Friday, March 27, 2015

A False Cresendo

Before being crushed by the falling sky that they always predict, American neo-conservatives were the only ones predicting an orgy of violence and death in Iraq after the withdrawal of U.S. forces.  However, nobody predicted the Arab Spring, when the governments of several Arab governments including Tunisia, Egypt, and Libya collapsed suddenly into bloodshed.  And, NOBODY foresaw an epic clash between Sunni Islam and Shia Islam in the budding war in Yemen.

As an American taxpayer tired of sending boatloads of dollars to keep Muslims from killing each other, I secretly wish for a climactic "mother-of-all-battles" to conclude this centuries old conflict between Sunni and Shia.  But, this war in Yemen will not do that.  Many more Muslims will be killed, and the hatred between both sects will only harden.

Maybe, the only way to solve such an intractable problem like this . . . is for Starbuck's to write "Islam Together" on all their cups?

Thursday, March 26, 2015

Prohibitive Opportunity Cost

One of the most useful concepts in economics is that of "opportunity cost," which means that everything has two costs, i.e., the dollar cost and the opportunity cost.  An example is that a man's suit might cost $300, which is the dollar cost.  The opportunity cost might be a man's suit costs three ladies' dresses and a pair of ladies'shoes.  The classic example is that our nation can have one new aircraft carrier or it can have one new hospital, fifteen outpatient centers, and a transportation system for patients -- which do we prefer?  What opportunities are we willing to give up, in order to get something else?

For many years, I have devoted much of my time to studying and thinking about investing and financial planning.  I think I know a good deal about those subjects.  But, there is an opportunity cost to spending so much time on those subjects.

I know nothing about televisions and the bewildering universe of high-tech electronics surrounding televisions!  That is the opportunity cost to me for studying the things I love.

A few months ago, I went into Best Buy and could not get past the question of "LCD, LED or plasma."  Huh?  So, being able to recognize what I that don't know, I hired a consultant to go back to Best Buy with me.  His dollar cost is part of my opportunity cost.

Today, I am the proud owner of 50" Sony Smart TV, Ultra HD, Wi-Fi certified, 3-D television complete with 3-D glasses.  Huh?  I'm not sure what all that means, but all the components seem to work together, it fits the room, and it looks unbelievable.  The best part is that I didn't have to spend much time learning about all this technology.  The time I would have to spend to understand all that would have been a prohibitive opportunity cost for me.

Remember the good-old-days when the only question was "black & white or color" . . . ?  For a person to make such a high-tech bundle of decisions . . . well, it does require expertise, and I'll pay for somebody else to have that expertise!

Wednesday, March 25, 2015

Speed Limit 2.2

When I was a young economics student in the last century, a GDP growth rate of 4% was good but not extraordinary.  It was at this rate the economy could grow without igniting inflation.  By the beginning of the Global Financial Crisis (GFC) in 2008, that maximum growth rate was close to 2.8%.  Today, it is probably only 2.2%.

So, why has this maximum safe speed continued to drop, especially since the recovery began in 2009?  One primary reason is that state and local government spending decreased significantly since the GFC and is now just getting back to 2008 levels.  Another reason is that consumers have worked hard on reducing debt by spending less (good in the long run but bad in the short run).  Also, our exports have suffered as the dollar rose against the currency of most other nations.

But, enough attention has not been paid to our aging workforce   The current inflow of new workers is not replacing the outflow of baby boomers retiring or just dying.  The workforce used to grow at 0.9% per year but is now growing at only 0.6% a year -- sounds small but actually makes a big difference.  Productivity per worker used to grow at 1.9% per year but is now expected to grow at only 1.6% going forward, as the benefits of the computer revolution fade into diminishing returns.

Why didn't Japan benefit as much as the U.S. from the computer revolution?  It doesn't matter how much your productivity gains are if your workforce is decreasing.

In 1970, just 9.9% of our population was over the age of 65.  By 2010, that had increased to 13.0% and is expected to reach 16.8% by 2020.  We're getting old!  The baby bust since 1970 is hurting us.  Forget Paul Ehrlich's classic best-seller The Population Bomb in 1968.  We baby boomers should have been making more babies instead of just making love.  That chicken has come home!

While I religiously avoid inflammatory rhetoric, I must ignore my nationalistic leanings to express my gratitude for those brave undocumented workers who come great distances to help their young families and to help our old ones.  We need you!

Monday, March 23, 2015

The Second Time Around

The first President Bush once joked that the best thing about being president was that he didn't have to eat broccoli anymore.  Late night comedians promptly had fodder for a variety of jokes about "negative goals."  You know, the goal for your kid is that he or she grows up and becomes a non-politician.  The goal of athletes is to NOT win, and all that.

