Black Coffee: Oh, the Humanity! Summer’s Here and the Markets are Getting Torched

It’s time to sit back, relax and enjoy a little joe

Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.

Summer is finally here! Hooray! As I’ve mentioned here before, it’s my favorite season of the year — after spring and fall.

Anyway, I’m not going to spend a lot of time behind the keyboard today because I’d rather be outside enjoying a little of that glorious summer sunshine.

I hope you all have a great weekend! Let’s get on with the show …

The Way-Back Machine: Past Posts Of Mine You May Have Missed

From April 2012:

My Cola Taste Test: Is Coke Really Better than Pepsi? – What’s the best-tasting cola? When I was a kid I drank Pepsi. Then, for some reason, after I got to college my preference switched over to Coke. In this post, I gathered 11 of my family members — including the family dog — for a blind taste test to settle the age-old question once and for all.

And Here’s Some Other Posts You Might Enjoy

Stacking BenjaminsSpeech Tips Learned in Public Speaking Hell

Budgets Are SexyThe Bigger, Better, Trade Up Game

DQYDJWant to be a Better Investor? Ask Your Wife!

Yes, I Am CheapTips for Gambling Responsibly

Money CounselorOur 3 Best Money Choices

Credits and Debits

Credit: Samoa Air has introduced a new, more expensive “XL” class for airline passengers that weigh more than 286 pounds. The higher fare won’t get you a jumbo-sized bag of in-flight peanuts, but it does entitle you to sit in a row that’s between 12 and 14 inches wider.

Debit: On a related note, last Wednesday the so-called “Hindenburg Omen” — a rarely-seen economic indicator that has presaged previous US stock market crashes — made its seventh appearance in less than a month. Batten down the hatches, folks.

Debit: The most recent Hindenburg sighting was likely sparked by remarks from Fed Chairman Ben Bernanke, who suggested that he might begin taking his foot off the accelerator of his latest epic money-printing campaign, known as quantitative easing, by the end of this year.

Debit: Of course, Bernanke’s suggestion sent markets across the world into a tailspin; the Dow dropped 560 points over the next two days before the bleeding finally stopped on Friday with a modest 41-point gain. Overall, US stocks had their worst week of the year.

Debit: Economists who continue to insist that all is well need to answer this: If the economy is so rosy, why did the mere hint of tapering the Fed’s easy-money injections cause so much market turmoil? Hello; is this thing on?

Debit: Perhaps a more ominous question is this: Never mind tapering, how spooked will the markets be after the Fed finally stops the party and pulls the monetary punch bowl away? The answer is obvious, and that’s why some economists insist that the Fed has painted itself into a corner.

Credit: Despite Wall Street’s market woes, and its dependence on the Fed to continue buoying stock values, the folks on Main Street now have the most optimistic view of the economy in five years. You can thank rising home prices for the improved consumer sentiment.

Debit: For its part, the bond market also tanked this week. The yield on US 10-year treasury bonds hit a 22-month high on Friday, while the 5-year note’s yield climbed 37% — that was its worst week in 50 years.

Credit: Yes, folks; although it may seem crazy, bond yields really can make significant moves in both directions.

Credit: On first blush, the sharp movement in the bond market seems to be validating former Goldman Sachs Asset Management chairman Jim O’Neill, who claimed last week that a bond crash could be around the corner. Only time will tell.

Debit: While rising interest rates may or may not be signalling a coming crash in the bond market, one thing is certain: higher interest rates mean higher borrowing costs. That’s not good news for a country like the US, that has nearly $17 trillion on its national credit card bill.

Debit: Rising interest rates are also bad news for the housing market; since May, mortgage rates have increased by more than a half-percent. Unfortunately, the Fed’s grand plan was for housing to lead the country into a full-fledged economic recovery. Oops.

Debit: If the US isn’t careful, it will soon be following in the footsteps of Detroit; last week the Motor City defaulted on obligations totaling $2.5 billion. I know. I was as surprised to hear that as you are.

Credit: And before you flood my inbox with letters telling me the US can’t default on its obligations, you’re right. Technically. But try telling that to bond holders who one day may end up getting paid in worthless fiat currency caused by a loss of faith in the US dollar.

Debit: In case you’re wondering, those trusting bondholders who were crazy enough to put their faith in the hands of Detroit’s irresponsible municipal politicians will be lucky to get less than 10 cents on the dollar. So much for security in bonds.

Debit: Speaking of broken government promises, Ohio is the latest state facing higher health insurance costs and fewer choices, thanks to Obamacare. The Ohio Department of Insurance says the average individual-market health insurance premium in 2014 will be 88% higher relative to 2013.

