Digital Currency & Blockchain Technology

NO RECOMMENDATIONS ARE BEING MADE IN THIS VIDEO.  THE DIGITAL CURRENCY MARKETPLACE IS HIGHLY SPECULATIVE. YOU COULD LOSE YOUR ENTIRE INVESTMENT.

The Digital Currency Market has created quite a stir with some of the biggest names in the finance weighing in while the price of some Digital Currencies continues to rise.  The underlying Blockchain Technology of Digital Currencies is also being herald as a new exiting software development system.  In this short value I touch on both subjects including the two aspects of Digital Currency that help us understand its potential value.

North Korea Threat

There is no question the North Korea (NK) situation has deteriorated and could very well be headed to a conflict.  Outside of an offer of asylum for the Kim Jong Un regime there appear few options.  It is clear the current NK leadership is antagonistic and their arsenal now represents a clear and present danger.  President Trump has already demonstrated militarily he is not satisfied with appeasement in geopolitical negotiations.

When evaluating the potential impact on U.S. stocks it helps to look at these developments in context to the overall economy and stock market.  The economy continues a slow growth path with little threat of a rapidly rising interest rates, which combined represent a constructive environment for the stock market and helps explain its continued upward trend.  Corporate earnings are also healthy (Q2 earnings growth for the S&P 500 came in at 10.3% and projected earnings and revenue growth for Q3 are currently around 5%).  In addition, any positive developments on a Trump Tax Plan would most likely be viewed as bullish.  Taken as a whole, the market is going into this potential conflict in a positive environment.

The last time we experience a conflict like this was the Iraq ground war in March of 2003 (see chart below).  You may remember we were just coming out of a nasty recession and the market had started rallying as we moved into the new year.  2003 ended up being a strong year for the stock market.  Iraq did not represent a significant global economic component and the market was at the early stages of a recovery.

On the other hand, the 9-11 attack in 2001 hit the U.S. during a contraction in the economy and stock market after the dotcom bust (see chart below).  Because of the already weak state of economy and the direct hit to a global financial center, the implications were likely to be longer lasting and more severe.

Investors have to be very careful with defensive moves and a long-term perspective needs to be the dominant factor when making investment decisions.  Corrections are often short and markets can bounce back aggressively.  That being said, there are numerous periods historically where markets have not only sold off aggressively, they have done so over long period of time (multiple years).  Having a strategy in place for this type of environment will be helpful as you start to rely on your investment accounts for income.

The likelihood of a conflict with NK has increased significantly.  Kim Jong Un’s threats and acts are unacceptable and he seems unlikely to change his course.  NK economic impact globally is very limited and their military capabilities are antiquated.  I am not suggesting the possibility for significant damage resulting outside of NK doesn’t exist.  Each situation is different and the ICMB and nuclear capability of NK is a game changer, not to mention all their artillery on the DMZ aimed at Seoul.

The biggest issue now may be the U.S. having to calculate whether future ICBM “tests” are actually loaded with a nuke.  I won’t be surprised if we start shooting them down.

In summary, normally stocks have responded well to conflicts they believe will be resolved quickly and with little global economic impact when conditions are stable.  At present that appears how the market is responding to the NK situation.

Equifax Breach & Securing Your Personal Information

By now you have likely heard about the data breach at Equifax.  We have been here before…numerous times in the recent past consumers have been notified of a massive data breach of personal information at well-known companies.  If you have not done so already, here is where you can check to see if your data was impacted by the Equifax breach.  equifaxsecurity2017.com

The best way to protect yourself is to monitor your own personal information and be on the lookout for identity theft. Here are additional options to consider.

