EXPOSED: Another Currency Manipulator!

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Currency manipulator!

Today we point an indignant and accusing finger at the latest currency manipulator.

Let all proper authorities take notice.

The accused is not China — incidentally.

But we cannot proceed without first noting another manipulated market…

The stock market presented a distressed scene this morning.

Plunging bond yields are the explanation widely on offer (falling yields reflect a poor economic outlook).

Yields on the 10-year Treasury slipped to 1.595% this morning — lowest since autumn 2016.

The Dow Jones was down 589 points before an invisible hand intervened, stabilized the bond market… and redirected the stock market.

The index nonetheless lost 22 points on the day.

Both S&P and Nasdaq gained on the day.

Meantime, gold spins into delirium — gaining another $25 today — to $1,509.50.

But now that the administration has hung a “currency manipulator” sign from China’s neck… we are duty-bound to expose the latest currency manipulators.

Our spies have marshalled the evidence. It is circumstantial evidence, we freely concede.

It is nonetheless damning — more than sufficient to empanel a grand jury.

Who are these latest currency swindlers?

Here we refer to the dastardly Swiss.

The Swiss are currency manipulators.

Our spies inform us…

That Swiss sight deposits — bank deposits that can be withdrawn immediately without notice — surged 1.6 billion francs in the week ending Aug. 2.

This anomaly follows a 1.7 billion increase one week prior.

Add one to the other and the conclusion is clear: The Swiss National Bank (SNB) has been monkeying in the currency markets.

It has been printing francs to purchase euros. Why?

To cheapen the franc… to advantage their exports… and to lift their tourism industry.

Evidence suggests Swiss manufacturing has already sunk into recession.

And the European Central Bank (ECB) is preparing to reopen the monetary faucets in September. The ensuing flow would depress the euro.

In comparison, the Swiss franc would tower high as the Matterhorn.

It is already at its highest peak since June 2017.

And so the Swiss authorities are purchasing euros — on the quiet — to cushion the blow.

That is the case we argue today.

Here we introduce our first witness, Credit Suisse economist Maxime Botteron:

I think the SNB was intervening in the market last week — this was the biggest weekly increase in sight deposits since May 2017. This is a clear sign the SNB was active in the market.

Witness No. 2 presently enters the witness stand, a certain Thomas Stucki.

Let the record indicate Mr. Stucki is former manager of the SNB’s foreign currency reserves:

When the ECB statement was published at 1.45 p.m. last Thursday the euro lost value against the dollar, but not against the franc… Any move by the SNB to buy euros with newly created francs would bolster the single currency [euro]. It is possible that the SNB is behind this development.

It is likewise possible that night will follow day… that a dropped apple will plunge groundward… that a senator of the United States will disgrace his office.

In conclusion we summon the testimony of Mr. Karsten Junius, chief economist at J. Safra Sarasin:

“The SNB are definitely in the market.”

The prosecution rests. The Swiss are currency manipulators.

And we consider the case jolly well closed.

When will the roars of protest come issuing from Brussels?

But let us now switch lawyerly roles… and leap to the defense of a currency manipulator wrongly accused:

China.

The recent charges against China are not only false. They are precisely, exactly, 180 degrees false.

That is, China has been labelled a currency manipulator not because it has manipulated its currency.

China has been labelled a currency manipulator… because it temporarily ceased manipulating its currency.

Here is the dynamic in operation…

China pegs its yuan softly to the dollar. But the dollar packs vastly more muscle than the yuan.

In order to maintain its peg, China manipulates the yuan higher — not lower.

That is, the People’s Bank of China buys yuan… and sells dollars.

And since last April alone, the yuan has appreciated 10% against the dollar.

A 7:1 exchange ratio is widely considered the “line in the sand.”

But this past Monday China temporarily let go of the yuan… and let it slip to 6.97 (the yuan presently trades at 7.06 per dollar).

The United States subsequently labelled China a currency manipulator — for failing to manipulate its currency.

Ponder the loveliness, the blinding brilliance… the staggering beauty of the charge.

Could Mr. George Orwell have improved upon it?

We can identify another term for currency manipulation.

It is a euphemism… designed to take much of the curse off “currency manipulation.”

That term is monetary policy.

The Federal Reserve runs its own.

And it has destroyed 96% of the dollar’s value since 1913…

Regards,

Brian Maher
Managing Editor, The Daily Reckoning

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The Swiss Battle to Cheapen the Franc

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One of the crucial insights in currency trading that many investors fail to grasp is that currencies don’t go to zero, and they don’t go through the roof. That’s a generalization, but an important one. Here are the qualifications:

This observation applies to major currencies only — not to currencies of corrupt or incompetent countries like Venezuela or Zimbabwe. Those currencies do go to zero through hyperinflation.

The observation also applies only in the short-to-intermediate run. In the long run, all fiat currencies also go to zero.

Yet over a multiyear horizon, major currencies such as the dollar (USD), euro (EUR), yen (JPY), sterling (GBP) and the Swiss franc (CHF) retain value and do not go to extremes. Instead, they trade in ranges against each other. That’s the key to successful foreign exchange trading. Trading profits are the result of catching the turning points.

Jim Rickards

Your correspondent in Zurich, Switzerland, during a recent visit. In analyzing the complex dynamics of foreign exchange markets, it is essential to visit the countries whose currencies are being studied. Foreign visits offer the opportunity to meet with government officials, bankers, business executives and everyday citizens of the affected countries to gain insights that are not available through digital and media sources.

Stocks can go to zero when a company goes bankrupt. Enron, WorldCom and a host of dot-com stocks in the early 2000s are all good examples. Bonds can go to zero when a borrower defaults. That happened to Lehman Bros. and Bear Stearns.

But major currencies do not go to zero. They move back and forth against each other like two kids on a seesaw moving up and down and not going anywhere in relation to the seesaw.

The EUR/USD cross-rate is a good example. In the past 20 years, the value of the euro has been as low as $0.80 and as high as $1.60. There have been seven separate instances of moves of 20% or more in EUR/USD in that time period. But EUR/USD never goes to zero or to $100. The exchange rate stays in the range.

Turning points in foreign exchange rates are driven by a combination of central bank interventions, interest rate policies and capital flows. The old theories about “purchasing power parity” and trade deficits are obsolete.