Negative goals also exist for retirees, like NOT living at the poverty level.  One retiree I know had a goal of NOT working.  He didn't have any positive goals that I ever knew, like finishing his college degree or hiking the Appalachian trial or taking a cruise or anything else.  His only goal was simply to NOT work.

Maybe, if a person worked in a coal mine, inhaling coal dust, digging the carbon out of a hole a mile deep, then his perception of work would be understandably different from someone who worked in an office all his life.  I do understand that but suspect that is an extreme example.

A new survey by Merrill Lynch found that 42% of existing retirees either have worked or are planning to work during retirement.  Among workers, otherwise known as pre-retirees, fully 72% expect to work during retirement.

Of course, I understand the baby-boomer generation got blindsided by the death of corporate pensions and were slow to grasp the benefits of defined contribution plans, like 401(k)'s.  Still, according to the survey, "retirees are four times as likely to say they are continuing to work because they want to rather than because they must."

Eighty-three percent of the "working" retirees only work part-time.  Sixty percent of them went into entirely new fields.   Incredibly,  one-third of working retirees now own their their own business.

The world of retirement has changed.  No longer does an employee get a gold watch before going off to die somewhere else.  Longevity has changed all that.  Retirement now offers an opportunity for a second career, a second opportunity for growth and a cure for the retirement boredom or emptiness that financial planners see so often.

Sunday, March 22, 2015

A Pressure Release Valve

I feel qualified to discuss economics, investing, and financial planning.  However, I feel unqualified to discuss religion . . . which I will now discuss.

For convenience, let's assume everybody on Earth is either a Christian, a Jew, a Hindu, a Buddhist, or a Muslim.  That's five major religions.  Yet, a disproportionate share of world disorder involves Islam.  While all religions have zealots or "true believers," my observation has been that all major religions are able to marginalize their extremists except Islam.

Do you remember the crazy preacher of Westboro Baptist Church in Topeka, Kansas who thought it was a good idea for his congregation to travel around the country, demonstrating at the funerals for our fallen heroes, who died in Iraq & Afghanistan, simply because they died fighting for a country that tolerates gay people?  He was a Christian extremist, whose 15-minutes of fame have thankfully passed.  More importantly, his Biblical poison didn't spread.  He was marginalized, but why?

Increasingly, religion is our country is capitalistic or atomized into independent units.  Preachers rise or fall based on their ability to sell "The Word."  Just as there is a market for tofu, there is a market for extreme religion, but it is a really small market in the U.S.   Except for hot-button social issues like abortion and homosexuality, our government stays relatively un-involved in our religion.  Our extremists are able to vent their spleen without government approval or disapproval.  We have a pressure-release valve for extremism.  Is this the same case in Islam?

A friend tells me that my thinking is flawed, as there are not five major religions but six.  His point is that there are two Islams, i.e., Sunni Islam and Shia Islam, which are wholly different.  The troubles of the world revolve around that divide.  We are just caught up in their civil war.  I understand his point, but still believe that the many respective governments of both Islams are so supportive of religion that they actually encourage extremism.

The first amendment of the Constitution says "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof."

That's a good rule!  Maybe Islamic governments should try it . . .

Friday, March 20, 2015

Fantasy Revisited

Every "C" student in every Economics 101 course in every college in every state of this country knows that a national economic policy has both a monetary policy and a fiscal policy.  Monetary policy are those actions taken by the central bank (Fed) to affect the economy.  Fiscal policy are those actions taken - or not taken - by the central government to affect the economy.

There is general agreement among economists that monetary policy has been the only tool available to recover from the Global Financial Crisis.  Fiscal policy has been absent.  It has been a one-fisted fight!  My fantasy has been to grab Obama and Boehner by their shirt collars, knock their heads together, and use my  precision Army vocabulary to verbally assault them, as well as insult their entire bloodline . . . loudly.

However, at a recent conference, I heard Alice Revlin speak.  She is the former director of the Congressional Budget Office as well as Vice Chair of the Fed.  She emphasized that the death of fiscal policy is not recent and, in fact, has been dead since 1974.  I've been reading and thinking about that comment and think she is right, but with the caveat that it has been a slow, gradual death since that time.  Past sins of Congress do not approach the uselessness of the present Congress.

But her point is well made.  While grabbing their shirt collars, I should not fantasize about saying "Mr. Obama & Mr. Boehner, your inability to compromise is seriously hurting our country both now and in the future" (translated loosely from my precision Army vocabulary).  Instead, I should address them more respectfully as "Mr. President & Mr. Speaker" because their predecessors were also guilty, even if less so.

It makes me wonder if the sins of partisan redistricting compound, like interest, and increase over time.  If Republican voters are corralled into one political district, doesn't that tend to make the congressman more highly partisan than a district that is only 50% Republican?  (Of course, the same logic applies when you corral Democratic voters into one district.)  Maybe my new fantasy should be that the cancer of partisan redistricting would be removed from the body politic?  Maybe then we could see a rebirth and recovery of fiscal policy.

