Thursday, December 18, 2014

Santa Cheats

Gifted and/or cursed with the "early to bed, early to rise makes a man healthy, wealthy, and wise" and/or sleepy metabolism, I get to watch the European stock markets open most every morning.  It is like watching the sun come up, where one witnesses renewal of the physical universe, only that I witness renewal of the commercial universe.  It is a living, breathing phenomenon.  (On weekends, I use the quiet of early morning to simply write.)

However, during the last two weeks of December, I usually enjoy the "Santa Claus rally" by sneakily watching The Golf Channel, instead of CNBC or Bloomberg.  So far this month, there has been serious question whether Santa was coming or not, and I have been cheated out of my annual golf fantasy.  Now that it looks like Santa has just arrived tardily, I'm going to watch The Golf Channel and start working on my annual New Year's Resolution to play more golf next year . . . which I secretly know I will never do!

Replace or Repair

Conservative pundit Michael Gerson has written an excellent column about the need for compromise in Congress.  Please read:

http://www.washingtonpost.com/opinions/michael-gerson-can-clinton-or-bush-deal-with-americas-desire-for-populism/2014/12/15/ca531074-848e-11e4-b9b7-b8632ae73d25_story.html 

Crashes Are Transitory?

Back in 1980, I was doing graduate study in international finance at the University of Dallas when I took a course in the economics of energy (which is not surprising in Texas, I guess).  I learned that oil is the most competitive commodity in the world, as well as the most regulated.  Most of all, I learned that oil is the most important commodity in the world, even more important than gold.

So, it was surprising to me when I heard Fed Head Janet Yellen describe the impact of oil's recent crash as "transitory."  As we know, this commodity has caused a massive shift of wealth to the Middle East from the rest of the world.  The lack of that commodity nearly brought our economy to its knees in the early 1970s.  It accounts for 10% of all construction in this country, larger than government or office buildings or shopping centers.  It is largely responsible for the robust job growth we've seen this year, due to fracking.

How many national economies have we seen rise or fall with the price of oil?  How many national leaders have we seen replaced, when their oil-based economy suffered?  There is even a remote possibility of Russian president Putin being deposed in the near future.  How many wars have we seen fought over oil?  How many people have died?

"Transitory"???

I guess the way to look at this unfortunate choice of words is that she was not under-estimating the importance of oil.  She was just suggesting that the price of oil will rebound within three months, agreeing with Goldman Sachs, and that the geopolitical changes will also be short-term.  Now, is that good or bad?

Wednesday, December 17, 2014

The Squid's 2015 Outlook

Self-esteemed investment bank Goldman Sachs has released their outlook for next year.  In no particular order, they expect:

1.  The S&P will rise to 2,100 over the next three months and stay there for the rest of the year.
2.  The European stock markets will rise 12.3% by 2015 year-end.
3.  Interest rates will start moving up quite soon, with ten-year Treasuries going from 2.1% to 2.5% within three months and ending the year at 2.85%.
4.  The dollar will rise 7.8% against the euro.  (Think European vacation!)
5.  The dollar will rises 9.5% against the yen.  (Think Japanese vacation????)
6.  Oil will recover within three months, with Brent Crude hitting $85/bbl before stabilizing.
7.  Gold will continue falling, reaching $1,050 by year-end.
8.  GDP in the U.S. will rise from 2.2% this year to 3.1% next year, which is impressive.
9.  China's GDP will continue to decelerate slowly, dropping from 7.3% this year and 7.0% next year.
10.  "The geopolitical condition is often quite difficult to quantify and unpleasant to summarize.  Although turmoil in Russia and Ukraine and in the Middle East bears watching in 2015, the majority of geopolitical hotspots are, in our view, regionally tethered and of limited broader economic consequence."

Reflecting the respect I have for their research department, I can see the logic of all these predictions except #3 above.  With the high level of uncertainty and nagging level of U-6 unemployment and Yellen's dovish nature, I cannot see interest rates rising so soon.  It is also surprising to me that they expect strong GDP growth of 3.1% but without a more significant increase in the stock market.

Tuesday, December 16, 2014

"Considerable Period"

The friendly wagering on Wall Street last week was whether the phrase "considerable period" would be removed from the language describing the remaining time the Fed will keep interest rates at historic lows.  It is an important distinction.

