Working Poor in the U.S. Hits One-Third of all Employed Families

In Today's Issue:
Working Poor in the U.S. Hits One-Third of all Employed Families… This Old Economy Stock’s a Moneymaking Winner… Boost Your Portfolio Returns with the Emerging Markets…

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Why is Inflation Below 3%?
Since 2008, the Federal Reserve has created an unprecedented $2.6 trillion in new money out of thin air…so many new dollar bills that inflation should have skyrocketed well past 10% annually.

So why does the Bureau of Labor Statistics say the official inflation rate is only 2.16%?  The answer is almost too shocking to be true. 

In a just-released tell-all interview, a 30-year investing veteran tells us why the official numbers are so misleading, they’re almost manipulative.

Working Poor in the U.S. Hits
One-Third of all Employed Families ~ by Michael Lombardi, MBA

Michael Lombardi

It wasn’t too long ago when the U.S. economy was on the verge of collapse and any prospects for economic growth were bleak (think 2008). We all know what happened after the financial crisis. Banks needed help or else the financial system would have collapsed. So big banks had billions of dollars made available to them via the government and Federal Reserve.

Fast forward to today, and with all the stimulus packages implemented by the U.S. government and the quantitative easing programs of the Federal Reserve, the banks have been saved. But not much else has been done in the U.S. economy. In fact, the statistics show we may be going in the wrong direction again.

The U.S. economy took a huge wrong turn when banks were permitted to make loans to people who never really qualified for them. It will take decades for the U.S. economy to recover from the wounds of the financial crisis. And some economists like me think all this quantitative easing will create long-term problems for America, as our national debt has skyrocketed and the strength of the U.S. dollar has deteriorated.
My question: if creating jobs was one of the goals of quantitative easing, why are so many people falling into poverty?

In 2011, there were 47.5 million people in 10.4 million families in the U.S. economy living near poverty. Called the “working poor,” they are defined as earning less than twice the official poverty rate income of $22,811 per year for a family of four. 

To give you some perspective, the working poor are now almost 33% of all the working families in the U.S. economy. In 2010, this number was 31%. In 2007, it was as low as 28%. (Source: Reuters, January 15, 2013.) 

Thanks to several rounds of quantitative easing implemented since 2008, there were surely some jobs created in the U.S. economy. But as I have been harping on these pages, the majority of new jobs created since the “big bust” has been in low-wage industries. The rising number of working poor in this country proves the point.

According to the Working Poor Project (aimed at improving economic security for low-income families), working parents in the U.S. economy have taken jobs such as cashiers, maids, waiters and other low-paying jobs where they are offered fewer hours and minimal benefits. One in four low-income parents has one of these types of jobs.

Even Federal Reserve Chairman Ben Bernanke agrees with this occurrence. At University of Michigan, while talking about the U.S. economy, he said, “…we would like to see a stronger labor market…there are too many people whose skills and talents are being wasted.” (Source: Wall Street Journal, “Fed Chief Sees Bond Buys Continuing,” January 14, 2013.)

Quantitative easing; it’s been good for Wall Street and the big banks. For the “working poor,” the statistics show money printing hasn’t helped. Unfortunately, I see a time down the road when hyperinflation becomes an after-effect of too many dollars in the system. At that point, when inflation comes into play, the poor will just fall further behind.

Michael’s Personal Notes:
It’s quite a race…

As countries around the world struggle to grow in 2013, central banks in the global economy are in a race to devalue their currencies. This is one race I predict will end with a bunch of losers. 

The central bank of Japan has gained some extra attention lately due to its increased printing activities. The Prime Minister of Japan, Shinzo Abe, made an announcement last week about a new 10.3-trillion yen spending spree to boost Japan’s economic growth. (Source: Financial Times, January 11, 2013.) 

But Japan is not the only country involved in printing and devaluing its currency. Other countries in the global economy are doing the same. The central banks of Switzerland, Brazil, and China have taken steps to devalue their currencies. It’s an outright currency war amongst central banks. 

