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Buffett on the Fed
May 12, 2015
During Berkshire Hathaway’s annual meeting, Warren Buffett, Charlie Munger and Bill Gates sat down with CNBC reporter Becky Quick to discuss recent hot topics.
Throughout the interview, the three investors shared their perspective on the job Janet Yellen is doing at the Fed; their perspective on recent currency; as well as the European monetary union, among other issues.
Click here to watch the video.
March 9, 2015
For 37 years, I've sought to educate folks on "real-world" safety and how to achieve a fair, long-term return on their investments. My advice often runs the opposite of the "trend du jour."
Lately, I've noticed the crowd is starting to behave like they did in the late '90s, and this behavior is causing me concern.
Let's look at some facts:
- The adjusted (CAPE) PE ratio on the S&P is now approaching 28! The historic norm is close to 16. Click here to see the Shiller PE ratio.
- The dividend yield is less than 2% compared to over 3% in most of the rest of the world. And it is about 4% in Australia, Norway, New Zealand and Finland. Click here to see recent data on this compiled by JP Morgan Asset Management.
- The earnings have principally gone up because of share buybacks and cost-cutting, very little from sales growth, so earnings aren't what they appear to be. Click here to see the source of S&P 500 Year-Over-Year EPS growth over the past 10 years, compiled by JP Morgan Asset Management.
Don't be fooled by the madness of the crowd or the promises of salesmen. The good news is that good investments are still available in the unloved assets. In addition, the "value" sides of the U.S. and global markets are attractively priced, and our portfolio is now as "conservative" as it has been since 2000 when the crowd went crazy chasing the popular stocks (similar to how they are chasing last year's winners today).
The political risks associated with Obama, Iran and Isis continue to increase.
The FED will likely be raising interest rates later this year, and they seem to be floundering seeking solutions to problems they create and setting us all up for the next bubble. Alan Greenspan, former FED Chairman, was recently quoted saying: "Gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments."
Grain, commodities, oil and land prices have been plummeting.
Japan, Europe, China and the FED have all been printing money as if there is no tomorrow. The actions of Switzerland may be just a beginning.
Our government continues to choke small businesses with regulations and arbitrary bureaucratic rule changes.
And then there is the deficit, the debt, the unfunded liabilities, etc., etc., etc.
Lastly and most dangerously is the incredible mountain of derivative trading that could bring down the house of cards at any time.
Here at Manarin Investment Counsel, our portfolios continue to be diversified mostly into "value" positions. We also have a good hedge against possible disasters that could result from any of the events above. Our portfolios are invested for long-term growth with real-world safety, because I believe this is the best place to be in today's political and economic environment.
I'd like to encourage you to share this message with anyone you know who is following the "herd mentality," or is worried about recent events or their impact on the markets. Our wealth-building classes are also a great place to find more information and gain peace of mind. Click here to see a list of upcoming classes.
And as always, if you have specific questions about your portfolio or the impact of recent events, call your Manarin wealth advisor at 402.330.1166.
This information is provided for general purposes and is subject to change without notice. The information does not represent, warranty or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. The information has been obtained from sources considered to be reliable, but it is not guaranteed. Past performance is not a guarantee of future results.
January 9, 2015
The U.S. Treasury recently spent $200,000 on survival kits for all of its employees who oversee the Federal banking system. These kits, which according to an article published by Freebeacon.com will be delivered to every major bank in the United States, will include a solar blanket, food bar, water-purification tablets, and dust mask (among other things).
What’s even more confusing is that, according to an article published by Zerohedge.com, two days before the survival kit RFP solicitation became public, the Fed’s recruiting Twitter account tweeted that the Fed was “hiring an emergency preparedness specialist familiar with Department of Homeland Security directives.”
Both moves are puzzling, considering the Fed is known as a safe institution where economists contemplate the country’s monetary system.
As the Zerohedge.com article asks: “just what do they know that the rest of us don’t?”
September 29, 2014
A recent piece by Mohamed El-Erian published on Bloomberg.com stated that the U.S. Federal Reserve is trying to generate growth from a stimulus policy that relies heavily on artificially boosting stock and bond markets.
Through its programs, the Fed is running a higher risk of financial instability, with an increasing dependence on an inept Congress. Recently, the Fed confirmed that it will end its exceptional bond-buying program in October, yet did not change its policies to end near-zero interest rates – an outcome that was widely expected for this period of time in the recovery.
The reason? The Fed hopes to create momentum that will more than offset the increased threat of financial instability.
With the political posturing ahead of November's elections, it is unlikely that lawmakers will make much progress on any economic measure important for the country. Although the private sector is growing more confident, it still lacks much of the necessary growth to increase velocity. Time is ticking, and if growth doesn’t pick up, the Fed's policy bet could end in a large disappointment.
August 14, 2014
Over the past several years, the Federal Reserve has “seamlessly morphed from an institution that occasionally intervened in financial markets to a monster that apparently wants to control a great deal of the U.S. financial system,” according to a recent article by Brian Wesbury published by First Trust Portfolios.
In the article, Wesbury provided examples of how, throughout history, the Fed has always looked to expand its influence and power. “In the thirty years, between 1977 and 2007, its balance sheet (the monetary base) averaged 5.4% of US GDP. Today, it’s 22.4%. Never, in the history of the United States, outside of the military in World War II, has one government institution been so dominant.”
And it’s continuing to expand. The Fed is in the process of adapting a new management technique called “macroprudential regulation.” In a nutshell, this means the Fed will try to regulate specific financial system behavior to avoid economic problems. However, this technique, like many others, offers opportunities for the Fed to increase its power even more.
Click here to read more.
May 16, 2014
Over the past seven years, the Federal Reserve has increased the size of its balance sheet from about $850 billion in 2008 to $3.96 trillion in 2014.