The Street is expecting it to be removed, at the Federal Open Market Committee (FOMC) this week.  This reflects the market's expectation that the Fed will initially raise interest rates modestly in the second quarter (Q2) of next year.  If it is removed, it will put modest downward pressure on the market.

My bet is that the Fed will retain that magical phrase, because uncertainty has increased so much within the past week.  Few, if any, analysts predicted this collapse in oil prices.  Fewer, if any, analysts predicted the huge subsequent impact on Russia, where their currency is collapsing dramatically, along with their stock market (which is down a whopping 14% so far today).  Retaining the language will put upward pressure on the stock market.  However, with so much downward pressure, it may not even be noticed.

When most people think about market crashes, they think of the horrific, iconic 1929 crash.  Most can actually remember 1987, when the market dropped 24% in one day.  My expectation is that, if this continues, the crash will look more like 1997-98.  Remember Long-Term Capital Management, the collapse of the Thai baht, and chaos in Russia?  If so, then you must also remember that the stock market got over it and moved upward to new record highs within two years?

Some thought-leaders say that the Days of Globalization are over.  The United States is an economic fortress, comparatively speaking, to the rest of the world.  Yet, the troubles of the rest of the world continue to wash up on our shores, and that sure looks like globalization to me.

It is still unthinkable that the egocentric, egomaniac, ex-KGB, intensely nationalistic Russian president will take his country to war . . . but only barely unthinkable!  It might be the only way Putin can survive.  Otherwise, unlike the Fed, he does not have a "considerable period" before he disappears into history.

Sunday, December 14, 2014

An Individual Duty

Senator John McCain is right.  We should renounce all forms of torture and should abide by the Geneva Convention . . . as a nation.  If we are to ever become the "shiny city on the hill" that President Reagan wanted us to be, we must renounce torture and once again embrace.the Geneva Convention . . as a nation.

However, in the wildly unrealistic situation that I am holding the hostage who has the code to prevent an explosion killing Americans in one hour, I would immediately begin severing fingers, toes, and all other appendages until I get that code.  Afterwards, I would throw myself on the mercy of the court, because serving time in prison is a cheap price for serving my country . . . as an individual.

Sometimes, what is wrong for a country is justifiable for an individual.  The Chinese argue that Americans suffer from the "cult of the individual," placing the good of the individual above the good of many.  I would argue with them . . . not always. 

Thursday, December 11, 2014

Short-Term Pain

You are really, really old if you can remember the TV show entitled The Millionaire.  It ran from 1955 to 1960 and illustrated possible effects on normal, unsuspecting people when they were suddenly given a million dollars, which was an unimaginably huge amount of money at the time.  Some people quit their jobs and therefore lost their identity.  Some people watched their family spin apart as they all had strong ideas what should happen to the money.  Some people became jerks, alienating those who loved them.  Some found ingenious ways to just give away their money.

Right now, the stock market is convulsing over the sudden, dramatic 40% drop in oil.  It reminds me of the old TV show -- adjusting to a good thing can be quite painful.  Make no mistake:  a drop in the price of oil is good for the economy in the long run.  However, we must adjust to it in the short run.  The market angst is whether the drop is due to oversupply or to falling demand, which would indicate weakening economic growth worldwide.  Oversupply is a good problem.  Weakening economic growth would be a bad problem.

Another short run adjustment is the damage to fracking industry in the United States.  This has been such a growth industry and has really helped lift the economy out of recession.  It has also brought us closer to energy independence than we have been in my lifetime.  I hope we will protect that industry, as well as minimize any environmental damage.  Related to this, the growth in this industry allowed many of the smaller companies to issue high-yield or "junk" bonds, which powers the portfolio income for many income-needy investors.  The value of these bonds have dropped rather dramatically.  (The value of MLPs have dropped but not as much.)  Banks with heavy lending exposure to the energy sector have also dropped in value.

Another complicated adjustment is with international relations.  When Russia confiscated Crimea and invaded Ukraine, it did not know that the price of its primary source of hard currency was about to drop 40%.  China did not know that its most expensive import would be blessed with the gift of a 40% decreased cost.  The already-shaky oil-exporter Venezuela is now circling-the-drain.  The list of affected international relations is long and complex.  (Maybe, the leaders of all these countries could star in a new reality show called The Trillionaire?)

