If you have a child in your family, you’re probably familiar with the work of Laura Numeroff. She authored the books If You Give a Mouse a Cookie, If You Give a Moose a Muffin, and If You Give a Pig a Pancake. The premiss in this series is simple, one thing leads to another in a fashion that brings us right back to the beginning.

I couldn’t help but think how the same thing applies in the economy. There’s a cycle of companies hiring, people feeling secure in their jobs, spending on new homes, bigger homes, and other goods which drives up demand in all sectors and keeps those companies profitable. Of course, you might say there’s a bit of chicken and egg going on, the companies aren’t hiring because demand isn’t there.

We are now looking at companies having a cash hoard of over $2 Trillion. There are times that interest rates are too high and the cost of money keeps investment down. That’s when the Fed (The Federal Reserve Bank, the Central Bank of the US) typically lowers rates in order to encourage businesses to expand. We are at a very strange juncture in this economic cycle. Mortgage rates are at an all time low but housing is still stagnant. The current 3.75% 30 year fixed rate means that a $1000 per month mortgage payment can cover a mortgage of just under $216,000. That $1000 is below the amount a median income family can budget to the mortgage, while the $216,000 is well above the median home price in much of the country. Why is no one buying? Uncertainty. People are not secure in their jobs, and are afraid to spend. Businesses are waiting to see the results of the election and understand the costs they’ll have over the next year for health care, taxes, etc.

Former Federal Reserve Chairman Alan Greenspan was interviewed last month by CNBC’s Larry Kudlow regarding this issue with the economy and he offered, “The best way I would describe it is to think in terms of two separate economies,” he said. “One is probably 90, 92 percent of the GDP and is doing actually reasonably well. The other 8 percent is largely structures or more exactly, long-lived assets. The attitude of business and households against committing to long-lived assets is extraordinarily suppressed.” This is a great observation, much of the behavior of both the consumer and corporations seems to be similar in this regard, little in the way of long term spending. It’s as though capital itself is on strike.

This brings me right back to today’s title, the fact that Quantitative easing won’t help. That’s not where the problem is. I have banks willing to lend me money short term at 2.5% (my HELOC) and even 1% for just a year (a credit card’s cash advance deal) but I’m not likely to take advantage of either. You’ll note, I don’t have answers, just observations. Something needs to give the economy a needed jump start (imagine Uncle Sam using a defibrillator on the economy) to get out of the strange cycle we are in.

written by Joe \\ tags: economy, Finance, interest rates

A source of untaxed income, the underground economy is bigger than you think. An infographic shared from my friends at TurboTax –

Free Tax Filing, Efile Taxes, Income Tax Returns – TurboTax.com

written by Joe \\ tags: economy, Taxes, underground economy

A guest Post from Kevin -
I’ve been an econ-junkie now for 3-4 years. Sure I have been into the markets and the economy essentially since I graduated college back in 2005, but since the economic meltdown of 2008, I can’t get enough. I was determined to understand what happened and whether or not it will happen again In the future. Unfortunately, my findings aren’t exactly encouraging, but there is optimism to be had for those of us with drive and an understanding of the environment in which we find ourselves.

Let’s look briefly at what I believe you should be watching on the economy for the rest of the year.

Nothing is bigger than the end of quantitative easing scheduled for next month. Since last fall, the Federal Reserve has been doing roughly $600 billion in large asset purchases. They call it quantitative easing to make it sound complex and sophisticated. It’s really not much more than printing money to buy Treasuries.

While the Fed would argue this boosts economic activity, the jury is still out on that. Most would agree that it does help boost asset prices such as stocks and commodities which can be good and bad. Good in the regard that everyone likes their 401(k) plan to rise, but bad in a way that we don’t like spending $4 per gallon of gasoline.

The real question becomes what happens in the markets when the round of quantitative easing is complete. The Fed has effectively put a floor under many asset prices especially Treasuries since they have been the biggest buying of them. With the Fed “buy order” out of the way, will prices drop? An unstable Treasury market will indeed cause some ripple effects in markets. In plain language, when Treasuries drop, the interest rates rise which essentially increases the borrowing costs of the United States Government and I’m sure you’ve heard already about how much debt the government has to service.

If you look at stock market charts, you can see pretty clear correlations between the rise in prices over recent years and quantitative easing programs. The Fed hopes that the economy has recovered enough to sustain stock prices without the Fed pumping liquidity into the economy. Again, we’ll see.

So, why do we care about all this?

