Saturday, October 22, 2016

The Lehman Line

Readers know I've been worried that the next "Lehman Moment" or Black Swan event, triggering a financial collapse, was more likely to come from Deutsche Bank (DB) than any other company in the current environment, and I have been watching it closely.

You'll recall this company is the largest bank in Europe, with a net worth of about $16 billion, who got fined $14 billion by the United States for sales practices of mortgage-backed securities.  The company was already over-leveraged with $164 billion in debt and, more importantly, had derivatives exposure of $43 trillion (which is bigger than the whole GDP of Germany).

The good news is that the U.S. Department of Justice has agreed to negotiate a smaller settlement, probably in the neighborhood of $5-6 billion.  In addition, there is a rumor that the Bank has entered into enough cross-agreements to reduce their derivatives exposure to "only" $20 trillion.  Their stock has now recovered to the level before the DOJ fine.

There is a rule-of-thumb that the tipping point in the spreads of credit default swaps (CDSs) is about 300 basis points, which was the tipping point when Lehman collapsed.  The CDS spread for DB is down to 130 points, meaning the DB counter-parties are now less fearful of a collapse.  This is all good!

Does that mean the danger has passed?  Absolutely Not!  There is still no indication that Germany's Merkel will try to recapitalize its largest bank, although most observers think the European Central Bank will eventually backstop Deutsche Bank.  But, nobody knows . . . for sure.

Does all this mean we can stop worrying about systemic collapse?  Never!

Thursday, October 20, 2016

Client Service !!

I'm proud of my wife!

We have an 86-year-widow who has been our client over twenty years.  This lady has enjoyed remarkable health and has never had any surgery.  Finally, she needed dental surgery and had some understandable anxiety about this.  My wife volunteered to stay with her the night before, to drive her to the surgery, wait for her, and spend the second night to make sure she was well.  Now, THAT is outstanding client service!

I'm proud of my wife!

Wednesday, October 19, 2016

Second Deadly Sin

For those gluttons of punishment, my latest quarterly column for Inside Business lives here: 

Better To Know or . . . Not

Different people like to use their financial planner in different ways.  Some see us a family CFO and consult with us regularly, which is our preferred role.  Other people see us as investment managers.  Still others see us as estate planners.  Some see us as budgeting experts.  We wear many hats, indeed!

One of our least appreciated roles is that of monitor - to be a vigilant lookout for potential problems.  Of course, it is sometimes painful to describe potential problems.  For example, how do you tell a healthy, rational person you suspect they are at risk for Alzheimer's?

Well, one way is to write a blog, listing the ten warning signs, which are:

1.  Memory loss that disrupts daily life.
2.  Challenges in planning or solving problems.
3.  Difficulty in completing familiar tasks.
4.  Trouble understanding visual images.
5.  New problems with words in speaking or writing.
6.  Confusion with time and place.
7.  Misplacing things and losing ability to retrace steps.
8.  Decreased or poor judgment.
9.  Withdrawal from work or social activities.
10. Changes in mood or personality.

So, if your planner hands you a copy of this blog, he/she is honestly concerned about you.

Don't you wish everybody was?

Tuesday, October 18, 2016

Losing Like A Man ??

Former P.O.W. John McCain has long been one of my political heroes.  When he was trashed last year by Donald Trump, I wrote that Trump was just another egocentric egomaniac and unworthy of consideration.  Don't forget -- when McCain lost to Obama, McCain never whined that the election was rigged -- because his love of country exceeded his personal ambition.

Al Gore became a political hero to me in 2000.  Even though he believed that he had won Florida and therefore the Presidency, he graciously conceded to his opponent, in order to end the nagging national uncertainty.  Never forget that more people voted for Gore nationwide than for Bush!  Yet, Gore never whined the election was rigged -- demonstrating that his love of country exceeded his personal ambition.

