Wednesday, June 29, 2016

Sideshow or Slideshow ?

For those of you smart enough to miss my June 14th presentation to the Hampton Roads Association for Financial Professionals, here is a link to their website, where you can click on the slideshow: 

It could be worse . . . they might have put the video online!

Tuesday, June 28, 2016

Miscellaneous BREXIT Thoughts

First, polling in the U.K. has never been as scientific as it-used-to-be in this country.  With the tsunami of cell phones and the now-stylish disdain for anything remotely "establishment," the percentage of the population actually surveyed has been dropping steadily for years in both countries.  In the U.K., it was thought that the betting odds were a more reliable indicator of the pending BREXIT vote than the polls.  Both indicated that the REMAIN voters would prevail, and both were wrong.  Next time, lick your finger and hold it up in the breeze!

Second, power, influence, and money normally transition from one generation to another in a slow, quiet, predictable manner.  In the U.S., there is considerable resentment among millennials toward "the greatest generation" which has burdened the millennials with unimaginable debt to pay for entitlements like Social Security and Medicare benefiting the seniors.  That resentment also existed in the U.K., but it just got much worse.  The young voted to REMAIN, while the old voted to LEAVE.  The U.K. millennials are now almost certainly facing a recession, courtesy of the older Brits.  Will this widening generation-gap upset the normal "quiet, predictable manner" of generational transfer?

Third, the European Union must do a better job of coordinating its compartmentalized fiscal policy with its unitary monetary policy.  Just as gerrymandering is the root of all political evil in the U.S., the lack of coordination between fiscal and monetary policy is the root of all economic evil in the E.U.  Optimists pray that BREXIT will drive home that point and start fixing that problem.  Let us pray!

American know-it-all Jim Cramer calls BREXIT "the dumbest financial mistake I've ever seen."  Another American know-it-all, Jim Flinchum, calls the lack of a unitary E.U. fiscal policy "the dumbest economic mistake I've ever seen."

Sunday, June 26, 2016

Intellectual Scapegoating

The last chapter is almost every textbook on introductory economics discusses international economics.  Unfortunately, many courses don't get to the end of the textbook, and the students miss the most interesting area of economic study.  One subject in that last chapter is always the Law of Comparative Advantage.

A full discussion is beyond the scope of this brief blog, but that law demonstrates that nations become more prosperous when they make and export their high-margin goods and import low-margin goods.  It is the intellectual basis for globalization, which I enthusiastically support.

But, notice that nations become more prosperous, not necessarily individuals, and certainly not equally.  It was always known that governments would have to provide political solutions for job retraining and relocation assistance to displaced workers.  Unfortunately, only token efforts were made.  As the misery of those displaced or disadvantaged workers increased worldwide, immigrants became an increasingly convenient scapegoat, which demands a political response, not an economic one.  Trade policy has also become a popular scapegoat, usually on both sides of the trade agreements, but that also demands a political response, not an economic one.

The bad news is that government gridlock has prevented the political solutions.  That gridlock now drives the call for political action from the halls of an impotent Congress to the bellicose campaign trail.  Government has failed to release some of the expected pressure building from globalization.  Now, we have Trump, Sanders, and Brexit!

Yes, the bathwater has been soiled with immigration and trade issues by the politicians, but I pray we don't throw out the baby, which is globalization.  Once you understand Comparative Advantage, globalization will become YOUR baby too! 

Saturday, June 25, 2016

Brexit Questions

Q.  Will the Brexit vote lead to a depression?
A.  Of course, anything is possible but is not likely:

Q.  Why did the stock market react so strongly about the vote?
A.  Wall Street likes to worry but hates surprises.

Q.  Did the British voters make a mistake?
A.  The mistake was not going far enough in creating the European Union originally.  It has control over monetary policy but no control over budgets.  That remains the fatal flaw in a worthy project.

Q.  Do you suspect the European Union will become a "slow-motion train-wreck?"
A.  Unfortunately, it already is.

Q.  Where does something like Brexit fit into your tidy little economic concepts?
A.  Recessions are normal and not to be feared.  A financial crisis is sudden and should scare all of us.  Brexit was a political "2x4 applied forcefully against the head" of the global economy.