Even Russia is getting into the currency devaluation race. The central bank of Russia has been actively buying foreign currencies. It bought 4.83 billion worth of foreign currencies so far in January and purchased 5.15 billion Russian rubbles worth of foreign currencies in December of 2012, as the rising ruble has been hurting exporters. (Source: Bloomberg, January 11, 2013.)

But how useful is the ploy of devaluing currency to stimulate economic growth? Philadelphia Federal Reserve Bank President Charles Plosser recently explained that currency devaluation has no benefit to the global economy. He said, “So central banks and governments need to be cautious about allowing us to slip into a regime like that because that would not be healthy for world trade or for the economies.” (Source: Reuters, “Fed official warns about slipping into currency wars,” January 11, 2013.) 

Dear reader, my concern is that there are too many central banks involved in this new (but really old) phenomenon of printing money to lower currency values and stimulate economic growth. If all central banks work to devalue their currencies at the same time, will it work? 

Right now, the reason for central banks to print money is declining exports. But I don’t think they realize how bad the situation is on the demand side. Once demands picks up, export growth will eventually follow. Printing more money devalues currencies, but won’t increase demand; rather, the more money printed, the greater chances of inflation and the more expensive exports become—a classic double-edged sword. 

Where the Market Stands; Where it’s Headed:
As I have been predicting in these pages, I believe 2013 will be the year the bear market rally in stocks that started in March of 2009 comes to an end. And it may end earlier in the year than most analysts think possible. The stock market is close to its top.

What He Said:
“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: the low interest rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in Profit Confidential, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

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This Old Economy Stock’s a Moneymaking Winner~ Ahead of the Street Column, by Mitchell Clark, B. Comm.

Mitchell Clark

I’ve always liked railroad stocks; they are the backbone of North America, and they’re very good at making money. Often in this column we consider the stock market performance of Union Pacific Corporation (NYSE/UNP). I firmly believe that this company will continue to be a winner for investors.

As part of an ongoing series in this column, we’ve been looking at some of the best long-term performers the stock market has to offer. So far, we’ve considered PepsiCo, Inc. (NYSE/PEP), Union Pacific, and Colgate-Palmolive Company (NYSE/CL). While a track record can’t tell you where a stock is going in the future, for me, it lends a lot of weight to making a new investment decision. What I’m trying to find are great, dividend paying stocks that investors can accumulate when they’re down. If a stock has a history of recovering strongly from periods of price weakness, this lends a lot of credibility to its story.

Looking at railroad stocks specifically, one of the best-performing companies on the stock market has been Canadian National Railway Company (NYSE/CNI), which trades on both the New York and Toronto stock exchanges. Among railroad stocks, this company’s long-term wealth creation on the stock market is unmatched. The company’s dividend yield isn’t as large as other railroad stocks, but its capital gains are very impressive. The company’s stock chart is featured below:

Chart courtesy of www.StockCharts.com

This stock has basically been going straight up since the stock market correction in 2008/2009. On a split-adjusted basis, the stock was worth approximately $50.00 a share at the beginning of 2008, $20.00 a share in 2004, $10.00 a share in 2000, and $6.00 a share in 1996. Who said you can’t make money with old businesses like railroad stocks?

On the stock market, Canadian National Railway (CN) has a track record that can’t be beat by other railroad stocks. The company’s position is unique within the group, as it owns track all across Canada and straight down the middle of the U.S. to the Gulf Coast. The size of this infrastructure in two countries is unique and creates awesome economies of scale that have proven to benefit shareholders very well.
CN is the kind of company that I think blue chip stock market investors can consider when it’s down in price. Of course, this stock market winner isn’t down in price very often, because business is so good. Although economic forecasting is glorified guesswork, the Federal Reserve recently announced that it expects the U.S. economy to grow about 2.5% this year and 3.5% in 2014. If this economic recovery actually happens, which industry will be the first to benefit? It will be the railroad sector, and railroad stocks are some of the best large-cap companies that a stock market investor can consider.

