Tuesday, July 28, 2015

The Long View

Bobby Doll is the chief equity strategist of Nuveen Asset Management.  Before that, he held the same job at Blackrock.  I have followed his commentary for many years and always try to catch his interviews on CNBC.  His gravitas is amazing, and I have never seen him smile.  But, he never loses the long view, which is so critical during a crisis.

In his latest commentary, he sees the stock markets churning within a relatively narrow range, as it comes to grip with the geopolitical drama of Greece, Puerto Rico, and China.  After that, he is bullish that all the positive fundamentals will eventually overwhelm the front page.  He lists them as a strengthening U.S. economy, the improving outlook for jobs (with jobless claims now at the 1973 low), and modest interest rate increases.  He points out that the Fed has raised rates in a series six times since 1983.  On average, the S&P 500 has increased 14.4% by the 500 day point after the initial increase in interest rates.  Importantly, he also points out the Q2 corporate earnings have been better than expected, about 5.8% better.  So far, 74% of the companies have beat relatively low expectations.

He expects these great fundamentals will overwhelm the headline news at some point and drive the market higher.  In other words, don't lose the long view.  Things are not nearly as bad as the headlines!

Monday, July 27, 2015

Horror Flicks

Greece is off the stage, taking an intermission.  Now, China is spooking the stock markets - in Asia, in Europe, and in the Americas.  (Isn't globalization wonderful?)  The Shanghai Stock Market lost 30% of its value last month.  That is a whopping $3 trillion of wealth destroyed - in one month.  Then, it stabilized, due to extraordinary government intervention.  Today, it dropped another 8.48% - in one day - the biggest one day loss in eight years.  Yes, this is what a crash looks like.

In a effort to transition from an export-based economy to a services-economy, like the U.S. economy, China had to get consumers to spend more.  Understanding the "wealth effect" that people spend more when the stock market is up, the Chinese government and their central bank decided to pump up the market by goosing up margin investing and increasing money supply   Their margin debt now equals 8% of GDP, compared to only 2.8% here.  This was incredibly irresponsible monetary management.  Predictably, their stock market boomed.  In fact, it boomed too much and promptly collapsed.  Obviously, consumer spending also collapsed, and some rioting quickly began.

While I have been to Asia several times, I've only been to China twice.  That certainly doesn't make me a scholar, but I do have a clear idea of the one thing Americans don't understand about the Chinese Communist Party, i.e., they are deathly afraid of social unrest.  Not even the Communist Party can control a billion unhappy people.  It is not an over-statement that they are obsessively paranoid about social unrest.  This is the reason they continued to meddle with their stock market this month, briefly driving it back up before today's collapse.

Following the market collapse, the government took a number of steps that would spell disaster in a free society.  They made margin investing even easier, they lowered interest rates again, and they banned all IPOs because that sucks money out of the market.  Incredibly, they even outlawed short-selling or betting on stocks going down.  Yes, they criminalized a legitimate investment technique.

Expect more social unrest and more draconian measures in China!

More concerning to the world's stock markets is the fear that other stock markets could meltdown like China last month or Russia last year.  While the Russian meltdown was due to the price of oil collapsing and the initial economic sanctions, the Chinese meltdown was due to regulatory negligence.  If the Chinese wanted to orchestrate a meltdown, they would not have done one thing differently.  If there is ever an economic horror movie, this is it!

Of course, there are some important differences between the U.S. and the Chinese stocks markets.  As a percent of GDP, their stock market is tiny compared to our's.  This was one of China's justifications for pumping up their stock market.  Another difference is that most stock trading is by retail investors, which are ordinary people, unlike the U.S. where most are institutional investors.  China accidentally increased the possibility of social unrest among retail investors by meddling with their stock market.  Most importantly, the collapse of the Chinese stock market is unrelated to derivatives trading.  For this reason, the contagion effect will be limited.

The world's second largest economy (15% of world GDP) is slowing down faster than the world's largest economy (the U.S. at 25%) is picking up.  China has been the world's economic engine for 15 years, but that is slowly shifting back to the U.S. -- too slowly.  (I believe there is no chance the Fed will raise interest rates this year!)

While most analysts expected to Chinese economic to drop below 7% this year, causing a worldwide decline in commodities, those estimates of GDP will soon be dropping even more, as the Chinese economy experiences some drag from its financial crisis.  Keep in mind that this drag will not put China into recession, as their growth will remain positive, just less positive, like 4% maybe.

However, there remains the fear that corporate earnings worldwide will be hurt if China slows down faster than the U.S. and Europe speed up.  Earnings this quarter, so far, appear to slowing - not as much as predicted but slowing anyway.  I expect some drag on the U.S. stock market but certainly not a collapse.

Don't you miss that Greek horror flick on the world stage?  They will return . . . and so will China!

Sunday, July 26, 2015

Existential Humor -- No, really!!

Although existentialists have a reputation as dour and sullen, surprisingly, they actually have a sense of humor, even if it is always a bit awkward.  There is the very dark humor.  Dark existentialists like to joke that everyone is going to die, and everything in life is worthless because you're going to die.  Real upbeat souls, they are!  An example would be:  I can't go to the movies tonight, because I don't have time to get shot.  Dark existentialists are no fun and should be avoided.

