Tuesday, March 3, 2015

"Uncle" Jeremy Semi-Warns

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

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

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

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

Stay the course . . . at least for now.

Monday, March 2, 2015

That Fearsome Number

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

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

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

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

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

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

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

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

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

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

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

Now, make your financial planner happy!

Friday, February 27, 2015

You Go Girl!

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

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

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

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

Thursday, February 26, 2015

Leading On The Dance Floor

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

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

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

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

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

Wednesday, February 25, 2015

Special Words

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

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

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

Tuesday, February 24, 2015

Watching Molasses

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

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

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

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

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

Tuesday, February 17, 2015

One More Time . . .

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

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

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

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

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

So, how much risk do you want?

Monday, February 16, 2015


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

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

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

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

Friday, February 13, 2015

Too Sudden And Too Severe

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

Now, take a look at this graph:

Chart of the Day

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

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

Thursday, February 12, 2015

He Said, She Said . . .

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

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

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

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

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

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

Wednesday, February 11, 2015

A JOLTing Report

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

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

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

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

Sunday, February 8, 2015

Sweet Satisfaction

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

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

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

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

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

Naw . . . not a chance!


Saturday, February 7, 2015

Better Than Good

The January Jobs Report was simply great.  Not only were 257 thousand jobs created last month, but we learned last year was even better than we thought, especially the last two months of 2014.  For the last three months, including January, we've averaged 336 thousand new jobs each month, which is the best since 1997.  Democrats were happy to see that average pay was also up, largely because sixteen states didn't wait for the impotent Federal government to act and increased their minimum wage last month.

From a Republican viewpoint, the best news was that the Labor Participation Rate or percentage of population who wanted to work increased from 62.2% to 62.9%, as a million more Americans started looking for work.  It is not that a million Americans suddenly decided to stop being lazy or ran out of meager unemployment benefits.  It is that another million Americans thought the job market had improved enough that they might finally have a chance to actually get a job.  This is significant because the Fed has been carefully watching this statistic, and that good news makes the Fed more likely to increase interest rates sooner than later.  (Still, I don't expect a rate increase before late this year or even next year.

Because this is the single most important economic statistic each month, one would have expected to the stock market to rally, and it did . . . briefly.  Then, Europe rained on our good news with bad news from both Greece and Ukraine. There is no question that the U.S. stock market would rally if we could suddenly reverse globalization and decouple from the world.  Of course, there is zero chance of that happening, and I'm glad . . . but only in the long run.

For now, let's just be happy for the 257 thousand Americans!

Friday, February 6, 2015

Internally Consistent, Externally Valid

When I took philosophy 101 in the last century, I recall the professor warning us to beware of philosophies that make a great deal of sense and are intuitively logical . . . until you apply them to the real world.  I've come to believe that is true for objectivism or libertarism.  Ayn Rand would be 110 years old this week, and I think I've read everything she ever published.  I love her absolutist view of the world, where the government should not restrict individual freedom - ANY individual freedom.  Everything she wrote is consistent with that view, because her philosophy is internally consistent.

Case-in-point:  Newly-elected Republican senator Thom Tillis of North Carolina was sitting in a Starbucks when he said it was an unnecessary restriction on employees that they be required to wash their hands after using the toilet.  He proposed that rule be eliminated and another rule be imposed on businesses to post a notice, only if they do not require employees to wash their hands after using the toilet.  He argued that customers staying away from restaurants with such notices would cause businesses to impose the rule - better imposed by employer than the government?

As it is now, I know every employee in every restaurant has to wash his hands after using the toilet.  If this libertarian pipe-dream replaces one law with another, we will then have to search each restaurant for a sign that employees are not required to wash their hands.  How will you know where the sign is?  Can you just ask an employee?  How awkward to ask "do you wash your hands after using the toilet?"