Foreign exchange trading today is all about capital flows driven by policy intervention, sentiment and interest rate differentials.

Another good example is the Swiss franc (CHF). If you look at its exchange rate with the dollar, an exchange rate of 0.80 francs per dollar indicates a strong franc. An exchange rate of 1.05 francs per dollar indicates a weak franc. Right now the exchange rate is 0.97, which leans towards a weak franc relative to the dollar.

CHF has traded in a range of 0.87–1.03 for the past six years. One move that stands out is the spike on Jan. 15, 2015, when CHF surged from 1.02 to 0.86, a nearly 20% move in a matter of hours. CHF then backed off that high of 0.86 and declined to its more recent trading range of 0.91–1.03.

The spike on Jan. 15, 2015, was caused entirely by the decision of the Swiss National Bank (SNB) to remove a cap on the Swiss franc relative to the euro intended to protect Swiss exports.

The Swiss economy is heavily dependent on exports of precision equipment, luxury goods such as Swiss watches and food including cheeses and chocolates. The Swiss economy also depends on tourism, which is akin to a service export sold to foreigners. All of these exports suffer when the Swiss franc is too strong.

The SNB has been enforcing the cap by printing francs and buying euros to put downward pressure on the franc. The problem with this policy is that the world wants francs as a safe haven.

That was especially true during the European sovereign debt crisis of 2010–2015. The SNB balance sheet was becoming top-heavy with European debt purchased with printed francs at a time when the European debt itself was in distress.

Eventually, SNB threw in the towel and allowed market forces to determine the value of CHF. This produced an immediate spike in CHF against the euro and the dollar, which has since moderated into a trading range.

But the franc is currently at the 1.09 level versus the euro, on expectations of monetary easing in both the euro zone and the United States have set in.

So the SNB has been buying euros in an attempt to get out ahead of the curve. It’s trying to cheapen the franc to keep its exports and tourism industry competitive. You see evidence for this in its so-called sight accounts. Sight account can be transferred to another account or converted into cash without restriction.

There has been a recent surge in these accounts lately, which indicates the SNB has been actively intervening in the currency markets.

With rising market uncertainty and hot money in search of safe havens, what does the future hold for the Swiss franc?

The single most important factor in the analysis is that hot-money safe-harbor inflows are clashing with the SNB’s cheaper franc policy.

The demand for Swiss francs will be driven by the lack of palatable alternatives. Investors are increasingly concerned about sterling because of conditions imposed by the EU, Ireland and others in the Brexit process. Brexit is irreversible, but satisfying all of the demands of interested parties to achieve Brexit will weaken the U.K. economy and sterling.

Likewise, the dollar and yen are both the cause of investor concern because of out-of-control debts. The Japanese debt-to-GDP ratio is over 250% and the U.S. debt-to-GDP ratio will soon be 110%. Any ratio higher than 90% is considered a danger zone by economists.

Almost all Japanese government debt is owned by the Japanese people, so there’s a higher threshold for panic in Japan than in the U.S. The U.S. debt is about 17% owned by foreign investors who could choose to dump it at any moment. Still, both Japan and the U.S. are on unsustainable paths and have shown no willingness to tackle their debt problems or reduce their debt-to-GDP ratios.

The euro offers better debt-to-GDP ratios than Japan or the U.S. in the aggregate. However, the European Central Bank is getting ready to pursue more quantitative easing and near-negative interest rate policies. The euro is also plagued by lingering doubts about the individual debt situations in Greece and Italy, a legacy of the 2010–2015 European debt crisis.

Meanwhile, the Swiss debt-to-GDP ratio is about 30%. In fact, Keynesians complain that its debt levels are far too low!

Russian rubles and Chinese yuan are unattractive for major global capital allocators because their markets lack liquidity and they do not have satisfactory rule-of-law regimes behind their currencies.

With dollars, yen, sterling, the euro and emerging-market currencies all unattractive for different reasons, the primary safe havens for global investors are Swiss francs, gold, silver and some of the smaller currencies such as Australian or Canadian dollars.

Many investors won’t allocate to gold because of investment restrictions or simple bias. This leaves the Swiss franc first in line to absorb huge global capital flows looking for a home.

The SNB may keep trying to knock down the Swiss franc by buying stocks, bonds, euros and anything else that’s not nailed down, but in the end it won’t be enough. Global capital will continue buying francs for lack of a better alternative.

Eventually the SNB will once again throw in the towel as they did in 2015 and allow the franc to appreciate sharply.

Having a strong currency is desirable. But in today’s world outside of a gold standard, having too strong a currency can actually be a curse.

Regards,

Jim Rickards
for The Daily Reckoning

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How THIS Is Making the Housing Crisis Worse

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It’s happened several times in the last couple of months – someone approaches me, clipboard in hand, and asks if I’m a California voter. Then, barely waiting for my response, they start asking me to sign a petition related to rent control.

The first time it happened, at my local organic market in Santa Barbara, I just politely said “no thanks.”

The most recent time, at a professional women’s surfing contest in San Diego last week, I couldn’t hold back and ended up saying a bit more to the solicitor.

And now, after hearing Bernie Sanders mention the idea during last Tuesday’s primary debate, I want to tell you a more expanded version of where I stand on the topic (and why)…

My Grandparent’s Experience

Let me first say that, like Bernie Sanders and other proponents of rent control, I’m very familiar with the plight of poor families that rent all of their lives …

My mom’s parents rented the same apartment in downtown Wilkes-Barre, Pennsylvania for more than 50 years.

Her father grew up in such poverty that he had to drop out of high school to go work in the coal mines.

Her mother graduated from high school but stayed home to take care of the kids.

They were Depression-era people, conservative with what little money they had, and they never made the leap to home ownership.

After leaving the mines, my grandfather made his living doing all kinds of odd jobs – car mechanic, electrical work, etc. – including helping out his landlord whenever needed. His rent still went up on a regular basis. Even when my grandmother was living in the apartment alone in her early 90s, the landlord was talking about another increase.

Would it have been nice if their rent, established in the 1950s, could have only gone up 3% or 4% a year so long as they stayed in that apartment? Absolutely.