Light-hearted existential jokes compensate for the seriousness that society in general and religion in particular attach to death.  They are commonplace on the internet.  A good friend sent me the following:


Looks like Florida has a sheriff like Arizona has . . .

The Polk County Florida Sheriff said "You kill a policeman; it means no arrest...no Miranda rights... no negotiations...nothing but as many bullets as we can shoot into you...PERIOD."


An illegal alien, in Polk County , Florida , who got pulled over in a routine traffic stop, ended up "executing" the deputy who stopped him. The deputy was shot eight times, including once behind his right ear at close range. Another deputy was wounded and a police dog killed.

The murderer was found hiding in a wooded area. As soon as he took a shot at the SWAT team, officers opened fire on him. They hit the guy 68 times.

Naturally, the media went nuts and asked why they had to shoot the poor, undocumented immigrant 68 times.  Sheriff Grady Judd told the Orlando Sentinel: "Because that's all the ammunition we had." 


Now, is that just about the all-time greatest answer or what??
 

The Coroner also reported that the illegal alien died of natural causes. When asked by a reporter how that could be, since there were 68 bullet wounds in his body, he simply replied: "When you are shot 68 times you are naturally gonna die."  An even better answer!

And, of course, there are stupid existential jokes, because existentialists are no smarter or dumber than anybody else.  An example would be:  The existentialist went to the liver doctor and "doctor, doctor, my liver is bad, and I'm going to die.  The doctor replies "that's probably not the case, as liver failure victims feel fine."  The existentialist replied "I know,I know, that's exactly how I feel!"

See, existentialists are not entirely dour and sullen??

Thursday, July 23, 2015

Next Currency War?

I know this graph looks a bit complicated initially, but it is interesting.  First, you will see that the dollar (USD) and the Chinese currency or yuan (CNY) pretty much tracked each other until July of last year.  At that time, the Fed ended quantitative easing (QE), and the Fed started talking about interest rate increases.  Naturally, the dollar started rising in value against the euro,the yen, and many other currencies but not the yuan.  A few years ago, China began informally tying the yuan to the dollar.  You can see in the red box that the relationship of the yuan and the dollar has remained relatively constant.

The bad news is that stronger currencies hurt exports.  It is estimated that the US GDP lost $19 billion in exports during the first quarter and at least twice that much in the second quarter.  With the yuan tracking the dollar, that means Chinese exports are getting slammed as well.  The difference is that the US economy is strengthening and can absorb the impact on its exports, while the Chinese economy is weakening and cannot absorb the impact nearly as well.

The US has 25% of the world's GDP.  China has the second largest share of world GDP at 15%.  While their growth rate is higher than ours, the difference is decreasing slightly, and the stronger dollar is helping to reduce that difference.

The question is how long will China maintain this link between the yuan and the dollar?

Market Update: Viva le Dollar
Post QE rise in USD set to repeat as Interest Rates rise
sources: HiddenLevers
Rate Hike
=
s...

Wednesday, July 22, 2015

Reasonable Men Disagreeing

Some people pass through your life too quickly, and you wish for more time with them.

While doing some certification work at Wharton, I was able to hear Dr. Jeremy Siegel of Wharton five times . . . but only five times.  I respected him greatly, because he was an economic agnostic, which means he borrowed from whatever school of economics that made sense out of the numbers.  He was not an ideologue nor a "true believer."  He was way too pragmatic for that.

Given my respect for him, it is uncomfortable for me to disagree with him.  He thinks the Fed will raise interest rates in September, while I think it will be December at the earliest.

Of course, it may be an "inside baseball" difference without a distinction, but it does impact the stock market.  It is not unlike waiting for the guillotine to fall.  The waiting is worse than the action!

As the September meeting date gets closer, I expect the market will weaken somewhat but bounce back nicely when the Fed declines to act.  The same pattern will be repeated in December.  (A gradual rise between both dates is the most likely scenario.)  More important than actually raising the rate will be the Fed minutes. The best scenario is that they raise rates by one-eighth of a percentage point, instead of one-quarter point, while reminding the market that the increase may be a solitary action and further increases will be "data-dependent."  In that case, don't get crushed by running with the bulls.

However, if I am right and Professor Siegel is wrong, I'm still young enough to attribute my correct prediction to "beginner's luck" . . . that is true, right?

Tuesday, July 21, 2015

A GOP Curse

A definition of ad hominem attacks is this:  "Overtly attacking somebody, or more subtly casting doubt on their character or personal attributes as a way to discredit their argument. The result of an ad hominem attack can be to undermine someone's case without actually having to engage with it."  It can usually be found where reason is lost and emotions are found.

To avoid the temptation of saying something negative with too much emotion and too little reason, my late mother always told me "if you can't say something nice, don't say anything at all" -- and, to her credit, I never heard her badmouth another person.

However, after hearing Donald Trump's comments about Senator John McCain's POW years, I can only follow my mother's advice by saying "I will NOT refer to Trump as a pompous, bombastic cowardly windbag, who brings shame to the Republican Party.  So, out of respect for her, I will say nothing."

Nothing!