It implemented Quantitative Easing by “creating” excess bank reserves that were above and beyond what was required. Now, it looks like the Fed will try to finish tapering then raise interest rates without decreasing its own balance sheet.
According to a recent Monday Morning Outlook report from First Trust Portfolios, these recent moves will lead to all kinds of problems, including a possible “arms race” in the financial system, where interest rates must be raised faster and higher than any of us want.
Click here to read more.
April 7, 2014
Economist Milton Friedman was known for teaching us that the “transmission mechanism” for central bank policy works through the quantity of money, or amount of money injected into or subtracted from the economy.
But several members of the Federal Reserve apparently don’t believe this anymore.
As a recent blog post by First Trust Portfolios reports, the Fed plans to end bond purchases later this year, and then, “without unwinding QE, start to raise the federal funds rate.”
Unfortunately, excess reserves are the problem, not the level of interest rates. And in the end, this new move by the Fed creates a big risk.
March 24, 2014
After reading through the Federal Reserve’s minutes from 2008, Brian Wesbury, chief economist at First Trust Portfolios, identified several mistakes the board made during that crucial year.
He shares some of his findings in a recent Wesbury 101 video.
An underlying theme, Wesbury reports, is that “the Federal Reserve never understood until the end of the year the dramatic nature of the problems facing the economy.” They thought they could fix any problem by using a “hammer” to either inject liquidity or lower interest rates. We know now that a bigger problem needed to be addressed.
Click here to watch the complete video.
March 7, 2014
Attention continues to be focused on the Federal Reserve with the nomination and subsequent confirmation hearings of Janet Yellen to replace Ben Bernanke as Chair of the Federal Reserve Board. Most commentators believe Ms. Yellen will continue the Fed’s current policy of easy money and low interest rates. The Fed has set targets of 2.5% inflation and 6.5% unemployment as they continue to purchase $85 billion of treasuries and mortgage-backed securities a month. Yet even with interest rates held at near zero for an extended period and the liquidity efforts of three rounds of quantitative easing, which have resulted in an unprecedented expansion of the Fed’s balance sheet and the money supply, we continue to experience slow economic growth, an unemployment rate in excess of 7%, and over a million fewer jobs than at the start of the recession.
It has become clear that the tools available to the Federal Reserve (interest rates and quantity of money) can’t solve the unemployment problem. Even so, the media continues to speculate on when the Fed may begin to taper or phase out their massive purchases, and how the economy will be impacted by that change. In reality, if the Fed were to stop the $85 billion per month of QE3 purchases overnight and not tell anyone, we would see very little change in business as usual. The reason: the money is held in bank reserves and is not in circulation. This is the same reason we currently have very low inflation.
Companies have hundreds of thousands of open jobs because they can’t find qualified employees. The manufacturing jobs of today are not the manufacturing job my father had. Today’s jobs require technical skills. The United States’ manufacturing sector is as large as it has ever been, but because of technology, we make more with fewer workers. Bureau of Labor Statistics data indicates that the 2012 unemployment rate for individuals with a bachelor’s degree was 4.5%. For high school dropouts, the unemployment rate was 12.4%. The challenge we face is how to train people to do the jobs that are open. Why are businesses not training the people they need? This leads us to the bigger problem: fiscal policy.
As I mentioned earlier, the Federal Reserve’s tools for monetary policy are interest rates and the quantity of money. Fiscal policy is set by the U.S. Congress and the president. The tools for fiscal policy are taxation and spending.
The Small Business Administration data indicates that small business “accounted for 64 percent of the net new jobs created between 1993 and 2011.” Yet today, small businesses are not adding people. The No. 1 fear of small business people today is regulation with taxes second. The biggest regulation fear appears to be the Affordable Care Act. Small business owners are afraid to borrow money to grow their business and hire new employees.
And while our government continues its spending spree, large companies are hoarding cash. Moody’s currently estimates that non-financial companies are holding almost $1.5 trillion on their balance sheets, up 81% since 2006. The reason: “zero clarity” with respect to U.S. fiscal policy. Macroeconomic Advisors estimates that fiscal policy uncertainty has cost the U.S. 900,000 jobs since 2009 and shaved three-tenths of a percent per year from economic growth.
The solution to the unemployment problem boils down to fiscal policy and a reduced regulatory burden on business. History tells us when government gets out of the way, business grows, employment grows, and the economy grows. The Federal Reserve can’t fix fiscal policy - congress and the president can. Remember that one of President Kennedy’s first acts was to cut taxes so that the economy would grow.
Unless noted, labor market figures courtesy of U.S. Department of Labor.
Manarin Investment Counsel Offers Special Screening of “Money for Nothing: Inside the Federal Reserve”
February 18, 2014
One hundred years after its creation, the power of the Federal Reserve has never been greater. Markets around the world hold their breath in anticipation of the Fed Chairman’s every word. Yet the average American knows very little about the most powerful financial institution on earth.
You’re invited to learn more during a special screening of “Money for Nothing: Inside the Federal Reserve,” dubbed “the first film about the next crisis,” on Monday, Feb. 24 at 7 p.m. and Tuesday, Feb. 25 at 2 p.m. at the Manarin Investment Counsel offices, 505 N. 210th St.
Click here to view a special video invitation from Roland Manarin.
The movie is the first film to take viewers inside America’s central bank and reveal the impact of Fed policies – past, present and future – on our lives. As Ben Bernanke’s tumultuous tenure comes to a close, join Paul Volcker, Janet Yellen, and many of the world’s best financial minds as they debate the decisions that led the global economy to the brink of collapse and ask whether we might be headed there again.
Space is limited, so call the office at 402-330-1166 by Friday to reserve your spot. See you there!