But, all this assumes the price of oil will stay low.  Over the last seventeen years, oil has traded within a channel.  Take a look at this graph:

Chart of the Day

Now, it appears that oil is close to rebounding, which will also upset the stock market.  Some argue that this drop in oil price is a "black-swan" which unexpectedly resets all relationships, making this graph of past relationships meaningless.  

A little stability would be a big blessing, don't you think?

Wednesday, December 10, 2014

What's Wrong With This?

Quoting from the front page of the December 5th issue of The Kiplinger Tax Letter:

The final bill (new tax law) will contain a significant new break for disabled individuals.  Tax-free ABLE saving accounts, similar to 529 college savings plans.  Starting in 2015, states can set up ABLE programs so families can set aside funds to help the long-term disabled maintain their health, independence, and quality of life.

Nondeductible contributions to ABLEs of up to $14,000 a year will be allowed for those who became blind or disabled before age 26.  Lifetime payins would be capped at the same level as the state's 529 plan.  Account owners would remain eligible for Medicaid.  And account balances of $100,000 or less wouldn't affect SSI benefits.

Withdrawals would be tax-free if the funds are used for housing, education, transportation, job training and the like.  This includes payout of account earnings. 

Tuesday, December 9, 2014

Austrian Pantsuit

My late mother always told me that name-calling is bad.  She was right, of course, but she was looking at it from an etiquette standpoint.  I think she was also right from an economics standpoint.  If you are going to invest precious resources, like time and effort, into another person, relationship, or situation, then name-calling is a risk to your investment.  I avoid calling anybody by any name worse than "dork" or "geek," which are both terms of endearment used to describe myself.

Still, I nearly collapsed with laughter when CNBC Jim Cramer referred to Chancellor Angela Merkel as "Herbert Hoover in a pantsuit."

During the stock market crash in 1929 and the subsequent economic collapse, all we understood about economics was that surplus budgets were good and deficit budgets were shameful, with even moral implications.  Therefore, President Herbert Hoover raised taxes and slashed spending, which seemed logical at the time, but the economy promptly went from recession into depression.  He took precisely the wrong action at the wrong time, and history has been unkind to him because of that.  (No, I'm not endorsing either the Keynesian or Supply Side approaches, but either would have worked better in that particular situation than the simplistic Austrian approach of Hoover.)

Not surprisingly, the Austrian approach is still taken as gospel in its home of Germany, where the hyperinflation following World War I is still a vivid, relevant memory.  As the European economy remains stalled, in desperate need of lift-off by its economic engine (Germany), Merkel wants higher taxes and less spending, like Hoover.  Compounding the problem is that she is pushing hard to impose the same solution on "basket-cases" like Greece, which makes recovery from their depression even more difficult.  European history will be unkind to Merkel, I'm afraid, but Greek historians will be even more unkind.

There is a time for this Austrian approach, but not when the economy needs a kick-in-the-pantsuit.

Sunday, December 7, 2014

Sunday Thoughts

Construction is a pro-cyclical industry.  That means it makes the business cycle more pronounced.  It makes good times better and bad times worse.  Right now, commercial construction is doing well.  Residential construction is limping along.  But, one area of construction is a drag on the economy.

Construction of churches has fallen to the lowest level since 1957.  It is down 80% from its peak construction level in 2002.  It totaled a mere $3.5 billion in 2012.

Some explain that churches are now more concerned with their ministry than their buildings.  Certainly, that might explain part of it.  Of course, there are other things going on as well.  The percentage of the population that never attend church was 25.3% in 2012, up dramatically from a mere 5.1% in 1972.  Financial giving has also changed dramatically.  Religious groups received half of all giving in 1990, which has now fallen to only one-third.  They simply don't have as much money to build new facilities.  They are a smaller portion of the GDP.

Rather than looking at this change from a religious standpoint, it may be more helpful to look at it from an economics standpoint, which is unrelentingly honest.  Benjamin Graham was the father of value investing and the mentor of Warren Buffet.  He famously argued that, in the long run, the marketplace is a weighing machine, i.e., determining the substance of an idea or product.  I think he would argue that marketplace for traditional religious thought and practices finds that it weighs less today than it used to weigh.  The marketplace is sending a disturbing message to religious leaders but what is it?

In the economy, if a product is not selling well, the seller has to make a decision:  (1) stop selling the product, (2) lower the price, (3) change the merchandising, including advertising campaign, or (4) change the product to meet changing consumer needs or preferences.