Monday, July 20, 2015

Happiness On A Monday Morning

Everybody has their memory of living with inflation during the late 1970s.  One of mine was early on a Monday morning in the offices of an insurance company that was buying a construction loan I had made for a large apartment property to be built.  When we arrived, we noticed that everybody was far, far too happy for a Monday morning.  Something had obviously happened to make these people so happy.  Then, we learned that everybody in the office had just been given the news they were receiving a 9% raise to compensate for inflation - no wonder they were so happy!

Eventually, Paul Volcker crushed inflation by raising interest rates as high as 20.5%.  Of course, that also induced a recession.  The lesson was clear:  To crush inflation, create a recession.  Every Fed Head since Volcker has lived with the fear of inflation, because they don't want to create a recession, which drives up unemployment.  Fortunately, there has been only minimal inflation since those days.  In fact, some Fed watchers have been more concerned with deflation, which is a far more difficult problem to control.

The latest data indicates a slight pick-up, very slight - core CPI has held steady at 0.2% a month for six straight months, with food CPI up 0.3% primarily due to Avian flu.  This is good news, because the Fed wants to see a minimum annual rate of inflation of 2% at least.  A little inflation is good, but too much is bad, very bad!

Most analysts believe this makes an interest rate increase in September more likely.  By itself, I agree, but that ignores the concern this particular Fed Board has about unemployment, as well as the pressure from other nations to keep the U.S. economy running as fast as possible.  Plus, exporters are living in fear of a stronger dollar, which happens when you increase interest rates.  Because of all this, I'm doubtful the Fed will raise interest rates this year . . . we'll see.

Thursday, July 16, 2015

Paved With Good Intentions

There is no good intention that cannot eventually be corrupted by craven politicians pandering for votes.

Sometimes derided as the "Appalachian retirement system," the Social Security Disability Insurance (SSDI) program was created in 1956 by Republican Dwight Eisenhower, who promised it would be operated "efficiently and effectively" to help "rehabilitate the disabled so that they may return to useful employment."  A good intention, indeed!

Here are some factoids about that good intention:
1.  It pays out 25% more than it gets in tax revenue.
2.  There are over one million pending applications.
3.  It is expected to become insolvent next year, in 2016.
4.  Eleven million people currently receive SSDI.
5.  In 2013, less than 1% left the program to get a job.
6.  Since the Great Recession started in 2007, applications have increased 28% per year.

Conclusions are pretty obvious, but there are some interesting causes.  One, the mentally-challenged make up an increasing share of the applications, such as autism victims.  Two, applicants are getting younger, as the young feel less attached to corporations who readily fire employees and provide no retirement benefits.  In other words, the "social contract" that used to exist between employers and employees kept people off SSDI but no longer.

One of my favorite relatives believes there should be a "sunset law" for marriage, i.e., that they should automatically expire after 25 years.  It is tempting to suggest such a sunset law for good intentions, but do you think a dysfunction Congress could really make an intelligent decision to revamp this program or any other program?  Some things are too important to be entrusted to our elected politicians.  How about a "Re-invention Agency" that is separate from Congress, like the Fed?

Of course, that agency itself should also expire after 25 years!

Sunday, July 12, 2015

Spock Gets A Kleenex

Years ago, during those days when the TV series Star Trek was a cultural phenomenon, most young men fashioned themselves after the brave commanding officer, Captain Kirk.  I was always more interested in the executive officer, Mr. Spock, who was actually brave enough to control his demons, which some people describe as emotions.  His goal was to be 100% brains and 0% heart.  To achieve that, he avoided situations where one of those demons or emotions might escape his control.

A dear friend insisted that I watch an incredible DVD by Ken Burns.  While many filmmakers have made more films than Mr. Burns, nobody has ever produced more important films.  This one is called Cancer:  The Emperor of All Maladies.  Even a hardened existentialist would hesitate to watch such a DVD, so I put it on a shelf for several months, waiting until a rainy Saturday and until all demons/emotions were safely tucked away.

To repeat, it is an incredible DVD.  There is a great deal of historical information.  Did you know that the idea of chemotherapy arose from the bodies of British soldiers who were victims of mustard gas used by the Germans in 1917?  There is a great deal of technical information.  Do you know that oncogenesis means the change from a healthy cell to a cancer cell?  Did you know that childhood leukemia used to be a death sentence but is now 90% curable  There is a great deal of ethical information.  Would you torture two dying kids so that a third dying kid could live?

Importantly, because it is a three-disc DVD, you are brought into a strange new ecosystem, the culture of cancer.  I can walk thru a convention of the National Association of Business Economists or the Investment Management Consultants Association and feel perfectly conversant.  While I could never walk thru a convention of the American Cancer Society and feel conversant, I think I would at least feel comfortable, purely as a result of watching this three-disc DVD.  It is worth watching for that reason alone - to get comfortable with the culture of cancer.  It really is OK to discuss cancer!

And, of course, there is also the requisite amount of heart-tugging.  When watching the contorted, numbed faces of parents at that soul-crushing moment when they first that realize their child has no hope and would suffer a horrible death, the demons escaped.  It was difficult to keep a dry eye, but my wife quickly handed me a Kleenex . . .