Still, they never complained. They knew prices for things went up over time. They cited a few times in the past when they might have been able to buy a house in the neighborhood but just couldn’t mentally commit to the idea. Nor did they like borrowing large sums from banks.

My grandmother died in that small apartment, with not very much to her name.

Now, let me tell you another story…

Where Rent Control Goes Bad

As my grandmother was into her 80s, I was moving into New York City and looking for apartments.

I was working for Standard & Poor’s and making a good salary, but hardly anything exorbitant. My one-bedroom apartment just off Wall Street was $2,300 and was subject to market rate increases going forward.

My boss, perhaps 30 years older than me, lived a couple neighborhoods away. He obviously made more than me but he’d been in New York for a long time and his apartment – twice the size of mine – was under rent control. I don’t know exactly how much he paid but I would guess a third of my rent for twice as many bedrooms. He also owned a vacation home outside the city.

Meanwhile, there were plenty of rent-controlled people charging large amounts of money to let someone move into a vacant bedroom while their landlord received nothing.

I also knew someone who lived in another state almost all of the year but maintained a rent-controlled NYC apartment as a little getaway (lying about residency in the process).

This is just a little taste of what I saw, but the big-picture was pretty easy to see – rent control largely rewarded people who got there first, regardless of their financial status … it was easily abused … and it did very little to help newcomers or anyone looking to move from one place to another.

There is also no doubt that many landlords do everything in their power to screw over tenants, especially in a place like New York City. And from what I saw, rent control didn’t help that situation either … it merely discouraged building owners from improving their rent-controlled properties any more than was absolutely necessary.

Indeed, New York City just changed a bunch of rules related to rent control and we’re already hearing about landlords bailing on big capital investments.

But you don’t have to accept my personal experience or anecdotal evidence.

The academic research is pretty decisive that rent control doesn’t work, whether you’re talking about New York or Paris.

As Reason noted in a recent article:

“Brookings Institute associate professor of economics Rebecca Diamond did a recent review of the literature on rent control, finding that ‘Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood.’ The reason is simple and boils down to the law of supply and demand. While some of the people renting may benefit from rent control by removing some of their risk, it also gives landlords an incentive to alter their supply of rental property.

“They have several options based on the circumstances. First, they may withdraw their properties from the rental market to sell them as condos. Former George Mason University Chairman of the Department of Economics Donald Boudreaux summed it up nicely in a 2006 letter to the editor of The New York Times: ‘By decreasing the profitability of supplying units occupied by renters, these controls spawn condo conversions and prompt builders to construct fewer rental units and more units for sale to owner-occupiers. People who can’t afford to buy housing are unnecessarily disadvantaged.’ Landlords may also stop investing in maintenance, which, over time, may lead to neighborhoods with many run-down properties. The bottom line is that rent control never increases the supply of affordable rented housing.”

What about this legislation they’re trying to pass in California?

Well, after I explained that I recently purchased a million-dollar home and would never want to cap my own future rental potential, the solicitor at the competition assured me that it would only apply to landlords who own three or more properties.

At that point, I didn’t bother to explain that I also recommend investing in companies like Real Estate Investment Trusts (REITS) that are essentially corporate landlords.

It was clear we simply had different ideas about capitalism and free markets.

If Rent Control Doesn’t Work, What Will?

From my perspective, the person who took a chance on New York City back in the 1970s – when it was a far cry from its current look and feel – deserves to get market rates for that money invested and risk undertaken.

As did my grandparents’ landlord…

As do I for working hard, and saving enough to buy a house in Santa Barbara.

Can you imagine what it would be like if we suddenly capped the amount of dividends that stocks could pay to their investors?

Well, that’s exactly what rent control does with real estate.

Perhaps the biggest irony is that some of the same people here in California who cry for more affordable housing are the very same people who don’t want garages converted into auxiliary dwelling units, Airbnb listings allowed in residential neighborhoods, or high-rise buildings in land-constrained areas.

Look, housing affordability is a complicated issue. In highly desirable locations with little room for further development, it’s doubly complicated.

But I would much rather see solutions that start with increasing supply, even if it’s something small like simply allowing existing homes to be partitioned into several micro houses. At least it’s a start to fixing a long term problem and not a band-aid that will fester given enough time.

Thinking we can wave a magic wand and keep prices in check through artificial rent controls isn’t going to cut it.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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What I Learned from Eating Candy

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I don’t remember exactly how old I was, but it was either late single digits or early doubles.

I was looking through the local newspaper and saw a big, bold ad. Or maybe my parents showed it to me… I can’t remember that part either.

What I do remember is what the ad said, and how exciting it was to me at the time: Topps, the famous baseball card and candy company, was looking for taste testers.

More specifically, they wanted children taste testers. It was a one-day job. You’d go there, taste some sweet stuff, and get paid to tell them what you thought.

My brain was reeling. Paid to taste candy! Are you kidding me???

This ended up being my first paid job.

I can still picture the long wooden table. A bunch of us were sitting around it, with an adult at the head. We tried different things one at a time – gum, hard candy, and all sorts of other confectionery products.

After giving our opinions, we walked away with even more candy and $5 each.

The more I think back on it, the more I realize it might have also been my best job ever.

The Lesson:

A job isn’t just about the raw pay. It’s about the other benefits … including doing something you enjoy.

The Gas Station

Of course, once I turned 16, I went out looking for a “real” job.

As a newly-minted driver, a gas station seemed like a logical place to start. Heck, my dad worked at one when he was a young man and the hours were pretty flexible.

I saw one of the local chains was looking for attendants so I applied.

A few days later, I was heading out for my first real job interview. I put on a collared polo shirt … a nice pair of khaki pants … and, unlike the present day, made sure my hair was neatly trimmed.

Just like the Topps gig, I can still remember what the room looked like. I was sitting in a dark, cramped office across from a guy who wasn’t nearly as dressed up as me.

After a brief introductory conversation, which I thought went well, he surprised me by saying, “Do you really think pumping gas is the right job for a kid like you?” 

A kid like me? What did that mean?

I didn’t have to wait very long for the answer. He basically went on to explain that I was a little too polished for the job. It was messy, menial work and I probably wouldn’t want to do it very long.

He went on to say something about I would probably be happier as a cashier inside one of their other stations but I was already insulted.

