Meeting Minutes

We had a wonderful meeting today at The Olive Garden!  We had a total of 6 attendees: (from left to right) Nathaniel Taylor, Elena Swindull, VJ Arjan, Jeff Harrington, Kevin Day and one more who chooses to remain anonymous.

The Recession to Come

It is a historical fact that a recession or a slowdown of some sort has occurred in the US roughly every 4 to 6 years.  Also, the average bull market lasts about 2 ½ years.  The current bull market that took off in March 2009 has now lasted about 2 ¾ years.  It is therefore conceivable that some slowdown can be expected in the near future.

We all had a discussion on how this would play out.  There was relative consensus that the downturn would wait until after the election has been secured.  There has only been 3 occasions in history when the market indices ended up negative during an election year, one of which was 2008.

Asked whether the coming recession or slowdown would be worse than the last one, Kevin Day answered that he did not see the slowdown as significantly worse.  It still may be one to reckon with, but not with the same severity as the last one.

Although there is some opinion amongst the board of the Federal Reserve that is opposed to QE3, Kevin noted that there was little doubt that it would occur at some point.

Leverage

The exponential rise of the 1% has been mainly possible directly due to the availability of credit for leverage.  Here is a case in point:

-       In the 1970s, there was 1 billionaire, Mr. Ludwig, an America shipping magnate

-       In the 1980s, there were 8 billionaires, a majority of them oilmen riding on the coattails of the rising price of oil

-       Today, there are publicly and privately, estimated to be 1,500 billionaires.  About 30% have inherited their wealth.

Below is a graph that illustrates what is occurring:

(R. Pollins, The Contour of Descent)

While the wave of technology has increased productivity, adjusted for inflation, real wages have gone down relatively speaking for the last four decades.  

(Mother Jones Magazine, based on data from the U.S. Census Bureau)

The greatest absolute impact of the Great Recession of 2008 was upon the 1% that had gained their wealth with the help of massive amounts of credit.  The de-leveraging process that occurred post-2008 was the cause.

The resurgence of Populism

VJ Arjan noted how history has a tendency to move in cycles and that the current cycle could mirror the Populist movement that started in the last 18^th century and lasted up to the presidency of the “trust-busting” Theodore Roosevelt.

The Gilded Age, the era that preceded the Populist era, created the world’s first billionaires and centi-millionaires, including John D. Rockefeller, Andrew Carnegie, John Pierpont Morgan, and Jay Gould.  During that era, the average blue collar worker worked anywhere from 10 to 16 hours per day, while not seeing any significant rise in their wages.  


The rebellion of these workers formed the labor unions that still exist today, demanding fair pay and a lighter work schedule.  These were necessary reforms of the time.

Perhaps, today we are seeing this same reforming of the labor market pan out with the mass demonstrations in Greece and Spain and the Occupy Wall Street movement in the US.

So, therefore, if history is any guide, perhaps we will be moving into a new normal for many years to come with more and more reforms to the labor market.

European Basketcase

There are many watershed events occurring in Europe that do will shape the future of the European Union for many years to come.  


The Euro has certainly not responded well; below is a chart over the past month. 

France

Jeff Harrington discussed the policies and persona of the new French president, Francois Hollande.  His election only puts more pressure on the European Union as he ran and got elected on a platform that directly opposed taking on further austerity measures. As Jeff put it, some of his economic policies put “the Left” to shame.

Jeff also mentioned how it would be increasingly difficult for France to remain as a part of the Union as their forecasted debt-to-GDP levels would continue to violate the Maastrict Treaty.  Of course, France is not the only one that has violated these levels, all of the PIIGS have far surpassed the minimum 60% debt-to-GDP levels laid out in the document, but they are all participating in severe austerity measures in an effort to return to the 60% level specified in the treaty.

He also has the reputation of not taking orders very easily, which would make it very difficult for Merkel who has come out as the head-in-charge of this Euroland rescue operation.

Spain

(The Puerta del Sol square in Madrid)

Last week in Spain, a staggering 100,000 “indignants” crowded the streets of Madrid in protest of the dismal economy and austerity measures that are being undertaken.  The unemployment rate has recently hit a record 23.6% most of which are college graduates under the age of 25.

Greece

With mass unemployment, inflation at roughly 50%, and government paralysis in dealing with the issues has prompted serious discussion for the first time that the best course might be for Greece to exit the Eurozone. This would instantly wipe out the bondholders who own Greek debt and lead to disastrous consequences for Greece when they issued a badly deflated currency, perhaps reissuing the drachma.

Eastern European countries

Surprisingly, the newer market entrants to the Eurozone, like Poland and Romania, are performing much better than their “more advanced” Western European counterparts.

Elena mentioned how the Slovak countries have done extra-ordinarily well after their entrance into the Euro.  Jeff added that this is partly due to the relatively conservative economic leverage levels that they have sustained and also because production and manufacturing capacities, particularly for auto manufacturing, are being shifted from Western to Eastern European countries.

Flow of money

Jeff noted that money has a tendency to flow from one asset class into other asset classes.  At the present moment, he feels that the smart money is flowing out of Europe and the emerging markets and into the U.S. in hard assets like commodities and real estate.  He particularly suggested looking at farmland if you can find it cheap enough, as farmland is appreciating rapidly.

Beware the high yield dividend

Kevin mentioned that just because a company is paying out a high dividend, does not mean that it is a safe investment.  Jeff mentioned that often times a company will do this to exit a dying industry.

Of course, VJ didn’t know this when he invested in Cellcom Israel, which was touting a 12 percent dividend yield.  He figured that because Cellcom is the biggest cellphone provider in Israel and cellphones aren’t going anywhere for a while, it would be a safe investment.  

Here is what happened to the stock recently:

VJ pointed out that apparently due to some regulatory restrictions and increased competition, the profits would be sharply diminished.  The stock has dropped 60% in the last year.  It still touts a 12% dividend, but on a significantly reduced stock price.

The lesson here is to look at the whole stock before investing, instead of getting caught on the lure of a dividend yield.  If there is a high dividend yield, it may be prudent to ask why the yield is so high.

Market plays

Here are some market plays that were bought up during the meeting:


-       Brigus Gold (BRD) - A Canadian junior gold miner
-       Sandstorm Gold (SNDXD) - Negotiates contracts with gold miners for a percentage of 
the profits; up 50% in the last year
-       Westpac Bank (WBK) - Australian banking corporation with a 7% dividend yield
-       Aberdeen Asia Fund (FAX) - a no-load income fund that invests in Asian debt securities
-       iShares Preferred Stock Index Fund (PFF) 
-       Siemens (SI) - a multi-national conglomerate

The next meeting will be on Sunday, June 3^rd, 2012. 

For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com

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