  • Fraud alerts: Your first step should be to establish fraud alerts with the three major credit reporting agencies. This will alert you if someone tries to apply for credit in your name. You can also set up fraud alerts for your credit and debit cards.
  • Credit freezes: A credit freeze will lock your credit files so that only companies you already do business with will have access to them. This means that if a thief shows up at a faraway bank and tries to apply for credit in your name using your address and Social Security number, the bank won’t be able to access your credit report. (However, a credit freeze won’t prevent a thief from making changes to your existing accounts.) Initially, consumers who tried to set up credit freezes with Equifax discovered they had to pay for it, but after a public thrashing Equifax announced that it would waive all fees for the next 30 days (starting September 12) for consumers who want to freeze their Equifax credit files.6Before freezing your credit reports, though, it’s wise to check them first. Also keep in mind that if you want to apply for credit with a new financial institution in the future, or you are opening a new bank account, applying for a job, renting an apartment, or buying insurance, you will need to unlock or “thaw” the credit freeze.
  • Credit reports: You can obtain a free copy of your credit report from each of the major credit agencies once every 12 months by requesting the reports at annualcreditreport.com or by calling toll-free 877-322-8228. Because the Equifax breach could have long-term consequences, it’s a good idea to start checking your report as part of your regular financial routine for the next few years.
  • Bank and credit card statements: Review your financial statements regularly and look for any transaction that seems amiss. Take advantage of any alert features so that you are notified when suspicious activity is detected. Your vigilance is an essential tool in fighting identity theft.

At the end of the day the best person to protect your identity is you.  If you are not already, it is a good idea to start monitoring your financial accounts and credit file on a regular basis.

Hey Government: It’s Time To Get Serious!

Brian Wesbury, Chief Economist at First Trust Portfolios, does a nice job in the commentary below comparing and contrasting the difference between the private sector (which is doing well) and the public sector (with governments of all sizes in precarious financial positions).  This divergence is a risk factor; the next crisis could erupt from the public sector.  Fortunately it is likely a decade or more away at the Federal level although the upcoming debt ceiling debate could create some pain.  In the meantime, the private sector looks poised to keep making progress and driving stock prices higher in the process.

Hey Government: It’s Time to Get Serious!

At eight years, the current economic recovery is the third longest on record.  Personal income, consumer spending, household assets, and net worth, are all at record highs.  Stock markets are at record highs.  Corporate profits are within striking distance of their all-time highs.  Federal tax receipts are at record highs.

So, how is it possible that the federal budget, along with some state and local budgets, still look like they’re in the middle of a nasty recession?

The answer: Government fiscal management is completely out of control.  Politicians find time to fret about Amazon’s purchase of Whole Foods and won’t stop bashing banks, but they’ve lost their ability to deal with their own fiscal reality.

The federal government is projected to run a nearly $700 billion deficit this year, and long-term forecasts suggest trillion dollar deficits as far as the eye can see.  Illinois and the City of Chicago are running chronic deficits, while New Jersey and New York are fiscal basket cases.

This makes the politicians of the 1990s look downright responsible.  In 1999, after a 10-year recovery, these entities were all running surpluses. But even if this recovery lasts 12 years, deficits will persist.  And what happens if there’s another recession?

Politicians have claimed intellectual support for their fiscal irresponsibility from John Maynard Keynes.  He believed in deficit-spending to help cure the problems of weak consumer spending in a recession.  As a result, the Panic of 2008 gave cover to grow government, and they did so in spectacular fashion.  But that “emergency” spending then morphed into permanent overspending and chronic deficits.

Tax rates are higher today than in 1999, and the economy is bigger, but governments have consistently outspent the ability of taxpayers to fund it.

Even Keynes thought the government should roll back spending and get budget deficits under control in better economic times.  But politicians are long past seeking his intellectual support.  They love to lecture business-people about greedy human nature, yet can’t turn that analysis on themselves.

Businesses and entrepreneurs create new things and build wealth.  Politicians redistribute that wealth.  And while some of what government does can help the economy, like providing defense or supporting property rights, the U.S. government has expanded well beyond that point.  Politicians have never been this reckless or fiscally irresponsible.

Whenever we say this, people ask; “what would you cut from the budget?”  And then, if you are actually brave enough to answer, you get attacked for “not caring.”

