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

Twice-In-One-Year?

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 www.usdebtclock.org -- 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!

Saturday, September 10, 2016

Letting Bears Exercise

Describing any given day in the stock market is like reading a recipe.  There is a main ingredient, which has been marinating a long time.  You add multiple unrelated ingredients and mix together, before slow-baking a whole nano-second and then serving it while blindfolded to perfect strangers in a restaurant.

Take yesterday for example - you remember it -- the Dow hit an air-pocket and dropped a whopping 394 points.  It was all the more breathtaking, because the market had been so sleepy all summer, not moving more than 1% on any given day.  In fact, that was one reason -- normal volatility had been repressed or too low for too long.  After a lazy summer, Wall Streeters returned from the Hamptons and realized they needed to start trading stocks again.

However, the triggering event was one particular member of the Fed's Board of Governors, who has the reputation of being least anxious to increase interest rates.  Friday morning, she gave a very hawkish speech, emphasizing her readiness to raise rates.  The market began sinking rapidly.  (I'm not overly-concerned about a quarter point increase whether in September of December.  American businesses can handle that just fine.)

Another ingredient was the unexpected nuclear testing of a surprisingly large warhead in North Korea.  Investors fret about the economic costs of an attack on South Korea.  Not only could we lose demand for American-made products from one of the stronger Asian economies, but the U.S. could incur huge un-budgeted costs retaliating against North Korea.  (Oh, by the way, millions of people could die.)

The market was also unsettled by the admission from Wells Fargo that 5,300 of its employees were fired for cheating customers.  The bank agreed to pay a huge fine, but it surfaced a festering concern that the corporate culture of most banks has become rotten at the core.  Instead of being "credit allocators" for the economy, they have become mere retailers.

Less obvious is my suspicion that Wall Street has already reached the conclusion that Clinton will win the presidential election and began the bull run that normally occurs late in years with presidential elections.  Instead, the bulls began running during the Spring, assuming they knew who would win.  Last week, however, brought reports of Trump's surging strength, and Wall Street let the bears exercise, giving up some of its earlier gains.  (Don't assume Wall Street has a strong election preference for Clinton over Trump.  It has a much stronger preference for certainty, regardless of who wins.)

What did not happen yesterday was that the stock market clutched its chest, crying "this is the big one!"  There was no derivative blowup.  There was no huge, unexpected bankruptcy.  There was nothing new.  It was just the beginning of another buying-opportunity.  

Thursday, September 8, 2016

Individualized Advice

"Only employees retire -- capitalism is too much fun for the self-employed to retire."  A crusty, old financial planner told me that decades ago, and I never forgot it.  He wanted to emphasize that employees generally need more retirement savings than entrepreneurs need.

Richard Branson is a 66-year-old serial entrepreneur and self-made billionaire from England.  This week, he said he has no intention of ever retiring.  He attributed his pro-work attitude to the English philosopher, Alan Watts, who died in the US during 1973.

Among other things, Alan Watt was an Episcopalian priest who said life is not a journey somewhere.  There is more to life than merely travelling to retirement.  What are you doing . . . is far more important than . . . what have you done?  (see https://vimeo.com/176370337 )

While I do believe work is good for the soul, I think this binary view of -- working or not working -- is too business-specific and does a disservice to the many volunteer activities, which is even more important for some people than working.

So, what should a financial planner advise?  First, we are programmed to encourage saving.  How much savings does a person need?  The answer is always MORE!  It is against our DNA to ever tell a client to stop saving.  That is a moral certainty!  If work is good for the soul, is saving therefore good for the soul?

Certainly, we have clients who have far more savings than they will ever need.  Should we tell them to buy frivolous things?  Who defines "frivolous?"  Do we really have an obligation to maximize inheritance to the children?

How do we tell a client "you're an employee and therefore need to save more?"

Now, what kind of advice would a computerized "robo-advisor" give to a entrepreneur?  MORE!

Wednesday, September 7, 2016

Community Jewel

Sometimes, we are prisoners of the things we think we know.  I thought that Christopher Newport College in Newport News was just another four-year community college.  I was wrong!

Helping a client think about a substantial charitable contribution to the school, I was given an "insiders" tour yesterday and left the campus highly-impressed.  CNU started in 1960 as a two-year branch of the College of William and Mary and became a university in 1992.  Sitting on a massive 260 acres between Warwick Avenue and the James River, the relatively new buildings are simply beautiful.  If you wanted to design a college that looked like the perfect college, it would look like Christopher Newport University.