If it ain't broke, what are we trying to fix?  It is internally consistent that employees or anybody else should not be more regulated than necessary, but transferring the requirement to inquire whether the employees hands were washed after using the toilet to the customer is not externally valid.

Please save us from philosophical/religious/economic purists . . . of all types!

Thursday, February 5, 2015

A Heavenly Squid

When investment nerds die and go to heaven, they wake up in the research department of Goldman Sachs, the legendary Wall Street investment house widely known for their "aggressiveness."  The latest research indicates the following:

1.  Our GDP will grow at a 3.2% rate this year, compared to 1.1% in Europe.
2.  The dollar will continue to rise, with the Euro dropping 4.3% this year to 1.08
3.  Inflation will continue to fall, largely because of oil.
4.  Interest rates will rise, with benchmark 10-yr Treasury rising from 1.7% to 3% in 12 months.
5.  Gold will drop 8% to only $1,175 per ounce.
6.  Oil will rise to $70 per barrel within 12 months.
7.  The S&P 500 will rise modestly to 2,100 within next 12 months.
8.  For income investors, they like MLPs, REITs, Bank Loans, High Yield bonds, and emerging market debt.

With respect to the title above, don't forget that Mark Taibbi of Rolling Stone magazine once described this firm as a "great vampire squid wrapped around the face of humanity."  While I'm not trying to disagree, I still recommend their research.

Wednesday, February 4, 2015

How Long Is Long Enough?

Yesterday, when John Boehner was awarding the Congressional Gold Medal to the 40 surviving members of the Devil's Brigade (predecessor unit of the "Green Berets"), he teared-up.  If I had been there with them, tears would have been rolling down my cheeks as well.

Quoting from the Associated Press:  In 1942, they were lumberjacks, miners, hunters and farmers from the United States and Canada who came together at an Army base in Montana.  Within a few months, they were well-trained warriors who went on to become one of the deadliest commando units in World War II.

Now, how long have we been training the Iraqi military - regular forces, not commandos?

Do you feel a tear in your eye yet?

Monday, February 2, 2015

The Banality Of Monsters

My support for the death penalty solidified in 1962.  I think it was the now extinct Look magazine that published a full-page photo of the lifeless body of Adolf Eichmann hanging by his neck in Jerusalem.  The photo was a relief.  I didn't want to live on the same planet as a person who actually bragged that he was responsible for the murder of five million people.  There was no contrition.

The following year, Hannah Arendt coined an important phrase when she wrote Eichmann in Jerusalem:  A Report On The Banality of Evil.  She believed Eichmann was not inherently evil.  In fact, he was inherently normal.  She found he was not very smart nor very socially adjusted -- but was still very ambitious.  The face of a monster can be very ordinary, indeed.

I just watched the HBO movie Conspiracy about an actual meeting that took place on January 20, 1942 in a magnificent villa outside Berlin.  The surroundings were elegant, with fine china, fine food, and expensive wine.  It was organized by Eichmann but not attended by the most senior Nazi leaders -- only by the next level down.  The actual transcript of the meeting has been found, so we have an unfiltered account of the language used.  They went to great lengths to use the right "soft" words for extermination or murder, such as evacuation or resettlement.  Everybody was on their best behavior.  Manners were expected.  Everybody spoke with respect, even when they spoke about murdering millions of people.  It was simply banal.

It is a pity, because, like minds, civility is a terrible thing to waste!

Sunday, February 1, 2015

The Road To Hell Is Paved . . .

In his iconic 1667 book Paradise Lost, John Milton wrote "easy is the descent into Hell, for it is paved with good intentions."  English professors believe that is the origin for the expression "the road to hell is paved with good intentions."  It also explains how college loans became economic quicksand.