If you’re like me, I’m trying to build a portfolio that will generate wealth and help me reach my financial goals. There are a few things you could do in anticipation of possible higher volatility in the markets:

1. If you have some big winners, some stocks that may have doubled or tripled in value, it might make sense to sell part of that position and raise some cash. Not only do you lock in profits, but you now have cash available to take advantage of lower asset prices should they materialize.
2. Possible rotate into more defensive dividend stocks. I prefer consumer staples like Wal-Mart, Philip Morris, and Proctor & Gamble. The defensive, large cap stocks typically are less volatile, and the dividend payment will help offset any short term weakness in stock price.
3. Most of all, I’d encourage you to simply follow the markets. By learning how the markets react with various economic events, you are setting yourself up for years of strong investing. Nothing is better than improving your ability to invest over the long term.

Another major economic indicator that everyone from Wall Street to the average Joe will be watching is the unemployment index. I would encourage you to further understand how the official unemployment indicator is calculated. Pay attention to work force participation, as strangely, we don’t count people who are so frustrated with unemployment that they’ve given up. People falling out of the work force is not a positive indicator but it still impacts the official unemployment rate favorably.

Lastly, the other economic indicator to watch is inflation. Like unemployment, the inflation indicator (the “CPI”) is also calculated in sort of a way to keep inflation appear “muted.” The way this is done is by counting housing expense or rent as almost 40-50% of the indicator. As we all know, housing has dropped like a rock in recent years which is helping pull down the CPI, even though the cost of nearly everything else is going up. While the CPI might only be up slightly, we see the prices of gas, food, and other things up much more dramatically.

While it might sound like I’m negative on the economy to a certain degree, you would be right, but I’ll tell you why I’m not depressed. The reality is that smart people who are willing to work hard can make money in any economic environment. In fact, you might argue that the opportunities are better in a tough economy because asset prices might be depressed and/or people are willing to work for you for less. It’s tougher to be an average employee in a tough economy, but it might be better to be an entrepreneur or investor. No matter how bad the economy gets, or no matter how good it might get down the road, there’s no replacing innovation, hard work, and the drive to succeed. I wish you the best of luck!

Kevin who is a normal guy with a job that loves the markets and the internet.  He blogs primarily at 20smoney.com

written by Joe \\ tags: dividends, economy, Finance

Let me repeat that: Oil Keeping Inflation Down? Yup, that’s what I am going to suggest. I think before I get to the oil impact, it’s important to discuss the word inflation. I recall in grad school courses defining inflation as “too much money chasing too few goods.” By that measure, do you observe that the multitudes’ pockets are swelling with cash? I don’t. No bubble forming in the stock market, no solid bottom in the housing market. And wages are barely keeping up with inflation, if at all. This leads me to ask, do the higher gas prices represent inflation or something else? Now, we know the fed was busy pumping billions trillions into the system, but those dollars seem to be sitting in bank vaults somewhere, I sure don’t see them in my pocket.

Which gets me to the punchline. I was watching CNBC this past weekend and saw that Walmart was concerned about their sales forecast, specifically citing that high gas prices would keep their customers from driving over.  This is something to ponder a moment. I can’t imagine The Bernanke telling the commodities market to bid oil higher if he needed to head off inflation, but Walmart’s sales forecast really got my attention. Is inflation dead? Not at all, not by a longshot. It’s just not here yet, and higher prices for gold and oil are doing more to damper inflation than exacerbate it.

written by Joe \\ tags: Finance, gas, inflation

If you are a fan of This American Life, you may be familiar with the episodes I’ll mention today. If not, you might be pleasantly surprised at how the writers of these shows managed to take a pretty difficult concept to grasp and made it understandable. If you really enjoy it, why not buy the set of four on CD or make a donation to your PRI station?

The guide to the meltdown is present over four broadcasts that spanned just over a year’s time. The first episode titled The Giant Pool of Money offered an amazing overview of the housing collapse and specifically how the liquidity of the global financial markets helped to create loans that by all accounts never should have been written.

The next installment Another Frightening Show About the Economy discussed credit default swaps, with a focus on how and why these derivatives managed to go unregulated. This episode aired 10/3/08 just after the government’s $700 billion bailout was announced.

Bad Bank takes a step back, first explaining what a bank is and what it does. They actually make assets, liabilities, and balance sheets understandable.

Last, The Watchmen reviews the job the regulators were supposed to do to prevent all of this from happening. How did they get it so wrong? More important, who exactly were the regulators who were supposed to audit these failed institutions?

Each show can be listened to online, or if you prefer, you can download a transcript and read it at your convenience. I promise, after listening to these shows you will understand the crisis we are still recovering from better than most people. Let me know if you enjoyed them.

Joe

written by Joe \\ tags: banking, credit default swaps, Finance