We were drowning in factoids about CNU's many, surprising successes, but the ones that most impressed me were (1) it was a conscious decision to limit the student population to only five thousand students and (2) they receive eight thousand applications each year for only 1,225 openings.  Led by former U.S. Senator Paul Trible, who obviously works the levers of government quite well, I will be excited to follow CNU's future progress.

Whenever you meet a kid attending CNU . .. congratulate him/her!

Monday, September 5, 2016

Labor Thought

There is nothing so good that it cannot be distorted and used by extremists.  For example, take religion.  ISIS fancies itself as "religious."  The crazy extremists of Westboro Baptist Church in Kansas, who picket the funerals of our fallen heroes, fancy themselves as doing God's work.  Taken to extremes, Good becomes Bad.

As I think about Labor Day, I remember all the good work that labor unions did in their early days.  Then, they reached the point of "feather-bedding" and creating a sense of entitlement.  When they did, the public realized the labor movement was being taken to extremes, and support for labor began dissolving.  Union membership is now close to its post WWII nadir.

But, think of it as tidal movements.  As the public withdrew its support, labor power decreased as the tide receded.  Now, with increased awareness of the historic income inequality, that tide of public opinion is reversing, and labor support is once again increasing.  That is probably a good thing.  (Ironically, the angry populist supporters of Donald Trump will probably be in the forefront of growing union support.)

At some point, labor will abuse their growing power, and the tide will go back out again . . . unless they can find a way to marginalize their extremists. Good luck!  I just wish the Westboro Baptist Church could marginalize their extremists . . .

Sunday, September 4, 2016

Risky Business ?

The Wall Street Journal just reported on a new study that found investment "managers from poorer families tend to beat those from more affluent backgrounds."  As the son of a firefighter, my first thought was "I knew it!"

Then, I realized that study made the same mistake I warn investors about, i.e., it ignores risk.  Taking a little risk to earn a 6% return is far better than taking a lot of risk to earn the same return.  Investors get lust in their eyes about investment returns, ignoring the risk.

Everybody nods their head in agreement and appreciates the reminder, but here's the problem - how do you measure risk?  That is a big problem!  Currently, the best investment minds use volatility of the stock prices as a measure of risk, such as the Sharp Ratio or the Traynor Index, which are based on a statistical technique called standard deviations,  My thought is that they are nice, tidy little calculations that misrepresent risk.  There is no adequate risk measure at this time, which makes it impossible to accurately measure risk-adjusted returns.

So, what is an investor to do?  Ask yourself if your advisor focuses primarily on risk . . . or return.  If an investment manager starts talking about investment performance without first talking about the risk environment, that is a clue.  If he/she cannot explain the way he/she assesses risk, that is another clue.

Risk cannot be accurately measured, but that does NOT mean it can be ignored!

Friday, September 2, 2016

Politics, Not Economics ?

There is no member of the Board of Governors for the Fed that does NOT want to raise or "normalize" interest rates.  The question is when.  Guessing when has become an obsession on Wall Street.

If today's Jobs Report had showed over 200 thousand jobs were created last month, the Fed would take that as an indication of a strong economy and would be more inclined to raise rates soon, as in September.  Since we created only 151 thousand jobs last month, the Fed will probably wait until December and then raise it a mere quarter-point.  So what!

The Fed will soon be lambasted no matter what they do.  If they wait until December, the Republicans will accuse them of "playing politics" by NOT raising rates before the election, which would hurt the incumbent administration (read:  Democrats).  If they raise rates this month, the Democrats will howl that the Fed is pandering to the Republicans, who control Congress.

Who do you want howling at YOU - Republicans or Democrats?


Wednesday, August 31, 2016

The Rules. . . they're a'changing

Mark Twain once said "History doesn't repeat itself - at best, it sometimes rhymes."  I thought of that when studying this chart, which clearly shows that September has historically been the worst month of the year for the stock market, averaging the years since 1950.  The message to investors is "brace yourself for another stomach-churning month."
  
Chart of the Day
There's only one problem.  Since 2010, September has averaged a slight gain, not a big loss.