Thursday, March 19, 2015

What's Wrong ??

Several times in the last few days, I've been asked what's wrong with the stock market?  I guess it must be "wrong" not to set a new record high every other day?  We're only a few percentage points from all-time highs, but that was a month ago - ancient history, I guess.

Yes, volatility in the stock market has increased, but that is a normal occurrence when the stock market is shifting gears.  Over the last few months, there has been a lot of news for the market to digest.  Oil has hit new lows.  This redistributes money within the U.S. economy.  Outside our economy, this sends some oil producers like Russia and Venezuela circling ever closer to the drain, causing geopolitical unrest.  The dollar has hit new highes.  This redistributes income from nations with expensive currencies, like the U.S., to nations with cheaper currency, like the European Union.  Also, don't forget that economy is producing over 200 thousand jobs per month.  (Interestingly, wages earned by farm workers are now growing faster than wages for high school students.)  Don't forget that talks between Greece and the EU are going poorly, and "Grexit"" is becoming a real possibility.

Of course, the biggest adjustment for the market to swallow is the Fed finally letting interest rates rise, after six years of zero rates.  Yesterday's removal of the word "patient" from the Fed's minutes does not mean the Fed is now impatient to raise interest rates.  But, the market will eventually get comfortable with the idea that the Fed can now raise rates, because the economy is actually doing better, not worse.

And, no, the possibility of systemic collapse of the financial system is not becoming more likely.  In fact, once the new rules on derivatives disclosure start in 2017, I will finally stop worrying so much about this.

Despite recent economic data that suggests the economy is stalling somewhat, it is not!  It is shifting gears to grow more later.  Worry about something else . . . like why you didn't keep your New Year's Resolution, for example.  OK, why didn't you?

Sunday, March 15, 2015

Don't . . . Eat The Rich

There has been a book, a song, and a play entitled "Eat the Rich."  It plays into a very basic human jealously, but it has been emotionally reinforced by the belief that the rich benefited unfairly during the Global Financial Crisis (GFC) of 2008/9 . . . while others were suffering.

It is often reported that the rich got richer during the GFC.  Yes, it is true they owned a larger piece of the pie or national wealth after it was all over.  But, it was a smaller pie!  Like almost everybody else, the rich lost money during the GFC.  In dollar terms, they lost more per person than those in the middle or lower classes.  In percentage terms, they lost less.

For the middle and lower class, their home is usually their largest investment.  Housing also got crushed during the GFC.  If you have 10% equity in your home and if the market value drops 10%, then you have lost 100% of your equity.  The vast majority of the rich have little or no mortgage debt.  They argue their percentage of total national wealth increased because they were more risk adverse and avoided mortgages.  In other words, they were smarter.

The rich also stayed in the stock market for the long-run, even when it was down.  The other classes needed whatever cash they had in stocks and sold them, which means they missed the huge bull market that followed the GFC.  In other words, the rich were smarter.

Or, they could afford to be smarter.

Being rich means you can afford to have a nicer lifestyle, PLUS you have more choices and can choose to be smarter.

But, being smarter doesn't make you any tastier to eat . . . The rich benefited because they were lucky, not because they were bad or devious.  The rich are just people too!  Please don't eat them!!

Friday, March 13, 2015

His Due

It sounds like "inside baseball" or too hopelessly arcane to be interesting or important, but it is.  Do you believe a stockbroker should tell you the total fees he is charging you?  Or not?  Do you believe that a stockbroker should tell you when he has a conflict-of-interest with you, such as selling you a mutual fund that sends he and his wife to Hawaii for a week, instead of a better fund that does not send him to Hawaii?  Or not?

Registered financial advisors tell you these things, but stockbrokers do not.  Financial advisors are held to a "fiduciary standard" whereas stockbrokers are held to a "suitability standard" which is a much lower standard.  Stockbrokers cannot simply "cheat" you, but they don't have tell the full truth either.

For at least ten years, financial advisors have been urging the S.E.C. to make the fiduciary standard apply to stockbrokers, who have fought this vigorously.  They don't want to be held to the higher standard, as it will be more difficult to monitor compliance, and they will therefore have to "dump" small accounts.  Or, so they threaten.

Frankly, I had been losing interest in this debate, but then an 800-lb-gorilla suddenly got involved.  President Obama has come out in support of the fiduciary standard, at least for retirement accounts.  While I'm surprised he was even aware of the decade-old debate, all I can say is . . . thank you, Mr. President!

Wednesday, March 11, 2015

Shouting Truth To Power

The Fed was created by an act of Congress and could theoretically be terminated by Congress.  So, the Fed has to be respectful of Congress.

