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About Jim Walker

Jim Walker has been a member since November 8th 2010, and has created 732 posts from scratch.

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What Happens to Your Investments if the Trade War Becomes Permanent?

What is going to happen with US Chinese tariffs? The consensus of the stock market seems to be that an amicable agreement will be reached and all will be well. That may not be the case. What happens to your investments if the trade war becomes permanent? We are not the only ones to be concerned. CNBC reports that Moody’s believes the stock market is getting it wrong and that the trade war could be prolonged and cause lasting damage to the world economy. So far the USA has put tariffs on $200 Billion in Chinese goods and the Chinese have put tariffs on $60 Billion in US goods.

“It’s a very modest response,” said Edward Alden, a senior fellow at the Council on Foreign Relations, of China’s reaction. “There’s no question China’s hurting and they may want to negotiate. The problem is the Trump administration may be overplaying its hand. The harder they push, they may push the Chinese into a corner where politically and for just reasons of saving face, they can’t negotiate with the administration, and secondly the administration hasn’t established a negotiating process. There’s a real divide between the trade hawks and doves.”

Moody’s is predicting that US growth will slow to 2.3% next year and China’s to 6.4%. Why is this happening and why is there a danger of a prolonged trade war and diminution of the global economy?

The Rise and Predictable Slow Decline of US Economic Power

The USA became the dominant global power at the end of World War II. War had ravaged Europe and Asia. In the years after the war Japan and Germany rose from the ashes of defeat to become major manufacturing and global powers. India became a country instead of a British colony. Brazil started seriously developing its industry. The USSR rose and fell to be followed by the rise of the Russian Federation as a dominant producer of raw materials, especially oil and natural gas. As Europe, Asia, and other parts of the world gained economic ground they cut into the dominance of American industry and even science. This would have been easy to predict given that another global war did not occur. Nevertheless, many in the USA long for the “good old days” of American dominance. Those days occurred because WWII destroyed so much of the global economy and left the US economy intact. Nevertheless, many Americans are really angry and thus elected Donald Trump. Trump is under pressure to “get a better deal” for his constituents and is not known for backing off. And, even when Trump is no longer in office, US leaders will need to address the trade imbalance with China in order to preserve a strong US economy, manufacturing base, and defense.

The Rise of China

China was the “middle kingdom” in Eastern Asia for centuries. Then the European Colonial powers ringed them in. When the Communists defeated the Nationalists in the late 1940’s they became an enemy of the USA. And, the USA developed alliances that ringed in both the USSR and China. China was an isolated nation with a huge army and nuclear missiles.

In the 1970’s US President Nixon decided that bringing China into the community of nations was a better idea than leaving them as a dangerous outsider. The Nixon visit to China led to opening up of the world to Chinese manufacturing and a huge amount of investment in China. The result has been that China is the largest exporter in the world and has a trillion dollar foreign currency reserve. AND, the Chinese have a trade surplus with the USA in the hundreds of billions of dollars each and every year.

China does not want to go back to its period of isolation and has global ambitions as seen in its Silk Road project to create rail and sea links to markets across Eurasia. China needs to sell it products to the world in order to further its global ambitions. There will be a level of tariffs and loss of markets that China will not be able to agree to in their leadership wants to maintain control of the country. Meanwhile wealth Chinese are causing a flight of capital from the new Middle Kingdom.

Automation and Outsourcing

Throughout the world manufacturers are using more and more automation. Robots may cost more than people but they don’t get sick, don’t need pensions, and can be “retrained” with a few lines of computer code. The result has been fewer jobs in many industries. Then, companies in developed economies like Europe, North America, and even Japan outsourced their “easier” work to countries like China to get the work done for less. And, by outsourcing they bypassed labor issues and did not need to buy health insurance or pay pensions for those foreign workers. The net results was fewer jobs in the American Industrial Heartland and in similar areas in Japan and Europe.

Fewer Jobs, Lower Pay, and Angry People

You do not need to be a university-trained economist to drive through Gary, Indiana and notice that all the steel mills are gone. This picture has been duplicated across American and Europe as well. There certainly are good jobs in new industries but many of the good new jobs require a college or university education. And then there are all of those foreigners who can write computer code as well as a home-grown American. And they are willing to work for less! People are making less money and for the first time in American history do not believe that the country is getting better or that their lives will get better.

So, What Happens to Your Investments if the Trade War Becomes Permanent?

