mixflation – Where is the good news in all this?

The first thing is price movements are nothing more than a reallocation of wealth or at least wealth flows.

It means that some people win and others lose. You have to make sure that you position yourself and protect yourself by being on the winning side. The problem is consumer goods do not have good hedging options in themselves.

  • How to beat inflation and deflation – The good news if you are an investor in stocks, futures or options you can play these price movements. You can play currency exchange rates (the relative price of money), Interest rates (interest rate futures) commodity prices (gold, oil, grain futures), stocks (companies that are benefiting from outsourcing or off shoring and price of labor decreases), REITS (real estate), you can short or use put options. Every price change is opportunity. Mixflation might affect your budget when it comes to cashflow but it does not need to prevent you from making profits in the market.

So are pricing rising or falling?  Will there be Q3? Quantitative easing, printing money and the debt is the argument for inflation. Weak demand, outsourcing, improved efficiencies, and run away prices from the last boom above the shilling index is the argument for deflation. The Federal Reserve is clueless, as markets not the government should regualte money and prices not the Chairmain of the Fed, but that is another topic.  So what will it be inflation or delfation? I think both or biflation. Housing prices and wages are falling and food and energy prices are rising. As a whole the pie is not growing, but redistributing. Just make sure you are on the winning side of this round of musical chairs by investing.

Categories
Economics

Algorithmic trading – How can you compete in the Stock market

Here is a fact to meditate on – today just under 75% of all equity trades are done with computer programs. For me that is amazing. You will be outgunned by the big traders before you even your stock chart page loads in your browser.

If you are looking at investment strategies that try to take advantage of arbitrage or quick turns in the market, be aware there are traders out there who use supercomputers with streams of data that flow so fast no human could process this. There is a good chance as a small trader sitting at home you will get burned. I have been. The question is how can a small guy go up against these super computers with algorithms that execute trades in milliseconds and flash trade? The answer is easy, do not play their game.

How can you make money in stocks with basic methods, when the other guys are using super computer and high frequency trading strategies?

Take inspiration from my investment metaphors from pop culture

Morpheus: How did I beat you?

Neo: You… you’re too fast.

Morpheus: Do you believe that my being stronger or faster has anything to do with my muscles in this place? Do you think that’s air you’re breathing now?

Computers will never be what you are because they live in a world of rules and boundaries.

Here is another metaphor –  I remember an episode of the TV show the Highlander, where Duncan McCloud the main star was up against a master swordsman. In a one on one dual there was no way the Highlander could win because his opponent was two steps ahead of him as be had trained for centuries. Yet in the end he did win. How? He did not play his game, he tried something very unconventional. If you learn to zig when everyone else zags you can win.

Being unconventional does not means taking crazy risk or doing something random

I do not recommend random or risky in stock trading as in my experience mavericks usually get burned. The reason a particular strategy is not played in the market is it has been tested and proven not optimal.

Gary Kasparov also makes this same observation. Often players will attack him with unconventional lines, but they are risky and ineffective. They have been abandoned as strategies and do not work in practice. Hence not every unconventional stock trading strategy is good.

So again can you beat the flash trading experts who use super computers and quantitative models?

Think about Pareto principle if 80% or 90% of equtiy trades are driven by computer black box trading, where buys and sells are executed without human intervention, the system will start to degenerate. As models will try to out guess then next model in the short-term it will become zero sum.

How to be a trader – First high frequency trading tends to be short-term. You have to play long-term investment strategies. In my opinion that is the answer. That is why I look at the 12 month moving average for example. You have to emphasis strategy over HFT tactics. You have to explore and tap into your brain power like in the film ‘Limitless’. But first start with good base: Here are two methods.

  1. Questionably effective is computer trading – You can buy computer trading software, but still the big traders will have an advantage in terms of time of trade execution (miliseconds), on you in most cases. Better is to play a different game. Invest for the longer term, and if you find a strategy that really works, your gains can be amplified, see point two below.
  2. This is Effective for me – Quantitative investing – use a tested and academic investment screener. Let the Einsteins narrow the playing field for you based on sophisticated models, and from this group of stocks make selections using your own judgement based on the greatest super computer in the world, your brain.