Ask your rabbi, priest, or preacher what he or she thinks.  Then, tell them to really help the economy by building a giant new building . . .

Saturday, December 6, 2014

Too Good ?

The December "Jobs Report" was better than expected, with 321 thousand jobs being created.  That brings the three-month average up to 278 thousand, which is certainly respectable.  This will likely be the most jobs produced in any one year since 1999.  (Average weekly earnings, reflecting slight higher earnings per hour and a few more hours, are also up a relatively modest 2.1% over last year.)

Republicans immediately pounced on this release as politically motivated to spur Christmas shopping, which is ridiculous.    I have met many economists at the Bureau of Labor Statistics (BLS), which publishes this report, and cannot imagine a career technocrat or bureaucrat throwing away his fringe benefits and lavish retirement package for any slimy, non-intellectual political hack.  (Of course, Democrats made the same unfair, biased allegations against the BLS during the Bush Administration.)

Normally, I would feel confident that this number of 321 thousand is an anomaly and would be revised downward next month, as it is a relatively volatile number, produced from a survey of corporate payrolls.  However, the survey of households also indicates a three-month average of 289 thousand, confirming the payroll survey.  It may be the economy has shifted gears into faster job growth.

So, how did the market react?  It was up -- but not as much as one would expect from such good employment news.  Because the job numbers were so good, that would mean the Fed will start raising interest rates sooner than expected.  Therefore, interest-sensitive stocks, such as utilities and REITs, lost value with this news, holding down the overall market.  If you are an income-investor, this was a preview of what will happen as we approach that day when the Fed actually does it.  The Street still believes it will be mid-2015, while I think it will probably be late-2015.

In the meantime, let the good news be just that . . . good news!


Thursday, December 4, 2014

Bulls And Bears Are Different

Every time we have a bull market, there is another study that confirms what a similar study during the last bull market showed, i.e., index-investing out-performs active-investing.  A new study by Lipper shows that 85% of large-cap mutual funds failed to beat the S&P.  A confirming fact is that 2014 saw a record number of hedge funds, who are always active investors, closing and sending funds back to the clients, because their investment performance was so poor.

Index-investing means buying exchange-traded-funds (ETFs) or mutual funds that simply mirror indexes, such as the S&P.  Their fees are usually lower, because they don't try to "beat the market."  Active-investing means trying to outperform the indexes or beating the market.  If index-investing outperforms active-investing and costs less money, why not be an index-investor?

One huge problem with this study is that this out-performance by index investors only works during bull markets but not during bear markets, which are far more scary.  Active investing usually outperforms index investing during bear markets.  Active investors allocate a larger proportion of their funds to cash during a bear market.  Index investors do not.  Active investors can also shift allocation toward consumer defensive stocks, which usually retain more value during bear markets..

Another problem is there are plenty of examples of mutual funds outperforming ETFs, which demonstrates the importance of picking the right mutual funds, especially during bull markets.

Lastly, it assumes there is no value to financial planners besides making investments.  Serving as a chief financial officer to a client obviously has great value, such as advising on estate planning, college planning, gifting programs, divorce planning, etc.  Little things like taking care of annual minimum required distributions (MRDs) from IRAs is one example.  And, just "being there"  when there is a death in the family brings tremendous value to a client or their family.

While there are no guarantees in investing, I do guarantee that there will be yet another study during the next bull market, confirming the Lipper study in this bull market, which confirmed a similar study during the last bull market.

Wednesday, December 3, 2014

Ameri-pean?

One normally thinks of Europe as a hotbed of left-leaning governments, more concerned with over-work than their budgets.  So, it seems odd to thank them for protecting an old-fashioned American value.

For generations, privacy was expected in the U.S.  We had the right to control most information about ourselves and our families.  Then, Google came along, and privacy was no longer important to anyone.  Or, at least, it was no longer available to anyone.  People were so happy to see advertisements targeted to them individually that they surrendered their privacy.  Some trade-off!

The Calvary may be the European Union, who is locked into an anti-trust battle with Google, threatening a break-up.  Part of the battle is the "right to be forgotten" or the right to withdraw from Google's "data-mining" on every individual.  Go E.U. -- beat GOOG !