Prior to the creation of the Fed, our economic policy consisted fiscal policy alone, i.e., controlling the economy with the Federal budget and regulation.  The purpose of the Fed was to manage monetary policy, i.e., controlling the economy with the money supply and regulation of banking.  They wisely felt that a two-fisted or binary approach to economic policy would be more effective, and they were right!

The Chairman of the Fed is required to testify before each house of Congress twice a year, producing four very dull performances.  The Fed Head is always respectful, maybe more respectful than he should be.  For the last forty years, we have had an active monetary policy but a passive fiscal policy.  Congress has been unable to balance their budget over a year, as Austrian economists want, or over a business cycle, as Keynesian economists want.

One time, Fed Head Paul Volcker warned Congress he would "break the back" of inflation by himself, since Congress could not control its spending and taxing.  He promptly raised interest rates to traumatic levels, plunging America into a full-blown recession.  Congress howled but did nothing to improve their handling of fiscal policy.  Fortunately, the recession did as expected, reducing inflation.  Brinksmanship paid off!

His successor was Alan Greenspan, who used obtuse vocabulary to confuse and intimidate Congress but never threatened them.  Ever the Libertarian, he would sometimes make snide remarks, such as that companies would never do anything that threatened their own existence.  (Ask Lehman Brothers!)  He enjoyed a cozy relationship with Congress.

Next was Ben Bernanke, who famously said he didn't believe in brinksmanship with Congress.  He used monetary policy to steer the economy alone, without benefit of fiscal policy.  (I have the greatest respect for him and the single-handed role he played during the Global Financial Crisis.)  While he was always clear that he would appreciate some help from Congress, he never called them irresponsible.

Currently, the new Fed Head is Janet Yellen, and it is not yet clear how much truth she will speak to Congress.  One early observation is that she has a tendency to talk-over any idiot member of Congress, which is a step in the right direction.  You, Go, Girl!

The economy is now healing but Congress deserves no thanks.  Nobody is proud of the blunt force weapon that sequestration is!  How do we get fiscal policy working again?  Should we put the economy into recession again?   Did Paul Volcker do the right thing?  It was bad in the short term but helped America in the long term.

As long as Congress has the power to terminate the Fed, it will be difficult for the Fed to even whisper truth to power.  At the very least, the Fed should not volunteer to give up on brinksmanship.

Rand Paul is wrong!  The Fed must be strengthened and made safe from Congress.

Tuesday, March 10, 2015

Presidential Flexibility

Instead of another droll economist, yesterday's luncheon speaker was a Washington "insider."  He made  some interesting comparisons about our Presidents.  For example, both Clinton and Obama sustained large losses in the first mid-term election of their first term.  However, President Clinton is a person who wanted to be "liked" and changed his policies.  Today, he is a popular former President.  Even some Republicans respect him.  On the other hand, President Obama is so confident in his own intelligence and the correctness of his positions that he will not change them, believing it is his job to do the "right" thing and that history will be kind.

So, what recent President was most like Obama?  President George W. Bush - because he was also more concerned with being right than being liked.  He was so convinced that occupying Iraq and Afghanistan was the morally right thing to do that he ignored the growing opposition from the American people.  History has yet to be kind to his legacy.

The point our speaker was making is that Americans will not follow for very long, no matter how good a leader the President may be, unless they are being led in the right direction.  Since nobody is perfect and makes mistakes, let us hope the next President is flexible enough to lead us where we want to go, not where he thinks we should go.  But, how do you measure a person's flexibility?

Of course, maybe inflexibility is just another reflection of gerrymandering to produce rabid partisans?

Saturday, March 7, 2015


Probably, the least known part of my job is the never-ending pursuit of continuing education (CE) hours.  As a Certified Financial Planner (R) certificant, as well as a Certified Investment Management Analyst (R) certificant and a NAPFA-Registered Financial Advisor, I have to "feed" all three organizations with an unending flow of CEs.  Therefore, I attend far more conferences than the average person, because I am chasing CEs.  (I'm jealous CPAs don't have to do all this.)

Certainly, my favorite conference each year is the National Policy Conference of the National Association of Business Economics in Washington, D.C.  Most attendees are investment and planning illiterates, but they are bright - very bright - economic nerds.

Some attend wearing their red-tinted glasses and some wear their blue-tinted glasses, but most are non-partisan economic nerds, just trying to understand reality without a political agenda.  I truly enjoy this intellectual orgy of thought.

Friday, March 6, 2015

A Boring Big Deal

While everybody was watching winter's last fury for this year (I hope), the Fed released a little-noticed report on its annual "stress-tests" of the 31 largest banks in the United States.  The good news was that all 31 have passed and with relative ease.  The better news is that the test was actually severe enough to match the Global Financial Crisis of 2008/9.  We are now much better prepared than we were before.