Q.  What is the best case?
A.  There is the possibility the British voters will reverse themselves very quickly, AND the E.U. will correct their fatal flaw.

Q.  What was the most telling demographic in the vote:
A.  Young people wanted to remain in the EU, while older people wanted to leave.  I guess older people have had enough change, while younger people were thinking about the future?

Q.  What really worries you about Brexit?
A.  It happens at a bad time in the U.S.  Our economy has long been the economic engine of the world and could pull the global economy along with us, but our fiscal policy is painfully gridlocked.  At least, China can make decisions.

Friday, June 24, 2016

The Morning After . . .

During election night in 1968 between Nixon and Humphrey, I was so fascinated by the role of demographics in elections that I stayed up all night, watching the returns.  The next day, I felt so lousy that I swore to never do that again.

Last night, I stayed up all night watching the Brexit election returns in the U.K., because I could see the reaction ricocheting around the globe.  First, the pound dropped like a ten-pound rock, driving up the relative strength of the dollar.  Then, Asia currencies went . . . well . . . wacky, if that's a technical enough term.  Asian stock markets opened up strongly, following the U.S. lead, but turned around dramatically when the first election results started to come in.  Oddly, the U.S. futures market turned down before the European futures did, which I will study further.

Regardless, both the U.S. and European stock markets will take a beating today.  As promised, they will overreact.  There may be minimal structural change in the English economy for the next two years, while they negotiate a painful withdrawal from the European Union.  Hopefully, the period of ambiguity will be as brief as possible, as the stock market hates uncertainty.  If anything, English businesses may be more inclined to deal with U.S. businesses during the interim, because our trade rules with England are not changing.

I do like the stock market at this "over-reacted" level!

Okay, I confess . . . I watched the election returns all night from the couch with my eyes closed part of the time . . .

Thursday, June 23, 2016

Binary Betting

Remember:  the only guarantee about stock market behavior is that it WILL overreact!  Judging from the number of questions I've received about today's BREXIT vote in the U.K., I expect a very volatile stock market in the short term.  This is a good opportunity to ask yourself whether you are an investor or a trader.  Warren Buffett is an investor.  Traders seldom live enough to become famous.

Here is an investing rule:  Don't make binary bets!

That is a vote when there are only two outcomes - positive or negative, in or out.  In the BREXIT vote, the polling is that U.K. will stay in, and the markets are already adjusting to that.  If the actual vote is to leave, the long-term economic implications will still be unclear, but the short-term stock market reaction will be ugly.  Do you really want to bet your hard-earned dollars strictly on a vote in another country?  Are you ready to place your bets/investments on the November presidential election in this country yet?

I think the only way to play this exogenous event is to hope for the U.K. vote to leave the E.U. and then to buy your favorite stocks when the market drops.

Tuesday, June 21, 2016

R-Rated Fiduciary Explanation

The National Association of Personal Financial Advisors (NAPFA) has long been opposed to "hidden fees" being charged to clients.  One example is the sales commissions paid to stockbrokers when clients buy into mutual funds.  Another is the mysterious "12b-1" fee paid each year to stockbrokers.  Another is the value of exotic vacations for stockbrokers and their spouses for putting client money into the favored funds.  Another is selling bonds into a client portfolio for more than the purchase price, making a substantial profit on each investment of client funds, which is called a "mark-up."  And, the list goes on . . .

That is one primary reason that all investors should have a "NAPFA-Registered Financial Advisor" and the confidence they are not being charged any hidden fees.

NAPFA has encouraged the adoption of a "fiduciary standard" which means the stockbroker must put the clients interest first . . . and not a free exotic vacation with their spouse, for example.  The choice of a mutual fund should actually be based on the needs of the client.  After years of lobbying, the Obama Administration ordered that all retirement accounts be managed according to a fiduciary standard beginning next January.  Of course, stockbrokers are fighting mad!

But, the notion of a fiduciary standard has confused many investors.  Leave it to a comedian to explain it in a way that is both funny and understandable.  Unfortunately, the messenger can sometimes over-shadow the message, especially with coarse language.  If such language offends you, please don't click on this link for a 20-minute explanation: 

But, do you understand it better now?