Donald Trump has become an existential threat to the United States, by "pre-whinning" to his supporters that they are being robbed of the Presidency by election fraud.  Even the reliably Republican Wall Street Journal said "there's zero evidence that the [election] process is compromised."

The beauty and magic of our democracy is the peaceful transfer of power.  If he fails to take his loss like a man and fails to instruct his supporters to respect the results, Trump could become the greatest threat to America since the Civil War.

My fear is that Donald Trump loves himself more than he loves our country.

Sunday, October 16, 2016

The Boglelization of America

I love Jack Bogle, and I love Harry Markowitz too . . . but I fear Kool-Aid drinkers.

Jack Bogle is the legendary founder of the Vanguard Group and father of many, many long cost mutual funds and exchange traded funds.  He is famous for minimizing fund expenses.  He is also famous to telling investors to "buy and hold" their investments, without regard to business cycles.

Harry Markowitz is the father of Modern Portfolio Theory (MPT) and won the Nobel Prize.  He is famous for determining that long-term investment returns are maximized and investment risks are minimized by spreading your portfolio across many different asset classes, such as big company stocks, small company stocks, real estate, bonds of all types, commodities, AND cash.  The trick is what percentage of your portfolio goes into each asset class, especially since that is a moving target.

While I subscribe to both theories, to some degree, I'm afraid the U.S. government fully subscribes to both theories.  If you don't subscribe to the "buy and hold "strategy of ignoring business cycles, the Department of Labor's new fiduciary rule, which starts taking effect next April, raises the question of whether you employ a "prudent process" in the management of client funds, as you have a fiduciary responsibility to do.  The same is true for MPT.  How do you manage the "optimization" of allocating across all the asset classes?  What "prudent process" do you use to optimize that allocation?

There is a difference between religious doctrine and conventional wisdom.  The theories of Bogle and Markowitz are conventional wisdom, but the government sees them as religious doctrine.  Enforcing these theories will limit originality and innovation among investment managers and make hedge fund managers even richer, because the movement of investment balances between asset classes (and therefore stock prices) will become more predictable.

I fear that the regulators will drink this Kool-Aid of investing, probably for intellectual convenience, and become "true believers."  May God save us from true believers!  At least crusty, old Jack Bogle knows he is a mere human . . .

Thursday, October 13, 2016

More Scary Than Halloween ?

My regular quarterly column will be published by Inside Business this weekend.  In it, I remind readers how much the stock market hates surprises, including presidential elections.  Being "the brightest kid in the class," the stock market concluded months ago that Clinton would win.

The point in my column is that I expect a dramatic fall in stock prices if Trump wins, but that it will be relatively short, just like the market drop after the Brexit vote.  Investors will realize a Democrat-held Senate would effectively neuter Trump, and the market drop would offer a good time to buy more stocks.  (Frankly, even a Republican held House would stop Trump from accomplishing most of what he has promised.)

But now, investors are afraid of a possible Democratic sweep of the White House, Senate, and House, effectively ending gridlock.  Investors are no more afraid of a Democratic sweep than a Republican one, but the investing environment changes when gridlock ends.  One reason that policy issues have been discussed so little during this campaign season is that policy positions don't matter during conditions of gridlock, because nothing gets done.  The sudden possibility of a Democratic sweep means Congress will actually do something, and we have to figure out what.  Immediately, health care stocks and biotech stocks have started crashing.  What sectors of the economy will benefit from a Democratic sweep?

It is not nice to frighten Mother Market, which was expecting gridlock under Clinton but may be getting actual action.

From my standpoint, there are so many needed things that have been bottled up by the impotent Congress for so long that I welcome a sweep by either party.  As an example, both parties agree that we need to update the tax code but cannot pass even the code changes that they both agree on.  There are numerous other examples of needed legislation, unfortunately.  Some will be stupid, and we will learn from those errors.  But certainly not everything!

As Nike says . . . Just Do It!

