Small Business and the Recession

Small business employs 50% of the U. S. work force. It makes up almost 40% of the GDP. But small business cannot get sufficient credit from banks who are worried about strict regulators who look over their shoulders to see that the books show little risk.

The easy money policy of the Federal Reserve makes it far easier for banks to borrow at little cost from the Fed and invest in government bonds. So why bother to make risky small business loans?

Worse, small business cannot get meaningful relief from Washington in the form of lower taxes and less restrictive wage regulation.

Small Business Funding

I recently discussed how small business has had problems getting credit amidst restrictive Washington regulations.

Small business has little access to public sources of borrowing. And they are usually in no position to sell stock to investors. Where will they get funds?

Credit cards are one solution. About 80% of small businesses pursue this arrangement, though rates are high. But this source is getting tougher, because of increased government meddling.

Left-leaning politicians believe that anyone who charges more than what a bank does is a usurer, even when there is no money available at bank rates. That’s because such politicians never understand supply/demand economics.

The next time you hear talk about real jobs, it will be mere talk. Nothing practical is being done.

The Government is Rolling the Dice Again

After denying anything to do with the financial meltdown, the government is at it again, as Reresentative Barney Frank put it, “rolling the dice” for the good of the public.

Once again seeing to it that folks who cannot afford to own a house are able to buy one. Getting to buy homes with practically nothing down. In no time, they will join the rest of the rising numbers of homeowners in default.

Will left-leaning, vote-seeking, politicos never learn?

The media will repeat that the villains once more will be the “greedy” banks and mortgage brokers whose jobs depend on carrying out government edicts.

Many Hedge Funds Have Disappeared

The year 2009 was not good for many hedge funds. This year has been better but not as successful as the early 2000s. Some did well enough in the markets, though not as they did several years ago, during their Golden Age.

Many hedge funds went out of business due to a loss of investor interest. Or so-so performance that failed to attract followers of the past.

The main peeve against them is their cost. In addition to their standard management fee which is usually set at 2% of assets managed, they still get about 20% of earnings they produce. That is far too much for funds doing conventional, non-rocket-science investing.

Buying a Home as an Investment

Research shows that from 1890 to 1996, residential real estate values increased about 27%. I had always advised folks to treat a home as just that, not a means of growing rich. The small increase in home values would attest to that reasoning over the years.

I got lots of flak in the late 1990s and early in the 21st century. That’s because, from 1996 to 2008, residential real estate values rose sharply, about 72% on average.

That up-cycle has now come to a sudden demise and is in a down-spin. And I can repeat my old admonition. Buy a home to suit your budget and your family requirements.

If you want to invest in real estate there are other options. For example, commercial REIT index mutual funds or ETFs.

Buy ADRs or American Stocks Directly?

Investors who wish to buy foreign securities as a means of diversification may do so in several ways.

One is to buy what is known as ADRs or American Depositary Receipts. These are dollar, Euro or other currency denominated participation in global issues.

I find them more expensive for those who want basic, non-technical investing. But why not use foreign mutual funds or exchange traded funds (ETFs)? The latter can be traded and are cheaper to transact.

High Frequency Trading and Mutual Fund Investors

While high-frequency trading benefits most market participants, there are some hazards involved. The presumption is that high-frequency traders are more efficient, at the expense of the less adept. Individuals who feel they cannot compete with mutual funds or other large investors, are just one example of those who view the subject negatively.

If profits are made on tiny price variations, unscrupulous players can profit in some manipulation, like that caused by rumors. However, the SEC has the ability to supervise this possibility.

The SEC should protect small investors from active traders who could conceivably be hurt by high-frequency trading with their faster computers. At the same time, high-frequency trading benefits small investors who use mutual funds.

That is why I feel there is no problem that some have envisioned.