What occurred March 11th is going to have some interesting and dramatic effects on the course of global economics. The earthquake off the coast of Japan and the ensuing tsunami wave that devastated Japan will have economic repercussions throughout the world for years to come. Japan, the third largest economy in the world (recently passed by China as the second largest economy), is looking at reconstruction in the hundreds of billions… and it couldn’t come at a worse time. Granted, there is never a good time for a natural disaster but Japan is SO financially unprepared for this.

The first effect on global economics is a major disruption in the supply chain. Japan manufactures parts and components that go into finished products in Japan and other countries… especially those products that are used in computers, mobile phones, tablets etc. Damages to factories as well as a major disruption of electric power are causing delays… the length of which are still difficult to quantify. Five nuclear reactors at Fukushima Dai-ichi are completely destroyed and will need to be mothballed/dis-assembled. The electricity produced by five nuclear reactors is not easily or quickly replaced.

The other impact on global economics is difficult to quantify but will likely be larger and longer lasting than a disruption in the global supply chain. Japan, faced with having to spend several hundred billion dollars for reconstruction, already has an extremely impressive amount of debt.

The hottest topic in U.S. politics today is the massive debt being accumulated by the Bush and Obama administrations. The next election may be decided by the candidate who best promises how to address this problem. The amount owed by the U.S. is almost 100% of our annual Gross Domestic Product (GDP), a little over $14 trillion. That would be a little like you having debt equal to the total amount you earn in one year. No matter what your income is, having that much debt will ultimately affect your future spending pattern.

Japan’s debt is equal to OVER 200% of its GDP! … kind of like you owing TWICE what you earn in one year. If you had debt equal to double what you earn in one year, you would be ill-prepared to deal with a financial surprise. If you were leveraged like Japan….and you lost your job….you might have to default on your mortgage. Hmmm, sounds familiar.

For Japan, the good news is that the majority of Japanese debt is held by Japanese citizens. They have not been inclined to sell their bonds in great quantities, providing Japan the ability to continue to finance its debt with low interest rates. Conversely, U.S. Treasury Bonds are held by investors all over the world. China and Japan are the largest foreign owners of U.S. debt….almost $2 trillion combined. Any mass exodus of foreign investors from U.S. bonds would result in much higher interest rates for the U.S.… kind of like what is happening to Greece today.

As Japan issues more debt to finance reconstruction, it may eventually find itself paying increased interest and reducing its debt may become very difficult. We know what usually happens not long after that… default.

The Japanese populace is slightly older than in the U.S. and they have been notorious savers. That sounds like a positive thing but a drawback is that it has produced a very stagnant economy for the past twenty years. The potential positive of the reconstruction that will take place for the next several years is that it may stimulate Japan’s economy enough to grow its way out of debt. Stay tuned.

Meanwhile, the U.S. economy is humming along. Unfortunately, it is still humming a very slow dirge. Jobs are being created each month but at a very slow pace. The official unemployment rate dropped from 8.9% to 8.8%. The unofficial rate and the “underemployment” rate are still both much higher. The price of a barrel of oil experienced another eye-popping increase of 10% in March to $106.72. Oil has increased 27% from a year ago and has more than doubled from two years ago.

Since I graduated from high school in 1972 and started actually paying attention to what presidents say, I don’t think we have ever had a president that DIDN’T say, “we need to reduce our dependence on foreign oil”. Every president says it. None of them actually do it. I remember the “oil crisis” in 1974 when we had cars lined up as far as two blocks waiting to fill up at the gas station. At the time, it seemed like the OPEC nations had brought us to our knees and were holding us hostage. Surely the leader (and subsequent leaders) of such a nation would help spearhead the movement to free us from our oil addiction. If ever there was a time for an intervention, this was certainly it. Almost forty years later, we are no less dependent on foreign oil.

As the dictatorship regimes fall in Northern Africa and the Middle East, our dependence on oil will continue to guide our foreign policy. In conjunction with the United Nations, we are aiding the Libyan rebels in their fight to depose Gaddafi (that’s how I’m spelling it this month), primarily for humanitarian reasons. However, if Gaddafi is deposed, we will be just as concerned about the new regime because Libya produces a million barrels of oil each day.

The stock market took a breather this month. Perhaps everyone was so caught up in March Madness, they forgot about their investments. The S&P 500 was virtually unchanged from the end of February. For the past year, it increased 15.66%. Since the end of 1999, it is up less than 1% per year. In retrospect, it’s looking like 1999 was a tough year to take retirement.