Wednesday, October 12, 2016

Paging Alfred E. Neuman

Cartoonists don't get the respect they deserve.  They illustrate reality in more stark terms.  They beg questions to ask.  They generate thinking and discussion.  Consider this one:

Recession cartoon 04.14.2016

Is the cartoonist saying -- the country is unaware that we are about to fall into a recession.

Is the cartoonist saying -- recessions are not uniformly bad, only the "o" part is bad, the "r,e,c,e,s,s,i and n" parts are not so bad.

Is the cartoonist saying -- is the pit bottomless?

Is the cartoonist saying -- one part of a recession is a financial crisis.

Is the cartoonist saying -- we need to whistle less and worry more!

Or, is the cartoonist saying -- I am both a pessimist and alarmist.

Or, is the cartoonist saying -- you fill in the blank!

Friday, October 7, 2016

Goldilocks Jobs Report

Today's "Jobs Report" was just hot enough to know the economy is still growing and just cold enough to keep the Fed from raising interest rates in November.  It was perfect!

Against expectations of 175 thousand new jobs created last month, the Bureau of Labor Statistics estimated only 156 thousand jobs were created.  That is still healthy but not healthy enough to overheat the labor market.  Better news is that both the average hours worked and the average weekly earnings increased.

Over 200 thousand people entered the workforce, but that still leaves 94.2 million of people who don't work.  Approximately half are students and the other half are retirees.  The Labor Force Participation Rate ticked up, showing 62.9 percent of Americans work, which is up 0.5 percent in one year, which is good.

So, if the labor market is so good, why isn't the GDP growing faster?  Because the stubborn U-6 level of unemployment is still 9.7 percent.  These are the unemployed, the under-employed, and those who work part-time because they cannot find full-time work.  Call them lazy, call them uneducated, call them victims of globalization, if you like.  But, they are a valuable economic resource that is being wasted.

Wednesday, October 5, 2016

24/7 Pollution

When we returned to Virginia Beach, we were looking for a church home and visited several.  During one visit, we stood up in the middle of the church service and simply walked out.  The pastor started telling church members how to vote.  While I defend his right of free speech, my value system does not permit religion and politics to mix.

When I watch a football game, I like to focus on the sport and don't care about somebody's political opinion.  While I defend the right of any rich quarterback to sit on his butt during the National Anthem, I wonder what manners his mother taught him.  My value system does not permit sports and politics to mix.

Last weekend, Virginia Beach held its annual Neptune Festival, including its famous sandcastle competition.  Naturally, somebody had to exercise their right of free speech by creating a political sand sculpture.  The good news is that the officials removed it, but the bad news is that the partisans feel persecuted because it was removed.  My value system does not permit beach festivals and politics to mix.

Go down to city hall and stand on a soapbox to force-feed your political opinions on other people, if you must.  My value system does not permit good manners and politics to mix.

Is there no escape?

Saturday, October 1, 2016

With All Due Respect

The huge investment bank of Goldman Sachs is the most respected bank on Wall Street, by Goldman Sachs anyway.  Regardless, I do respect the soothsayers in their research department.  Here are some of their latest forecasts:

1.  GDP growth in the U.S. will increase from 1.5% this year to 2.0% next year.
2.  Japan's will increase from 0.6% to 1.0%, while Europe and England continue to shrink slowly.
3.  China will continue shifting to a service economy, with GDP growth dropping slowly.
4.  Other emerging markets will grow quickly from 5.1% this year to 5.8% next year.
5.  The S&P 500 will be unchanged over the next 3 months and up only 2.2% over 12 months.
6.  European stocks will increase 4.0% over the next twelve months.
7.  Interest rates will increase about 60 basis points over the next year.
8,  The dollar will appreciate about 10% against the euro and 6% against the pound. 
9.  Oil will increase about 18% over the next 12 months to $57/barrel.
10. Gold and copper will drop 6.1% and 13.5% respectively.