Saturday, June 18, 2016


There is one thing that older Republican men, older Democratic men, and older moderate men can all agree on -- those increasingly frequent "sleep interruptions" are really annoying!  However, serendipity can sometimes make lemonade out of that lemon.

In the wee-time of 0230 hours, I stood at our window overlooking the entrance to the Chesapeake Bay from the Atlantic.  In the darkness was a huge even-darker moving image!  It was worthy of a scene in any Star Wars movie.  Then, I noticed a very long line of faint blue-white lights that ran along a very long deck.  As it entered the Norfolk channel, passing the Chesapeake Bay-Bridge Tunnel, the faint blue-white lights merged into the same line as the lights on the Tunnel - lending an eerie appearance to the long line of lights changing colors, as the ship passed in front of the bridge lights.

I stood there a long time and watched.  While I have seen many aircraft carriers come in and out of the ocean over the years, this was the first time in the dark.  Knowing there are about 5,000 crew members on each aircraft carrier, I thought about all those individuals.  While few of them will ever see combat, hopefully, all were protecting us, by projecting American power around-the-clock and around-the-world.

Thank them for their service!

Que Sera Sera

Making no decision is an actual decision!  It is a decision to let whatever will be . . . just be . . . without any guidance or effort to change the inevitable. Some may think you cannot make a mistake if you do not make a decision, but they are wrong, because that is a decision to accept whatever will be.

In a rapidly changing world, societies and institutions choose between evolution and revolution.  If there is too little evolution, there will be revolution.  (Just as surely, if there is too much evolution, there will also be revolution.)

But, what happens when decision-making becomes constipated?  Evolution ends, and revolution begins, violent or otherwise.  It can happen in nations, like the United States, or in confederations, like the EU.  Perhaps, the E.U. was doomed from the beginning, with no formal institutional linkage between monetary policy and fiscal policy.  It is like charging the Fed with U.S. monetary policy, while leaving fiscal policy to each of the fifty states.  That would be insane!  A difficult concept to imagine, Brussels is even more constipated than Washington,  A noble ideal, the European Union was thought to be the first step toward a United States of Europe, but making no decision on that lack of linkage between monetary and fiscal policies was the fatal flaw.

The BREXIT election next week is making worldwide stock markets breathless with anxiety and uncertainty.  If the U.K. votes to leave, markets will drop and reset their trading ranges at some lower levels until the short-term impacts are clear -- such as how painful will be the "pound of flesh" that the EU extracts when the exit begins.

After much thought, I would vote for LEAVE -- but with tears in my eyes.  I have no desire to agree with the anti-immigrant bigots who lead the LEAVE campaign, but I'm afraid the U.K. is moored to a sinking ship.  The European Union is such a noble ideal.  I wanted it to work but believe it is fatally flawed.  It is like learning a childhood hero is merely another actor, likely with feet of clay.  It is hard to let go of such a wonderful ideal!

Maybe, BREXIT will be a signal to all the capitols of Europe -- to allow the E.U. to evolve, by shifting fiscal authority to Brussels, which is actually giving away some degree of sovereignty.  The United States of America was born in a revolution, and I'm afraid the United States of Europe will have to be born the same way.

The short-term issue is whether the U.K. stays or leaves.  The long-term issue is whether the E.U. evolves or . .. que sera sera!

Friday, June 17, 2016

Millions . . . down the drain

As a strapping young economics student in the last century, we studied how prices allocate resources.  If a product has a high price, more people will want to sell it.  Eventually, the new suppliers of that product will provide more than consumers want and will have to start discounting the price in order to sell their inventory.  As profits decrease, the number of people wanting to supply that product decreases, which puts upward pressure on prices.  Eventually, supply and demand for the product will come into equilibrium at some price.  But, what happens when the government sets a ceiling on the price that is below the equilibrium price?  Suppliers quit making the product.  The problem with socialism is that they set prices low enough to win votes, but those prices drive out the suppliers.

With all the bad news drowning us, it is easy to miss the most tragic story of all.  Venezuela is circling the drain, dragging MILLIONS of people down the drain and into chaos.  That nation adopted socialism decades ago.  Today, there are food riots.  Five people were killed just yesterday, fighting for food.  The price of food was been set so low that nobody can afford to provide food to the grocery store, where the shelves are now empty.  Would you grow food if you couldn't sell it for enough to make a profit?

