Author Archives: admin

World in Love with Debt

Posted on by

“There is $50 trillion more in world debt today than there was in 2018.” And that will hurt equities. Larry McDonald

2021 global debt database shows largest one year debt surge post World War II to $226 trillion, i.e., 256% of global GDP in 2020. Government borrowing was half this increase; global public debt rose by 20% to an unprecedented level in over 50 years.

In a financial sense, the bond (or debt) market dwarfs the stock market. Although the rise in interest rates has been devastating for bond investors because of the inverse relationship between rates (yields) and bond prices. In actuality, both the debt and equity markets have fallen this year.

Yet, “The world is still in love with debt,” according to analysts at Bank of America Merrill Lynch. Debt vulnerabilities are rising, with potential costs and risks to debtors, creditors and, more broadly, global stability and prosperity. But, does it matter. After all, world governments owe the money to their own citizens. The rising total global debt is important for two reasons.

  • First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future.
  • Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments’ sovereign bonds. Fail that test, as various euro-zone governments have done, and the country (and its neighbors) can be plunged into fiscal and economic crisis.

If the Federal Reserve raises the federal funds rate by another 100 basis points and continues its balance-sheet reductions at current levels, “they will crash the market,” states Larry McDonald, founder of The Bear Traps Report and author of “A Colossal Failure of Common Sense”.

A pivot may not prevent pain

McDonald expects the Federal Reserve to become concerned enough about the equity market’s reaction to its monetary tightening to “back away over the next three weeks,” announce a smaller federal funds rate increase of 0.50% in November “and then stop.”

References:

  1. https://www.msn.com/en-us/money/markets/the-stock-market-is-in-trouble-thats-because-the-bond-market-is-very-close-to-a-crash/ar-AA12Q8kd
  2. https://www.businessinsider.com/baml-global-debt-has-rise-by-50-trillion-since-the-financial-crisis-2015-10
  3. https://www.imf.org/external/pubs/ft/ar/2022/in-focus/debt-dynamics/

Intro to Stock Options

Posted on by

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” ~ Warren Buffett

Options are financial contracts whose values are tied to another underlying asset.

Options trading can be an appealing way to build wealth or manage risk, especially if you’re looking beyond just investing in stocks, bonds, and other assets in your portfolio.

But options trading can be a complex and challenging endeavor. The key to success in options trading is understanding the basics, including knowing what options are and the risks and rewards involved.

Options Basics

Options are contracts giving the purchaser the right to buy or sell a security, like a company stock or exchange-traded fund (ETF), at a fixed price within a specific period of time.

Options holders can buy or sell by a certain date at a set price, while sellers have to deliver the underlying asset. Investors can use options if they think an asset’s price will go up or down or to offset risk elsewhere in their portfolio.

Options are financial derivatives because they’re tied to an underlying asset. Other types of derivatives include futures, swaps, and forwards. Options that exist for futures contracts, such as S&P 500 or oil futures, are also popular among traders and investors.

A stock option typically represents 100 shares of the underlying stock. Stock options are common examples and are tied to shares of a single company. Meanwhile, ETF options give the right to buy or sell shares of an exchange-traded fund.

An option is a contract between the holder and the writer. The holder (buyer of the contract) pays the writer (seller of the contract) a price – the premium – for the right to buy or sell the underlying asset.

Option holders can buy or sell the underlying security by a specific date (called expiration date) at a set price (called the strike price). If the option holder exercises the contract on or before the expiration date, the option writers must deliver the underlying asset.

Many investors get interested in options trading because it can be a way to generate income, speculate on the price movements of securities, as well as a way to hedge against losses. However, with these possibilities, they are downsides to options trading too.

Before diving into the world of options contracts and options trading, it’s essential to understand the benefits and risks of this investment strategy.

Some of the main advantages of options trading are:

  • Options give you the chance to make money whether the market is going up, down, or sideways.
  • Options may be an inexpensive way to participate in the market without tying up as many funds as stock or bond trading requires.
  • Options provide investors with leverage, which can help magnify returns.