I think they see the world economy going into slow-motion for the foreseeable future.  They are not forecasting any serious recession . . . nor boom times, which is hard to dispute.

Investors should ask themselves about their risk-reward perspective.  Assuming Goldman Sachs is right and the world is slowing down, has market risk gone down . . . or up?

Friday, September 30, 2016

Thinking The Unthinkable

It is not news that governments give out very generous pension plans.  Such generosity was originally considered a trade-off for relatively low wages compared to non-government workers.  That may have been a nice gesture then, but there are consequences now.

To pay the pensions, governments put aside a certain amount of money each year to be invested in a pension fund for the benefit of retirees.  The amount put aside reflects some assumptions about investment returns.  When their portfolio earns smaller returns, there is a deficit in fund.

Republican politicians rightly complain about our national debt approaching $20 trillion.  But, we need to pay more attention to a different debt of another $2 trillion, which is the amount of money that state and local governments need to immediately add to their pension funds.  Poor investment returns and low interest rates are the cause.  This means there is $2 trillion less to spend on roads, schools, colleges, health, etc.

Of course, one way to avoid such spending cuts is to cut the pensions.  There is actually some talk about this in Dallas.  Seeking to retire before these cuts happen, the number of police officers and firefighters retiring  this year is twice as many as last year.

Let me say that again . . . "cut the pensions."

As a retiree receiving a pension check each month myself, I would hate to see it reduced, but it might be necessary.  Should retirees like myself require spending cuts in roads, schools, colleges, and health just to keep receiving our full pensions?  Or, should we raise taxes on "job creators?"  Or, should we cut the pensions?  Or, should we stick our heads-in-the-sand?"

Thursday, September 29, 2016

A Gun-Free Death ?

I like guns and have lots of them.  Except when I travel by air, I am never without one.  Nonetheless, I believe this Second Amendment cult is stupid.  A country like Switzerland was safer, because veterans were encouraged to keep their rifles when they were discharged from military service.  A country like the United States is less safe when 99% of people have easy, legal access to small, more-easily-hidden pistols.

In my never-ending pursuit of continuing education credits, I attended a class yesterday entitled "Transfer of Firearms at Death."  Because the gun-cancer needs to be dealt with and because Congress will not deal with it, regulators are filling the void.

Effective July 13th of this year, the liability of executors and trustees has increased dramatically, whenever the decedent dies with a firearm.  They can face jail time for not realizing that pieces of guns (magazines) are considered the same as working guns.  They also must determine if the person who inherits the firearm is a legal recipient and document it . . . or go to jail?  To transport a firearm, the executor must complete ATF Form 4 or 5 and submit his/her photograph and fingerprints or . . . go to jail.

Do your executor a favor -- do NOT die while owning a gun, any gun.  Get rid of it before you die!

One sadistic smart-alec suggested transferring title of all assets into your trust - except your gun - and then appoint your ex-spouse as the executor . . . 

Wednesday, September 28, 2016


Readers will remember my concern in January that a major player in the derivatives market (Glencore) was floundering, which was increasing the possibility of systemic risk -- a "Jim Fixx" event of sudden collapse.  Fortunately, the commodities giant was able to quickly sell enough assets to reduce their derivatives exposure, and their stock has doubled since then.

Now, I've become concerned about Deutsche Bank, which is an even bigger player in the derivatives market.  Their exposure has been estimated at $34 TRILLION.  All European banks are weaker than U.S. banks, because they were not required to raise as much new capital as U.S. banks.  Deutsche Bank has a capital base of $16 billion and debts of $162 billion - a 10X leverage.

The bank was already weak enough, when the U.S. precipitated this crisis by fining the bank a whopping $14 billion for complicity in the mortgage-backed-securities disaster causing the 2008/9 global recession.  While it is certain to be negotiated to a lesser fine, it did put the weakness of Deutsche Bank into clear focus.