Saturday, July 11, 2015

Second Quarter Recap

My latest column to be published by Inside Business can be found at:

http://insidebiz.com/news/strong-geopolitical-winds-q2 

Friday, July 10, 2015

Keynesian Luxury

If you're a hammer, then all problems look like nails.  When the U.S. economy began falling into serious depression in 1929, the hapless President Hoover only had one tool, Austrian economics, and he used it, getting Congress to pass the Smoot-Hawley Trade Bill in 1930, despite a signed petition from 1,028 leading economists to veto the bill.  The economy shifted from a severe recession into a severe depression.

You will recall that the Austrian school of economics argues for a balanced budget every year, with strong limitations on spending.  The hardship of the Great Depression gave birth to the Keynesian school of economics, which argues that budgets only need to be balanced over the business cycle and that deficit spending is an appropriate tool against depression.

When President Roosevelt took over, he slowly began this process of stimulating the economy with deficit spending and was beginning to see real economic growth.  However, it was the massive deficit spending of World War II that really kick-started the U.S economy.

The current debate in Europe over Greece is another version of the old battle between the Austrian and Keynesian approaches.  The Austrian version was forced upon Greece in 2010, whose economy promptly shifted from a severe recession into a severe depression.  Greece argues that a Keynesian approach now makes more sense with large deficit spending to boost the economy.

The difference is this:  The U.S. had minimal national debt before the Great Depression and could afford massive deficit spending.  Greece already has WAY too much national debt and cannot afford the luxury of more deficit spending.  By allowing their debt to spiral upwards already, the Greeks have forfeited the benefits of Keynesianism.

There are other schools of economics, such as Supply-Side, Monetarism, etc, but   they offer little in the way of a solution for Greece.  While Europe will likely postpone the harsh reality, I do suspect Greece will need more humanitarian aid than financial aid.

Now, here's the real problem:  At $18 TRILLION of national debt, has the U.S. also forfeited the benefits of Keynesianism?

Wednesday, July 8, 2015

The Old One-Two Punch ?

While the world stands mesmerized by the slow-motion train wreck of Greece, the Chinese stock market is crashing.  That is the only word for it -- crashing!  Since it set a seven-year high on June 12th, it has been losing $145 billion of value everyday.  It is now down 32% in less than a month!  Take a look at this graph:

Chart of the Day

You'll have to look closely, but you can see it has breached the green support line and is still dropping.  To a technical analyst, that is a strong indicator of more trouble ahead.

I'm not one to condemn everything that government does, but the Chinese government has been too active in something they don't understand.  First, they liberalized the margin trading rules, which increased the purchasing power of investors.  The stock market promptly hyperventilated and soared.  Of course, hyperbolic growth usually results in hyperbolic drops.  When the drop started, the Chinese government started investing some of its money into the stock market.  This showed the government understood that the stock market reflects the supply and demand for stocks.  But, it also showed the government doesn't understand messaging.  Their action was meant to say the government will support the market.  What it actually said was that even the all-powerful Communist government is powerless against the Capitalistic market, because the stock market continued to fall.  Then, the government suspended IPOs, thinking that IPOs drew money away from existing stocks, thus pushing down values.  Of course, this didn't help to arrest the fall either.  They also cut trading fees to encourage more investors to buy.  Instead, investors benefited from lower trading fees to sell.  Then, they told some 1,200 trading firms to stop trading, preventing millions of investors from selling.  How can they meet margin calls if they cannot sell?  This required those investors to sell stocks they had on other stock markets, creating an unexpected contagion.  This is a textbook case of the central government making a bad situation worse!  This crash will also increase social unrest in China, something the Communist government is deathly afraid of.

The significance of this is hard to over-estimate.  After all, they are the world's second-largest economy.  However, what I really fear is that the combination of the now-manageable Greek tragedy with a crash of the Chinese stock market may overload worldwide investor confidence, making contagion more likely.  This Chinese problem is happening at a very delicate time . . .


Tuesday, July 7, 2015

America's Most Important Website

The most important website in America is:

http://www.usdebtclock.org/ 

Now, don't be overwhelmed by the dizzying speed of growth in our debt!  You'll get used to it.

However, it is easy to miss the amount of "unfunded liabilities" on the bottom.  This is the most important item on the most important website in America. It shows the future costs of entitlements, like Social Security and Medicare.  (Yes, those are trillions of dollars.)  This is the amount of money that still must be taken from taxpayer pockets.

This is NOT to say Social Security or Medicare should be abandoned.  The key word is "unfunded."  These amounts are after deductions for the paltry existing "trust funds."  We DO need to stop fooling ourselves that there is no liability for our grandchildren to pay.  If we are going to have such entitlements, we need to get serious about funding them.

No, I don't know of any similar website for Greece . . . but would it have made any difference?  

Will America's most important website make any difference in America?  

Monday, July 6, 2015

Slow-Motion Suicide

While religion has no place in a blog about "honest economic analysis and existential opinions," I could not avoid remembering Luke 23:34 when listening to the outcome of the Greek referendum.  It said:  Forgive them, for they know not what they are doing.

I understand that nobody wants austerity.  Besides, why me?  The last two generations of Greeks have enjoyed a living standard  that the economy could not afford.  So, why not this generation?  Or, the next one?