Both the USA and China see the trade war as “zero sum” game. A zero sum game is a situation in which the losses by one side are the gains of another and vice versa. China sees is place in the world as the dominant global economic and political power, which are positions now held by the USA. The USA sees itself as maintaining its place in the world and is justifiably fearful of a world controlled by China.

There may be a point at which neither side will back off of its demands. When that happens, trade between the USA and China will diminish. There is a chance that trade between China and Europe could also suffer is Europe adopts the view of the USA. This would result in different global trade patterns and diminished global trade.

How are your investments going to do if Caterpillar, Boeing, 3M, Microsoft, Apple, Harley Davidson, and other US companies lose foreign sales?

Can the USA bring industry back to the Industrial Heartland? What will happen to the USA dollar if the global economy shrinks? Right now, investors are pulling money out of developing economy and into dollars. Forex traders are waiting for that trend to reverse. Domestic businesses like utilities, railroads, and others whose businesses are limited to the USA may be a hedge against a permanent trade war.

Who Wins if Coca Cola Adds Cannabis to Soft Drinks

As more and more states legalize medical and even recreational marijuana, Coca Cola is talking to Aurora Cannabis about putting non-psychoactive cannabis in beverages. Who wins if Coca Cola adds cannabis to soft drinks? We recently posed the question, are marijuana companies good investments.

Tilray is the second largest publicly traded marijuana company. Their sales have doubled in the last year and the stock recently went up 17%. With more and more states legalizing marijuana for medical or even recreational purposes, are marijuana companies good investments?

Our opinion as expressed at the end of the article:

In the end, the marijuana companies that will be good investments will be those which manage their cost of production, compete well on quality and price, and market most effectively. Right now, it is not clear who that will be!

Well, the business of effective marketing may be taken care of for Aurora Cannabis if they team up with the largest soft drink maker, Coca Cola. According to CNBC, the marijuana infused drinks will contain non-psychoactive cannabis and not the stuff that creates a “high.”

The companies would likely develop health-focused beverages that will ease inflammation, pain, and cramping, the report said.

The health market is full of drinks, pills, and foods offering health benefits. According to Allied Market Research, the natural food and drinks market had a value of $79 billion in 2016 and is expected to hit $191 billion by 2023. This is three-fold growth in just 7 years.

Non-psychoactive Cannabis

There is always lots of hype about the benefits of health foods and drinks, most of which is not supported by hard facts. However, in the case of cannabis products, real scientists are doing real research and reporting the results. And, it turns out that the constituent cannabidiol (CBD) can be used to successfully treat a real inflammatory process, acute contact dermatitis (think poison ivy!).

When cannabis (the marijuana plant) is processed for its various constituents, there are lots of different chemicals. Several of them appear to provide health benefits without producing the “high” for which marijuana is known. Researchers are now tracking down specific uses for these. The Journal of Pharmacological Therapeutics (2018; Jun; 365(3):652-663) reports that one cannabis compound, cannabidiol (CBD), effectively treated acute contact dermatitis.

This was the first demonstration of the anti-inflammatory properties of CBD in an experimental model of ACD.

Don’t for a second believe that if Coca Cola teams up with Aurora Cannabis that the advertising machine at Coke will not make the anti-inflammatory benefits of a cannabis-infused “health drink” perfectly clear.

Cannabis: More than the “High” and Relaxation

There is another set of neurological and psychological health benefits from cannabis-derived compounds. And these, are not related to the parts of marijuana that create the “high.”

Surgical Neurology International (2018; 9: 91.) reports on the wide range of conditions for which the compounds phytocannabinoids, cannabidiol (CBD), and delta-9-tetrahydrocannabinol (Δ9-THC) are being studied and actively used in treatment.

Recent neurological uses include adjunctive treatment for malignant brain tumors, Parkinson’s disease, Alzheimer’s disease, multiple sclerosis, neuropathic pain, and the childhood seizure disorders Lennox-Gastaut and Dravet syndromes. In addition, psychiatric and mood disorders, such as schizophrenia, anxiety, depression, addiction, postconcussion syndrome, and posttraumatic stress disorders are being studied using phytocannabinoids.

This is a lot of science and most laypersons do not need to know the specifics. What is important for investors is to know that the science behind this is real and not just health product industry hype. With the “real science” in mind, who wins if Coca Cola adds cannabis to soft drinks? Aurora ought to win by teaming up with the Coca Cola Empire. And, a lot of folks who derive real health benefits from their products may do pretty well too.