It is not news that Deutsche Bank is weak, but it would be very bad news if the German government did not "bail it out."  Over the weekend, Angela Merkel said they would not.  The possibility of systemic panic suddenly increased.

There is reason to believe a country like Germany, who would bail out another country like Greece, would also bail out its biggest bank.  But, Germany's leader, economy, and biggest bank have all become substantially weaker since then.  Fortunately, the bank is also selling assets, such as its insurance company subsidiary.  This is obviously a situation that bears careful watching.

Perhaps more importantly, I'm concerned that this has happened twice in one year.

Monday, September 26, 2016

R.I.P. Arnie

Image result for arnold palmer

I never met the man but always knew it would be an honor to simply shake his hand.  Long before anybody named Tiger ever picked up a golf club, Arnold Palmer had already popularized the sport of golf.  But, he will not be remembered primarily for his golf ability.  He will be remembered for his common-man decency to everyone.  He was an emotional man, who actually enjoyed being around people.  Although every president since Eisenhower played golf with him, Arnie avoided partisan politics.  I don't know how he voted but don't know and don't care.  He was a genuinely decent human being. He was above partisan politics.  The sport of golf should also remain above the slime of partisan politics.

While I defend their constitutional right to bad manners, if the crazies from the Westboro Baptist Church do show up to protest at Arnie's funeral, like they protest at the funerals of our fallen soldiers, I hope they get beaten senseless with Arnie's golf clubs.

Shoveling Truce

There is a lot of conversation these days about negative interest rates, something that Europe and Japan are experimenting with.  So, should the Fed take our interest rates down, like Europe and Japan, rather than up?

NO!  This reminds me of a situation where you are digging a hole deeper and deeper, while your partner stands on the surface and starts shoveling the dirt back down on you.

Interest rates are a powerful double-edged sword.  Lower interest rates reward borrowers and punish savers.  We have had exceptionally low rates for eight years, and it has barely stimulated the economy.  While it was a good tool at first, we have kept them too low for too long.  (Pension funds are becoming increasingly under-funded, because they cannot earn anything on their bond portfolio.  The same is true for insurance companies.)

It is not true that - if a little is good, then more is better.  Eight years of historically low interest rates have barely stimulated the economy.  Why do we think lower or negative interest rates will do much more?  The economy is not weak because interest rates are too high.  That is especially true in Europe and Japan.  Already, we are seeing the demand for cash - that is, actual currency - increase dramatically worldwide.  It is better to hide a wad of $100 bills in your closet than pay the bank to hold your money for you.  How crazy is that?

Central banks like the Fed are in the hole, still digging to save the world, and legislators are standing on the surface, shoveling the dirt back into the hole.  Central bankers have been doing the hard work for too long . . . how much longer can they be expected to save the world alone??

Friday, September 23, 2016

Viewer's Guide

As you listen to the presidential debates on Monday, recall the website -- go look at it now!

Remember that our national debt is rapidly approaching $20 TRILLION.

Remember that our debt-to-GDP ratio is 105% - a traditional "point-of-no-return."

Remember that there are about 4 million fewer workers now, compared to 2000, without assuming that people are simply more lazy now than then.

Remember there are as many retirees as there are students in this country, about 50 million each.

Remember another 43 million people live in poverty and receive food stamps.

Finally, remember that tough talk does not a solution make!  We cannot raise taxes enough nor cut entitlements enough to solve the problem, which requires both.

Wednesday, September 21, 2016

One More Time . . .

I have told this story before but, with less than 50 days until the election, it is worth telling again.

One of the most important things my father taught me was at age 13 when I was a paperboy.  I had just finished delivering all the newspapers and was pedaling my bike back home, when a truck loaded with walnuts passed by me.  In the back were three black boys who began pelting me with the walnuts.  While it didn't really hurt, it did confuse me.  What did I do wrong to deserve that?