Even though it is now less true than previously, it is still commonly believed that a college degree is a guarantee of higher lifetime income.  So, let's make it easier for those who cannot afford to get that degree by lending them enough money to get it.  Let's put them in debt for $1.3 TRILLION, which is more than total credit card debt and more than all car loans in America.  The hoped-for consequence of this lending tsunami was that the students would graduate and make more than enough additional money to repay these.  The unintended consequences is that graduates are now delaying marriage, delaying having kids, and delaying buying a home.  Consumer spending is almost 70% of GDP, and these delays don't help America.  It is a big number, estimated at 40 million young people or 70% of recent graduates -- that's right, 70% of recent graduates have student loan debt, which averaged $33 thousand last year.

Imagine you're a young person chasing the American dream and borrow $33 thousand to get that degree.  Then, there is the Great Recession, and you wind up working a retail job.  You are under-employed and under-paid.  Incredibly, 45% of graduates age 24 or under are still living at home or with relatives, because they cannot afford to live independently AND pay back their college loans.  We have a generation rapidly losing faith in the American Dream.

The final nail in the coffin is the impact of student loans on entrepreneurship.  The percentage of businesses started by someone under age 34 has dropped from 26.4% to 22.7% over the last ten years.  Recent research at Purdue shows that only 16% of those with student loans exceeding $40 thousand started a business, compared to 40% who have no debt.

There is a clear moral responsibility to hold down the cost of college, which is the only major cost rising faster than the cost of health care. It has been too easy to raise tuition to pay for the elaborate pension plans of faculty and staff.  It has been too easy to set-up for-profit colleges that advertise constantly for new students and then hook those students on college loans.  They are no better than drug dealers!

There is also a clear moral responsibility to provide financial counselling to college students about the depressive impact of student loans.  There is a clear moral responsibility to help the 70% who took out student loans, ignorant of financial planning, in order to chase the American Dream.  We don't need to forgive the debt directly, unless they do appropriate volunteer work of some sort.  Or, we can ease the amortization terms.  Or, we can just apologize for leading them to believe in the American Dream that a college education pays for itself.

Saturday, January 31, 2015

Pity The Fool ?

One of my favorite quotes from the Rocky movies was the line by the champ (Mr. T) that "I pity the fool," referring to challenger Rocky Stallone.  Sometimes, economists are as arrogant as the champ.

This blog has discussed the problem of a strong dollar quite often.  Yesterday's announcement that GDP growth was only 2.6% in the fourth quarter of last year is proof of the problem.  Most economists were expecting about 3% or better.

However, with the dollar strong, Americans found foreign-made products cheaper and bought more from other nations, pushing our imports up.  Conversely, with the dollar strong, other nations found American-made products more expensive, forcing our exports down.  As a result, our trade deficit widened, which causes GDP growth to decrease.

How much did the trade deficit widen, you ask?  Enough to drop GDP growth in the fourth quarter from a healthy 3.8% to only 2.6%.  In other words, our growth decreased by 32% due to the strong dollar.

Politicians like to strut and take credit for the strong dollar.  Sometimes, economists just look at politicians, roll our eyes, shake our head and . . . "pity the fool."

Wednesday, January 28, 2015

When Is Fast Too Fast?

For about ten years, investment strategists have been arguing that, since half of the world's stock is outside the United States, we should invest about that much in foreign stocks.  In other words, about 50% of your portfolio should be invested internationally.  One way to do this was to buy the stock of large U.S. multinational companies, whose revenue from foreign nations already exceeds 50% of their total revenue.  When the dollar was decreasing in value, that made their foreign earnings even more valuable.

Now, that has changed.  The recent earnings announcements by Microsoft, Pfizer, Caterpillar, P&G and other large companies all attributed disappointing earnings to the appreciating dollar.  (Foreign earnings were no longer able to buy as many dollars now that the dollar is so expensive.)  The stock market dropped almost 300 points that day.  Just for good measure, it dropped another 200 points today.

Chart of the Day

It sure looks like we are entering a "currency war," where each nation wants to cheapen its currency to help its exports and labor force.  Because the U.S. economy is relatively strong compared to other currencies, we can take the economic loss from a stronger dollar without complaining too much.  After all, we want other economies to be stronger as well.