Rules of thumb were helpful guideposts for many years but now seem to be less helpful, especially since the global financial crisis of 2008/9.  Regular government-released economic reports also seem to have more measurement questions than before the crisis.  There is no conspiracy about all this, but there has been a fundamental change that we are not measuring correctly.  I cannot articulate what that change has been, but I'm glad some serious thinkers are working on it.

The good news is that the last three months of the year are historically very good months in the stock market.  I suspect it may be a little less good this election year, as the market has already pulled the post-election gains forward to the Spring/Summer, thinking it knows that Clinton will win.  

Tuesday, August 30, 2016

What Could Go Wrong ??

What could be wrong with this stock?  Revenues are down, and it lost $369 million for the first six months of this year.  The founder received a pardon from the President of the United States years ago, and even worse, some investment pros think it poses a systemic risk to entire world financial system.

Yet, the stock doubled in value this year!

One of the biggest mining companies, this London-based company has had a reputation of too-cozy relationships with some of the world's least-revered national leaders.  Revenues are down because commodity prices are down and, more importantly, because the company is intentionally shrinking its asset base.  This has allowed it to decrease its use of derivatives, thankfully.  And, the loss of $369 million is a big improvement over the $676 million loss for the same period last year.  I suspect the increased scrutiny resulting from this year's troubles will be good for the world.

Whew . . . but, does that mean Glencore is off the radar screen?  Not a chance!!

Open Letter to Colin Kaepernick

Colin Kaepernick is another rich NFL quarterback, who wears a football uniform for the San Francisco Forty-Niners.  Last week, he chose not to show the basic courtesy of standing for the national anthem, as a protest against continuing racial injustice in America.

Dear Mr. Kaepernick,

Often attributed to Voltaire in error, it is nonetheless true that "I disapprove of what you say, but I will defend to the death your right to say it."  You exercised your freedom of speech by showing no respect for the national anthem.  After all, sitting on your butt requires so much courage.

I defend your right to say whatever you choose -- in a speech somewhere, in front of a courthouse, or on the village square.  I even defend your right to sit on your rich butt during the national anthem.  I'm not offended by the exercise of your right to free speech.  I am offended by your lack of taste or manners or tradition.

The national anthem was born when America was under attack in Baltimore.  Tears run down the cheeks of many Americans when they hear the anthem, because they remember those who wore a non-football uniform, because they remember the original "noble experiment" in democracy, because they remember the countless volunteers who work to make neighborhoods better everyday, and because they appreciate good.

Yes, you have the right to disrespect all of that.  Indeed, you have the right to disrespect everything that is good in life, but we have the right to disrespect you for such selfish stupidity.  In my case, I frankly don't care if you rot in Hell, where I presume you will continue your protest.

Sincerely,
Jim Flinchum

Monday, August 29, 2016

Cartoon Wisdom?

Cartoons can simply entertain the kids when we don't want to be bothered.  Or, cartoons can actually teach us something.  Here is one of the latter:

Gold cartoon 06.17.2016

This cartoon shows a bear market on the left and a bull market on the right.  The bulls have small gold rings in their nose, while the bear has large solid gold teeth, containing more gold than mere gold rings..  The message is that gold may be more valuable during a bear market, but it also has a place in a bull market.  Rising gold prices are sometimes cited as an indicator of an approaching bear market (and prices have been rising this year).  As the value of your portfolio falls during a bear market, gold will increase and become a larger and larger portion of that portfolio.

Some investors believe every portfolio should have 5% gold.  After all, because gold is both a commodity and a currency, it can be included in either asset class.  So, why do so few portfolios contain gold?  I think the reason is that the lunatic-fringe of investors always seem to be occupied by  "gold-bugs," people who are irrationally exuberant about gold.   As we are all judged by the company-we-keep, who would want to be judged by any association with the breathless gold-bugs on the lunatic fringe?

My thought is that gold prices are too emotional and irrational to be recommended . . . but should not be discouraged either.  If it gives an investor comfort, 5% is not an unreasonably large share of the portfolio.

Sunday, August 28, 2016

Mandatory Loyalty

In 2009, ABC News presented some interesting research into the relative dental health of different sections of the country.  They found the worst dental health in America was in the Appalachian region.  This poor state of dental health is primarily due to a condition called "Mountain Dew Mouth," a result of too many sugary drinks and too little dental care.