Some of the main drawbacks of options are:

  • Options trading is a complex and risky strategy and one that requires a great deal of knowledge and experience to succeed.
  • Options involve a great deal of leverage, which can amplify losses if the trade goes against the trader.
  • Options contracts are not always as liquid as other securities, making them harder to buy and sell.

Options are a complex, risky market and may not be suitable for everyone.

“Successful trading depends on the 3M`s – Mind, Method and Money. Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology their own feelings and the mass psychology of the markets. Each trader needs to have a method for choosing specific stocks, options or futures as well as firm rules for pulling the trigger – deciding when to buy and sell. Money refers to how you manage your trading capital.” ~ Alexander Elder

References:

  1. https://www.sofi.com/options-trading-101/
  2. https://www.sofi.com/learn/content/how-to-trade-options/

Mindset: Steps to Success

Posted on by

“A mind is a terrible thing to waste.” ~ Arthur Fletcher

The mind is a powerful and extraordinary thing. And, your mindset shapes your happiness, success and ultimately the direction and destination of your whole life.

Essentially, “mindset is a way of thinking; it is a habitual opinion or attitude that affects thinking”, explains Aaron Jarrels, a Licensed Therapist, and Certified Motivation & Mindset Coach. “A strong and growth mindset is confident, focused, determined, and maintains a desire to learn.”

Your life is a reflection of your habits and thoughts, and habits and thoughts are driven by your mind. Thus, the mind is everything… you become what you feed to it and what you focus on.

By developing the right mindset you can achieve almost anything. A growth mindset on the other hand, rewards those who want to get better at something. When you believe that you are capable of learning to do something, it sparks hope in the future.

Thus, it’s important to design your mindset and life for growth, learning and continuous expansion and improvement. Here are several steps:

1. Positive thoughts and outlook. Use positive thoughts and words to evoke feelings of strength, confidence, courage and success about yourself. Practice being kind and loving to yourself. You need to be able to keep yourself encouraged. Focus on the traits and skills that you like and that are productive, because what you focus on expands. Direct your thoughts towards the belief that you will succeed and achieve your life’s goals. But if you fail, embrace the failure, analyze, learn and grow from what went wrong. Give yourself credit and kudos for having the courage to try.

2. Build systems and a routine. Before you can permanently change your thoughts, you have to change your habits and behaviors. You must take responsibility and be accountable for you actions and behaviors. Discipline, patience and long-term perspective breed a positive mindset because you’re motivated by results and concentrating on achieving your goals. Delayed gratification is a key trait of successful people, states Jarrels. If you cannot control yourself and your desires, you will always be a slave to your impulses. When you develop the ability to maintain self-control, you conquer your biggest foe, your impatience. Owning your faults and how you respond gives you the power to change them.

3. See beyond today and maintain a long-term perspective. What the mind believes, the body achieves. Believe you can win. Visualize and focus on the end result, creating a mental image of the future you’re striving to achieve. Visualizing the desired outcome allows you to begin to accept the possibility of achieving your desired outcome. Perception is reality and the brain can be positively hacked with this simple strategy. And, be mindful of your tongue. If, you catch yourself saying “I can’t” you should stop immediately and replace it with “How can I?” Doing this will prime your mind and brain to look for possible solutions that were not imaginable prior. By asking “How can I?” you are creating a place for the desired outcome as well as the path to get there.

4. Step away from safety and liv outside your comfort zone. Operating in an stress free environment and using a limited set of behaviors won’t increase your performance or growth. It’s facing your fears and dealing with your challenges that allows you to realize your goals and to grow mentally, physically and emotionally. If you take risks and are willing to accept and learn from setbacks, nothing can stop you! Remember, if it scares you and makes you uncomfortable, it’s probably the right course of action to catalyze some next level personal growth.

High performance and growth is not realized when you’re comfortable and steering clear of stressful situations. You’re restricted by your self-imposed limiting beliefs. Becoming abundantly successful in whatever goal you want to achieve is simply a mindset shift away.