But, how much is too much?  The chart above shows a near vertical ascent of the dollar since last June.  So, when is fast too fast?  This chart shows you the answer.

Tuesday, January 27, 2015

Not This Year

Last Fall, the CNBC Fed survey of economists and fund managers showed their belief that the Fed would not begin raising interest rates until this June.  That didn't make sense to me, and I suggested it would not happen until much later in the year.  Today, the latest survey showed their expectation that the Fed would not begin raising interest rates until this September or three months later.

It still ain't gonna happen!

The Fed will not raise rates before December at the earliest, for two reasons.  First, Fed Head Janet Yellen is a dove, meaning she worries more about unemployment than inflation.  While the simple unemployment rate has fallen nicely and the economy did produce three million jobs last year, she is very sensitive to the high U-6 level of employment, which includes those part-timers who cannot find full-time work, plus the historically low 62.7% rate of the population that participates in the workforce and actually looks for work.  Keeping rates low will help.  Higher interest rates certainly will not help!

Second, the dollar is getting too strong, which is already hurting our exporters such as Caterpillar.  Raising interest rates in this country will make the dollar even more strong and hurt our exporters even more.  As Europe falters, that also makes the dollar stronger.  As China slows down, that also makes the dollar stronger.  All this ain't good!

Unfortunately, there is little the Fed can do right now, especially since they are the only branch of government that has done anything helpful so far . . .

Monday, January 26, 2015

Crybaby Nation

Imagine a Shangri-La where everybody gets free medical car and everybody retires at age 60 unless they have a hazardous job, like hairdressers who must work with dangerous chemicals, you know, or disc jockeys, who are around electrical equipment, you know.  They get to retire at age 55.

Imagine a national joke about paying taxes, where he who cheats the most is most respected.  Imagine having a job with a month's paid vacation, where you cannot be fired--absolute job security.  Imagine having the price of foodstuffs like milk subsidized by the government, so you can buy even more.  Wouldn't all this be wonderful?

Now, imagine somebody tells you the party is over.  GDP drops a staggering 27%, compared to 30% for the Great Depression in the U.S.  Unemployment rises to 28%, compared to "only" 25% during the Great Depression in the U.S.  It drags on for five miserably long years, compared to nine years of the Great Depression.  Even worse, government officials start demanding you actually pay taxes and don't get the joke anymore.  Now, other nations ridicule you and make fun of you.  They call you "spoiled children."

Why is everybody so mean to you?  You were happy and not bothering anybody.  What has changed to make the world so mean?  Maybe, we need a new government, yeah, a new government, so we don't have to change anything nor abide by the laws of economics anymore?

As expected, Greece elected a left-wing semi-socialist political party to protect their prerogatives and pampered way-of-life.  To do so, the new government promised to negotiate with their creditors to reverse the austerity measures that they had previously required.  In response, credit default swaps for Greece rose almost 11% immediately.  They are now the most expensive swaps anywhere in the developed world.  Very few expect those bonds to be repaid as promised.

Unlike three years ago, this did not come as a surprise.  Their debt was 160% of their GDP then, compared to 175% today.  (The U.S. is about 95% right now.)  Because no nation has ever left the European Union, it is not clear what will happen if Greece leaves (the Grexit), but I am not terribly worried about it!  It will be messy and make the stock markets choppy for awhile, but it will be good for the EU in the long run.  It will be good for everybody except the Greeks.

Greece took advantage of the strong currency of the EU to finance their borrowing at lower rates than their individual credit justified.  If they leave the euro, their borrowing costs will go up greatly.
I feel sorry for the Greeks.  (Of course, if they leave the euro, their exports should soar, because their new Greek currency will be almost worthless.)

For those bonds already issued, they are now in "strong hands" of the EU, the ECB and the IMF.  They have largely been removed from the private sector, except for a few courageous/stupid hedge funds.  I don't feel sorry for the hedge funds . . .