George Orwell's 1949 classic entitled 1984 described a world where the government watched everything that everybody did.  Who knew that it would be a giant tech company instead?  Raise your hand if you think the government doesn't have access to the private details of your life that Google collects.

My grandson will never know the concept of privacy or why it was even important.  Sad!

For now, I'll just paraphrase John Kennedy's famous 1963 speech in Berlin . . . ich bin ein European!

Sunday, November 30, 2014

Golden Memories Are The Constants

As individuals in the constantly changing world of relationships, we look for a constant - a relationship with someone which does not change over time.  That person usually becomes a spouse but often becomes our ex-spouse.  There really aren't constants in relationships, because people change as they age, and either the relationship adjusts or it doesn't.  Either way, people are not constants.  Neither are relationships.

As investors in the constantly changing world of investments, we look for a constant - an investment that is predictable, something we can save, rather invest in.  For centuries, we thought that investment was gold, and it was . . . until it wasn't.  Switzerland was the last developed nation to sever the link between gold and it's currency - the Swiss franc or the "Swissie."  That happened in 1999.  Since then, the Swiss central bank has tried to peg its currency directly to the euro.  Of course, whenever the euro has troubles, Europeans flock to put their money into the Swiss franc, which drives up the value of the franc, making imports expensive for the Swiss.  To maintain that artificial price, the Swiss central bank has to spend huge sums of francs to buy euros.  They are reaching a point where they can no longer afford the franc being tied to the euro.  It is just too expensive.

Today, Switzerland is voting on whether to require their central bank to hold 20% of their capital in gold, compared to 7% now.  If passed, the price of gold is expected to jump 5% tomorrow and another 20% over the next few weeks.  Of course, passage would be ruinous for the bank if gold went back to $300/oz.  The point is -- gold is also not a constant.  It is a heavy, dumb metal that pays no interest and costs money to protect.  Plus, you cannot sell it for more than people are willing to pay for a heavy, dumb piece of metal that pays no interest and is expensive to own.  It is worth whatever the market says it is worth, via supply and demand -- no more and no less!

If all nations could agree on a price to sell and buy gold, a constant could be imposed on the market but "gold-bugs" are almost always Libertarians, whose philosophy doesn't approve of any market manipulation, such as price-ceilings or price-floors.

Like fond memories of your high school sweetheart, remembering the glory days of gold just makes the heart ache . . . for no good reason.  The genie has escaped the bottle!

Friday, November 28, 2014

Opaque OPEC

Although OPEC is currently meeting in Vienna, little is expected, despite a flurry of activity behind the scenes.  Before the conference, the smaller producers were asking the "swing" producers like Saudi Arabia to reduce their own production levels to decrease the supply of available, which would drive up the price of oil and prop up the revenue of the smaller producers, at the expense of the larger producers.  Saudi Arabia has agreed to do this in the past but only rarely.

Also before the conference began, two non-members of OPEC showed up, i.e., Russia and Mexico.  Initial reports were that they were there to plead with OPEC members to reduce production.  Subsequent reports suggest Russia and Mexico were actually summoned to appear, so that OPEC could appeal to them to go along with any production cuts made by OPEC members -- an obvious attempt to spread the pain.

Then, Saudi Arabia said they would not cut production, causing oil prices to drop even more rapidly, and the shares of oil companies are dropping as rapidly as shares of airlines are taking off.  One Russian oligarch predicts oil will now fall another $10, to below $60/bl.

Today, it is reported that erstwhile ally, Saudi Arabia, does not see this short-term problem of a revenue drop as significant as the long-term threat of American energy independence, resulting from our shale oil production.  The rule-of-thumb is that shale oil production in the U.S. costs about $65/bl to produce.  If prices fall below that, the U.S. will shut-in those oil wells and begin losing its energy independence.

Obviously, the long-term implications of this loss of independence are profound.  I think that becomes a matter of national security, and I pray that our do-nothing government can actually protect that independence.

Of more immediate importance, about 15% of high-yield bonds (AKA junk bonds) over the last two years have been related to shale oil production.  If those companies start going bankrupt, when oil prices fall below $65, that fixed-income market will be hurt badly.  Income investors will be hurt the most.

It is possible to have too much of a good thing.  A small drop in the prices at the pump is good for America.  A big drop is definitely not!


Thursday, November 27, 2014

Thanksgiving Day, 2014

I am thankful that unemployment has dropped from 10% to 5.8%.