Prices can allocate resources efficiently when prices can float.  When the government fixes prices, trouble follows, as Venezuela is learning.  This is a lesson that was learned in Russia and China, where they have made considerable progress in deregulating prices.  Maybe, Cuba may yet learn and not succumb to call for artificially low consumer prices, but I doubt it.  Venezuela is already toast!

Socialism comes in many shades of gray.  Not all try to set arbitrarily low prices, but when they do, the government subsidizes the low prices for as long as they can, which is what Venezuela stopped doing.  Hence, food riots!

No government is smart enough to set prices.  Only the "free market" can do that!

But, let's not be too intellectual about this and lose sight of the human tragedy unfolding for millions of people in Venezuela.  It is a man-made disaster! 

Thursday, June 16, 2016

Leaderless ??

The war began in 2008.  Our armies arrayed themselves on the battlefield and waited for their generals.  Alas, only one general showed up, and that was only a lesser general.  The other generals stayed in the barracks and pointed fingers at each other.  The armies had no choice but to follow the one general who had the courage to lead.  Yesterday, that general was badly wounded!  The armies must now beg for the other generals to show up and lead . . .

Last December, the Fed raised short-term interest rates by a quarter-point and predicted they would raise the rates four more times in 2016.  I wrote then that the increase was for political reasons, not economic reasons, and predicted the Fed would raise rates only once in 2016 at most.  For the last two months, members of the Fed have been warning the next increase would be this summer.  I was hoping they would.  Yesterday, they said they really didn't know when they would be raising rates again.  They have become sadly irrelevant.  Monetary policy has now been used exclusively since 2008.

General Monetary Policy has led bravely up to this point but is now wounded and exhausted.  We now must beg General Fiscal Policy and General Immigration Policy and General Trade Policy and General Tax Policy to take to the battlefield and finally win this war!  Unfortunately, those generals are still cowering inside Congress and the White House, bathing in their ideological purity, without any pretense of filthy compromise.

This impotence among generals has been brought to you from safely Republican districts that don't produce moderate Republicans and safely Democratic districts that don't produce moderate Democrats, all void of any filthy, unprincipled compromise.  In our form of government, redistricting is the root of all evil.

We need those other generals NOW!

Wednesday, June 15, 2016

Shocked and Saddened

As someone who sees the world economy as a fascinating and almost living organism, it is rare that I can take my eye of it.  But, I have been shocked and saddened by the senseless massacre in Orlando.  The heavy fog of sorrow has fallen over Orlando, just like it did over DC and New York after 9-11.  While the body count may be less, I doubt the shock and sadness in Orlando is much less that the earlier cities experienced.  Mass murder feels personal.

But, there is a difference.  This time, it is more layered or nuanced.  While we have mutated from attacks by Big Evil to attacks by Small Evil. we now see other social fractures being exploited.

I don't understand the violent hatred of gays, probably because I had a gay uncle who was a good guy and certainly not a pedophile.  I know parts of the Bible condemn homosexuality, just like it also condemns lying, stealing, and killing.  But nobody works themselves into a lather about anything except gays.  Any day now, I expect some psychologist will announce an association between a person's hatred of gays and confusion about their own sexual feelings.  If I can kill people based upon who they sleep with, can I also kill them based upon what church they attend or how they vote?  Can I throw them off rooftops as well?

As a certified "gun-nut" who has more guns that he can easily recall, I nonetheless believe the NRA has become a cancer on the body-politic of America, and it needs to be excised.  It is nonsense to say that all amendments to the Constitution can be modified, except the Holy Second Amendment.  Allowing people on the no-fly list to buy assault weapons is past nonsense - it is criminal stupidity.  As a former member, I can say that the NRA is an example of a good organization that has mutated into an evil organization.  It needs to be "put down!"

The method of radicalization is also different.  The violent Islamic extremists of 9-11 were radicalized in foreign countries.  That almost sounds quaintly old-fashioned.  Our modern, crazy lone-wolves are radicalized by the internet in nice, safe American bedrooms.

The next evolutionary step will be from Big Evil to Small Evil to Smart Evil, as the computer is used to research methods of mass poisoning.  Evil computers will eventually be used to attack other computers, controlling most everything.  "If you see something, say something" may work on the street, but it doesn't help on the computer.