Normally, a profligate government finds its currency falling in value, raising the cost of both their imports and their borrowing  This discipline of the market is not available when a country is in a currency union, like the EU.  As an example, Greece was partially able to continue borrowing money at low interest rates to lavish that money on voters without increasing either their imports costs or their borrowing costs, because they were borrowing in euros, not drachmas.  Their profligate ways were enabled by membership in the euro.

Of course, I see their point that the vengeful imposition of Austrian economics by Germany and the rest of Europe five years ago has done nothing, except to drive the Greek economy into full-blown depression, with 26% unemployment.  But, the important word is "imposition."  Austerity was forced on the Greek people, but the attitude of entitlement remains unchanged.  Look at the bureaucracy and difficulty in doing business in Greece -- it is essentially unchanged, as is Greece's attitude.

Greek existentialists saw the election as a choice between committing suicide or being murdered.  The voters chose suicide, albeit a slow-motion one.  The open question is whether the European Union will show mercy and keep the recalcitrant patient alive.  It may be more of a choice between financial aid . . . or humanitarian aid.

Sunday, July 5, 2015

Smart Is As Smart Does?

The smartest people on Wall Street like to say that the smartest people on Wall Street work at Goldman Sachs.  Because of their apparent sincerity, it is worth the effort to follow their forecasts.  In no particular order, here are some of their latest predictions:

1,  GDP growth in the U.S. will be flat this year but rising to 2.6% next year.
2.  GDP growth in the Euro area will rise from 0.9% last year to 1.9% next year.
3.  GDP growth in China will continue to drop from 7.4% last year to 6.7% next year.
4.  The S&P 500 will rise to 2150 within three months but drop back to 2125 nine months later.
5.  The European STOXX will rise 10.8% over the next twelve months.
6.  The Japanese TOPIX will rise 6.2% over the next twelve months.
7.  Ten-year U.S. Treasury rates will rise 52 basis points over the next twelve months.
8.  The Euro will fall 14.4%, while the Yen gains 4.8% against the dollar.
9.  Oil will continue to fall, while natural gas rises 26.4%.
10. Gold will continue to fall, along with copper.

Any questions?

Saturday, July 4, 2015

Thanks To Wealthy, White Men

It was two hundred, thirty-nine years ago that the Age of Enlightenment gave birth to The Great American Experiment, known as Democracy.  That birth was midwifed by a group of wealthy, white men, who courageously risked their lives and their wealth by signing the Declaration of Independence.  This single piece of paper gave us the Big Freedoms, which were later amplified by the Bill of Rights or first ten amendments to the Constitution.

These Big Freedoms enable "life, liberty, and the pursuit of happiness."  Big Freedoms are well-known and include (1) the right to own private property, (2) the right to vote. (3) freedom of Assembly, (4) freedom of Speech, (5) freedom of the Press, and (6) freedom of Religion.

It is customary on Independence Day to give thanks for our Big Freedoms, which are also the wellspring, from which flow the many, many Small Freedoms that shape our lives.  Small Freedoms include (1) the right to marry or not, (2) the right to travel or relocate anywhere or not, (3) the right to get educated or not, (4) the right to choose a career or change careers or do nothing at all, and (5) the right to have personal priorities.

One of my personal priorities is avoiding excessive structure.  One reason I volunteered for Special Forces was to avoid the more highly-structured regular Army.  The reason I retired from banking and started my own financial planning practice was to reduce structure in my life.  Now, I am free to work my own hours, helping my clients as I think best, and have never been more happy in my life.  I am very thankful that my individual "pursuit of happiness" was successful and appreciate those wealthy, white men who delivered the Big Freedoms, allowing me to enjoy the Small Freedoms.

This is not a day about saluting veterans.  We have Veteran's Day for that.  This is not a day to remember those who died for our Freedoms.  We have Memorial Day for that.  This is a day to give thanks for an idea, a radical notion at the time - The Great American Experiment -  and our many personal Freedoms that flow from it.





Friday, July 3, 2015

Jobs, Jobs . . . Skills

Wall Street was expecting 233 thousand jobs were created in June, with whisper-numbers as high as 300 thousand.  When the actual number of 223 thousand were announced, we also learned that our estimates for April and May were over-estimated by 60 thousand jobs.  Economists were disappointed but traders were happy, because a weaker employment picture takes pressure off the Fed to raise interest rates.  Dow futures immediately jumped 50 points.  Pundits labelled the report as a "Goldilocks Report," because it was neither too hot or too cold.

The unemployment rate dropped to only 5.3%, which is the lowest in seven years.  Conservatives believe that rate is politically motivated and is unrealistically low.  They cite the U-6 level of unemployment as more realistic, because it includes those workers only marginally attached to the workforce and those who are forced to work-part because they cannot find full-time work.  That level was as high as 16.1% in 2009 but had dropped to 10.9% in May and then 10.6% last month.  Either way, the trajectory is improving.

Part of the "numbers-manipulation" hypothesis is not so much the number of unemployed or jobs created but the size of the workforce, which actually decreased by 442 thousand last month.  The Labor Force Participation Rate is the percentage of able-bodied people who actually hold jobs or are looking for jobs.  Normally, it drops during bad economic times, as the unemployed become discouraged and quit looking, but the percentage increases as the economy improves.  Last month, it dropped from 62.9% to 62.6%.