I am thankful that the more problematic U-6 level of unemployment, which includes people who want to work full-time but can only find part-time work, has dropped from 18% to "only" 10%.

I am thankful for the average 4% GDP growth in the second and third quarters.

I am thankful we have minimal inflation and, more importantly, no deflation.

I am thankful that the stock markets are once again setting new highs.

I am thankful that the U.S. economy is once again the economic engine of the world.  (Sorry, China!)

I am thankful for my clients, who give me purpose in life.

I am thankful for my small extended-family, who provide a constant in a constantly-changing world.

I am thankful for our freedom of speech, so we can complain about every little thing, and for my right to pretend to listen politely.

I am thankful for our freedom of religion, so we can attend the church of our choice or stay home without fear of being arrested for not attending church.

I am thankful for Thanksgiving Day, so we can focus on how really lucky and fortunate we are!!


Tuesday, November 25, 2014

Things That Matter

Despite his impressive memory and command of details, Jim Cramer of TheStreet and star of CNBC is not my favorite analyst.  I find his style annoying and egocentric.  Nonetheless, my gut tells me he is still a good guy.

For anybody who has ever lost a parent, I recommend Cramer's fond eulogy to his father, which you can find here:

http://www.thestreet.com/story/12963316/1/jim-cramer-on-his-dad-our-last-day-together-was-our-best-one.html 

No Comment

Long ago in Panama, along with a young black captain who had just returned from Vietnam, we caused a private club located on Canal Zone property to integrate and allow black members.  In the course of that, we had to face down seven men holding shotguns.  Later, we received many compliments, including those of the commanding general.  With a "street cred" like that, I felt entitled to have thoughts on the touchy subject of race.  I was wrong.

Over the intervening years, I worked for three different banks.  Each required employees to attend "diversity sensitivity training."  It was there I realized I was not permitted to do anything other than to nod my head in agreement.  After all, since I've never been black, I could not possibly have any legitimate thoughts on the subject of race.  (Of course, I've never been a Catholic or a communist or sang in a choir either, but I am allowed to comment on those subjects?  Go figure!)  Of course, no matter what else, a person must always avoid being called a racist.

The inability to discuss race creates more problems.  The prosecutor in Ferguson was so concerned with being called a racist that he made a circus of the grand jury process.  Instead of leading the jurors thorough the evidence, as prosecutors normally do, he simply dumped a massive amount of evidence on them, with no direction.

Solomon Wachtler, former Chief Judge of the New York Court of Appeals, is usually given credit for saying that a grand jury would "indict a ham sandwich," meaning the prosecutor had so much influence over the grand jury that anybody could be indicted for anything.  That does not seem to be the case in Ferguson.

To avoid being called a racist, the Ferguson prosecutor conducted an exhaustive grand jury proceeding, which are always secret and out-of-view.  This creates mistrust and has created a new class of grand juries -- for defendants in racial crimes.  Shouldn't the next defendant in a racial crime receive the same sort of grand jury proceeding?  Why not?  Doesn't this perpetuate the assumption that the courts have one system of justice for whites and another for blacks?

Note:  Those are just questions, not comments or opinions.
I have no comments or opinions on the subject of race.

Monday, November 24, 2014

Incoming Tide

The bulls are running on Wall Street and running hard.  The stock market is up sharply.  But, doesn't the stock market reflect the economy?  The economy is growing but not rapidly.  Shouldn't the stock market be going up as slowly as the economy improves?

Yes, there is a loose relationship between the economy and the stock market, but the stock market reacts primarily to the "flow of funds."  If more money is flowing into the market, it will go up.  If money flows out, the stock market goes down.  That is why mutual funds are watched so closely, as a proxy for the overall market.

Right now, foreigners are pouring money into the U.S.  The latest available data is from September, when foreigners bought $94.2 billion in long-term securities, half of which went into U.S.  Treasuries.  That is the highest inflow since January of 2012.  In addition, Americans sold $70.1 billion of their assets owned outside the U.S. and brought that money home as well.  The combined $164.3 billion of inflows to the U.S. is the highest on record.  Obviously, this increased inflow reflects the rising fear outside the United States.