One of my favorite anecdotal economic indicators for the past four years has been the number of For Sale signs in the yards of houses that line my bicycle ride. When I first began to register significant concern for the U.S. economy in early 2007, I began counting For Sale signs as I rode my bike. Rumors about the magnitude of sub-prime mortgages were beginning to appear to be more than just rumors. If what I was hearing was true, things could get really ugly.

I’m not one of those serious riders… with the racing bike, spandex pants and a water bottle. No, I just ride a dorky looking mountain bike in my dorky bike-riding clothes a little over four miles through residential neighborhoods. In the summer of 2007, I counted seven signs. No big deal. In the summer of 2009, the number peaked at twenty-six.

Since then, they have gradually and grudgingly declined. This past weekend the weather warmed enough for me to take my ride for the first time since before winter. There were only eleven For Sale signs. According to this tiny economic indicator, things ARE getting better.

But there was an odd thing about the eleven houses for sale. On my ride, I travel the exact same route each time through three different housing developments. One development is made up of maintenance free “Villas”… nice homes with small yards for people whose kids are grown and who want to “downsize”. The average price is between $400K and $500K. Next are larger homes with large yards for families that range between $450K and $800K. The last development is very pricey. Most of the homes are >$1 million and some (at one time) sold for $2 million. That’s a lot of house in Kansas City.

The odd thing is that of the eleven houses for sale, seven of them were in the pricey development. For four years, houses for sale were fairly evenly divided between all three price ranges. The recession did not play favorites… but the recovery seems to be playing favorites. I heard that across America home sales were slightly picking up but primarily in the lower price ranges. As small as my bicycle-riding sample is, it has been incredibly reflective of the national real estate market.

Home prices have continued to decline nationally and we don’t see any reason that home prices will begin to increase any time soon. Household wealth has increased in the past year but primarily because the stock market has increased. We know how quickly that can disappear so until household wealth increases are based on less ethereal items, we are skeptical that consumer demand will kick in and start an economic party.

At Boyer & Corporon Wealth Management, we are cognizant of the positive economical developments but continue to be wary of high levels of debt all over the world and the potential volatility that results from high levels of debt. As a rule, we feel it is important to keep portfolio duration as short as possible while still generating a reasonable amount of cash flow. The exception to this is the extremely low valuations assigned to some municipal bonds with longer durations.

~Richard W. Boyer, CFP, CFA
Chief Investment Officer

This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

What occurred March 11th is going to have some interesting and dramatic effects on the course of global economics. The earthquake off the coast of Japan and the ensuing tsunami wave that devastated Japan will have economic repercussions throughout the world for years to come. Japan, the third largest economy in the world (recently passed by China as the second largest economy), is looking at reconstruction in the hundreds of billions… and it couldn’t come at a worse time. Granted, there is never a good time for a natural disaster but Japan is SO financially unprepared for this.

The first effect on global economics is a major disruption in the supply chain. Japan manufactures parts and components that go into finished products in Japan and other countries… especially those products that are used in computers, mobile phones, tablets etc. Damages to factories as well as a major disruption of electric power are causing delays… the length of which are still difficult to quantify. Five nuclear reactors at Fukushima Dai-ichi are completely destroyed and will need to be mothballed/dis-assembled. The electricity produced by five nuclear reactors is not easily or quickly replaced.

The other impact on global economics is difficult to quantify but will likely be larger and longer lasting than a disruption in the global supply chain. Japan, faced with having to spend several hundred billion dollars for reconstruction, already has an extremely impressive amount of debt.

The hottest topic in U.S. politics today is the massive debt being accumulated by the Bush and Obama administrations. The next election may be decided by the candidate who best promises how to address this problem. The amount owed by the U.S. is almost 100% of our annual Gross Domestic Product (GDP), a little over $14 trillion. That would be a little like you having debt equal to the total amount you earn in one year. No matter what your income is, having that much debt will ultimately affect your future spending pattern.

Japan’s debt is equal to OVER 200% of its GDP! … kind of like you owing TWICE what you earn in one year. If you had debt equal to double what you earn in one year, you would be ill-prepared to deal with a financial surprise. If you were leveraged like Japan….and you lost your job….you might have to default on your mortgage. Hmmm, sounds familiar.

For Japan, the good news is that the majority of Japanese debt is held by Japanese citizens. They have not been inclined to sell their bonds in great quantities, providing Japan the ability to continue to finance its debt with low interest rates. Conversely, U.S. Treasury Bonds are held by investors all over the world. China and Japan are the largest foreign owners of U.S. debt….almost $2 trillion combined. Any mass exodus of foreign investors from U.S. bonds would result in much higher interest rates for the U.S.… kind of like what is happening to Greece today.

