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Growing VS Dying World Economies

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Growing VS Dying World Economies

The records say that there is a downgrade of the world’s total GDP for 2016 from a January prediction of 3.4% to a 3.2 %

However, first world economies have had evidence of growth, despite being a lot slower than many would hope.

Significant events/factors which have slowed down the global economic growth are:

  • The Chinese economy is suffering a slowdown.
  • The drop in oil prices, mainly taking its toll on nations like Russia and the Middle East.
  • There is also a significant slowdown in markets that are merging.
  • The increase in terrorism, immigrants, and international aid.
  • The wars in Syria, Libya, Ukraine, and other Middle Eastern areas.
  • Cold War tensions between USA and Russia, consequently resulting in sanctions and exclusions.

Although heightened world mishaps have broken out, this doesn’t mean that everyone has been suffering.

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The world’s fastest growing economies:

The IMF has reported Myanmar to be the world’s fastest growing economy currently, with an estimated GDP growth set at 8.6% for this year.

The country has experienced reforms economically and politically; making headlines all across the world. Myanmar has high confidence from both consumers and investors.

Typically, numerous small countries in the Middle East and Africa are going through this same pattern of transition, nations like:

  • Tanzania
  • Bangladesh
  • Bhutan
  • Iraq
  • Cambodia
  • Senegal
  • Vietnam
  • Rwanda
  • Panama
  • Laos
  • Ivory Coast

Why are small countries experiencing a spike in growth?

Many of these developing nations have managed to become a democracy, from previously being under military rule – this has allowed for an increase in exports and for new foreign investment and markets to emerge.

However, poverty and inequality are still rife in these countries.

How about fast growing first world countries?

For this year, advanced economies expected to project 2% growth – not including Japan. India has been enjoying great prosperity, with GDP reaching over 7%.

There is a public outcry of China’s slow turn, but since moving to service and finance markets from manufacturing, growth for that nation has been forecasted to grow by 6% – IMF figures are looking to increase for 2017.

But it must be mentioned that both imports and exports are still down in China, which is having a knock-on effect on foreign economies.

The world’s slowest economies:

Yemen

This nation’s economy is energy-dependent and has been burnt by the 2014 Oil crash – while currently experiencing a civil war.

Domestic troubles for Yemen include:

  • High unemployment.
  • An accelerated population boom.
  • Stern famines.
  • A decline in water resources.

Russia

Another economy reliant on the energy market so has suffered from the result of falling oil prices. Also, they have increased spending on the military, have sanctions imposed by the USA, government interference with the private sector and fundamental issues.

However, for 2017, Russia is predicted to grow its GDP by 2.5%.

Brazil

Many factors have caused Brazil’s frail economy to fracture, these include:

  • The government’s attempt to revive economic growth, by making cuts for industry and incentives to household consumption.
  • Brazil’s current account and fiscal balances have decayed.
  • The World Cup in 2014 was also a burden to the economy.

Croatia

This nation has still been left behind from the recession in 2008, which has not been able to bring down its unemployment rate, encourage foreign investment and lack of regional development.

GDP shrank by 0.4% in 2014.

Serbia

Similar to Croatia, Serbia has never brought down the unemployment rate since the global recession – while household incomes have remained stagnated, and structural reforms have been an ongoing delay.

Other domestic issues in Serbia:

  • An aging populace.
  • Extremely high levels of corruption.
  • An ineffective judicial system.

Saint Lucia

This country experienced a devastating blow to its tourist-dependent economy after the recession hit, and it has never been able to recover since. Even airlines have cut the frequency of flights to go there.

It is always vulnerable to a decline in tourism when the global economy slows down.

Libya

This nation’s GDP fell by a staggering 24% in 2014, despite the government taking significant sums of money from energy supplies – the fatal error being no investments helping into a developing economy.

Libya also experienced a civil war in 2011.

The primary cause of the 24% fall was by the war and major protests causing disruptions to oil ports around the country.

Ukraine

Initially, the economy took its first hit when the financial crisis initiated. It did manage to bounce back in 2010 but was then devastated again after Russia annexed Crimea (causing GDP to fall by 6.8% in 2014).

Lack of reforms and political corruption is still holding the country back from any future growth.

What to expect for the rest of the year…

Despite growth only reaching a 3.1% rate for this year, it is still moving in the right direction – which is surprising considering all the challenges that face the world. Emerging economies will continue to speed ahead while other corners of the world will be devastated by war and commodity prices.