Developing a strong mindset takes the decision not to give up. It takes a willingness to grow and become more than you currently are now. It takes a strong determination to focus on what’s good, what’s going well and what’s positive in your life. It takes living a life of faith, rather than a life of fear.

Additionally, a strong mindset is one that sees, what others call failure as lessons and successes as steps along the way.

“The mind is everything. What you think you become.” ~ Buddha

References:

  1. https://aaronjarrels.com/how-to-develop-a-strong-mindset/
  2. Peter Oakden, There’sNo Such Thing as Luck: 4 Steps to Abundant Success, Muscle and Health Magazine: The Wealth Issue, Fall 2022, pg. 89.
  3. https://www.setquotes.com/a-mind-is-a-terrible-thing-to-waste/

Minimum Book Corporate Income Tax

Posted on by

Book income is the amount of income corporations publicly report on their financial statements to shareholders. This measure is useful for assessing the financial health of a business but often does not reflect economic reality and can result in a firm appearing profitable while paying little or no income tax. ~ Tax Foundation

In August, President Biden signed a minimum book income tax into law under the 2022 Inflation Reduction Act. The law was passed in both chambers of congress by Democrats.

Book income is the amount of income corporations publicly report on their financial statements to shareholders, explains the Tax Foundation.

The appeal of the minimum book tax for Democrats is two-fold, explains Laura Davison, in an article written for Bloomberg.com.

  • First, the minimum tax goes after corporations that many Democrats say don’t pay enough in taxes.
  • Second, it’s a way to raise taxes on corporations without increasing the 21% headline tax rate.

Senator Joe Manchin, Democrat (WV), says the minimum tax doesn’t so much raise taxes as close a loophole — even though it would mean that some corporations have to pay more to the federal government.

The law enforces a 15% corporate minimum tax targeted at companies that earn more than $1 billion a year. President Joe Biden cited a report in his State of the Union address that found that 55 companies paid no federal income taxes in 2020, despite earning profits under the standards of GAAP.

The corporate minimum tax would require companies with at least $1 billion in income to calculate their annual tax liability two ways:

  • One using longstanding tax accounting methods, which is 21% of profits less deductions and credits;
  • The other by applying the 15% rate to the earnings they report to shareholders on their financial statements, commonly known as book income.

Whichever amount is greater would be what they owe to the IRS.

A corporation’s profits for tax purposes and for financial reporting to shareholders often vary. Book income sticks more closely to generally accepted accounting principles, or GAAP, while the Internal Revenue Service code includes a slew of deductions and credits that companies can use to offset their income. 

This roundabout method to collect more money from corporations provides much of the new revenue to fund the energy investments and deficit reduction that Democrats are hoping to tout in the midterm elections this November.

References:

  1. https://www.bloomberg.com/news/articles/2022-08-01/how-the-15-us-minimum-corporate-tax-would-work-quicktake
  2. https://taxfoundation.org/tax-basics/book-income-vs-tax-income/

Social Security Trust Fund

Posted on by

Social Security’s Trustees project that the trust fund will be depleted in 2034. At that point, 71 million beneficiaries could face across-the-board Social Security benefit cuts of 23 percent if elected leaders fail to act.

With the retirement of baby boomers and lengthening life expectancies, programs critical to older Americans, such as Social Security, will come under significant strain in coming decades. Social Security’s Trustees project that the combined Old-Age and Survivors Insurance and Disability Insurance (OASI) trust fund will be depleted in 2034. At that point, 71 million beneficiaries could face across-the-board Social Security benefit cuts of 23 percent if policymakers fail to act.

Social Security is the primary source of retirement income for million of Americans. But without action, it will lack sufficient resources to pay for all of the benefits promised under current law.

Almost every American worker pays a dedicated payroll tax, which entitles them to benefits when they retire or become disabled. But as the population ages, fewer workers will be paying taxes to support each Social Security beneficiary, thereby endangering the program’s finances.