Republicans believe the low Labor Force Participation Rate reflects the fact that high level of entitlements makes people too lazy to work.  Democrats point out that baby-boomers are retiring/dying faster than they're being replaced.  Interestingly, the ratio of "prime-age" (25-54) workers actually increased.

Most interestingly, the number of job openings has increased from 4.5 million last year to 5.5 million this year.  That is a huge increase.  In normal times, we might find that the jobs and the potential workers are in different parts of the country, which is called structural unemployment.  Recently, a survey of employers documented the biggest problem is the skill gap between what employers need and what applicants have.  The switch from an analog economy to a digital economy has been more traumatic than expected.

While I'm somewhat disappointed with the June Jobs Report, it remains clear that the American economy is still a jobs-creating machine.  But, there is no need to blame the unemployed for not trying harder, when they just need better skills.

Tuesday, June 30, 2015

A Crisis By Any Other Name

Because a crisis seldom arrives alone, it is important to recognize each one as they arrive.  There is an economic crisis, a financial crisis, and a political crisis.  Either can begin a downward spiral.  Combined, they can destroy a country.

A garden-variety recession might be called an economic crisis, but it is actually routine, and in fact beneficial for the economy, in the long run.  There is part of the beauty of capitalism.  However, it can develop into a real economic crisis, if pushed by either a financial crisis or a political crisis.

The global financial crisis of 2008/9 started with an implosion of two hedge funds, obliterating Lehman Brothers, and igniting a first-class financial crisis.  An economic crisis promptly followed.  While we had a dysfunction government, we did not have a real political crisis, except for the failure to raise our debt ceiling, costing us our AAA credit rating.  (While some pundits think the severity of the financial crisis and economic crisis made our government even more dysfunction, I believe that is yet to be proven.)

The current Greek tragedy started as a political crisis, perhaps some sense of entitlement for the great contributions Greece has made to the "civilized" world.  Regardless, the political leaders of Greece lavished entitlements on the Greek voters, rewarding them with the lowest retirement age in Europe, if not the world.  As the devil of mathematics approached and wanted to be paid, Greece had the opportunity to escape by joining the euro, which bought them more time, allowing them to dig the hole even deeper.  Unfortunately, Greek political leaders jumped at the opportunity to delay the inevitable.  It was akin to selling drugs to an addict.  Finally, the devil still has to be paid, and here we are.

Since the Greek tragedy began five years ago, initial payments to the devil have reduced GDP by 26 percent, which is a first-class economic crisis.  Now, we are tipping into a financial crisis, which is usually the worst type of crisis.

Writing for Inside Business four years ago, I said the best thing we can do for our friends and loved ones in Greece is to send them a one-way plane ticket.  That is still true!




Monday, June 29, 2015

Buckle Up !

Thanks to Greek pensioners, the slow-motion train wreck that Greece has been for almost five years is finally coming to a head . . . for awhile.  This is not surprising.  The only real surprise would be if they didn't "kick the can down the road."  That could have theoretical implications for other weak European colonies, like Italy and Spain.

More important to the U.S. investor might be that the American Greece or Puerto Rico, which is also approaching a crisis point, but it is not yet as critical as Greece.  Would a bankruptcy in Puerto Rico destroy the American economy?  Of course not!  Would a bankruptcy in Greece destroy the European economy?  Of course not!

Nonetheless, the stock market will resemble a roller-coaster for awhile.  I'm glad -- let's get this drama behind us!

The global financial crisis of  20008/9 was a terrifying experience for many people.  Much has been written about its impact on Millennials.  They are less inclined to take on debt, even mortgage debt.  They are more inclined to start their business than any other generation, reflecting their deep distrust of the corporations that fired their parents.  They have been traumatized.  Less discussed, however, millions of investors during 2008/9 were also terrified and fled the market.  Since then, they have watched the stock market make a massive bull run and missed it.  With this major swoon in stock markets worldwide, it is an opportunity for former investors to get back into the market.  I hope they will take it.

For those who got back into the stock market, this would be a crazy time to sell.  It would be a much  better time to go to the beach instead!

This too will pass!

Thursday, June 25, 2015

The Hidden Cost

Congress is dominated by lawyers with little understanding of economics.  Wisely, they created the semi-independent Office of Management and Budget (OMB) to "score" or estimate the economic impact of the proposed legislation by lawyers.  It is strictly non-partisan.  However, there is a wing of the Republican Party (the Supply-Side wing) that insists the OMB is partisan, because OMB does not employ Supply-Side economics in their scoring or estimating.  To do this, OMB would increase the impact of changes in the marginal income tax rate.  OMB would have to show large, dramatic swings from small changes in taxes, according to this wing of the party.  It is the position of OMB that such arguments about economics belong in academia until resolved.  I agree with the OMB.  However, I wish there was some way OMB could calculate the cost of understanding.

All of my clients are intelligent and educated, but they struggle to understand the many conflicting claims of healthcare in general and healthcare insurance in particular.  There has been a distinct increase in the number of questions from them since Obamacare was established. There has to be a way to simplify this.  What do poor people do without the benefit of a professional financial planner to help them navigate healthcare insurance?  What good is coverage if you're afraid to use it?