I understand how the world economy mutates but, how does Evil mutate?

Thursday, June 9, 2016

5.79 Million Useless People

It is important to remember that recessions and bear markets are different.  Recessions happen in the economy, while bear markets happen on Wall Street.  There is a relationship but not a tight one.  We like to think that, since the average IQ on Wall Street is higher than the average IQ on Main Street, bear markets precede recessions by six months or so, because investors foresee the recession before mere humans can see it coming.  But, this is not a reliable predictor.

There is a slight seasonal pattern to bear markets.  Stocks usually take a summer swoon and rally by year-end.  There is no seasonal pattern to recessions.

Following last week's awful Jobs Report that only 38 thousand jobs were created in this country during the month of May, there has been much hand-wringing that a recession is coming.  The answer is that YES, there is a recession coming . . . at some point . . . but not today.  There is ALWAYS a recession out there somewhere.

This week's JOLTs Report offers reassurance that the next recession is not this week either.  (JOLT stands for Job Openings, Labor Turnover.)  There are 5.79 MILLION job openings right now - an all time high.  This doesn't indicate a recession this month.  If businesses could find qualified people, they would hire another 5,790,000 people, and that's a lot of taxpayers!

I side with the Democrats on this issue.  The Republicans argue we have 5.79 million too many lazy people in this country.  They cite the fact that 43% of the unemployed have stopped looking for a job.  The Democrats argue we have failed to educate or train 5.79 million students properly.  But, I do seriously question whether throwing more money into our hidebound educational system is the right answer, which is more concerned with maintaining the status quo than re-inventing itself.  One-third of the unemployed are between age 18-29, fresh from their experience in our hidebound educational system.

So, yes, a recession is approaching, which will be followed by a recovery.  And, yes, a bear market is approaching, which will be followed by a bull market.  Those things are sure to happen, as sure as the tide coming in and going out.  I just hope another 5.79 million people don't get washed out to sea and left behind by our 20th century educational system.

Wednesday, June 8, 2016

Coffin Fights?

One of my closest relatives is retired from law enforcement.  I am quite proud of him!  He has handled investigations from "routine, run-of-the-mill" murders to real headline-making mass murder.  Now in retirement but as a courtesy to a long-time friend in the funeral home business, he will occasionally get a request to attend funerals -- to break up fist fights among the grieving family.

What . . . "attend funerals to break up fist fights among the grieving family" ??

I know family members can often disagree and not speak for decades . . . but fist fights??

Oh, how the world has changed . . .

sibling rivalry illustration

Certainly, we are a more violent society, and we can debate the reasons.  Maybe, violence has become just another form of entertainment.  But, violence at funerals is still unthinkable!

Some blame goes to my fellow estate planners.  For the sake of families, we must convince our clients that "hope is not a plan."  It is malpractice to let clients merely hope their families will just "work it out."  If possible, the family members should be informed of any property divisions and distributions while the client is still alive and vibrant.  Sometimes, that is not possible.  When it is not, release of that information should be controlled.  It should be made clear that the lawyer or financial advisor will release that information AFTER the funeral.

In addition, provision can be made that, in the sole and non-contestable judgment of the lawyer or advisor, any family member causing violence at the funeral can be dis-inherited on-the-spot.  This would be an unwanted and problematic liability for the lawyer or advisor, but is it really any different than a "no-contest" provision?  Lawyers, you need to start drafting . . .

Fighting at funerals . . . just unthinkable!

Tuesday, June 7, 2016

Investors Think the Darndest Things

Earlier this year, I had to take a 22-hour course on behavioral finance, which is about peoples' attitudes and misconceptions about money and investing.  After all, there is considerable ongoing research in this field.  Frankly, it reminded me of Art Linkletter's 1957 classic book, Kids Say the Darndest Things!

However, one important point in that course was "garbage-in, garbage-out."  If a person doesn't see reality clearly enough, they can NOT be expected to think about it clearly enough.  I thought about that when I read the following from the respected research firm, Cornerstone Macro:

It's not often that you can say oil prices are up over 30% year to date, and investors are worried about deflation.  It's not often you can say that the market is (close to) an all-time high, yet investors are worried about growth.  It's not often you can say "risk-on" is working, yet bullish sentiment is sitting near all-time lows.  It's not often you can say the VIX (the volatility index) is at 13, yet investor uncertainty is at modern highs?