Understanding the importance of the Social Security program for low-income Americans is a critical aspect of reforming the program in a fair and equitable way.

In 2018, Social Security was responsible for lifting almost 22 million Americans out of poverty, nearly 15 million of whom were seniors age 65 and older.

Options for improving the financial outlook of Social Security’s retirement program include:

  • Increasing payroll taxes. Raise the payroll tax rate from its current level of 12.4 percent (half paid by employees and half by employers) on wage earnings subject to the tax. In 2022, earnings up to $147,000 will be taxed.
  • Raising the full retirement age. Propose increasing the retirement age above age 67 for younger cohorts to account for future gains in average longevity.
  • Reducing initial benefits. Change the amount that retirees can receive when they first apply for benefits. Many proposals combine a reduction in benefits for high earners with an increase in benefits for lower earners. (This is known as “progressive price indexing.”)
  • Adjusting benefits after retirement. Slow the growth of retirees’ benefits over time by changing the cost-of-living index. Many economists believe that Social Security currently uses an index that overstates inflation, so benefits grow faster than the true cost of living. They propose replacing the current index with chained-CPI, which is a more accurate measure of inflation. (That change would also apply to other inflation-indexed federal retirement programs and tax provisions.)

These proposals are intended to put Social Security’s finances on a long-term sustainable footing.

References:

  1. https://www.pgpf.org/finding-solutions/retirement

Investing Lessons Learned

Posted on by

“To maximize returns, buy stocks when everyone hates them and sell them when everyone loves them. This is easy in theory, but brutally difficult in practice.” ~ Brian Feroldi

Brian Feroldi is a financial educator and he has been saving and investing for 18+ years. From his experiences, below he shares 10 painful lessons he had to learn and sometimes relearn the hard way:

1. You don’t need leverage.

Margin and options are fun on the way up and BRUTAL on the way down. Many investors have lost more than 100% on investment before. Why? Leverage.

Buffett said it best:

2. Optimize for longevity, not upside

Compound interest is the most powerful wealth-building force that exists. But, it only works if you SURVIVE long enough for it to work.

You must avoid investing to optimize for upside potential. Instead, you should follow the barbell method to optimize for longevity.

3. High conviction DOES NOT = correct

If you convinced yourself that a certain stock could only go up. you might be right on some. On others, you may lost significant value.

Conviction is useful, but just because you think you are right doesn’t mean that you are right.

Allocate accordingly

4. Stock prices and business results (and intrinsic value) are 0% correlated in the short-term and 100% correlated in the long-term

Do not sell future mega-winners because their stocks were down (dumb).

Instead of watching the stock, instead focus on the fundamentals of the business.

5. Not having a system

Do not try to keep everything in my head, which was dumb (and impossible).

Instead, use checklists, journals, or watchlist, which are invaluable free tools.

6. Not understanding the P/E ratio

Do not pass on high P/E ratio stocks that went up big and buy low P/E ratio stocks that went down big.

Why? It’s about understanding the P/E ratio’s flaws.

Now, P/E only works in stage 4. It doesn’t work in stages 1, 2, 3 or 5

7. Panic selling and panic buying

Emotions have caused many investors to panic buy hype stocks and panic sell future mega-winners.

It’s easy to say you’ll be greedy when others are fearful, and visa-versa.

It’s hard to actually do it.

8. Study history

Human nature is remarkably consistent. The same forces that drove markets 100+ years still exist in all of us today.

There’s always a smart-sounded reason to sell and it’s important to understand that.

9. Don’t focused on what you can’t control

Do not follow the news closely, or watch for clues to predict the market.

This will be time poorly spent. Macro factors matter, but you have no control over them.

It essential you focus far more on what you can control.

10. Not changing your mind

This one is REALLY hard, but it’s necessary to do well.

Changing your mind is hard. Admitting you’re wrong is hard.

But, @JeffBezos said it best:

Learning invaluable investing lessons, especially from the mistakes of others, is an essential part of becoming a more successful long-term investor.