Here I was, trying to show respect and suitability by dressing up for an interview and this guy was going to deny me the job because of that? What, because I was too qualified?

I ended up working as a line cook at a local pizza and pasta restaurant. It was just as hard and messy as the gas station job I was turned down for. It didn’t pay more, either.

Still, I showed up every day on time and did all the tasks – everything from frying wings to banging out cheesesteaks – to the best of my ability just as I would have done handling the pumps.

It was the same thing with other “menial” jobs I did during my school years – everything from working as a bouncer at a nightclub to running the counter of a pool hall.   

The Lesson:

People are going to judge you – often because of your appearance, mannerisms, or background – and it won’t always be accurate. All you can do is move on and be true to yourself.

My Stint in Government

My senior year of college, it was time to start thinking about an actual career.

My Dad, a state employee, encouraged me to take the civil service exam. It was the first step toward all types of different government jobs, and he was sure he could help me get a position if I did well.

While working for the government wasn’t exactly my ideal path, I really liked taking tests. I aced the thing without a problem and ended up with a job interview in the state capital.

Everything was going great with the interviewer. 

Then, a question …

“What would you say to someone if they were criticizing state workers for getting too many days off?”

Huh?

I literally had no idea why this was being asked and it was just about the farthest thing from my mind.

I remember giving some kind of diplomatic response but it reinforced what I already had thought … that government employment probably wasn’t for me.

I ended up getting myself a job on Wall Street instead, where nobody worried about getting accused of having too many vacation days. Within a couple years I was making several times as much as the state job would have paid.

The Lesson:

Things almost always work out for the best if you choose your own path.

Back to Middle School

Eventually, my wife and I were ready to leave the city for good.

I thought about switching careers and doing something a bit more magnanimous. So I applied to become a teacher at an underserved school in Florida through the Americorps’ Teach for America program.

After a few steps, I was invited to come down to Florida for the final part of the hiring process where I would design and teach a sample lesson in front of other candidates and evaluators.

You were able to choose any grade from first through sixth. I picked sixth grade English. I designed a lesson around the haiku, a very specific form of Japanese poetry.

It was an ambitious undertaking – especially once I heard some of the other candidates walking the group through second-grade math problems – but I walked away feeling really good about my performance.

It wasn’t just me.

After the presentation, I had my final interview before flying home. At one point, the woman said something about coming back down to start the job. “Notice I said WHEN you come back down to start the job, not IF,” she told me.

As you can guess, I didn’t get offered the job and I was never given any explanation as to why not.

So, instead of teaching sixth graders about Japanese poetry, I went on to start teaching regular Americans how to better invest their money … something I’m still doing today, more than a decade later.

It suits me. It’s fun. It’s satisfying. I wear whatever I want.

And nobody asks me about how many vacations I take.

The only downside is that I have to buy my own candy.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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Rake in Summer Savings the Lazy Way

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Summer is here, and it is HOT.

Mind you, this week has been a bit of a reprieve from the oppressive heat, but last week was certainly a scorcher.

It got me thinking. 

When temperatures start rising, so do electric bills.

Obviously, where you live plays a big part in how much you end up paying on your monthly electricity bill.  Some places like Southern Louisiana for instance, have cheaper electricity, but scorching hot summers raise costs compared to more energy-expensive states like Northern California, where the climate is more temperate.

But no matter where you are, I have some tips that can help you save on your monthly bills.

The average US household spends about $112 a month on electricity according to the US Energy Information Administration. And a large portion of that is based on heating and cooling usage.

Is it worth moving to save a few bucks on electricity? Possibly.

Especially when you factor in “energy choice” states like Connecticut, Delaware, Washington D.C., Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, and Texas where you can negotiate cheaper contracts with providers.

But that’s a conversation for another day.

Today I’m giving you the lazy-man’s way to save on electricity.

No state hopping. No having to buy new energy-efficient appliances. No installing smart programmable thermostats. No extreme home makeovers to save a few hundred bucks on your electricity bill.

Why?

Because most of the big savings you’ll find on your monthly electricity bill don’t require a lot of money or investment.

These are my top 10 ways to save on electricity every month – the lazy way.

1. Fill the Cracks

Unless your home is brand new, there’s a good chance your windows and doors are leaking money.

Fill these cracks with caulk and weather-stripping to reduce drafts and your electric bill will drop dramatically.

According to Consumer Reports, sealing leaks in your home can reduce energy costs by 15 to 30%.

2. Use MAJAPs at Night

When it’s hot outside, avoid using your stove, washing machine, clothes dryer and dishwasher. All these major appliances (MAJAPs)  draw a lot of energy and typically produce heat.

This in turn causes your AC to work harder trying to maintain your home’s temperature. Also, depending on where you live, your electricity provider could offer reduced rates at different times of day.

Typically evening usage and weekends are cheaper than daytime during weekdays.

3. Use Ceiling Fans

Even if you have a central HVAC system, consider turning on your ceiling fans to help cool and heat rooms faster.

Fans push hot and cold air through your whole house so you can reach your room’s desired temperature a lot faster. Ceiling fans can save you up to $438 per year.

4. Wash Your Clothes in Cold Water

There’s no excuse for not washing the majority of your clothes in cold water.

Almost every detergent brand now dissolves just as well in cold as hot water at no additional cost and cold water proves to be less damaging to your fabrics.

Estimated savings for washing your clothes in cold water is around $150 per year.

5. Skip the Electric Dryer

If you have a yard and can set up a clothesline, do it.

But if space is limited or you’re worried about allergens, buy a few clothes drying racks off Amazon and hang dry heavier items like towels, jeans and sweatshirts.

Line-drying reduces average monthly electricity costs by $15.

6. Use a Slow Cooker

Avoid using your MAJAPs during the day but if you really want to cut costs, skip cooking in your oven altogether and use a crock pot or instant-pot.

Crock pots heat less of your house than traditional ovens and the best part is they require less work. Most crock pot meals are set it and forget it so you’ll save money and time using a slow cooker more often.

7. Reduce “Electricity Vampires”

Did you know 75% of the energy used by home electronics is consumed when they’re in standby?

These electricity vampires include TVs, computers, cable boxes, cellphone charging stations, and appliances – basically anything that holds a time or other settings.