My greatest fear has long been that we will have a "Jim Fixx moment.,"  You'll recall he was the father of running revolution who was healthy and lean but dropped dead from a heart attack.  My fear is that a derivatives blow-up, probably a credit default swap, will so weaken our banking system that it suffers a "heart attack."  That fear is now reduced . . . somewhat.

The fear largely remains due to the lack of meaningful stress tests of foreign banks.  A typical problem is that we don't know who is guaranteeing what debt to whom nor for how long.   For example, if Greece defaults, what customer of which European bank will default on his loan from the bank, causing the bank to write off that loan against its capital account.

Real progress has been made.  Now, when the ECB does what the Fed has done, I may stop feeling like Jim Fixx, even if I don't stop worrying . . . 

Tuesday, March 3, 2015

"Uncle" Jeremy Semi-Warns

My favorite professor at Wharton - the brilliant but affable Dr. Jeremy Siegel - enjoys a reputation for being an accurate forecaster as well as a "perma-bull," i.e., someone who always thinks things will get better.

Yesterday, he pointed out that the PE ratio for the S&P 500 is now 19 times last year's earnings per share.  This is significantly above the long-run trend of 16.7, suggesting the market is now fully-valued, historically speaking.  It is even more remarkable that the market is so fully-valued in the face of so many companies decreasing their future earnings, primarily due to the stronger dollar.

However, he is not calling for a market correction.  Given the historically low interest rate environment, he believes that a higher PE ratio is justified . . . at least for now.

Of course, interest rates are going up, sooner or later.  Yes, but earnings per share are also going up, sooner or later!

Stay the course . . . at least for now.

Monday, March 2, 2015

That Fearsome Number

Here, at the corner of Good Planning and Good Living, where I practice, I usually feel an obligation to teach my clients whenever possible, or at least, to help them see a wrinkle in their perspective that might be helpful.  Quite often, they teach me.

Recently, I was visiting a client and discussing the requirement that he begin taking minimum required distributions from his IRA since he had turned 70.  His demeanor changed at this, and I suspected he had a problem thinking about being 70 and asked him.  Paraphrasing now, he replied he did not, but he was very apprehensive about turning 80.

As this man was a hard-driving executive with a fondness for numbers and the gift of cold logic, I suspected his apprehension might spring from his inability to command the aging process, even though he has done a great job of managing it,  Although he is quite a good 70-year-old athlete now, he can still only manage the process, not stop it.  Some people just have a high need to control.  I think I mumbled something about the pride earned by being 80, but that didn't change his perspective much at all.

Since then, I've been thinking about the change from being 70 to being 80, as opposed from age 50 to 60 for example.  My first thought was that 80-year-olds used to be relatively rare but are now commonplace, which would make the obvious physical changes more routine and less startling.

More commonly, I see people concerned about the visible change in physical appearance by age 80.  Women fret about the loss of bone density, as men fret about the loss of muscle mass.  Is there any other word for age 80 than old?  And, is that a bad word anyway?  While there are lots of physically vibrant 70-year-olds, there are vastly fewer at age 80.

Financially, I don't see the uncertainty and fear that I see in most 50-year-olds.  80-year-olds have out-lived that fear and conquered it.  Popular wisdom says that older investors take less risk than younger investors, but there are numerous exceptions.  My least risk-adverse client is well into his 90's.

Socially, my totally unscientific observation is that 80-year-olds seek out fewer social activities but seem to enjoy them more.  By that age, I guess they know what type of activities they enjoy or maybe what type of people they want to be social with.  I would like to better understand this part of the aging process.

Beyond the physical decline, there is often both a mental decline and a psychological decline.  These are probably the greatest fears.  The science of arresting mental decline is not as advanced as the science of arresting physical decline, but it is growing faster.  At this point, doing different things with the mind, different than the mind is accustomed to doing, seems the best self-help remedy.  This is within our control.  We can, at least, practice doing different things with our mind.

The science of arresting psychological decline is still very rudimentary at this point.  Some people become extremely isolated and bitter at the world, for no apparent reason.  I suspect psychological decline is best arrested by associating with a number of different types of people and studying their psychological state.  So much research is needed in this area and so little is being done.

Twenty years ago, I recall a late client in his late 70's telling me that his mind was finally stronger than his libido, and he was glad about that.  I'm still struggling with this concept . . .

Cold logic suggests you will either live to be 80 or you will not.  If you don't, there is nothing to worry about.  If you do, you will be happier if you start planning now for the expected problems later.  Exercise your body - you know how to do that, don't you?  Exercise your mind by doing different things with it.  Exercise your psychological/emotion condition by tolerating/studying different types of people now.  Either you will plan ahead . . . or you won't.

Now, make your financial planner happy!

Friday, February 27, 2015

You Go Girl!