In fairness to the average investor, how can they develop an accurate perception of reality, if they have to rely on a media that benefits financially from selling fear?  My advice is not to read more -- but to read less -- financial and economic news.  While censorship is bad, self-censorship has advantages.  Avoid extreme predictable opinions, like perma-bear Stansberry and perma-bull Siegel.  The glass is neither half-full nor half-empty at all times.  Read a more neutral market observer, like Bob Doll of Nuveen.

Or, you could just read The Flinchum File . . . 

Thursday, June 2, 2016

Jobs, Interest Rates, and Libertarians

On average, there are about 160 economic reports each month.  Those are just the reports from the Federal government, various state governments, agencies, and trade associations.  That doesn't include reports from the many banks, brokerages, and other commercial companies.  I would guess the combined total approaches a thousand reports per month.

Can the average person process that many reports?  Of course not!  Pick your favorite and follow those.  The one report that Wall Street follows most closely is the Jobs Report or Employment Report, which is published on the first Friday of each month.  That would be tomorrow . . .

Wall Street is expecting that about 156 thousand new jobs were created in May.  If America created more jobs than expected, you would think that would be good news, and the stock market would rise.  You would also be wrong.

Tomorrow's report has been made even more "market-moving" by the various Fed members who have been warning that the next interest rate increase could easily be this summer, as in June or July.  If the Jobs Report is good, they can argue the economy is strong enough to withstand an interest rate increase, which will upset the stock market.  (Remember:  increased interest costs are a direct hit to the net profit line.)  This may be the Jobs Report that pushes the Fed to raise rates.

I think an increase in interest rates would be good, in terms of managing the Fed over the long term, so they will have ammunition for the inevitable next recession.  I hope they do raise the cost of borrowing.  After all, when was the last time you invested in a certificate of deposit?  Besides, the Fed would improve their standing with Libertarian wing of the Republican Party, which is more important than most people realize.

But, that view ignores the rest of the world.  The IMF is begging us not to raise borrowing costs, as that might slow down the world's economic engine -- the U.S.  In addition, the June Fed meeting will be shortly before the Brexit vote in England, which reduces the probability of an interest rate increase in June to zero, in my opinion.  However, July remains a real possibility, which makes the July Jobs Report even more earth-shaking than tomorrow's report.

When the Fed raised rates last December, they said they expected to raise rates another three or four times this year.  I predicted one more increase would be all we'd see in 2016.  July is probably it!

Monday, May 30, 2016

Aging Agelessly ?

There are tests to measure how well a person understands the wide world of finance.  They are called financial literacy tests.  There are also tests to measure how confident people feel in their understanding of finance, called financial confidence tests.  Not surprisingly, both test scores rise as a person ages but only until a point, usually in the early 60's.

A new study out of Texas Tech University studied the spread between the two scores.  Once a person gets past age 60, their financial confidence continues to rise while their financial literacy starts to fall.  This appears to be true regardless of gender, ethnicity, or income level.  (The spread between the two scores increased the most in the area of insurance, as annuities are purposely made more and more complicated just to confuse clients.)

Naturally, this new study reinforced the perception of older people losing their mental sharpness.  However, I have three thoughts on that:

First, as any college freshman can attest, there is an art to taking exams, relying on different types of memory.  The lack of experience taking tests apparently catches up at some point after age 60, but that says nothing about intelligence, perceptional abilities, or judgment.

Second, older people have more trouble getting a good night's sleep.  An unrelated study from Uppsala University in Sweden noted that two rare proteins (NSE and S-100B) appear in the brain shortly after it has sustained even the most minute permanent damage and further noted those proteins appear after "just one night of sleep deprivation."

Third, the brain is just a glorified muscle.  If it is not exercised properly, it will atrophy or lose its strength.  After a lifetime of work that requires both brain-exercise and brain-discipline, seniors enjoy their well-earned freedom from that, but it is an unhealthy freedom.  One of the smartest people I know is 95-years-old and just as curious about the world as he ever was.  He is a perpetual student.