Consumer Reports says that you can save $25 to $75 each year just killing these phantom electronics.

The easiest way to kill electricity vampires is to use power strips. Make it a habit of shutting off the strips between uses or buy a smart power strip that automatically shuts off when your electronics go in standby mode.

8. Turn Off Lights.

This one should be obvious.

Turning off lights you aren’t using or in rooms you’re not occupying saves a considerable amount of money every month.

Turning off a single 100-watt light bulb from running constantly saves around $131 per year.

If you really want to boost savings, switch all your lights to LED.

9. Raise/Lower the Temperature When You’re way

In the summer, raise your thermostat when you leave the house and in the winter lower it. There’s no sense cooling or heating an empty home.

Programmable thermostats are ideal for this but if you don’t have one, don’t think you have to go out and buy one.

Changing the temperature manually works fine too, it just takes more diligence.

10. Clean Air Filters Every 30 Days; Replace Every 3 Months

When your air filters are dirty your HVAC system has to work harder, which ends up costing you more money.

A good habit to get into is regularly cleaning and replacing your home’s air filters. Clean every 30 days and replace every 3 months is a good rule of thumb.

It might seem like your savings will be eaten up by the cost of replacement filters but that’s not the case.

Most people see savings from $20-$40 annually following this simple hack.

All of these hacks should add up to noticeable savings and don’t require much time or money.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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My Top 5 Tips to Save Money Using THIS

This post My Top 5 Tips to Save Money Using THIS appeared first on Daily Reckoning.

In corporate finance there’s a term used to describe inventory that sits in a warehouse costing the business money — that term is called carrying costs.

Imagine for a second that your house is run like a business and all your belongings are its inventory. The more stuff you own, the higher your carrying costs will be.

Of course, not everything you own will end up costing you money but you get the idea.

I believe minimalism is a sort of antidote to personal carrying costs.

Just like the costs of carrying excess inventory will eventually cripple a business, owning too much stuff will eventually wreak havoc on your state of mind and your wallet.

Today, I want to share a few principles from minimalism that will save you money.

What’s interesting about these five principles is they’re not about restricting your spending so much as changing what you decide to spend your money on that makes the difference.

Here are five minimalist principles that will fix your money problems:

1) Value Experiences Over Things

Minimalism is about focusing on what’s important to you. If you stop to really think about what you value most, you’ll realize it’s probably less about the materialistic things in your life and more about the experiences.

You remember the family vacations you took as a kid with your parents over the new suit you bought or the expensive watch that’s sitting in your dresser drawer.

Once you accept this reality, your spending shifts to align with these values. It’s no longer should I buy this new car or nicer pair of shoes. You’d rather save that money for your next big trip or outing with friends.

2) Understand Your Wants vs. Your Needs

It’s estimated that the average American household spends over 90% of their annual income. A big chunk of that spending goes toward things you don’t actually need.

Living minimally, forces you to identify what’s essential in your life and what’s excessive. A good exercise to do every month is review your credit card and bank statements.

Take out a pen and mark beside each line item whether it was a need or a want. If you do this every month, you’ll start to see patterns in your spending.

As you shift your spending to align with your values, you’ll see less wants show up. That’s not to say you shouldn’t spend your money on things you want though.

You’ll just have a clearer picture of the wants that actually add value to your life as opposed to the wants that are driven by laziness or gluttony. For example, eating out because you don’t want to cook versus going out for dinner with friends.

3) Buy Quality Over Quantity

If you’re always looking for the best deal on every purchase, you’re probably sacrificing quality.

Minimalism is less about trying to save a buck and more about buying quality things that last. Because in the long run you’ll spend less money owning fewer high-quality items than you will buying cheap stuff that constantly needs replacing.

Shoes are a great example. If you normally buy a pair of $30 running shoes, you might only get 6 months to a year out of them. If you were to spend 3x that amount, you’d get a shoe that will last you four to five times as long and are way more comfortable.

Minimalism helps you look at spending differently. Instead of getting the best deal today, it’s about finding a product that meets your needs and adds the most value to your life. Typically, this means shopping quality over quantity.

4) Less Things = More Space

As I said earlier, minimalism is the antidote to personal carrying costs. When you focus on downsizing your belongings, you see how much extra space you’re really paying for.

Approximately 1 in 10 Americans rent self-storage space, that’s almost 10% of the entire country that could be saving money if they followed this principle.

I’m not suggesting you move into a tiny house, but when you reduce your belongings you should consider what a move would save you long term if you were to give up a few hundred square feet.

5) Less Space = Less Maintenance Costs

Another benefit to owning less space and junk is it costs you less to maintain what you have. If you downsize from a four bedroom house to a two bedroom, your utilities will drop significantly.

And if you decide to sell one of your cars, your insurance, gas, and car repairs will all be halved.

Let’s Get Started!

There’s a reason businesses have entire accounting departments dedicated to reducing carrying costs. I recommend treating your home’s finances like you would a business. It may sound strange, but try it out!

As we’re about a week away from the month of August, now may be a good time to think about printing off your bank and credit card statements from the past month. Take a proactive step and ask yourself the tough question: what’s tying up my money today?


Then, once you have a clear picture of where your money is going, check to your spending patterns aligns with your values.  If they don’t, think about the things that you can cut.

Use this next month as a test.

Start small, don’t start with a big change like selling your car or house. Maybe start with cleaning out your closet and donating clothes that you forgot you owned. As you begin to adopt a more minimalist lifestyle, you may find you don’t need as much as you think.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post My Top 5 Tips to Save Money Using THIS appeared first on Daily Reckoning.

RIP: Fiscal Responsibility

This post RIP: Fiscal Responsibility appeared first on Daily Reckoning.

Republicans and Democrats have stowed their axes, sunk their differences… and agreed to raise the debt ceiling.

The government will remain in funds for the next two years — beyond the 2020 election, not coincidentally.

The Wall Street Journal reads the truce terms:

Congressional and White House negotiators reached a deal to increase federal spending and raise the government’s borrowing limit, securing a bipartisan compromise to avoid a looming fiscal crisis and pushing the next budget debate past the 2020 election.

The deal for more than $2.7 trillion in spending over two years… would suspend the debt ceiling until the end of July 2021. It also raises spending by nearly $50 billion next fiscal year above current levels.