This needs to stop.  Illinois is in a death spiral.  Tax rate increases will chase more productive people out of the state, while ratcheting spending higher.  And just like Detroit and Puerto Rico, the state will go bankrupt.

The U.S. government is on this path, but, because it has the ability to fund itself with the best debt in the world, a true fiscal day of reckoning is still 15-20 years away.

Government spending needs to be peeled back everywhere.  It’s no longer a case of picking and choosing.  And until that happens, the fiscal irresponsibility of the government is the number one threat to not only America, but the world.

No matter what politicians tell us, any pain caused by private sector greed will pale in comparison to the mayhem that collapsing governments can create.  Just look at Venezuela or Greece!  It’s time to reset America’s fiscal reality.  And if that means debt ceiling brinkmanship, shutting down the government, or moving to a simple majority on spending decisions, so be it.  It’s time to get serious!

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Approved for public use.  Thanks and have a great week!

Debt-Laden Companies? #FakeNews?

The following commentary is from Brian Wesbury, Chief Economist at First Trust, an innovative exchange traded fund (ETF) provider I use in some of my investment strategies.  I have found much of Brian’s commentary over the year to be helpful,  so I am sharing his most recent “Wesbury’s Comments”.  I hope you find it helpful too – Brian Dightman

Debt-Laden Companies? #FakeNews?

Remember the weak May payroll report – just 138,000?  Didn’t think so.  But, back then, that first report on May was reported as a massive economic slowdown that should stop the Fed from further rate hikes.

But the weak May number was due to a calendar quirk that led to an undercount of college kids getting summer jobs.  Payrolls jumped 222,000 in June, were revised up for May and, now, the two month average is 187,000.  That’s exactly the same as the average in the past twelve months and almost exactly the same as the 189,000 average in the past seven years.  In other words, the negative story from a month ago was misleading.

So, guess what?  The Pouting Pundits of Pessimism are pivoting!  It’s not jobs anymore, now it is “high debt levels among nonfinancial corporations.”  They say this happens near the very end of an economic expansion, so brace yourself.

It is true that nonfinancial US corporation debt is at a record high of $18.9 trillion.  It’s also true this debt is the highest ever relative to GDP.  But these companies don’t pay their debt with GDP.  They hold debt against assets and incomes.

Since 1980, nonfinancial corporate debt has averaged 44.9% of total assets (financial assets, real estate, equipment, inventories, and intellectual property).  Right now, these debts total 44.5% of assets, or slightly less than average.  The record was 50.6 in 1993.  Think about that, 1993 was right at the beginning of the longest economic expansion in US history.

Some say that the value of corporate financial assets is inflated by financial alchemy.  So, let’s take financial assets, which include record amounts of cash, out of the equation.

Before we do that, please realize that the financial assets of nonfinancial companies exceed total debts by $1.4 trillion, a record gap.  But let’s look at ratios without them, anyway.  The debt-to-nonfinancial asset ratio is at 85%.  This is right in the middle of the past 25-year range – roughly 74% to 95%.

Debt relative to the market value of these companies has averaged 82.2% since 1980 and currently stands at 80.0%.  If you calculate net worth using historical costs for their nonfinancial assets (instead of market value), the debt-to-net worth ratio is 121%, but has averaged 128% since 1980, 125% since 1990, and 119% since 2000.  Again, nothing abnormal.

What about interest payments?  The most recent data show that interest and miscellaneous payments are 11.2% of these companies’ profits versus an average of 13.2% since 1980, 12.2% since 1990, and 11.6% since 2000.  What happens if interest rates keep rising?  Less than you think.  Only 28% of the debt is short-term versus an average of 44% in the 1980s, 41% in the 1990s, and 33% in the 2000s.

None of this means the economy is safe forever.  Another recession is inevitable.  It’s just not coming anytime soon.  In the meantime, beware of stories that take one simple measure – like corporate leverage – and spin it pessimistically.

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Approved for public use.  Thanks and have a great week!