There are five modules to becoming a CERTIFIED FINANCIAL PLANNER professional, i.e., (1) Principles of Planning, (2) Estate Tax Planning, (3) Income Tax Planning, (4) Education Planning, and (5) Insurance Planning, which includes life, property, and health.  I am doing less and less education planning, while doing more and more health insurance planning.  The curriculum needs to change.

If it is difficult for financial planners and if it is difficult for the educated and affluent to understand, then how is the regular American supposed to understand it?  Is there no cost to this lack of understanding?  Even though it is difficult to estimate that cost, should it be ignored by OMB, by Congress . . . or by you?

Wednesday, June 24, 2015

Farewell "Stars & Bars"

As a son of the South, the old South, I grew up with great pride in my Southern heritage.  While I was never proud of the racist part of that heritage, I did have great respect for my ancestors who fought and for the mothers who donated their sons to bleed and die.

To understand the sentiment that I feel, here is a poem written by Alfred Lord Tennyson about a battle in the now-Russian Crimea called the "Charge of the Light Brigade."  Different war, same sentiment!

Half a league half a league,
Half a league onward,
All in the valley of Death
Rode the six hundred:
'Forward, the Light Brigade!
Charge for the guns' he said:
Into the valley of Death
Rode the six hundred.

'Forward, the Light Brigade!'
Was there a man dismay'd ?
Not tho' the soldier knew
Some one had blunder'd:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do & die,
Into the valley of Death
Rode the six hundred.

Cannon to right of them,
Cannon to left of them,
Cannon in front of them
Volley'd & thunder'd;
Storm'd at with shot and shell,
Boldly they rode and well,
Into the jaws of Death,
Into the mouth of Hell
Rode the six hundred.

Flash'd all their sabres bare,
Flash'd as they turn'd in air
Sabring the gunners there,
Charging an army while
All the world wonder'd:
Plunged in the battery-smoke
Right thro' the line they broke;
Cossack & Russian
Reel'd from the sabre-stroke,
Shatter'd & sunder'd.
Then they rode back, but not
Not the six hundred.

Cannon to right of them,
Cannon to left of them,
Cannon behind them
Volley'd and thunder'd;
Storm'd at with shot and shell,
While horse & hero fell,
They that had fought so well
Came thro' the jaws of Death,
Back from the mouth of Hell,
All that was left of them,
Left of six hundred.

When can their glory fade?
O the wild charge they made!
All the world wonder'd.
Honour the charge they made!
Honour the Light Brigade,


It was a different war in a different time in a distant place, but there was valor in dying for what they believed.  That profound respect doesn't change.  I have that respect for the soldiers who died in Crimea and in the Confederacy and everywhere else.

Unfortunately the tangible symbol of that pride later became the "Confederate flag", which has now been expropriated, confiscated, smeared, slimed, and desecrated by modern racists.  Like we lost that war, we have now lost our flag, the old "Stars & Bars."  So, we must now let it go.  Without that flag, we will still have our respect for those soldiers who fought and for the mothers who donated their sons to bleed and die.  That never changes!

Tuesday, June 23, 2015

Supporting The Republicans And A Democrat

Economists can often be as petty and spiteful as Republicans or Democrats.  But, sometimes, the over-whelming majority actually agree on something, and "free trade" is one of those somethings.  To really appreciate why this is true, you need to Google or Bing the law of  "comparative advantage."  Walking through the math is beyond the scope of this blog, but it would help you understand why so many economists favor "free-trade."

Currently, our Democratic President finds himself allied with the Congressional Republicans to give him "fast track authority" in negotiating a hugely-important trade deal with the 12-nations of the Trans-Pacific Partnership.  Our future growth lies with Asia, not Europe nor Africa.  We must formalize our trading relations with them to realize the real growth potential.

Historically, when the president negotiates a trade deal and presents it to Congress for approval, the politicians treated it as a Christmas tree to be decorated, creating a Frankenstein treaty that our trading partners could not accept.  (After all, why negotiate in good faith with the U.S. when you know Congress is going to change whatever you agreed to?)  Giving the president this fast-track authority means that Congress gets to vote on the proposed treaty as an all-or-nothing deal, without adding any extraneous ornaments.  This authority has been granted to other presidents and should be granted to this one.

To be balanced, Democratic politicians argue the objective is "fair trade."  Treaties that merely give foreign nations the opportunity to steal our jobs may be free, but it is certainly not fair.  Complicating this political drama is a new study by a respected MIT economist named David Autor, which "proved" that the Democrats worst fears were confirmed - trade agreements do cost U.S. jobs.

Of course, the jobs lost were mostly factory jobs that would eventually be lost anyway, but there is more to considering a trade agreement than jobs that are going to be lost anyway.  There are many other things that need to be negotiated, such as intellectual property and tariffs and tax transparency and terrorism.  Don't increased sales matter at all?  (Now, study the law of comparative advantage!)  Even the author of this study, David Autor, supports the new trade deal, as I do!

This "triangulation" between a lame-duck Democratic president, allied with Congressional Republicans, against Congressional Democrats is not new.  President Clinton used it successfully and repeatedly.  A lame-duck president does not need to appease his base - he just needs to do the right thing, and this is the right thing!