Failing a deal, the Capitol lights would have winked out Oct. 1. And the federal government would have slammed its door on the noses of the American people.

Chaos and Old Night would have descended upon these shores…

A Rain of Horrors

The ranger at Glacier National Park would have been thrown into idleness…

The Federal Theatre Project would have been thrown into darkness…

And the bright-eyed sixth-grader from Duluth would have been thrown from the Smithsonian.

The last government shutdown (December 2018–January 2019), stretched 35 impossible days.

How we endured those black, unlit times… we cannot recall.

Yet our representatives at Washington have spared the grateful nation a sequel.

Absent a deal…

They would have been required to hatchet spending $120 billion flat, all around.

The arrangement instead raises spending caps some $50 billion this year… and another $54 billion the next.

Both Sides Claim Victory

The president declared the deal “a real compromise in order to give another big victory to our Great Military and Vets!”

With straight faces Nancy Pelosi and Chuck Schumer announced:

With this agreement, we strive to avoid another government shutdown, which is so harmful to meeting the needs of the American people and honoring the work of our public employees.

Democratic Sen. Patrick Leahy gushed the agreement will “stave off economic catastrophe.”

It will furthermore reverse “unsustainable cuts in nondefense discretionary spending.”

Just so.

The Real Meaning of Bipartisanship

The late Joe Sobran labeled Democrats “the evil party.” Republicans were “the stupid party.”

Thus he concluded that “bipartisanship” yields outcomes both evil and stupid.

Perhaps Sobran hooked into something…

Under the deal Republicans get their guns. Democrats get their butter.

And the taxpayer gets the bill.

He pays now through higher taxes — or later through higher interest payments on the debt.

But pay he will.

And so fiscal responsibility lies dead beyond all hope of recall.

“No!”

We expect Democrats to spent grandly and gorgeously.

Since FDR it has read the identical electoral blueprint.

But Republicans traditionally existed for two purposes: to lower taxes — and to square the books.

You wished to spend money you did not have? And throw open the Treasury to the public?

“No!” was the answer you could expect.

Like a sour old schoolmarm with steel in her eye and a rattan in her hand… they might not have been popular.

But you knew where they were. And you could trust them with the checkbook.

But these Republicans are no more.

They have gone the route of fedoras, monocles and spats.

What Happened to the Old-time Religion?

They turned away from their old-time fiscal religion, made their peace with Big Government… and got elected.

They labelled the old religion “root canal economics.”

Republicans instead sat at the feet of Mr. Arthur Laffer, with his famous curve.

They could spend like Democrats without touching the taxpayer.

Deficits do not matter in the new catechism.

Only a few Republican holdouts remain… to keep the tablets.

Reports the Journal:

Fiscal hawks panned reports of the proposed deal Monday before many of the details had been released, warning it could add trillions of dollars more to projected government debt levels over the next decade. 

But they sob in vain…

Drowning in Debt

United States public debt excels $22.4 trillion… and swells by the day, by the month, by the year.

Federal debt presently rises three times the rate of revenue coming in.

To simply maintain current debt levels, CBO estimates Congress would have to increase revenues 11% each year… while simultaneously hatcheting the budget 10%.

Will Congress spend 10% less each year?

We have just received our answer.

For the long-term consequences we turn to the Brookings Institute:

Sustained federal deficits and rising federal debt, used to finance consumption or transfer payments, will crowd out future investment; reduce prospects for economic growth; make it more difficult to conduct routine policy, address major new priorities, or deal with the next recession or emergencies; and impose substantial burdens on future generations.

Deficits to the Horizon

Meantime, the present economic expansion is officially the longest on record.

Can the economy peg along another decade without a recession? Or even half so long?

We already detect smoke rising from the engine, and oil leaking out below.

Trillion-dollar deficits are already in sight.

In the certain event of recession, authorities will flood the economy with money borrowed from the future — deficit spending.

Deficits could double… or possibly triple.

What a Surprise

The only surprise about this debt ceiling deal?

That anyone could be surprised by this debt ceiling deal.

Republicans and Democrats might stage a splendid combat for the crowd. They batten upon each other with savage and vicious blows.

Mr. Trump’s gladiatorial presence makes the show grand beyond comparison.

But watch closer…

The combatants do not strike at the vitals. And the blood is fake.

When it comes to borrowing and spending… Republicans and Democrats are as united as any lovers could hope to be.

Threaten to cut them off.

Then watch the warfare immediately halt… and the hands of peace come extending from both sides.

This we have just witnessed. The debt ceiling is raised.

And so today we drop a mournful tear on the ashes of fiscal responsibility.

As we have noted before, Republicans once defended the approaches to the United States Treasury.

But they have since sold the pass.

And both parties have sold us all down a river…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post RIP: Fiscal Responsibility appeared first on Daily Reckoning.

My Important Message for Options Investors

This post My Important Message for Options Investors appeared first on Daily Reckoning.

I want to cover an important topic that is a little more technical, so put on your thinking caps!

I’m talking about options trading.

Options are by no means new, and I’ve talked about it options plenty of times before. But I find options trading is something that many traders are scared of because they don’t understand it.

And it makes sense!

You shouldn’t trade something that you don’t understand. So I wanted to take some time and explain options briefly and then look at some of the finer nuances of options trading.

That way, whether you are new to trading, or you have been doing it for a while, you can trade with more confidence!

What are Options

An option is a contract between two parties that grants the owner the right — but not the obligation — to buy or sell shares of an underlying security at a specified price (the strike price) on or before a given date (the expiration date).

U.S.-listed options generally expire on the third Friday of the month.

In the rare event that the Friday is a holiday, the options expire on the preceding Thursday instead.

There are two basic types of options:

A call option gives its holder the right — but not the obligation — to BUY an underlying security.

A put option gives its holder the right — but not the obligation — to SELL an underlying security.

Each options contract covers 100 shares of any given security, known as a round lot.

There are options actively trading on most major stocks and ETFs, and investors frequently use these investments as a way to hedge their portfolios or to speculate on a security’s future moves.

How Options are Traded

One advantage of using options like this is that investors put less capital at risk — because buying a contract allows you to control 100 shares for a lot less money than it would take to buy the shares outright.