The optics make me smile.  There is a little, old grandmother with white hair sitting at a table alone, facing off with a panel of men who question, sometimes rudely, everything she has done and everything she plans to do.  Those are the optics for the twice yearly testimony of the Fed Head before the separate houses of Congress.  The best part is that she holds her own quite nicely.  She answers intelligent questions with added intelligence and expertise.  She answers lame questions with graciousness.  She answers threats with simultaneous over-talking.  She is an excellent economist.  (Indeed, she is married to another economist and the mother of still yet another.)  She has far greater economic expertise than anybody questioning her.

But, does she need to be an economist?  Because the stock market tends to over-react to most everything the Fed does, she might need a public relations background more than an economics background.  Anybody who can spell F-E-D knows they are planning to raise interest rates sometime within the next twelve months or so.  The PR problem is that bonds adjust to "end-pricing" as well as current pricing.  Remember:  the price of bonds drops when interest rates rise.  She may only raise rates by a quarter-point but bonds could drop enough to justify a full-point rate increase.  His mission is to convince the bond market that the Fed will only raise interest rates slowly and not too much.  If the bond market doesn't believe that, the bond market will tank scarily.  The Fed can easily lose control of interest rates if that happens.  Unfortunately, media management is not taught to economists.

But, does she need to be an economist plus a media manager?  Because the Fed is such a powerful agency, those who fear everything about the notion of government, particularly Libertarians, want increased supervision of it.  Senator Rand Paul has again introduced legislation to "audit" the Fed.  What could be wrong about that?  We certainly don't want anybody stealing money from the Fed, do we?  I'm trying to recall how many different audits the Fed already conducts each year and seem to recall the number is twelve, with the reserve banks being audited separately.  In general, Senator Paul wants to audit how the decisions to change monetary policy are made.  In particular, he wants to make sure that Austrian economics is used to the exclusion of other economic approaches.  This is a crazy idea, and I wish him no luck with this legislation.  But, the Fed Head must stand up to her full 5'2" and stop his legislation.  She needs to be a lobbyist to protect the independence of the Fed from partisan interference.

But, does she need to be an economist plus a media manager plus a lobbyist?  Yes!

Thursday, February 26, 2015

Leading On The Dance Floor

Recent data suggests that the economy is sputtering somewhat, but I'm not particularly worried about that.  It probably suggests the GDP growth rate is slowing from the 3.5 to 4.0% range to a more sustainable 3.0 to 3.5% range.

Does that suggest the stock market is slowing?  No!  Over the last 115 years, the Dow has dropped 30% or more thirteen times.  The average bull market following each of these drops was 8.8 years.  The current rally is below average in both length and strength.  Take a look at this chart:

Chart of the Day
The normal relationship between the stock market and the economy is that the stock market predicts the economy.  It normally leads by six to nine months!  That suggests that, since the stock market bull has longer to run, that the economy will soon be picking up more momentum.  I certainly hope so, but we have been hoping that for a long time.

On the dance floor, my wife tells me to lead, even when I'm barely clutching my last shred of dignity.  In the economy, the stock market is telling the elected clowns in Washington to lead.  Unfortunately, they don't remember how to lead any better than I do . . .

At least, my wife doesn't tell me to "lead, follow, or get the hell out of the way!"

Wednesday, February 25, 2015

Special Words

When I joined the Army many decades ago, I knew very little.  About the only thing I knew was that I wanted to be the best possible soldier and to make my father proud.  So, I applied to become a "Green Beret." However, it was close to graduation before I realized our proper name was actually "Special Forces."  For many years, we were the only Special Forces.  Over time, other military units also became known as Special Forces, such as the Navy Seals, Marine LRRPs, (Long Range Recon Patrols), and Delta Forces.  The term of Special Forces became a term of art, rather than a term of precision.

Recently, the Secretary of the Veterans Administration got into trouble by saying he had been a member of Special Forces, which was not true -- technically.  Since then, he has apologized, but he continues to get pummeled by the media and others.  As it turns out, he was instead an "Airborne Ranger" which means he was tough enough to be a Ranger and dumb enough to jump out of a perfectly good airplane. (I repeat that joke with respect.)  As an old Special Forces trooper myself, with the dirty beret, the now-too-tight jungle fatigues, and the all-important DD-214 to prove it, I take no offense at Secretary McDonald's loose assertion that he was also part of Special Forces. As an Airborne Ranger, he has earned my respect!

Now, if he will start firing even more employees at the well-intentioned-Affirmative-Action-program-run-amuck, that is the Veterans Administration today, he will have also earned my gratitude!

Tuesday, February 24, 2015

Watching Molasses

For at least ten years, there has been a simmering battle between financial advisors and stockbrokers.  The battleground has been fought in the SEC, FINRA (which regulates stockbrokers) and lobbyists from one end of Connecticut Avenue to the other.  It has been as exciting as watching molasses ooze.  They have been fighting about whether stockbrokers should adhere to a suitability standard or a fiduciary standard.  Are you yawning yet?