Credit: I suspect the same people who are saying they never saw that coming — or try to argue that the state of Ohio’s figures are illegitimate — probably also thought Detroit was a paragon of fiscal responsibility. Hey, I’m not saying. I’m just saying.

The Question of the Week

Sorry, there are no polls available at the moment.

Last Week’s Poll Results

How many kids do you have?

  • Zero (42%)
  • Two (28%)
  • One (12%)
  • Three (8%)
  • Five or more (7%)
  • Four (3%)

By the Numbers – Contest Time: Win $100 Trillion or a $20 Starbucks Gift Card!

Yep, it’s contest time again! Below is a list of the top 10 movies of 2004. I’ve got a $20 Starbucks gift card — or a $100-trillion bill from the Federal Reserve Bank of Zimbabwe — for the person who can correctly guess one of the three movies in the list that I haven’t seen.

Please place your answer in my blog’s comment section; I’ll only accept one answer per email address. If multiple folks pick the correct answer, then I’ll select the winner by a random draw among everybody who got it right.

And if nobody enters or gets the correct answer, then I’ll use the card myself.

The contest closes on Friday, June 28 at 5 pm, Pacific Daylight Time. Good luck!

1. Shrek 2 (Total gross: $441M)

2. Spider-Man 2 ($374M)

3. The Passion of the Christ ($370M)

4. Meet the Fockers ($279M)

5. The Incredibles ($261M)

6. Harry Potter and the Prisoner of Azkaban ($250M)

7. The Day After Tomorrow ($187M)

8. The Bourne Supremacy ($176M)

9. National Treasure ($173M)

10. The Polar Express ($163M)

Source: Box Office Mojo

Other Useless News

Here are the top 5 articles viewed by my 4019 RSS feed and weekly email subscribers over the past 30 days (excluding Black Coffee posts):

  1. Why Some Who Cut Expenses to the Bone Still Can’t Make Ends Meet
  2. Eight Smart Alternatives to Payday Loans
  3. Yet Another Reason Why I Hate Buying Tickets from Ticketmaster
  4. Smart Tips for Traveling Abroad During the Economic Downturn
  5. 100 Words On: One of the Biggest Mistakes a Household CEO Can Make

Hey, no matter how you got here, please be sure to:

1. Click that “Like” button in the sidebar to your right and become a fan of Len Penzo dot Com on Facebook!

2. Make sure you follow me on Twitter!

And last, but not least…

3. Don’t forget to subscribe to my RSS feed too! Thank you. :-)

Letters, I Get Letters

Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com

This week, Kim commented on my tipping policy of 20% for exceptional service, 15% for average service, and 10% or less for poor service:

I really wish I was a server and you sat down at one of my tables because I would give you exceptional service, but I would spit in your food right after I rubbed it on the side of a garbage can. Of course serving it to you with a smile.”

Well, Kim, you certainly have a twisted definition for what constitutes “exceptional service.” Do you enjoy eating boogers too?

I’m Len Penzo and I approved this message.



Comments

  1. 4

    Sam says

    “useless fiat currency” – The currency has worth because of perceived scarcity. Bernanke signaled money may tighten someday and markets took his word for it. Your hyperinflation assumption rests on an independent Fed not having any credibility, when it seems to be overly credible in fighting inflation, and not credible at all in raising it.

    • 5

      Len Penzo says

      “Useless fiat currency” is meant in the future tense, Sam. As more people wake up to the fact that the world is swimming in dollars, that faith will begin to falter, before it ultimately fails.

      Re: inflation. Do you buy groceries or fuel? Have you had to get a prescription, other medicine, or go to the doctor over the past few years? Inflation isn’t under control in any of those areas — and they happen to be the things that most of us buy more than anything else. It’s convenient that the government counts neither food nor fuel as part of its consumer price index.

      True, most — but not all — commodities are down, but the lower prices there aren’t translating to better standards of living.

      See my other comment to you that I left on the water post. Deflation is financial death to debtors, and the US government is the biggest debtor in the world. As things get worse, the US won’t tolerate it because they can’t afford to tolerate it. They will do everything in their power to reverse course and stoke inflation, even if it means directly depositing thousands of Fed dollars into each of our bank accounts.

      Remember, deflation first — then hyperinflation. The latter will come in a last ditch effort by the Fed to keep its debt-based Ponzi scheme from unraveling.

  2. 6

    Sam says

    Your comment does not imply an independent Fed, which it is. Advanced economies with an independent central bank and high debt typically experience slower growth and continual LOW inflation.