  • Oil prices to now rise in value.
  • 2017 is forecasted to grow by 3.4%.
  • Foreign relations are making improvements.

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Many Americans Put Their Stimulus Checks Into The Stock Market

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Many Americans Put Their Stimulus Checks Into The Stock Market

The government sent $1200 stimulus checks to help Americans pay their bills. However, it turns out that many people turned around and put most of that money into the stock market. This is according to research done by Envestnet Yodlee, a data aggregation company.

Bill Parsons, Group President, Data Analytics at Envestnet Yodlee said during a recent CNBC interview, “Covid is causing conversations among family members and family members with their advisors about what to do with their money and were seeing that in the data… Securities trading did see significant lift week-over-week and I suspect that that’s in part due to big changes in the market.”

People Investing in Stocks

In most income brackets, data shows that buying stocks was the second or third most common use for the funds. Fortunately, the most common uses of the stimulus money were increasing savings and cash withdrawals.

The company started tracking the spending habits of 2.5 million Americans in early March. It noticed a divergence in behavior in mid-April when the checks started to arrive in mailboxes. Those that received their check increased their spending by 81% compared to the prior week. Some of that spending went into the stock market.

In the $35,000 – $75,000 income bracket, stock trading increased by 90% in the week the check was received compared to the prior week.

In the $100,000 – $150,000 income bracket, trading increased 82% in the week the stimulus check arrived. Meanwhile, in the $150,000 or higher income bracket, stock trading only increased by 50%. The $150,000 or higher bracket would not have been eligible for a stimulus check. Therefore, it acts as a good baseline.

New Online Trading Accounts

All of this stock buying meant a whole lot of new online trading accounts were opened in the last month or so. However, the brokerage houses aren’t sure if that is due to the stimulus checks, or the opportunity to buy stocks cheaply as the market fell.

Charles Schwab reported “monumental volumes” as it opened 609,000 new accounts in the first quarter. Additionally, the stock trading app Robinhood reported daily trade volume was up 300% in March compared to the previous year. The company co-CEO also said during an interview with CNBC that over 50% of its customers are first-time investors.

You may believe the brand new investors were wise enough to buy stocks because they recognized they were cheap and the markets would rebound. Either way, it seems they have very good timing.

Since the market bottomed in late-March, stocks have staged a tremendous rally in the last two months, with the Dow Jones Industrial Average and S&P 500 climbing nearly 35% from their March lows, and the Nasdaq gaining more than 40% over the same time period.

It’s better than spending the money on weed, sneakers and video games.

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Unemployment Rate Soars Despite States, Economy Reopening

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Unemployment Rate Soars Despite States, Economy Reopening

The slow reopening of the economy has done little to boost the job market and stall the unemployment rate.

Another 2.4 million Americans filed initial jobless claims for the week ending May 16. This brings the total since late March to an incredible 38.6 million.

Continuing unemployment claims, those who file to receive ongoing benefits, added another 2.5 million through May 9. This brings the total to 25.1 million.

Observers were hoping that they would see the number of continuing claims to begin to decrease. This comes after last week’s report only showed an increase of 500,000 claims, the smallest increase since March.

With that figure jumping by 2.5 million, it dashed those hopes.

“It is looking like May is shaping up to be worse for the labor market than we had initially thought,” economists at Jefferies said in a recent note. “We noted in our response to the April employment data that we expected that we would see another drop in payrolls in May of about 1 million, followed by a strong rebound in June. However, the stubbornly high levels of both initial and continuing claims suggest that we are actually in store for another historic drop in payrolls in May.”

Hoping for a Drop

Diane Swonk, chief economist at Grant Thornton, was also hoping to see a decrease in continuing claims. However, she says we may see some improvement soon. It’s possible as companies use money from the Payroll Protection Program to bring back workers.

“I’d love to see a big drop in continuing claims because that would really be a sign of rehiring,” she said, but also cautions that May is shaping up to be a terrible month for workers, who may find that their temporary unemployment may not be so temporary. “This is the week of the survey. … It tells us May is going to be another bloody month, with a lot of downward revisions for an even worse month of April,” said Swonk. “May will be a much worse unemployment rate because people will be looking for jobs again and their layoffs weren’t as temporary as they had hoped.”

Current Concerns

Very real concerns exist that the unemployment figures fare worse than the actually reported ones. These concerns come as states are still overwhelmed by the sheer number of claims and still haven’t processed the backlog.

It’s hard to imagine what the real unemployment rate would be if a backlog of initial filings does exist.