As Japan issues more debt to finance reconstruction, it may eventually find itself paying increased interest and reducing its debt may become very difficult. We know what usually happens not long after that… default.

The Japanese populace is slightly older than in the U.S. and they have been notorious savers. That sounds like a positive thing but a drawback is that it has produced a very stagnant economy for the past twenty years. The potential positive of the reconstruction that will take place for the next several years is that it may stimulate Japan’s economy enough to grow its way out of debt. Stay tuned.

Meanwhile, the U.S. economy is humming along. Unfortunately, it is still humming a very slow dirge. Jobs are being created each month but at a very slow pace. The official unemployment rate dropped from 8.9% to 8.8%. The unofficial rate and the “underemployment” rate are still both much higher. The price of a barrel of oil experienced another eye-popping increase of 10% in March to $106.72. Oil has increased 27% from a year ago and has more than doubled from two years ago.

Since I graduated from high school in 1972 and started actually paying attention to what presidents say, I don’t think we have ever had a president that DIDN’T say, “we need to reduce our dependence on foreign oil”. Every president says it. None of them actually do it. I remember the “oil crisis” in 1974 when we had cars lined up as far as two blocks waiting to fill up at the gas station. At the time, it seemed like the OPEC nations had brought us to our knees and were holding us hostage. Surely the leader (and subsequent leaders) of such a nation would help spearhead the movement to free us from our oil addiction. If ever there was a time for an intervention, this was certainly it. Almost forty years later, we are no less dependent on foreign oil.

As the dictatorship regimes fall in Northern Africa and the Middle East, our dependence on oil will continue to guide our foreign policy. In conjunction with the United Nations, we are aiding the Libyan rebels in their fight to depose Gaddafi (that’s how I’m spelling it this month), primarily for humanitarian reasons. However, if Gaddafi is deposed, we will be just as concerned about the new regime because Libya produces a million barrels of oil each day.

The stock market took a breather this month. Perhaps everyone was so caught up in March Madness, they forgot about their investments. The S&P 500 was virtually unchanged from the end of February. For the past year, it increased 15.66%. Since the end of 1999, it is up less than 1% per year. In retrospect, it’s looking like 1999 was a tough year to take retirement.

One of my favorite anecdotal economic indicators for the past four years has been the number of For Sale signs in the yards of houses that line my bicycle ride. When I first began to register significant concern for the U.S. economy in early 2007, I began counting For Sale signs as I rode my bike. Rumors about the magnitude of sub-prime mortgages were beginning to appear to be more than just rumors. If what I was hearing was true, things could get really ugly.

I’m not one of those serious riders… with the racing bike, spandex pants and a water bottle. No, I just ride a dorky looking mountain bike in my dorky bike-riding clothes a little over four miles through residential neighborhoods. In the summer of 2007, I counted seven signs. No big deal. In the summer of 2009, the number peaked at twenty-six.

Since then, they have gradually and grudgingly declined. This past weekend the weather warmed enough for me to take my ride for the first time since before winter. There were only eleven For Sale signs. According to this tiny economic indicator, things ARE getting better.

But there was an odd thing about the eleven houses for sale. On my ride, I travel the exact same route each time through three different housing developments. One development is made up of maintenance free “Villas”… nice homes with small yards for people whose kids are grown and who want to “downsize”. The average price is between $400K and $500K. Next are larger homes with large yards for families that range between $450K and $800K. The last development is very pricey. Most of the homes are >$1 million and some (at one time) sold for $2 million. That’s a lot of house in Kansas City.

The odd thing is that of the eleven houses for sale, seven of them were in the pricey development. For four years, houses for sale were fairly evenly divided between all three price ranges. The recession did not play favorites… but the recovery seems to be playing favorites. I heard that across America home sales were slightly picking up but primarily in the lower price ranges. As small as my bicycle-riding sample is, it has been incredibly reflective of the national real estate market.

Home prices have continued to decline nationally and we don’t see any reason that home prices will begin to increase any time soon. Household wealth has increased in the past year but primarily because the stock market has increased. We know how quickly that can disappear so until household wealth increases are based on less ethereal items, we are skeptical that consumer demand will kick in and start an economic party.

At Boyer & Corporon Wealth Management, we are cognizant of the positive economical developments but continue to be wary of high levels of debt all over the world and the potential volatility that results from high levels of debt. As a rule, we feel it is important to keep portfolio duration as short as possible while still generating a reasonable amount of cash flow. The exception to this is the extremely low valuations assigned to some municipal bonds with longer durations.

~Richard W. Boyer, CFP, CFA
Chief Investment Officer

This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.