A suitability standard requires a stockbroker to put the money of his clients into investments that are suitable.  That means a barely-suitable mutual fund can pay "kickbacks" or hidden fees to the stockbroker and his employer.  It is not uncommon for a stockbroker to spend a week in Hawaii with his wife, all paid for by the mutual fund company, just for investing, say, $250 thousand of client funds in that particular mutual fund.  Sometimes, the mutual fund companies pay big upfront commissions plus "12b-1" fees to stockbrokers each year.  Sometimes, the stockbrokers employer operates their own mutual fund, keeping all fees for themselves.  Personally, I find all this very sleazy!

A fiduciary standard requires a financial advisor to put the best interests of his client before his own.  That means no hidden fees.  That means the choice of mutual funds is based on the client's investment needs, not the income needs of the stockbroker.

For at least ten years, there has been a lot of talk about this and no action -- just like immigration.  Yesterday, the President did an end-run around the SEC and FINRA and the lobbyists by proposing the Department of Labor start enforcing the fiduciary standard on managers of retirement funds,

It is similar to the immigration battle, don't you think?  

Tuesday, February 17, 2015

One More Time . . .

I've written this before.  In fact, whenever the stock market hits a new high, I have to write it again.

The S&P 500 was up 13% last year, but your portfolio was not.  Should you be unhappy about this?  NO!  In fact, if your portfolio was up that much, you should consider firing your investment advisor for taking too much risk.

Remember, if you took a little risk and had a 5% return, that was a good return.  However, if you took a lot of risk and had a 5% return, that was a lousy return.  As risk increases, so should returns, but how much risk do you want?  Seriously, how much risk do you want?

Since 1990, when it won the Nobel prize, Modern Portfolio Theory has demonstrated that risk can be minimized and returns can be maximized over the long-term by investing in multiple asset classes.  That means you should have some money invested in the stocks of big companies, of middle-sized companies, of small companies, of foreign companies, as well as some bonds, some commodities, maybe some currencies, and yes, some cash.

Anytime one of these asset classes hits a new high, some naive investors think their whole portfolio should have done equally as well.  Right now, the S&P 500 just hit a new high.  The S&P 500 is exclusively large-cap stocks.  If you are invested in large-cap stocks alone, you have taken too much risk.  If you are not invested in large-cap stocks alone, you didn't get a 13% return last year.

So, how much risk do you want?

Monday, February 16, 2015


Since ISIS or ISIL burst onto the world's stage last year, I've been trying to get my head around the subject of "evil."  To me, it seemed that ISIS had taken the notion of evil to a whole new level.  Hitler and Stalin certainly killed more people but in a more mechanical and a somewhat less horrific manner.  ISIS seems to relish murder more than other "evil" men.  It seems more akin to a horrible aphrodisiac for them.  As an old soldier, ISIS truly frightens me.  Their objective is accomplished!

Looking for a definition of evil, I recalled being taught that evil was anything un-Christian and that the devil was a real supernatural being, a fallen angel even.  Then, I descended into a definitional purgatory and found more definitions of evil than I could ever comprehend.  Some were as simple as the absence of good.  Some definitions included thousands of words.  I even read the thoughtful Evil:  An Investigation by Lance Morrow, where I learned that different generations have different definitions of evil, further complicating acceptance of any one definition.

Then, I wondered if being evil was like being pregnant, either you are or you are not.  Are there degrees of evil?  In Islam, there is no concept of absolute or pure evil.  In Hinduism, there is no concept of evil people, only evil actions.  In Judaism, since evil is not part of God's creation, it can only exist by the bad actions of people making bad choices.  Plus, evil is not personified by Satan, who was just another angel controlled by God.  Psychology giant Philip Zimbardo suggested people act in evil ways as part of their collective identity, not their individual identity.  This makes sense, except it doesn't explain how collective identities become evil.

After wandering through definitional purgatory for months, I do believe that ISIS is the most pure evil I've ever studied.  But my biggest fear is that the savages of ISIS simply reveal mankind without the thin veneers of both civility and sensitivity.  Even worse, are they nothing more than savages pumped up on the steroids of religion?  If so, how do we destroy them with the dignity and decency they deny to others?

Friday, February 13, 2015

Too Sudden And Too Severe

The staggering drop in oil late last year was universally unexpected.  While we have seen drops before, this one is both sudden and severe.  My take on it was that North American frackers were so successful in making us energy independent that the world slowly became over-supplied with oil.
Then, when questions about the global economy suggested oil demand would fall, the initial drop in the price of oil became magnified.  Saudi Arabia, as the "swing" producer could easily have withheld oil from the market and maintained the price.  However, they are also the low-cost producer and can still make a profit at today's prices.  The problem is that North America frackers cannot!  If those frackers go out of business, that would be fine with Saudi Arabia and OPEC.  We would lose our hard-won energy independence.