Chris Rupkey, chief financial economist at MUFG Union Bank, said if you add in the initial claims from last week’s report, “That would put the unemployment rate at about 25.4%”

Some states are seeing relatively little impact on employment due to the pandemic. Utah and South Dakota are seeing unemployment rates remain below 10%, while other states have been crippled by job losses.

Georgia and Kentucky have the highest unemployment rates in the country, where the jobless rates are approaching 40 percent. Other states seeing unemployment rates at or near 30 percent include Washington and Louisiana. Also included are Michigan, Rhode Island, Nevada and Pennsylvania, as per Deutsche Bank Research.

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Buffett Recommending S&P Index Fund A Mistake, Says Berkshire Shareholder

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Buffett Recommending S&P Index Fund A Mistake, Says Berkshire Shareholder

In an article earlier this week, we posed a simple question: has Warren Buffett lost his touch?

Mark Hulbert, of the Hulbert Financial Digest, says skeptics are being “unfair” on Buffet. Hulbert adds that anyone suggesting he’s lost his touch should cool their heels. He says Buffett hasn’t lost money in the last 10 years. He also mentions that nobody beats the market all the time.

Others, like Howard Gold, a columnist at Marketwatch, points out that Buffett has been “profoundly underperforming” against the S&P 500 and most of his recent deals have been duds.

Buffet Gives Advice

But what irks one investor, in particular, was Buffett’s advice that the average investor should just buy an S&P index fund.

Buffett’s comment came during the Berkshire Hathaway conference call, when he stated “In my view, for most people, the best thing to do is to own the S&P 500 index fund.”

That may be practical advice for the vast majority of Americans. However, Tony Scherrer, a CFA at Smead Capital Management, says that Buffett’s comment completely goes against his own advice.

Scherrer believes that by recommending an S&P index fund, Buffett is telling investors to buy the exact type of companies that he himself has spent his career avoiding.

Specifically, a quote from the 2007 Berkshire Hathaway shareholder letter, where Buffett says:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”

Scherrer takes each part of the statement and points out where Buffett contradicts or simply ignores his own advice. He starts with:

“The worst sort of business is one that grows rapidly…”

The S&P 500 has 21% of its weighting in just five stocks: Microsoft, Apple, Amazon, Facebook and Alphabet. Scherrer points to research by David Kostin at Goldman Sachs that shows these top five names have an expectation of revenue growth of 14% over the next two years, and trade at 28x the forward two-year earnings average. The other 495 stocks in the index are expected to grow revenue much slower, at 4% over the next two years, but also trade at a much lower 14x the forward two-year earnings average. In other words, buying the S&P index fund means paying twice as much (28x vs. 14x) for a handful of stocks that are growing rapidly.

“…requires significant capital to engender the growth…”

Netflix, Amazon and Facebook are among the heavily weighted stocks in the index, and Scherrer says they are all burning through significant amounts of money to keep growing.

“Netflix’s cost for its content has mushroomed from $4.5bn five years ago to an expected $15bn in 2020 and will have to continue to expand to operate its business. Amazon… recently announced a $4bn increase in costs associated with safety of its workers and protection in its warehouses on the heels of its deficiencies… Facebook’s recent quarter included a 34% increase in expenses year-over-year to a whopping $46.7bn, as its cost to acquire new customers and increased regulatory expenses spiked.”

“…then earns little or no money”

Looking at the numbers, Scherrer says ”Netflix burned $3.1bn in free cash flow last year and must persistently ramp that up to attract and retain subscribers. Amazon’s flywheel generated an eye watering $280bn revenue number in 2019, but operating profits for everything outside its cloud business came in at a measly $5.3bn. You currently pay 68x forward price-to-earnings for Netflix, 126x for Amazon, and 28x for Facebook.”

Buffett of the Past v.s. Buffett of the Present

Scherrer believes that if 2007 Warren Buffett met today’s Warren Buffett, there’s no way he would allow him to buy an S&P index fund that is highly concentrated into a handful of stocks that are high growth, capital incinerators that earn very little money.

But 2007 Warren Buffett would probably be most appalled that 2020 Warren Buffett would be selling airlines stocks. That means at some point, Warren Buffett thought investing in airline stocks was a good idea.

In the same 2007 shareholder letter, Buffett outlined what “The Great, the Good and the Gruesome” businesses look like. Buffett described a “gruesome” business by using airlines as an example.

Incredibly, he described them as “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”

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