As I have a large number of relatives living in the area, I made them aware of the region's dental health.  Instead of sparking interest, I sparked anger.  Instead of gratitude for the information, I received indignation.  I didn't understand!  Do you think the people of Flint, Michigan, were angry at the messenger when they learned life-saving information about their water supply?  Why were the people of Appalachia not relieved to know what sugary drinks were doing to them?  If I could keep some over-paid dentist from sticking sharp needles into my gums and rattling my head with a drill, why would I not want that information?  Why does additional information produce anger?

J.D. Vance is a successful investment banker living in California, who just penned his analysis of growing up poor in Appalachia, entitled Hillbilly Elegy:  A Memoir of a Family and Culture in Crisis.  Many people of that region trace their ancestry to the Scots and Irish who originally pioneered there.  Their values reflect that heritage.  They value loyalty above all else.  The logic is that I may fight and squabble with my family, but nobody else can -- without a punch in the nose.  If I cannot punch them in the nose, it is then obligatory that I disbelieve whatever I am told.  Truth is optional.  Loyalty is not!

Well, the same "logic" applies to the region.  Because I am a "city-slicker," I am authorized to criticize only the city.  It is an affront to the people of Appalachia if I "criticize" their area.  To simply present critical information made by others is just as disloyal as making the criticism myself.  Truth is optional.  Loyalty is not!  By repeating what I heard on ABC News, I was criticizing all my relatives who lived there, as well as their region.  It was something they did not want to hear.  Truth is neither convenient nor inconvenient.  It is simply optional.

J.D. Vance describes this culture fondly but worries that it is crumbling, which is sad for anyone like myself with roots in "the country."  He compares the slow death of the "country culture" to losing a religion, which came complete with a standard of values and perspectives.  Stung by globalization, the culture is becoming a "hollowed-out" society.  (I guess that also explains why the region is so enthusiastic about Donald Trump as President.)

This sensitive and exceptionally well-written book is required reading.  Take the time to understand a region of the country that has increasing poverty and declining church attendance, a region that doesn't trust "outsiders" . . . or their facts.  A people hurt by the continuing out-migration of young people, feeling their class is being betrayed by their own kids.  Deeply insulted by the stereotype of  "ignorant hillbillies," they will not open up and discuss this culture with you, but it has a beauty and symmetry that is well-worth knowing.

Thursday, August 25, 2016

Much Ado About Nothing

It is hard to defend an obsession, any obsession.  Wall Street is obsessed with the Fed raising interest rates.  They will be glued to the television tomorrow when Janet Yellen speaks at the Fed's summer retreat in Jackson Hole.  Everybody knows that rates have to increase, but why first and then when.

If you are a borrower, you like low interest rates.  If you are a saver, you hate low interest rates.  If you are a bond investor, you loved falling interest rates, because the value of your bonds increased.  Conversely, you will hate rising interest rates, because the value of your bonds will decrease.  That much is easy to see.

But, low interest rates cause a mis-allocation of capital.  Searching for yield, money has poured into stocks, especially large cap value stocks, because those dividends exceed the interest earned on ten-year Treasuries, just as an example.  Then, the excess cash spills over into other stock classes, such as more risky small cap growth stocks.

Consider that investors currently have a historically high level of un-invested cash sitting on the sidelines.  Wait, you might ask -- how is it possible that un-invested cash is at historic highs, while enough cash has spilled into stocks to drive those stocks to historic highs at the same time enough cash has spilled into bonds to also drive those bonds to historic highs?  It is due to the massive but necessary increases in the money supply, following the global financial crisis.

There are even insidious minor mis-allocations.  Low interest rates mean the portfolios set aside to pay the generous government pensions are no longer producing enough income.  This means municipal, state, and Federal budgets have to allocate a larger and larger portion of their revenue to prop up the retirees.  That means they need you to pay more in taxes.  Lower interest rates puts upward pressure on taxes.  Not counting municipalities and Federal shortfalls, another TRILLION dollars in revenue (read:  more taxes) is already needed for the states to pay those pensions.


Un-winding all this will take time and will be more difficult the longer we wait.  The Fed raised rates by a quarter-point last December, and I would like to see them raise rates a like amount this December.  A quarter-point each year is certainly not too much for the economy to withstand.

I worry that the Fed will delay raising rates, because it will strengthen the dollar, hurting exporters and posing an economic drag on the rest of the world.  Wall Street is afraid the Fed will start next month.  Big Deal!!