When I got home, I asked my father, who explained that ten percent of all black people are bad people.  After thinking about that for awhile, I went back to him and asked what percent of white people are bad people.  When he said "ten percent," I immediately then understood the lesson he was teaching - that ninety percent of black people are good people, just as ninety percent of white people are.

The musical artist named Sting asked the rhetorical question of "do the Russians love their children too?"  The answer, of course, is that the Russians do love their children the same way Americans love their children.  Ninety percent of the Russians are good people, just as ninety percent of the Chinese are good people.  It applies to religion as well, i.e., ninety percent of the Catholics, Jews, Protestants, Muslims, Buddhists, etc are all good people.

Now, with less than 50 days before the election, it is vital that Republicans remember that ninety percent of Democrats are good people, and that Democrats remember that ninety percent of the Republicans are good people.

Yes, love those people who cancel out your vote!

Tuesday, September 20, 2016

Stockbrokers Need Love Too

If your stockbroker seems more worried and harassed than usual, show some kindness to him/her.  They are stewing in a witch's brew of increased regulation and decreased understanding of their job.

One of the changes in the Dodd-Frank bill was that the SEC was charged with task of developing rules so that stockbrokers could be held to a fiduciary standard, which would require the stockbroker to always place the interests of the client above his own.  They are not required to do this currently and can still put their clients into whatever mutual funds "kicks-back" the most commission to the stockbroker.

The Republicans were opposed to this bill and, since passage, have "starved" the SEC with no budget increases and no confirmations for the vacancies on the Board.  The result is that the now-highly-politicized SEC failed to develop the needed rules.  So, into the vacuum rode the Department of Labor (DOL) with their own definition of the fiduciary standard and rules to comply with it.  Of course, it only applied to ERISA accounts, including IRA rollovers.

Stockbrokers now had two governmental agencies looking over their shoulder (ignoring the intolerant self-regulatory organization known as FINRA).  The SEC's hot button is full disclosure, where it is okay to steal from your clients, as long as it is fully disclosed.  The DOL's hot button is conflicts of interests.  It is not enough to disclose conflicts of interest.  They must be eliminated.

Not the least of all the problems, who will audit for compliance?  The SEC has an audit staff, as well as the state regulators, but not DOL.  So, who is going to audit for DOL compliance?  Are you confused yet?  So is your stockbroker!

If you chose to use a registered-investment-advisor (RIA) instead of a stockbroker, you made a good decision.  However, if your RIA is blissfully smug that all this change will not affect his relationship with you, then he/she does not understand it.  Ask for an explanation.

Sunday, September 18, 2016

Mere Lyrics . . . or something more?

Jimmy Buffett – Growing Older But Not Up Lyrics

I rounded first never thought of the worst
As I studied the shortstop's position
Then crack went my leg like the shell of an egg
Someone call a decent physician
I'm no Pete Rose, I can't pretend
While my mind is quite flexible
These brittle bones don't bend

I'm growing older but not up
My metabolic rate is pleasantly stuck
So let the winds of change blow over my head
I'd rather die while I'm living than live while I'm dead

Sometimes I see me as an old manatee
Heading south as the waters grow colder
He tries to steer clear of the hum drum so near
It cuts prop scars deep in his shoulders
That's how it flows right to the end
His body's still flexible but that
Barnacle brain don't bend

I'm growing older but not up
My metabolic rate is pleasantly stuck
So let the winds of change blow over my head
I'd rather die while I'm living than live while I'm dead

So now don't get me wrong
This is not a sad song
Just events that I have happened to witness
And time takes it's toll as we head for the poll
As the days grow more complicated the night life still wins

I'm growing older but not up
My metabolic rate is pleasantly stuck
So let the winds of change blow over my head
I'd rather die while I'm living than live while I'm dead

Let the winds of change blow over my head
I'd rather die while I'm living than live while I'm dead

Friday, September 16, 2016

A Republican Lobbyist Speaks . . .