This is also what has been driving up the dollar.  Foreigners need dollars to buy U.S. assets.  Therefore, they have to sell Euros or Yen or whatever, which drives down that currency, and buy dollars, which bids up that currency.  It is a good time to use your dollars to travel abroad but not to be an exporter.

Enjoy the ride, but remember that those inflows will become outflows -- when worldwide fears subside even a little.

Sunday, November 23, 2014

"Red, White & Blue" From "Ol Blue Eyes"

As an introduction to his song, The House I Live In, Frank Sinatra said he loved this country, even more so because it is NOT a perfect country.  His reasoning was that it so much "fun" trying to make it perfect.  I don't know if he would still say that today, but I still love every word of the song:

What is America to me?
A name, a map, or a flag I see;
A certain word, democracy.
What is America to me?

The house I live in,
A plot of earth, a street,
The grocer and the butcher,
Or the people that I meet;
The children in the playground,
The faces that I see,
All races and religions,
That's America to me.

The place I work in,
The worker by my side,
The little town or city
Where my people lived and died.
The howdy and the handshake,
The air and feeling free,
And the right to speak my mind out,
That's America to me.

The things I see about me,
The big things and the small,
The little corner newsstand,
And the house a mile tall;
The wedding and the churchyard,
The laughter and the tears,
And the dream that's been a growing
For a hundred-fifty years.

The town I live in,
The street, the house, the room,
The pavement of the city,
And the garden all in bloom;
The church, the school, the clubhouse,
The million lights I see,
But especially the people;
That's America to me.

The house I live in,
My neighbors white and black,
The people who just came here,
Or from generations back;
The town hall and the soapbox,
The torch of liberty,
A home for all God's children;
That's America to me.

The words of old Abe Lincoln,
Of Jefferson and Paine,
Of Washington and Jackson
And the tasks that still remain;
The little bridge at Concord,
Where Freedom's fight began,
Our Gettysburg and Midway
And the story of Bataan.

The house I live in,
The goodness everywhere,
A land of wealth and beauty,
With enough for all to share;
A house that we call Freedom,
A home of Liberty,
And it belongs to fighting people
That's America to me.

All I can add is . . . Amen!


Saturday, November 22, 2014

Trouble Next Door?

Just two years ago, optimism about Mexico was high and rising.  The new President, Pena Nieto, seemed truly committed to reforming the hidebound and corrupt country.  He opened the oil business to foreign investment, which has long been a sacred cow to the Mexican people, who vividly remember exploitation by foreign corporations.  With an improving economy and a falling birthrate, even illegal immigration to the U.S. decreased markedly.

Now, something is starting to smell.  Yesterday's release that GDP growth in Q3 was only 2.2%, far below expectations.  While still respectable, the leading component was construction, which is often fleeting and not dependable.  Mining was way down, for the fifth straight year.  The transportation sector only grew 1.1%.  (Remember Dow Theory?)  Even government spending was substantially less than expected.

In addition, protests over the 43 student-teachers who were mutilated and massacred has spilled over from the province into the nation's capital.  The outrage over the powerful drug cartels seems to have found a lighting rod.

If that wasn't enough, there is now some existential absurdity to the revelation that President Pena Nieto and his TV-star wife have a "sweetheart" arrangement with a government contractor for their private mansion.  So much for his reputation as an upright reformer of corruption.

This is worth watching, but I wouldn't travel to Mexico to watch it . . . 

Friday, November 21, 2014

For History Students Only

When we look at stock market cycles, we know the current bull market is getting old -- over five years old.  However, if you look only at bull markets that follow at 30% decline, it is a very different perspective.  The deeper the bear drop in the stock market, the longer and strong the bull recovery.  Our stock market drop of 52% in 2008/9 was terrifying, but it did set the stage for an impressive bull run since then.  Now, take a look at this chart:

Chart of the Day
Over the last 114 years, there have been 13 recoveries, averaging 8.8 years each.  Of those 13 bull runs, 6 had a shorter duration than the current one, and six had a longer run.  We're in the middle.  However, because our 52% drop was substantially greater than the 30% minimum, one can easily argue that this recovery will be much longer and stronger than average.

I hope so!

But, please note one big difference:  Never before have we sustained a major economic recovery on such a sea of debt -- except for the longest and strongest recovery of all, labelled 1942 above.

