Will we race to the bottom?

Financial markets are in turmoil. President Trump’s trade war is escalating, and with it, fears that both China and the U.S. will employ a new weapon, currency devaluation, to win the war. Is that a wise move? The last time the country devalued the dollar outright was on December 18, 1971 when President Nixon took the country off the gold standard. Since then, there have been times when various administrations have nudged the dollar down, but most American presidents have maintained a strong dollar policy. However, over the course of the last two years, President Trump has increasingly complained that the United States is at an unfair advantage versus other countries that are deliberately devaluing their currencies in order to increase their exports. As most readers understand, the cheaper your currency, the cheaper the price of your exports. This week, however, the question of currency manipulation moved front and center. In response to the president’s decision to place a 10% tariff on an additional $300 billion of Chinese exports on September 1, China ordered its companies not to purchase any additional food stuffs from the U.S. The government also allowed its currency, the renminbi, to drop below the seven to one U.S. dollar valuation, the lower end of the official exchange rate range. The Chinese currency does not trade freely but is instead managed by the government. Its value is allowed to trade within a range with the 7-to-1 level being the lower end of that band. Up until this week, the Chinese government had been attempting to stabilize their currency despite the accusations from the administration. Outside economists...

What does your 401(k) investments look like?

By Nate Tomkiewicz and Bill Schmick It might surprise you to know that many retirement savers religiously contribute to their tax-deferred savings plans but have no idea what investments they own. Many plan representatives simply suggest that if you don’t know, just invest in a target date retirement fund. Is this a good idea? Most 401(k)s and 403(B)s plans, for example, have between 20 and 30 investment options you can choose from. This menu of choices normally includes bond and stock funds as well as international funds. There are also balanced or blended funds, which invest in a mixture of stocks and bonds. Many plans also have some kind of annuity-like investment as well as target date funds. Supposedly, target date funds take the thinking out of investing. Let’s say you plan to retire in 2040, so you select a target date fund that approximates that year. The rule of thumb states that the closer you get toward retirement, the more conservative one should be. That means you should have more bonds than stocks (according to Modern Portfolio Theory) in your investment portfolio as you age. Each year you draw closer to retirement, the computer model that actually manages these funds simply put more bonds in your portfolio and less stocks. As a diligent saver who wants to make as much as one can before retirement, let’s look at the track record of bonds versus stocks over the last ten years. In this case we have used Vanguard’s intermediate term bond fund versus Vanguard’s S& P 500 Index fund. But wait, you may say, the last ten years stocks...

Coffee prices at 13-year lows

A few days ago, Arabica coffee futures prices fell to a price they haven’t seen since December of 2005. But don’t expect your morning cup of coffee to reflect those cheaper prices. The coffee business doesn’t work like that. Normally, when the price of a commodity falls (like oil), consumers can expect to see a drop in price at the gas pumps within a week or three. The same thing might happen if the price of beef, wheat, corn or any number of commodities experienced a decline in price, so why not coffee? You might guess (as I did) that the demand for coffee by consumers must be falling, but that’s not the case. In fact, more Americans are drinking at least one cup of coffee per day, if not more, than at any time since 2012. Over 64% of Americans drink a cup of the brew daily. In order to understand this disconnect between the prices we pay at our local Starbucks or Dunkin Donuts, and the money that growers receive in places like Columbia, Brazil and Vietnam, we need to understand the present state of coffee production. Too many farmers are growing too much coffee. We call that “oversupply.” One of the culprits is government., which, in the case of Columbia, offered additional incentives for farmers to grow more coffee. In Brazil, where growing any sort of food is a big business, they decided to step up their coffee production. At the same time, the cost of growing coffee is also climbing, as costs of labor, energy, equipment, etc. keep rising. Last year, Columbian coffee farmers were...

Will pot stocks go up in smoke?

Today, medical marijuana is legal in 33 states, while recreational marijuana is legal in ten states, plus the District of Columbia. Although there has been progress, little of the recent enthusiasm and hype over pot stocks will come to naught unless the Federal government does a major about face and legalizes the substance. What are the chances of that? Billions of dollars’ worth of investment, stock market gains, and federal, state, and local taxes are at stake. Predicting the outcome of such a change in Federal legislation is, for now, like betting all your chips on red or black in a roulette game. Nonetheless, a growing number of retail investors want to “get in” on pot stocks. The calls and emails I get today are reminiscent of two years ago. Back then it was all about Bitcoin or some other crypto currency. As Bitcoin climbed (from a few hundred dollars to $20,000), the interest and demand to “get in” was almost hysterical. As you might imagine, most of those calls were made as Bitcoin hit new highs. Fast-forward to today and, while no one has called about a cryptocurrency in over a year with Bitcoin now around $4,000, pot stocks are all the rage. And like Bitcoin, few callers know anything about the marijuana industry. “What do I need to know? “said one client (an ancient hippie like me). “You put it your mouth, inhale, and bingo. You are high.” But smoking it is a lot different than investing in it. There is now a bewildering array of investment vehicles (and more coming every day) that confronts the up...

Turmoil in Turkey

Turkey, a country that represents about 1% of the world’s gross domestic product, has suddenly become a cause of concern for investors worldwide. Both developed and emerging financial markets have plunged over the last week as that country’s currency plummeted. Fear that this tiny country’s problems could somehow spark a global financial contagion has everyone on edge. Those fears are unfounded. There will be no “contagion.” What is happening in Turkey is truly a “Tempest in a Teapot” that bears little resemblance to the crisis in Greece several years ago. Yet, over the last week, Turkey’s currency, the Lira, fell to record lows, interest rates skyrocketed, and their stock market cratered. Turkey’s problems are nothing new. It is a classic case of a country that borrows abroad (in U.S. dollars) to leverage their economy’s growth rate, which make the voters happy—until it doesn’t. Investors have erroneously compared Turkey’s woes to the Greek crisis of a few years ago. But there are big differences. Turkey’s economy is about 1% of global GDP, the 17th largest in the world. The country is not a full member of the European Union, nor does it use the Euro as its national currency. In addition, European banks have relatively little exposure to Turkish debt. Unlike Greece, where all the above were real fear factors, Turkey is more of a “corporate debt problem.” It has been companies, and not the government, that have gone on a borrowing spree. And foreign investors, searching for better returns that can be had in safer, more developed markets, were glad to loan Turkish companies’ money for a double-digit return....

The incredible shrinking stock market

There was a time, back in the late Nineties, that publicly-traded stocks were the envy of all companies, great and small. But times have changed, and since then the number of public companies have fallen by 50%. You might have missed that trend, however. That’s because the market capitalization of equities has been increasing for a decade. This year the market cap of the U.S. stock market hit a record $32.2 trillion. Globally, the World Bank estimates stock market capitalization is above $80 trillion. The largest contributor to this trend has been the large increases in stock prices. Bottom line: investors are simply bidding up the prices of existing stocks in an incredibly shrinking market. The peak year for publicly-traded companies was 1996, when there were over 8,000 companies listed. Since then the number has gradually decreased until today, where only 4,336 companies remain in the public sphere. The same trend has been identified in developed markets around the world. European and Canadian stock market trends mirror our own with listed companies falling by anywhere from 20 to 60% overseas. There are several reasons why listing your company on an exchange has lost much of its luster. Most companies complain of an increasingly complex and expensive mountain of governmental and industrial rules and regulations they are required to obey. Despite the Trump Administration’s effort to reduce this onerous burden, few companies are planning to reduce their law departments any time soon. Then there is the media and an increasingly active shareholder base. Every move, every action by management is scrutinized, analyzed and sometimes reported inaccurately by the financial media....