Will There Be a Recreational Coca Cola-Cannabis?

We mentioned at the start that more and more states are not only legalizing medical marijuana but recreational marijuana as well. In that case, there is nothing to keep Coca Cola and Aurora Cannabis from partnering on a Coca Cola soft drink that creates a bit of a “high” and provides health benefits!

Why Are Investors Leaving Emerging Markets?

Remember when the BRICS nations were all set to surge into the forefront of the global economy? Brazil, Russia, India, China, and South Africa were all seeing spectacular economic growth and attracting huge amounts of foreign direct investment. These nations are still substantial actors on the world stage but their growth has slowed and in some cases reversed course. Investors have been pulling their money out of these markets and putting it into the USA, Europe, and Japan. So, what happened? Why are investors leaving emerging markets?

China Moves to Adjust Its Economy

China helped lead the way out of the financial crisis and the Great Recession by doubling down on their investments in both infrastructure and industrial capacity. Nations, like Brazil, saw huge benefits as China’s industrial machine consumed more and more raw materials. The price of oil skyrocketed making not only OPEC happy but also Russia and Brazil. China had been expanding its state-run economy for years and steadily increasing its customer base to span the globe.

But, as large as the world economy is, it is finite. And, the industrialized economies of the world got tired of seeing jobs and whole industries pivot to China. China had over-built its industrial base and now saw a substantial slowdown in growth, closing factories, and even labor unrest. A slower Chinese economy needed fewer raw materials and the emerging markets suffered.
Rich Chinese saw the slowing of China’s miracle expansion and started a capital flight that still threatens the country’s economy. China’s economy is now under pressure due to a trade war with the USA.

Russian Adventurism Brings Sanctions

In 2014 we wrote about investing in Russia after the annexation of Crimea and support of separatists in Ukraine in parts one, two, and three. Russia was hurt by the fall in oil prices that year and is still hurting. Then, the EU and USA levied economic sanctions that greatly reduced investment in Russia and the ability of Russians to use the international banking system. With Russia meddling directly in elections in Europe and the USA, it is unlikely that these sanctions will be lifted any time soon.

Political and Economic Chaos in both Brazil and South Africa

When the BRICS first met officially in 2009 the Brazilian president, Lula de Silva, was commonly called the most popular politician on the planet. Today he is due to start serving a 12 year prison term for his involvement in governmental corruption. Jacob Zuma was the president of South Africa and was recently forced out of office by his own political party. Along the way the focus was no longer the spectacular growth of Brazil but Brazilian bankruptcy. South Africa’s GDP was $400 Billion in 2011 and $295 Billion in 2017.

Trade War and a Strengthening US Dollar

Trump did not start a trade war with nations like Brazil. But, if and when a trade war slows economic production in China, Europe, or anywhere, the emerging markets get hurt. A couple of years ago we wrote about the resource curse of boom and bust cycles. Nations like Brazil, Russia, and South Africa are rich in natural resources. When demand goes up they prosper and when demand goes down they suffer. And, another result of the trade war ramping up is that the US dollar is getting stronger. The dollar is perceived to be a safe haven currency and the US Federal Reserve is steadily raising interest rates. Investors are leaving emerging markets to flee to dollar-denominated assets, and to flee to the USA where markets are still healthy.

Which Growth Stocks Are Really Value Investments?

The failure of many so-called “growth stocks” to surge ahead in today’s stock market has puzzled value investors. After all, the traditional use of measures, such as price to earnings ratio and price to asset ratio, has served many investors well over the years. But for many investments in the stock market, it is not working today! Growth stocks keep forging ahead while stocks with low price to asset ratios are lagging. The questions we want to bring up are which growth stocks are really value investments in disguise? And, which value stocks are really not so valuable?

Successful Investing by Seeing the Future

We commonly use intrinsic stock value as a guide to successful investing. This approach assumes that you can successfully predict the income stream that an investment will generate in the coming years. Then, you look at the current stock price as well as the financial condition of the company. Here is where the Generally Accepted Accounting Practice that is used to do the books may not serve a modern investor very well. There are factors that may overstate the value of a so-called “value stock” and understate the value of a so-called “growth stock”. The Wall Street Journal looks at the traditional way of measuring value stocks and offers some advice to investors.

Is “value” dead? Or have we just been measuring it in the wrong way?