Plus, when buying options, they have strictly limited downside, which is not technically the case with other speculative activities like short selling.

Of course, in addition to buying options, you can also SELL options to generate additional investment income.

You see, most investors who use options to speculate never think about where the options actually come from.

Yet the reality is that options come from other investors willing to take on the specific obligation of the contract, in a process known as option writing.

An investor who writes a call is willing to sell the security covered by the contract at the specified strike price up until the option’s expiration day.

And an investor who writes a put is willing to buy the security covered by the contract at the specified price up until the option’s expiration day.

Now, here’s something a lot of options investors – maybe even sophisticated ones – fail to consider: Taxes!

How Taxes on Options Work

Take someone who sells a put option to generate income upfront, which is a strategy I heartily endorse.

Let’s say their trade goes through on December 31st of a given year.

Do they report the income for that year?

Surprisingly, no.

The income is only reportable once:

1) The option expires.

2) The option is exercised

3) The seller buys back the same contract to close out the trade.

This is a really interesting fact that a lot of people miss.

It might even affect which particular option contract someone wants to sell.

For example, the difference between selling a contract expiring in December vs. one expiring in January could mean an entire year of deferred taxes on the proceeds!

Meanwhile, if the option gets exercised, you simply use the premium collected to reduce your cost basis in the underlying shares that were put to you. Your holding period for the stock begins the day after you acquire the stock.

In the third case, when a seller buys back the contract to close the trade, a so-called “offsetting transaction,” your short-term gain or loss is the difference between the premium you originally collected minus the amount you paid to buy back the same contract.

It’s the same basic idea when selling covered calls, too. Under the second scenario above, you simply add the premium you collected to the gain (or loss) achieved on the underlying stock sale.

Speculative Options

What about anyone buying options for more speculative purposes?

It’s pretty similar to the rules I just outlined for selling options with a few additional concepts to consider.

For starters, your gain or loss can be either short-term or long-term in nature. The dividing line is 12 months. It doesn’t really matter whether you sold the option or it expired. Whatever year the result happened is the year you report it for.

Meanwhile, if you exercise a put option you deduct the premium cost (and associated commissions) from the money you received when you sold the stock.

One Last Twist

If you happen to exercise a call option you bought, you add the premium you paid into your cost basis for the shares themselves.

But what’s interesting is that your holding period for the stock begins the day after you received the shares – i.e. the day after you exercised the option. You do not receive credit for the time you effectively controlled the shares with the option itself.

Obviously, if you’re doing your option trading inside of a tax-sheltered account like an IRA then none of this matters to you at all.

But if you’re using a regular taxable account, then understanding how various options strategies get treated by the IRS is important … and could even influence what contracts you select and what strategies you implement.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post My Important Message for Options Investors appeared first on Daily Reckoning.

My Important Message for Options Investors

This post My Important Message for Options Investors appeared first on Daily Reckoning.

I want to cover an important topic that is a little more technical, so put on your thinking caps!

I’m talking about options trading.

Options are by no means new, and I’ve talked about it options plenty of times before. But I find options trading is something that many traders are scared of because they don’t understand it.

And it makes sense!

You shouldn’t trade something that you don’t understand. So I wanted to take some time and explain options briefly and then look at some of the finer nuances of options trading.

That way, whether you are new to trading, or you have been doing it for a while, you can trade with more confidence!

What are Options

An option is a contract between two parties that grants the owner the right — but not the obligation — to buy or sell shares of an underlying security at a specified price (the strike price) on or before a given date (the expiration date).

U.S.-listed options generally expire on the third Friday of the month.

In the rare event that the Friday is a holiday, the options expire on the preceding Thursday instead.

There are two basic types of options:

A call option gives its holder the right — but not the obligation — to BUY an underlying security.

A put option gives its holder the right — but not the obligation — to SELL an underlying security.

Each options contract covers 100 shares of any given security, known as a round lot.

There are options actively trading on most major stocks and ETFs, and investors frequently use these investments as a way to hedge their portfolios or to speculate on a security’s future moves.

How Options are Traded

One advantage of using options like this is that investors put less capital at risk — because buying a contract allows you to control 100 shares for a lot less money than it would take to buy the shares outright.

Plus, when buying options, they have strictly limited downside, which is not technically the case with other speculative activities like short selling.

Of course, in addition to buying options, you can also SELL options to generate additional investment income.

You see, most investors who use options to speculate never think about where the options actually come from.

Yet the reality is that options come from other investors willing to take on the specific obligation of the contract, in a process known as option writing.

An investor who writes a call is willing to sell the security covered by the contract at the specified strike price up until the option’s expiration day.

And an investor who writes a put is willing to buy the security covered by the contract at the specified price up until the option’s expiration day.

Now, here’s something a lot of options investors – maybe even sophisticated ones – fail to consider: Taxes!

How Taxes on Options Work

Take someone who sells a put option to generate income upfront, which is a strategy I heartily endorse.

Let’s say their trade goes through on December 31st of a given year.

Do they report the income for that year?

Surprisingly, no.

The income is only reportable once:

1) The option expires.

2) The option is exercised

3) The seller buys back the same contract to close out the trade.

This is a really interesting fact that a lot of people miss.

It might even affect which particular option contract someone wants to sell.

For example, the difference between selling a contract expiring in December vs. one expiring in January could mean an entire year of deferred taxes on the proceeds!

Meanwhile, if the option gets exercised, you simply use the premium collected to reduce your cost basis in the underlying shares that were put to you. Your holding period for the stock begins the day after you acquire the stock.

In the third case, when a seller buys back the contract to close the trade, a so-called “offsetting transaction,” your short-term gain or loss is the difference between the premium you originally collected minus the amount you paid to buy back the same contract.

It’s the same basic idea when selling covered calls, too. Under the second scenario above, you simply add the premium you collected to the gain (or loss) achieved on the underlying stock sale.

Speculative Options

What about anyone buying options for more speculative purposes?

It’s pretty similar to the rules I just outlined for selling options with a few additional concepts to consider.

For starters, your gain or loss can be either short-term or long-term in nature. The dividing line is 12 months. It doesn’t really matter whether you sold the option or it expired. Whatever year the result happened is the year you report it for.