I attended a lecture by a Republican lobbyist yesterday, who said, regardless of  who wins the White House . . . America loses.  (She did not say how she would vote.)  But, she did provide an interesting historical perspective.

She started showing graphs of the polarization of Congress, between extreme Republicans and extreme Democrats.  Then, she showed graphs of the general population of Americans, and how they are also polarized, albeit not nearly as polarized as Congress.  Then, she demonstrated how that polarization has been increasing since 1980s.

Contributing to this increasing polarization was (1) the rise of "talk radio" where every lunatic fringe got a microphone, (2) a Speaker of the House who told our elected representatives to limit any social or family interactions with the opposite party, and (3) NAFTA, which began the "hollowing-out" of the middle-class, especially among the non-college educated.

She thinks the Senate elections are now more important than the White House election.  Recalling the 2008 election of Obama when one party controlled both houses of Congress, she compared that with the gridlock that currently exists and will continue to exist, because the Democrats have no chance of winning the House.  Republicans may win the White House, but can they hold the Senate when she believes two incumbent Republican senators are already "toast?"

Republicans rightfully say the President is using the bureaucracy to wield increasing power, but he was left with no choice since Congress was gridlocked.  But, even that bureaucracy is being strangled by the Republican Senate, who refuses to vote on any presidential appointments.  As an example, the mighty Securities & Exchange Commission has not had a budget increase in five years and has two vacancies on the Board, one Republican and one Democrat, neither of whom can get a vote.  In other words, the Senate is slowly making the executive branch as impotent as Congress.  It is her hope that whatever party wins the White House also wins the Senate.  I agree!

She did not discuss the inability of Congress to deal with fiscal policy, which has forced the Fed to over-use monetary policy, just as the inability of Congress to govern has forced the executive branch to be over-used.  Gridlock is a cancer on our democracy!

The Softer Side of . . .

Normally, during my all-too-frequent hunting trips for continuing-education-credits, I search out lectures on economics and investing - you know, things I actually care about.  However, in the last few years, others have become more interested in the "softer" side of investing, called behavioral finance.

It is well known that investors damage their investment performance by selling out when fear is high, which is when the stock market is lower.  Then, they are slow to re-enter the stock market, missing its rise.  This is a very normal, if harmful, human behavior.  Yesterday, I heard a financial advisor describe a conversation with a client, where the client said to the advisor:  "I don't pay you to manage my money.  I pay you to manage my fears!"

I get the point:  To protect a client's portfolio, I must fight them when they are afraid and want to sell.  But, I question how black & white that should be.  There is more to taking care of a client than the value of their portfolio.  I would always tell a client they are making a mistake, but not all people are alike.  Some people can be re-assured, while others will fret and worry themselves sick.  Have we really helped a client if they can no longer sleep at night?

In another "softer" lecture, I learned that widowers are ten times more likely to get remarried than widows over age 65.  (This led to a humorous discussion of the "first casserole rule" - the first widow to deliver a casserole to a new widower wins!)  But, that raises financial planning concerns:  do we have an obligation to protect the inheritance of widower's children or do we encourage the widower to enjoy the remainder of his life?  Again, there is no black & white rule - we need to adjust our advice to the individual client.  Some widowers have the ability to enjoy life, and some don't.

And, some people say that economics is a "fuzzy science" . . . ?!?!

Wednesday, September 14, 2016

The Decline of Banking

When I taught the junior-level Economics of Money and Banking at the University of Texas in Arlington during the last century, I taught that the economic function of banks was to allocate credit across the economy effectively and efficiently.  Credit is like any other resource and cannot be wasted.  When someone takes bankruptcy and doesn't pay their credit card or car loan, the lender has to write off the loss by decreasing his income, which decreases the value of his stock, which makes it harder to raise additional cash to make good loans to better credit risks.  It takes a lot of good borrowers to offset the losses from one bad borrower.