Warren Buffett picked up on this trend a few years ago and bought out Burlington Northern Santa Fe entirely. This was a very good move, and I’m sure it’s highly profitable for his holding company. I think railroad stocks are going to do very well over the next few years, especially as agricultural commodities rise in value. I don’t have a sense as to where the stock market might go, but one thing I wouldn’t do is bet against railroad stocks. The old economy is back, and it’s going to make a lot more money for shareholders. 

Boost Your Portfolio Returns with the Emerging Markets~ The Leong Side of the Market, by George Leong, B. Comm.

George Leong

The key to the global economy is to drive consumers to spend in their respective economies. My view is that the emerging markets will continue to be an excellent place to have some capital, from the BRIC (Brazil, Russia, India, and China) countries to the four “Little Tigers,” comprising Hong Kong, Singapore, South Korea, and Taiwan. My reasoning is that the newfound wealth and growing middle class in these markets will drive consumer spending and economic growth.

Just take a look at the numbers from global credit card provider MasterCard Incorporated (NYSE/MA), as the company is a good global barometer on consumer spending, with its presence in over 210 countries. In a third-quarter press release, MasterCard reported that its worldwide purchase volume surged 12% in the third quarter on a local currency basis MasterCard President and CEO, Ajay Banja added, “Additionally, emerging geographies and governments continue to provide great opportunities for growth.” (Source: “MasterCard Incorporated Reports Third-Quarter 2012 Financial Results,” Yahoo! Finance via BusinessWire, October 31, 2012, last accessed January 15, 2013.)
What’s interesting is the appearance of credit in the emerging markets where cash was once king. MasterCard clearly sees new markets in these growth regions where the per-capita income is rising, helping to drive consumer spending and economic growth.

The iShares MSCI Emerging Markets Index (NYSEArca/EEM) chart below shows the rally since mid-November 2012.

Chart courtesy of www.StockCharts.com

The BRIC region is showing decent market returns to start 2013.

The Brazilian benchmark index, the Bovespa, is up nearly two percent this month, while the Russian Traded Index (RTX) is up a whopping 4.2%. Stock returns in the two major regions, India and China, are up 2.5% (BSE SENSEX India Index) and 1.9% (Shanghai Stock Exchange Composite Index), respectively.
As many of you know, I feel China and India will be the explosive areas for consumer spending, given over one-third of the world’s population lives in these two regions.

“China, followed by India and other emerging Asian economies, is creating a vast new population of consumers, whose growth will continue into the coming decade,” reports consulting firm Bain & Company on its web site (Source: “The Great Eight: Trillion-Dollar Growth Trends to 2020,” Bain & Company, September 9, 2011, last accessed January 15, 2013.) The company’s research suggests that about two-thirds of the world’s growth in the middle class will be derived from China and India, and that will translate into increased consumer spending.

On a smaller but equally important scale, the Little Tigers could be a place to invest some money given the strong consumer spending.

South Korea, the fourth-largest economy in Asia, grew at 6.1% in 2010, but growth is estimated to fall to 3.5% this year, according to the Bank of Korea.

Latin America is also hot for growth for consumer spending. The region’s gross domestic product (GDP) growth is estimated to slow to 3.7% this year, down from 4.5% in 2011, according to the International Monetary Fund (IMF). On the plus, growth is expected to rally to 4.1% in 2013. The key player in Latin America is Brazil, which will be host to the upcoming 2014 FIFA World Cup and the 2016 Summer Olympics.

Another emerging region that will see strong consumer spending growth is Eastern Europe—namely Russia, the largest economy in Eastern Europe, and Poland, the second-largest economy in the region.
To diversify and add possible higher returns, take a look at these emerging markets and the companies that operate there.