Friday, June 19, 2015

Equal But Opposite

Sir Issac Newton (1642-1726) was an important English physicist and mathematician.  His Third Law of Motion says that every action produces an equal but opposite reaction.

Or does it?

As a thirteen-year boy, I was one of the larger boys my age and wanted to play football.  Unfortunately, my mother would not permit me to try out for the football team,  She was afraid I might get hurt.  However, she did permit me to join a bowling league, but that probably just made things worse.  Naturally, when I joined the Army, I volunteered for Officer Candidate School, Parachute School, Ranger School, Special Forces School, Pathfinder School, and Sniper School - capped off by a rare request for service in Vietnam.  While I didn't get everything I requested, I did get enough to make up for lost time.

There has been much hand-wringing among sociologists that young people are being given an unrealistically optimistic and possibly unhealthy view of reality.  When everybody gets a trophy, somebody has a lesson unlearned.  For reasons beyond my skill set, girls are maturing much faster than boys.  Their college boards are increasing faster than that for boys.  Locally, girls were valedictorians in twelve of fifteen high schools.  Last year, a reporter for The Wall Street Journal complained that men her age reminded her of the kids she babysat -- igniting quite a controversy.  My opinion is that boys are being over-mothered.

At the same time, one of the fastest growing industries in country is extreme sports - you know, crawling in mud, swinging on ropes over water, submerging in nasty water, leaping over fiery pits, etc.  In 2013, I did the Spartan Race in Wintergreen, which was a 10-mile obstacle course up and down summertime ski slopes, (winning first place in my age group, mind you!).  I was accompanied by 6,000 other lunatics.  Since 2010, over four million - 4,000,000 - people have done this and similarly insane events, like Tough Mudder and Warrior Dash.  This would be an equal but opposite reaction to what exactly?  Maybe . . . over-mothering?  Other generations never felt the need to crawl in mud, did they?

So,mommies, don't let your babies grow up to be cowboys . . . or bowlers!

Thursday, June 18, 2015

One And Done

Wall Street wags like to say the stock market is completely unpredictable, except for one thing -- it will always over-react.  To either good news or bad news, it will over-react!  The most recent example is known as the "taper-tantrum."  That occurred when the Fed announced that it would slowly decrease or taper the amount of monthly purchases of government bonds during the days of Quantitative Easing (QE).  The stock market promptly tanked!  Of course, the monthly purchases are now zero, and the market has set several new highs since QE ended.  Certainly,the stock market over-reacted!

Listening to Fed Head Janet Yellen yesterday, it is obvious that she remembers that lesson well.  No interest rate increase has ever been so well-telegraphed.  Is there anybody left in the United States who does not know the next movement in interest rates will be up?   Why will the stock market tank when it actually happens?  Because it over-reacts!

But, I think it will be a sharply V-shaped recovery.  One reason is that a rate increase is already "baked-into" the stock market, which has been listless all year.  Another reason is that traders will remember that Yellen is primarily a dovish labor economist, who is very concerned with unemployment, and does not want to take the chance of prolonging long-term unemployment by raising rates.  They will also remember that she NEEDS to prove to the market that she will raise rates.  She needs to "earn her stripes" and this is the way to do it.

She has been consistent in reminding the Street that the Fed is data-dependent, not calendar-dependent.  In the past, the Fed has often had a mechanistic approach to raising rates, by raising rates a modest amount at each meeting.  She explicitly rejected that approach and base decisions on the most recent data.  I suspect the rate increase will be "one & done."  That way, she earns her stripes, she temporarily quiets the Libertarians, she doesn't hurt unemployment too much, and she doesn't cause the dollar to appreciate too much more.

So, fear not the rate increase! 

Tuesday, June 9, 2015

Reporting On Redistricting

Redistricting is the practice of allowing politicians to draw the lines of their district, which is akin to allowing them to pick their voters, instead of the more traditional view of letting voters pick the politicians.  It is not uncommon for people on one side of a street to vote in one district, while neighbors on the other side of the street vote in a different district.  Politicians know what types of people are most likely to vote for them, and they know where they live.  For example, Democrats would draw the lines to include as many minorities, as many young people, and as many government employees as possible.  Republicans would draw the lines to include as many older voters, as many affluent voters, as many veterans as possible.  That information is readily available.

In Virginia, a panel of Federal judges have ruled that our districts must be redrawn, and I applaud this decision.  They found that one particular congressional district had been packed with minorities, insuring that district would be represented by a black Congressman but eliminating any influence those minorities might have in neighboring districts.  Unfortunately, that decision is being appealed.   So far, taxpayers have paid $224 thousand to defend "packing."

My complaint is that news coverage of this issue deals with the Republicans versus Democrats dynamic.  It is more important to see this along a moderate versus extremist dynamic.  A district that is 80% Republican is more likely to elect a Republican extremist than one that is only 50% Republican, which would be more likely to elect a moderate Republican.  The same is true for Democratic districts.

Since extremists or "true believers" cannot govern, it is more important that we elect moderates, be them Republican or Democrat.  Too bad the newspapers do not report it that way!