Meanwhile, if you exercise a put option you deduct the premium cost (and associated commissions) from the money you received when you sold the stock.

One Last Twist

If you happen to exercise a call option you bought, you add the premium you paid into your cost basis for the shares themselves.

But what’s interesting is that your holding period for the stock begins the day after you received the shares – i.e. the day after you exercised the option. You do not receive credit for the time you effectively controlled the shares with the option itself.

Obviously, if you’re doing your option trading inside of a tax-sheltered account like an IRA then none of this matters to you at all.

But if you’re using a regular taxable account, then understanding how various options strategies get treated by the IRS is important … and could even influence what contracts you select and what strategies you implement.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post My Important Message for Options Investors appeared first on Daily Reckoning.

Expect Buybacks to Sustain Markets

This post Expect Buybacks to Sustain Markets appeared first on Daily Reckoning.

With uncertainty swirling around the financial markets right now, many are warning about a financial storm brewing and how to navigate through it.

Let’s consider the storm elements in the world right now. The ongoing trade war is obviously a major concern, which is nowhere near being resolved. Growth is slowing in many parts of the world and central banks are preparing to begin cutting rates again.

Geopolitical tensions are also rising again, especially in the Persian Gulf. Late last week, Iranian forces seized a British-flagged tanker in the Strait of Hormuz, one of the world’s most important chokepoints. Britain has demanded the ship’s release.

On the U.S. domestic front, we are facing government dysfunctional, trade war uncertainty and a looming debt ceiling deadline. A deal will likely be reached, but that is not a guarantee. If a deal isn’t reached, the federal government would run out of money to pay its bills.

That’s why you should consider the tactics of Warren Buffett along with the strategy used by some of the most skilled sailors.

Buffett, one of the most successful investors in history, has made billions by knowing how to steer through storms. One of my favorite Buffettisms has to do with keeping your eye on the horizon, a steady-as-she-goes approach to investing. It also happens to relate to sailing.

As he famously said, “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.”

What that means is that you should carefully consider what’s ahead and choose your course accordingly. Buffett doesn’t strive to be a hero if the risk of failing, or crashing against the rocks (in sailing lingo), is too great.

In a storm, there are two possible strategies to take. The first one is to ride through it. The second is to avoid it or head for more space in the open ocean. In other words, fold down your sails and wait it out until you have a better opportunity to push ahead.

While there is no perfect maneuver for getting through a storm, staying levelheaded is key.

We are at the beginning of another corporate earnings season, which is the period each quarter when companies report on how well (or poorly) they did in the prior quarter.

The reports can lag the overall environment but still give insight on how a company will be positioned in the new quarter. But to get the most out of them requires the right navigation techniques.

This season’s corporate earnings results have been mostly positive so far. But what you should know is that Wall Street analysts always tend to downplay their expectations of corporate earnings going into reporting periods. That because corporations downplay them to analysts. It’s Wall Street’s way of gaming the system.

When I was a managing director at Goldman Sachs, senior members of the firm would gather together each quarter with the chairman and CEO of the firm, Hank Paulson, who went on to become the Treasury secretary of the United States under President George W. Bush.

He would talk with us about the overall state of the firm, and then the earnings figures would be discussed by the chief financial officer.

This would be just before our results were publicly disclosed to the markets. There was always internal competition amongst the big investment banks as to what language was being provided to external analysts about earnings and how the results ultimately compared with that language.

You couldn’t be too far off between “managing expectations” of the market and results of the earnings statements. However, there was a large gray area in between that was exploited each quarter.

When I was there, it was very important for Goldman to have better results than immediate competitors at the time like Morgan Stanley, Merrill Lynch or Lehman Bros.

It was crucial to “beat” analysts’ expectations. That provided the greatest chance of the share price rallying after earnings were released.

The bulk of our Wall Street compensation was paid in annual bonuses, not salaries. These bonuses were in turn paid out in options linked to share prices. That’s why having prices rise after fourth-quarter earnings was especially important in shaping the year’s final bonus numbers.

Here’s what that experience taught me: There’s always a game when it comes to earnings.

Investors that don’t know this tend to get earnings season all wrong. However, successful investors that take forecasts with a grain of salt will do better.

Years later, I realized this was also Warren Buffett’s approach to analyzing earnings. As he has told CNBC, “I like to get those quarterly reports. I do not like guidance. I think the guidance leads to a lot of bad things, and I’ve seen it lead to a lot of bad things.”

We’ll have to see how earnings season turns out. But good or bad, markets are finding support from the same phenomenon that powered them to record heights last year: stock buybacks.

Of course, years of quantitative easing (QE) created many of the conditions that made buybacks such powerful market mechanisms. Buybacks work to drive stock prices higher. Companies could borrow money and buy their own stocks on the cheap, increasing the size of corporate debt and the level of the stock market to record highs. Corporations actually account for the greatest demand for stocks..

And a J.P. Morgan study concludes that the stock prices of U.S. and European corporations that engage in high amounts of buybacks have outperformed other stocks by 4% over the past 25 years.

Last year established a record for buybacks. While they will probably not match the same figure this year, buybacks are still a major force driving markets higher.

And amidst escalating trade wars and all the other concerns facing today’s markets, executing buybacks makes the most sense for the companies that have the cash to engage in them. If companies are concerned about growth slow downs in the future, there is good reason to use their excess cash for buybacks.

What this means is that the companies with money for buybacks have good reason to double down.

As a Reuters article has noted, “the escalating trade war between the United States and China may prompt U.S. companies to shift money they had earmarked for capital expenditures into stock buybacks instead, pushing record levels of corporate share repurchases even higher.”

So buybacks could prop up the market through volatile periods ahead and drive the current bull market even further.

Of course, buybacks also represent a problem. They boost a stock in the short term, yes. But that higher stock price in the short may come at the expense of the long run. It’s a short-term strategy.

That’s because companies are not using their cash for expansion, for R&D, or to pay workers more, which would generate more buying power in the overall economy. Buybacks are not connected to organic growth and are detached from the foundation of any economy.

But buybacks could keep the ball rolling a while longer. And I expect they will. One day it’ll come to an end. But not just yet.

Regards,

Nomi Prins
for The Daily Reckoning

The post Expect Buybacks to Sustain Markets appeared first on Daily Reckoning.