References:

  1. https://bookshop.org/shop/Feroldi
  2. https://www.marketwatch.com/amp/story/the-critical-money-and-investing-lessons-i-wish-my-younger-self-had-understood-11651762064
  3. http://mindset.brianferoldi.com

Consumer Price Index (CPI) at 8.2% Inflation Rate

Posted on by

U.S. inflation hits 8.2% in September — hotter than expected. Core CPI surges to 6.6%, the highest since 1982.

A key consumer inflation report, the Consumer Price Index (CPI), came in hotter than expected, signaling that the Federal Reserve will likely continue with aggressive interest rate hikes. Prices consumers pay for a wide variety of goods and services rose as inflation pressures continued to weigh on the U.S. economy.

The consumer price index for September increased 0.4% for the month, according to the Bureau of Labor Statistics. On a 12-month basis, so-called headline inflation was up 8.2%, off its peak around 9% in June but still hovering near the highest levels since the early 1980s. Core CPI, which strips out volatile food and energy prices, rose to 6.6% from 6.3%. Both numbers came in higher than economists polled by the Wall Street Journal had expected.

Source: Bloomberg

The report signals that inflation is a persistent problem even amid large interest rate hikes from the central bank. Going forward, the Fed will likely have to keep delivering increases and keep rates high until there are signs that inflation is cooling off.

References:

  1. https://www.cnbc.com/2022/10/12/stock-futures-are-up-as-investors-await-inflation-data.html
  2. https://www.marketwatch.com/story/u-s-stock-futures-plunge-as-september-cpi-comes-in-hotter-than-expected-01665664995

Mindfulness

Posted on by

“Mindfulness is about being fully aware of your experiences as they are happening in the present moment. You are aware of your thoughts, emotions, and your body sensations.” Charles A. Francis

Webster’s definition of mindfulness is “a mental state achieved by focusing one’s awareness on the present moment, while calmly acknowledging and accepting one’s feelings, thoughts, and bodily sensations, used as a therapeutic technique.”

Mindfulness is a secular form of meditation that has its roots in the teachings of Buddha over 2,500 years ago. The main goal of the practice was to attain freedom from suffering. This is accomplished by developing self-awareness, or mindfulness, because it was your inaccurate views of the world that trigger your negative emotions and harmful actions.

With mindfulness, you can develop an awareness of the true nature of reality. By observing what is happening within your mind, body, and the world around you, you’ll begin to lift the veil of illusion that creates the suffering in your life, states Charles A. Francis, co-founder and director of the Mindfulness Meditation Institute.

4 Simple Mindfulness Practices

Mindfulness is a powerful practice that can help you avoid a lot of unnecessary anxiety and negative thoughts, writes Francis. It will enable you to cope with life’s many challenges and help you find peace and joy. Here are some of the simple tools you can use, according to Francis.

Mindful breathing. At the heart of the mindfulness practice is mindful breathing. Paying close attention to your breath will help you calm your thoughts and emotions. It will keep you from becoming overwhelmed. All you have to do is occasionally stop what you’re doing, and just observe your breath for a few moments. You can count 5-10 breaths, and then return to what you were doing. That’s it.

Mindful walking. This is another simple practice. Unless you have mobility issues, we all do some walking throughout our day. When walking from one place to another, pay close attention to your footsteps, just like you do with your breath in mindful breathing. If the weather is nice, you can go for a mindful walk. Try keeping yourself in the moment by observing your surroundings. Notice the different sights and sounds of nature. Focus on smelling the fresh air and observing all the critters, both large and small.

Your mind affects your body, and your body affects your mind, perhaps more than you realize.

Sitting meditation. Many people have the misconception that meditation is difficulty, and that they need to clear their mind before they can start meditating. That’s not so. Sitting meditation is actually quite simple. All you have to do is sit quietly for a few minutes, and follow your breath as best as you can. When your mind wanders off, and it will, just keep bring it back to your breathing.