    Yes, I buy fuel, it’s cheaper than 2008. 12 years ago I bought top sirloin on sale for 3.99 a lb. I also did that last week. So your 2 product basket of goods actually has a negative inflation rate the whole time the Fed has been “printing money” (which it can’t actually do, it needs banks to lend it first)

    Why aren’t the rises in food and fuel sustainable? Because money isn’t actually easy – it’s not going to higher wages to create demand side inflation.

    • 7

      Len Penzo says

      High debt leads to low inflation in countries that choose austerity. The US is not cutting back their spending in any significant way — it’s pedal to the metal — there are trillion dollar deficits ahead for as far as the eye can see.

      You can cherry pick data points all you want, Sam. That being said, today I just paid $4.13 per gallon for fuel in California. At the last price trough in 2009, I was paying just over $2 per gallon for the stuff. To be a bit more realistic, the inflation-adjusted price of gasoline has more than doubled since 1998. So please don’t tell me there is no price inflation.

      http://www.inflationdata.com/inflation/images/charts/Oil/Gasoline_inflation_chart.htm

      The same holds true for food and medicine. Twelve years ago, the sale price for top sirloin was 1.99 pound. Today, a good steak in my neck of the woods is selling for $6.99, $7.99 per pound — or more. Not $3.99 per pound. Package sizes are decreasing to keep prices in check. One egregious example: I recently noticed that Anthony’s reduced the size of their egg noodle package from 16 oz to 12 oz. The price? It stayed the same. That’s a de facto 25% price increase.

      Money is extremely easy. Just ask the Fed — they print like it’s going out of style. Money is so plentiful, I just borrowed $30,000 at 1.9% interest. That’s easy money, Sam! It doesn’t get much easier than that.

      Since we are the world’s reserve currency, we can export the resulting inflation to the rest of the world — but foreign nations everywhere are getting tired of it. There are plenty of countries now — including some of our biggest allies — who are making side deals to bypass the dollar in their day-to-day exchanges. Our time as the world’s reserve currency is quickly coming to a close.

      I appreciate the counterpoints, Sam.

  3. 8

    Sam says

    Are you sure there are no supply side things causing prices to jump around? The swings you mention are exactly why the Fed doesn’t include food and gas. That and the Fed absolutely should not tighten money if there is a fuel supply problem.

    You cannot sustain price increases over the long run without increasing incomes. You will simply have some prices going up and others going down. If beef gets expensive, you buy chicken. Look at nominal INCOMES in the last period of sustained inflation (hint: they keep pace).

    • 9

      Len Penzo says

      Sam, what is the point of tracking inflation if the criteria being measured doesn’t include the most basic expenditures that affect our standard of living? The volatility is irrelevant as long as the measurement criteria remain consistent.

      I agree with you on on the relationship between increasing prices and income. So far, prices increases in food/energy/healthcare are rising without much protest partly because the government is subsidizing costs through food stamps, disability, 99-week unemployment insurance benefits, etc.

      Once inflation really starts to take off, employee wages will rise to keep pace, if only because employers will have no choice if they want to keep their employees. (History proves this out too, although the increases will occur on a slightly lagging basis.)

  4. 11

    Sam says

    Here’s something we likely agree on: CPI is totally wrong. We just probably disagree on why, but let me explain why my reason is right :)

    CPI is exactly right for a person who behaves just like that behavioral model and buys that exact basket of goods, right? This is probably between 0 and 300 people in a given year, and a different 300 in the next. Inflation is meaningless because no two people experience the same inflation rate; we all buy different things and react differently to price increases!

    Except the same goes for whatever method YOU like for measuring inflation. No one behaves exactly like that either!

    This is why I think the Fed should ignore inflation altogether, and focus solely on incomes.

    Then you will note that Bernanke has been pretty good at growing NGDP at 4% a year every year the last several years. I honestly don’t care if my personal inflation rate has been 30%. If nominal incomes have only grown 4%, the Fed did the right thing by not tightening.

  5. 15

    says

    Summer is a lot of people’s favorite season I think. The sun, the beach, everything… It’s so nice and relaxing and makes you want to go outside and enjoy. For the contest time, hmmm, my guess is Meet the Fockers ($279M).

  6. 17

    Amanda says

    Spider Man 2, which I say only because I really wish I had not seen it. Alas, my husband disagrees with me on its entertainment value and I see it (or hear it in the background as I read a book) every time it airs on cable.

    I bought quite a bit (for me) of stock when prices were down several years ago and could sell them at a 25-42% profit now, then wait until the crash to buy back in. Makes sense, yes? Good business, right? Somehow, my stomach turns and twists into knots more at the thought of selling now than at the thought of turning that potential profit into realized losses if I hold onto them and need to sell before the rebound. My hat is off to all you investors who can keep your emotions separate from your investments.

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