It’s an urgent question, because value stocks-when defined according to the traditional criterion, low price-to-book-value ratios-have lagged behind growth stocks for at least a decade now. And though value stocks in the past have come roaring back after going through similarly long periods of lagging, some researchers are questioning whether they will do so again.

The point that the WSJ makes hinges of how “intangible assets” are treated in the world of accounting.  What is important when predicting the future of a stock is being badly represented in financial statements.

That’s because a growing percentage of companies’ market value now comes from intangible assets-things like patents, trademarks and research-and-development expenditures-that are either ignored in the book-value calculation or reflected inconsistently. Therefore, the researchers say, the price-to-book ratio has lost its relevance.

If they are right, we can’t expect stocks with the lowest such ratios to reassert their historical dominance over stocks with the highest ratios.

Stocks that keep going up are those that keep increasing their earnings. The value of many of these companies lies in their names, trademarks, and patents. The money that they pour into R&D comes back as new products, more efficient ways to produce their products, dominance of their market niche, and creation of totally new market niches. The market keeps rewarding the companies that are following this path because their earnings are steadily increasing. Which growth stocks are really value investments? The first trillion dollar company, Apple, fits the mold of a company that is steadily growing based on continual product improvement, strong R&D, and lots of patents. Johnson & Johnson and Microsoft, the only two companies with AAA corporate bonds as mentioned in our article about how to invest without losing money, also fit the mold. Until they change the way that “intangibles” are reported by the accountants, earnings may be the best guide to picking “value stocks.”

Which Growth Stocks Are Really Value Investments? PPT

Smart Ways to Predict a Correction and Protect Your Investments

Over the last few years you have ignored the nay-sayers who incessantly predicted stock market, real estate market, and economic crashes. You stayed in the market and have seen a rather nice increase in the value of your investments. However, all good things come to an end and those things include bull markets. But, after every stock market correction there will be a rebound. What are some smart ways to predict a correction and protect your investments in order to profit from the next upswing?

Market Corrections and Recoveries

Is There a Correction around the Corner?

There are signs of a market correction that you can watch for.

When the market keeps going up too many investors become impatient, looking for more and more profits. They forget risk management. An old piece of investing advice is that you do not have a profit until you take a profit. If you have done well with a volatile stock there is nothing wrong with taking a little profit, paying long term capital gains and holding on to cash until the market offers great deals again. Prior to the burst of the dot com bubble several well-known investors stated that they were essentially cashing out of the stock market because it made no sense. These folks were able to re-invest at very attractive prices a year or so later.

Today, according to CNBC, Deutsche Bank is cautious for the near term and expects a 3 percent to 5 percent pullback but a rebound later in the year.

Citigroup makes a similar prediction as reported in the same article. They use a proprietary formula that takes into account a brewing trade war, geopolitical uncertainty, Federal Reserve policies, and spreading weakness in emerging markets as part of a creeping economic weakness internationally.

There Is Always a Recovery, Somewhere

After all stock market crashes in recent memory there has been a market recovery. The S&P 500 fell from 1500 to 900 between September of 2000 and the beginning of 2003. Then it steadily rose again to a peak of 1560 before the financial crisis. At that time it fell to 680 by March of 2009. And, from there the index has climbed steadily for nearly a decade to 2870 today.
As we noted in our “signs of a market correction” article, smart investors decided that the market made no sense in the run-up to the dot com crash. And, smart investors saw the dangers of over-leveraged investments going into the financial crisis and got out. These folks all re-invested after the crash and resumed earning profits.

If you are a passive investor and just invest in index funds that track the S & P 500, you can expect the results like we just showed you. But, there were a lot of weak stocks with really poor intrinsic value going into both the dot com and financial crisis crashes. These stocks inflated the prices of index funds going into a crash. And these companies commonly went bankrupt and disappeared from the index after the crash.

Over the long term it is financially dangerous to follow the “rising tide raises all ships” method of investing. The stocks of strong companies go up because of strong earnings, strong products, and a margin of safety in the form of money in the bank and minimal debt. A company selling in the same market niche may see its stock go up based more on optimism than a fundamental-based promise of growth. Two stocks today that raise concerns are Facebook and Tesla. Facebook is looking at more regulation due to its prominent communication role in modern society and Tesla needs to start producing profits for investor get tired and start selling. Smart ways to predict a correction and protect your investments include culling out potentially dangerous investments, like Facebook and Tesla.

Smart Ways to Predict a Correction and Protect Your Investments PPT

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