As the economy expanded, banks increased the number of branches.  Non-bankers thought all those branches looked like retail stores, and bankers slowly became retailers.  Loan approvals no longer considered the character of the borrower, because only his credit score mattered.  Who needs intelligent, analytical bankers when you have computers?  Banking was "dumbed-down" and became mere selling.

While it is sad, it is not surprising to read about the latest scandal at Wells Fargo, involving the fraudulent cross-selling of retail services to their customers.  Over five thousand people were fired, but -- make no mistake -- they were mostly retail clerks, not real bankers.  I'll assume the vast majority were essentially young victims of a corporate culture where they were "expected" (wink, wink) to open fraudulent accounts, and "everybody" was doing it.

Please note that nobody has been charged with any crime, and I'll bet nobody will be, which is another shame!  Remember:  Sins don't count when done in the name of a corporation.

If I teach that course again, I will probably teach that "efficient" credit allocation is now done by computers and that banks are nothing more than retail stores, slowly devolving into risk pools.  Money and sales goals do not co-exist well over the long-term.  I just hope no student asks me who is carefully allocating credit in the economy today.

Monday, September 12, 2016

More Than Perfume

Obsession is a defining characteristic of the stock market.  Invariably, it finds something to obsess about.  Since the global financial crisis of 2008/9, it has mostly obsessed over Fed policy.  (To take a break, it sometimes obsesses about oil prices instead.)

Right now, Wall Street is obsessing over whether the Fed will raise interest rates in September or December.  Last Friday's plunge started with one Fed governor suggesting September.

Ben Bernanke increased transparency of the Fed during his tenure, by encouraging members of the Feb to discuss their thinking in speech across the country.  They did, and it seemed to calm market fears that more rate cuts were on-the-table.  It seemed to work as the trend in rates was down, but I don't think it is working well when the trend is up.

The timing of rate changes does matter.  You don't want to increase rates in a weakening economy, as it will cause the economy to weaken more.  Business will be less inclined to make more investment decisions when their businesses are weakening.  Expectations matter!

Z xchart

Sunday, September 11, 2016

Unrequited Anger

Most everybody has experienced unrequited love and are probably better people because of it.  But unrequited anger is very different and is a cancer on the soul.  Maybe, that is the natural long-term consequence of 9-11.

That is how I feel about the 9-11 attack on all that I love.  Many fellow Americans share this unrequited anger.  Fifteen years is a long time to carry such anger so deep inside . . . too long.

I know, aside from watching the Pentagon burn from my office window, I was not directly affected by the tragedy.  Thankfully, I lost no friends nor loved ones on that day.  Maybe, I have no right to be angry . . . but I am anyway . . . fifteen years later.

Since that day, I have hit nobody.  I have shot nobody.  I have dropped no bombs on anybody.  I have let others do all that for me.  That is just another reason that I am still angry!

I am angry because we have a whack-a-mole enemy.  We defeated al-Qaeda, and we will defeat ISIS in the not-too-distant future, but what will be next?  There will be another fanatical foe.  World War II was a terrible war, but it was not a whack-a-mole war.  This is a new and more-frustrating type of warfare.

Dick Cheney said the Muslims hate us because of our freedom, which was simplistic.  Fareed Zakaria thinks Muslims developed a warped impression of Americans, based upon the writings of one socially-conservative zealot who traveled in the U.S. during the 1950's.  Maybe, they are both right, but I see little hope, until sane Muslims figure out how to marginalize their lunatic fringe.  All religions have fanatics, but other religions marginalize them in varying degrees.  Unfortunately, there is no way we can require Islam to marginalize their lunatics.

Maybe, we can mature past anger and begin accepting mindless-religious-violence as part of our normal day-to-day business.  Or, the unrequited anger will continue to build, with unhealthy consequences.  This anger must be vented, or we must somehow mature past it.

More importantly - far more importantly - I pray that the families of the 9-11 victims do mature past the anger and discover enough peace and forgiveness to find the happiness they deserve!