Budget Cuts
Stocks moved sideways today, but bonds are surrepticiously moving up in interest rate. This is the highest I’ve seen in the last couple of years.
The Dollar moved higher against the Euro which hit a recent low today. Gold was down slightly, as was oil/gasoline.
In the news today…..
UK Prime Minister Gordon – is under fire for selling half of the UK gold reserve when he was Chancellor of the Exchecker between 2000 and 2002. He sold the gold at the LOW of the gold price, and if he had held it, it would be worth about $12B more today. So, why did he sell it? He has been stonewalling because this is a political question today as much as an economic question of yesteryear. Here are some of the hidden issues. There were two UK banks – AIG UK branch and Rothchild’s – and they both were gold bullion dealers. They were getting killed with their short positions in gold, and needed to be bailed out. The UK Chancellor was told that if these banks fell, they would bring down all the other ones. So, he did what he was told to do – suppress the gold price so these banks could buy back their shorts at reasonable prices. The US FED was selling gold in concert at the same time. The main dealer in selling the gold was Goldman Sachs. Does any of this sound a little sinister to you? It does to me. This was a prelude to the economic meltdown that occurred 18 months ago. No one talked about it too publicly – WHY? Didn’t anyone learn any lessons? Apparently not. Well, this is now a political issue, and will add to the woes that Brown has when he calls the next UK election – he should be thrown out of office. So, why isn’t this an issue in the US????
Illinois – may have 4 day school weeks coming. This is one of the solutions to Illinois’ debt problems being seriously discussed. Get used to it. The real question is how do we balance all the state’s budgets? Every state will come up with a different solution. History (the Great Depression) gives us some solutions. Civil Servants will need to be fired so the state payrolls can be reduced. In addition, state and city employees will need to take pay cuts.
New York City – is proposing 19,000 city job cuts. This is how NYC will be balancing its budget. This is a bold move, and you can probably anticipate some civil (servant) unrest.
North Korea Finance Minister – was executed for his botched currency changes. N. Korea had done a 1 for 100 debasement of its currency, and apparently the Supreme Leader wasn’t amused. Now when can we start really punishing officials for their actions?
Tonight’s Dinner Conversation…..
When are stocks overvalued or undervalued? Well, I wanted to give the readers some perspective so you can use some “common sense” when you buy stocks. Here are the prices people have been willing to pay for stocks over the past 100 years. The best measure is the PE (price earnings) ratio.
This chart shows how the recent rise in earnings has impacted the current valuation of the stock market as measured by the price earnings ratio. In general, when the P/E ratio is high relative to history, stocks are considered overvalued. Conversely, when the P/E ratio is low, stocks are considered undervalued or cheap. From the mid-1930s into the early 1990s, the P/E ratio tended to peak in the low 20s and trough close to around seven. The price investors were willing to pay for a dollar of earnings shot up during the dot-com bubble and spiked to nosebleed levels during the financial crisis. Currently, the P/E ratio stands at about 23, which is above the high end of the range that existed from the mid-30s up until the early ‘90s.
This chart is clearly saying stocks are overvalued, and have been for some time. It also shows that stocks can be overvalued for a LONG TIME, and people would become complacent with prices. Prices that people are willing to pay – and we are talking about human behavior – tends to not change. So, it is reasonable to expect PE ratios to come back down to where they were before.
Here are the last numbers for today:
Dow Jones 30 Industrial – 10,842 (up 
10 Year Treasury Bond – 3.90% (up 0.02%)
Euro – $1.3283
Gold – $1093 (down $8)
Oil – $80.26 (down $0.26)
Gasoline – $2.22 (down $0.02)