This is what happens when you put your grandchildren into debt to pay for your entitlements today.

Sunday, January 25, 2015

American Hero

Clint Eastwood's new movie American Sniper is a must-see for every lover of America.

It is not about war.
It is not about the Iraqi war.
It is not even about warriors.

It is about one particular warrior in the Iraqi war.
It is about one particular American Hero, who deeply loved his country.
It is a true story about a genuine "Boy Scout."

It is also about the "warrior code" and the camaraderie of those living with horror.
It is also about the invisible illness of Post-Traumatic Stress Disorder (PTSD).
It is also about wives who remain in safety but must live with a crushing fear of a ringing telephone.

Chris Kyle was indeed a SuperHero, with breathtaking marksmanship.
Once, I wore my expert marksman badge proudly but am not good enough to carry Kyle's backpack.
He made a head shot at 2100 meters, more than a mile away -- a head shot, no less.

With each succeeding war since World War II, an ever smaller percentage of the population serves to protect an larger percentage of the population.  While that is probably a good thing, it does make our relatively few warriors ever more important to the rest of us.  We need every Chris Kyle we can find.

It is cleansing to watch his movie.  It would be an honor to salute him!

Thursday, January 22, 2015

All Eyes On Europe

This morning, the European Central Bank announced it would begin quantitative easing (QE) in March by purchasing 60 billion euros or about $70 billion of "bonds" each month until Fall of next year, if not longer.  This was more than expected, and almost as much as the $85 billion the Fed was buying before it ended QE last Fall.  Dow futures immediately jumped upwards from about 45 point to 125 points, before dropping back as questions arose, such as what kind of bonds and how much of the 60 billion is "new money" in addition to its present bond-buying program.  As hoped, the euro depreciated and the dollar appreciated, which is good for European businesses and bad for American businesses.

The ECB is following the well-worn path of the Federal Reserve, the Bank of Japan, and the Bank of England, simply because Germany has been dragging their well-healed feet.  The common denominator is that each nation needs budget reform but, since their democratically elected governments are impotent, their central banks are forced to stimulate the economy in any way they can.

Right now, the risky 10-year Spanish government bonds are only paying 1.4% compared to risk-free U.S. Treasuries paying 1.9%.  That does not make sense.  And, that which doesn't make sense will not last.

In addition, don't forget the election in Greece this weekend.  It is expected that the socialist party will win and will put an end to austerity, which could preclude any additional assistance from the European Union, causing Greece to exit the EU.  There is a great deal of anxiety as to whether the EU can survive, but I am not one of the worriers.  It will be bumpy for a short while, but that is all.

Lastly, all of the world's most beautiful brains are now assembled in Davos, Switzerland -- setting a very high standard for "group-think" . . . at least, among the 1%.  Pay attention!

Wednesday, January 21, 2015

Middle-Class Economics ??

I didn't watch the State of the Union address last night.  It was past my bedtime, plus I already knew whatever the President said would be dead-on-arrival and could already cite the reasons the Republicans would use to explain why everything was dead-on-arrival.

But, apparently, the President coined a new phrase -- middle class economics.  I've been scouring the internet looking for a definition without success.  Given the source, the term must be rooted in Keynesian economics.  But, it reminds of of a famous urban myth that the CEO of GM once said "whatever is good for GM is good for the country."  I think "middle class economics" means that anything that is good for the middle class is good for the country.  This neatly justifies a higher tax on the upper class to pay for middle class entitlements.

And, by the way, the CEO of GM never made such a foolish statement.  In 1953, Charles "Engine Charlie" Wilson had that job until nominated by President Eisenhower for Secretary of Defense.  He was asked if he could act as Secretary of Defense in a way detrimental to GM and replied that such a conflict was highly improbable "because for years I thought what was good for the country was good for General Motors and vice versa."