Now, take a look at this graph:

Chart of the Day

Technical analysts, who attach great significance to charts, look at this chart and tell us that the drop in the price of gas, as a proxy for oil, is not sustainable.  A drop in price was justifiable in terms of supply & demand, but this was too sudden and too severe to be sustainable.  The chart tells us there is more than economics involved.  The ugly nose of geopolitics is under-the-tent.

Economists tell us the drop is unsustainable, but foreign politicians may yet make it sustainable, albeit for the wrong reasons.

Thursday, February 12, 2015

He Said, She Said . . .

Negotiations are underway to resolve the Greek Debt Tragedy, version 3.1.  Unfortunately, it has become a Greece versus Germany battle.  Greece argues that one-third of their debt should be forgiven.  After all, one-half of Germany's debt was forgiven after World War II.  In addition, Germany inflicted immeasurable destruction on Greece during that war and never paid a penny of reparations to Greece.  In other words, Greece is not the debtor, Germany is!

Germany argues that their forgiven debt was a result of war, not of profligate spending, i.e., lavishing entitlements on its citizens, as Greece has done.  Apparently, debt to kill people is forgivable while debt to spoil people is not?

Another problem is that Germany conflates economics with religion.  Germany is home to Austrian economics, which believes every budget must be balanced every year.  They insist, with a missionary zeal, that Greece do the same.  And, we all know how much more difficult it is to negotiate with "true believers."

Greece also argues that Germany's many export industries have benefited from having Greece in the European Union.  This is because the euro would have been stronger without the lousy credit of Greece.  While there is probably some theoretical truth to this, it's significance is academic and tiny.

The reason Greek Debt Tragedy, version 3.1, will be less damaging than previous versions is that Greek bonds are no longer owned by weak European banks.  Those bonds are now in the strong hands of the ECB and other government agencies.  In other words, a default by Greece will no longer have a fatal domino effect.

Greece also argues that the European Union will disintegrate without them, which is analogous to saying the United States would disintegrate without Rhode Island.  Our stock market will be volatile and messy for awhile, but it will also be a good time to invest more cash.

Wednesday, February 11, 2015

A JOLTing Report

We are so accustomed to economic data that contradicts other economic data that we become almost giddy when data does agree.  Last week's Jobs Report was simply great, showing a million jobs created over the last three months, as well as discouraged workers streaming back into the workforce.  Yesterday's JOLTS (Job Openings & Labor Turnover Survey) Report confirms the tightening of the labor force.

In 2009, there were 6.8 job-seekers for every job opening.  Today, there are only 1.9 job-seekers per opening.  There are now five million job openings -- THE MOST IN FOURTEEN YEARS.  Because it takes both courage and confidence to quit a job, the number of quits is also watched closely, and the good news is that 2.7 million workers quit their jobs in December, up 10.4% over the previous year.

The only "bad" news is that the current unemployment rate of 5.7% is high relative to the number of job openings.  This suggests a higher level of structural unemployment, that which cannot be decreased by the improving economy, because the unemployed don't have the right job skills or they live in the wrong part of the country.  Trying to drive down structural unemployment could be extremely inflationary.

At this point, there have been minimal wage gains among the working class.  I expect we will soon witness some significant wage gains for them.  At least, I hope so!  It is hard to argue that our economy is not doing well enough to pay increased wages.  It is a question of economic power, which is slowly shifting from management to labor.  CEOs would be wise to pacify their workers now, before those workers either quit their jobs for another or, even worse, remember the purpose of unions.

Sunday, February 8, 2015

Sweet Satisfaction

It is with sweet satisfaction when you learn that something you always suspected is now justified by research.  I have never believed that either the body or the mind were machines that simply wear out over time.  I have suspected the aging process can be delayed by both physical exercise and mental exercise.  Yesterday's Wall Street Journal details that research -- Read it!

Both the body and the mind are adaptive, which means they try to change and adapt to the tasks asked of them.  We know countless examples of people whose body adapted to physical exercise and stayed in remarkable condition.  While it is harder to document, it is equally clear that some people maintain clear-thinking minds until the end of a long life.

What was interesting to me was that mental exercise must be as varied as physical exercise.  We already know it is not enough to do cardio exercise without some weight exercise and vice versa.  We've learned that yoga is surprisingly useful in delaying the aging process.

There is more to mental exercise than "use it or lose it."  The research showed that doing one crossword puzzle per day is not mental exercise.  Mental exercise needs to be varied and new.  Engineers should study poetry, for example.  Social workers should study math.  "Homebodies" should study geography.  In other words, studying the same subject over and over again doesn't delay the brain's aging process as much as studying something different.  It is important to exercise your mind outside your normal interests.

Maybe, I should study cooking, which is totally and completely outside my normal interests?

Naw . . . not a chance!