Thursday, November 20, 2014

NOT Our Finest Hour

In Infantry Officer Candidate School, we were taught that, whenever your men come under fire, it is critically important to give a command.  It doesn't matter if you holler - hit the dirt or climb a tree or drop your pants - just give a command, even if it is wrong!  Just make a decision . . .

It doesn't matter if you think the President is a corrupt usurper of Congressional power, determined to be the Emperor, OR if you think the impotent Congress has had enough time, since they haven't made any decisions on immigration since the Executive Orders of Reagan in 1984 or Bush in 1991 - a few numbers always helps.

Since 2007, the number of undocumented persons in this country has dropped from 12.2 million then to 11.5 million now.  As the Mexican economy has improved and as their birth rates have decreased, their in-migration has dropped from 700 thousand annually in 2001 to only 160 thousand in 2012.  In fact, the number of undocumented Mexicans in this country dropped from 7 million in 2009 to 5.6 million in 2012.  (Of course, more immigrants are coming from Central American countries now, instead of Mexico.  Almost all undocumented workers in Virginia are from Central America.)

In 2012, there were 8.1 million undocumented workers who were either working or looking for work in our country.  That was 5.1% of our total labor force.  We're hardily being overrun.  This is not a metastasizing economic cancer that is growing.  It is a moral issue.

Making a decision on immigration is not rocket science.  It doesn't take twenty years to study.  It just takes courage.

Certainly, it would be much better if the Republican leadership of Congress would personally agree to a deadline of March 31st, when they will control both houses of Congress, but if not . . . well, it just takes courage.

I assume we will have a Republican president in 2016, but we will still have a useless, gerrymandered Congress, because that cannot be fixed until after the next census in 2020.  I hope he will use his executive authority to make decisions that Congress cannot make . . . if he has the courage.

Wednesday, November 19, 2014

Keynesian Malpractice

A few years ago, the flaccid Japanese government decided to take a Keynesian approach to end their "lost decade(s)" and applied a huge stimulus, using deficit spending.  Predictably, the economy strengthened and their stock market boomed.

Now, a "true" Keynesian knows that deficit spending has to be temporary, followed by budget surplus, to keep the debt level low.  Given that their debt-to-GDP is almost twice as problematic as the U.S., they really did need to start reducing the debt.

So, earlier this year, they raised the sales tax by 60% from 5% to 8%.  Of course, it was expected consumers would respond with less spending, but economists were stunned by the large 7.2% drop in Q2 GDP.  They argued it was a one-time response and predicted Q3 GDP growth of 2.1%.  Instead, GDP dropped 1.6% last quarter, and the economists were stunned again.

My first thought was -- how can Japanese economists be so bad?  My second thought was that -- what, governments can do something, anything?!?!  But, the more important thought is - sure, the economy strengthened after the stimulus package but they didn't give it enough time to normalize before applying a LARGE tax increase.  While I applaud their courage in applying the unpopular part of Keynesian economics, i.e., raising taxes, a responsible Keynesian would have given the economy more time to strengthen before applying a much smaller tax increase.


Tuesday, November 18, 2014

Involuntary Mercenaries

Vladimir Putin is the greatest danger to the United State, far more dangerous than ISIS or Ebola.  He is also a danger to the Russian people.  Yet, they still love him.  Vitaliy Katsnelson has written an excellent article on the Private Portfolio website, proving that -- perspective is everything.  Yes, their access to information is highly restricted but is very effective in presenting Putin as working hard for the Russian people.  Nothing could be further from the truth.  Putin is working for himself.

He has essentially run that nation for twenty years and is now rumored to be one of the world's wealthiest men, at about $40 BILLION.  During that time, Russia's petro-economy has gone from largely dependent on oil to one that is almost entirely dependent on oil.  He had the opportunity to make it better but has made it worse!  During the years of high energy prices, this increasing dependence was not obvious to the Russian people.

So far this year, the Russian ruble is down 27%.  Imagine what would happen in this country if the dollar dropped 27% so rapidly!  Yet, the Russians inexplicably still love their unsavory leader.

Don't forget that Hitler knew it was time to start the war when the bond markets cut him off.  Putin is getting closer to that point, where Russia can no longer borrow enough to stay afloat.  However, instead of starting a war, he could throw Russia into the arms of China.  Already this year, he has announced two huge deals with China, which analysts agree are very favorable to China.  Russia could become the spear held by China.  The patriotism of Russians would serve their Chinese masters well.