If you’re new to meditation, try it for just 5-10 minutes each session. Then increase the duration as you’re able. Remember, you don’t have to do it perfectly. The ideas is to give your mind a break from the constant stimulation, and simply allow it to calm down naturally. And it will.

Writing meditation. This is a practice helps you overcome stubborn habits that are preventing you from being at peace. What you do is take the scripted meditation, which is a set of affirmations, and copy it by hand over and over. This will imprint the affirmations in your subconscious mind, and they will manifest themselves in your life without any conscious effort. And it only takes about 5 minutes a day.

An article in Fast Company, called How the Pope Does Mindfulness, revealed how company executive Drake Baer practices mindfulness. He practices daily “mindfulness” by:

  • First, remind yourself why you are grateful as a human being.
  • Second, lift your horizon for a moment. Call to mind some crucial personal objective, or your deepest sense of purpose, or the values you stand for.
  • Third, mentally review the last few hours and extract some insight that might help in the next few hours. If you were agitated, what was going on inside you? If you were distracted and unproductive, why?

You can use this executive’s short method and practice mindfulness several times a day. It is beneficial to focus on the present.

References:

  1. https://time.com/4184938/mindfulness/
  2. https://www.catholiccompany.com/magazine/turn-mindfulness-into-god-full-ness-5908
  3. https://mindfulnessmeditationinstitute.org/the-mindfulness-meditation-practice/what-is-mindfulness-meditation/
  4. https://mindfulnessmeditationinstitute.org/2022/07/14/7-powerful-mindfulness-tips-for-better-coping-with-grief/

September PPI 8.5% and Stubborn Inflation

Posted on by

Inflation at the wholesale level rose 8.5% in September

September’s Producer Price Index (PPI) came in at 8.5% on a year-over-year (y/y) basis and 0.4% month-over-month (m/m) basis, according to the Bureau of Labor Statistics (BLS). Both numbers are higher than expected. Goods (ex-food & energy) added nothing on a m/m basis, but services (which are stickier) were up 0.6% m/m. Not great news in the fight against inflation.

The Producer Price Index (PPI), produced by the Bureau of Labor Statistics (BLS), is an index that measures the average change over time in prices received (price changes) by producers for domestically produced goods, services, and construction. PPI measures price change from the perspective of the seller.

Inflation operates much like a tax, a particularly egregious one that disproportionately falls on the poor and leads to a variety of economic problems, including, as we’re seeing, higher interest rates, slow economic growth, and reduced incomes, according to the Tax Foundation. Inflation reduces every Americans purchasing power.

With inflation stubbornly running high, bondholders and consumers bear much of the burden of inflation over the long run, however a new Congressional Budget Office (CBO) report reveals that lower- and middle-income households are disproportionately shouldering the burden of this current inflation wave.

Inflation is a burden on all those who use U.S. dollars, but the burden varies considerably across users. For instance, it falls particularly heavy on lenders, who subsequently are repaid in less valuable dollars.

In contrast, borrowers benefit from inflation, with the single largest beneficiary being the federal government, as Treasury debt is repaid with less valuable dollars. Publicly held Treasury debt is currently about $31 trillion, larger than the size of U.S. economy measured by GDP.

There is a long history of the federal government using inflation, or money creation, to finance spending instead of taxes, particularly in times of war, states the Tax Foundation. For example, the sharp increase in federal spending during World War II produced large fiscal deficits that were financed by Treasury debt. The debt was purchased by the Federal Reserve through printing money.

References:

  1. https://www.bls.gov/news.release/pdf/ppi.pdf
  2. https://taxfoundation.org/inflation-regressive-effects/

Quotes of the Day

Posted on by

“I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.” ~ Nelson Mandela

“My mission in life is not merely to survive, but to thrive; and to do so with some passion, some compassion, some humor, and some style.” ~ Maya Angelou

“Never let the fear of striking out get in your way!” ~ Babe Ruth

“Obstacles are those frightful things you see when you take your eyes off [the prize] your goals.” ~ Anonymous

References:

  1. https://www.t3live.com/blog/2017/12/01/best-trading-investing-quotes/