The best 25 cents I ever spent was in the bookstore of the Special Warfare Center in Fort Bragg for a cheap little poster.  It shows a wizened old First Sergeant, wearing his beret, saying "The mind is your primary weapon -- keep it working!"

It still hangs in my office today.

Saturday, May 28, 2016

Dying Inside-Out

This afternoon, the neighborhood will celebrate Memorial Day with an old-fashioned party of hot dogs, hamburgers, and all the unhealthy American food a red-blooded person could want.  Neighbors will re-connect after a long winter, I guess.  Everybody will be happy to see each other.

This morning, my 93-year-old father, who is a veteran of the European theater in World War II, sent me an email that he was remembering "the 18 and 19 year old boys lying under all the little white crosses in France - those boys who were unlucky enough to be the right age at the wrong time -- a time for war."  He now lives alone on top a mountain in the far western part of the state, lost in his memories, and will have a frozen TV dinner tonight.

In Infantry Officer Candidate School decades ago, there was another candidate whose first name was Bill and whose last name was so close to mine alphabetically that we were bunk-mates for 26 weeks there and another 3 weeks in Paratrooper school.  By the time, we got to Special Forces training, we were both commissioned officers and could afford our own apartments, but even our apartments were close together.  We were like brothers.

In the highlands of Vietnam, the Vietcong would sometimes burrow into the ground, digging elaborate tunnels.  (There was a nickname for those soldiers tasked with flushing out the enemy, but it is now lost in the layers of my memory somewhere.)  The standard operating procedure was to first drop grenades into the tunnels, hoping for a frag-kill or a tunnel collapse.  Sometimes, a flamethrower was used, but the bounce-back of flames could be dangerous.  As the officer, Bill would usually wait on the surface to direct fire on any escaping enemy.  One day, an enemy solder suddenly popped out of an unseen tunnel and sprayed him with "a burst of six."  It was the last thing that enemy solder ever did.  Fortunately, Bill survived but with shattered knees.

In 1990, he came to visit me in Texas.  As soon as I hugged him, I knew something was wrong.  On his third unhappy marriage and in pain from his wounds, he was "hollowed-out," as he described it.  We sat on the shore of Lake Hubbard, remembered old buddies, and cried together.  A few years later, Bill ended his pain with a 9mm pistol, unfortunately transferring some small part of that pain to his loved ones.

It is good to remember those who died for us on the battlefield, but it is also good to remember that dying emotionally is different than dying physically.  I don't know if it is better to die laying in the mud in some Godforsaken place or slowly dying from the inside-out over many decades.  At least, if you die laying in the mud, you never have a chance to hurt anybody else.

So, I will consume a large quantity of unhealthy food today and will also raise a beer to all those who died . . . and to all those civilians who are still dying slowly on the inside.

Thursday, May 26, 2016

120th Birthday

Happy Birthday to you,
Happy Birthday to you,
Happy Birthday, Dow Jones Industrial Average,
Happy Birthday to youuuuuuuuuuu  !!!

Yes, today is the 120th birthday of the Dow Jones Industrial Average, and you would expect that it would be a time of celebration.  Instead, Wall Streeters have begun slinking into shadows, afraid to identify themselves.  They don't understand the hostility of Sanders' supporters and Trump supporters.  After all, their leader,  Lloyd Blankfein of Goldman Sachs, assured the Wall Streeters that they were "doing God's work."  The times, they're a'changing, indeed!

Now, there has been a controversial article in the May 23rd edition of Time entitled "Saving Capitalism."  Based on a new book by Rana Foroohar entitled "Makers and Takers," it argues that the financial sector has become too large.  It decries "the financialization of America."  That sector is now 7% of GDP, compared to only 4% in 1980.  That is not good for America, because it produces relatively fewer jobs.  With 25% of corporate profits, it represents a mere 4% of all jobs.  This is allegedly proof that the sector is not doing enough for Americans.  (Looking at it differently, 4% of all workers produce 25% of all profits.)

The writer correctly points out that the traditional job of finance has been to recirculate savings from consumers to small business.  Although unsaid, there is a tone that a conspiracy exists to expand that role, to make the industry "too-big-to-control."  Then, the fat-cat bankers can finally steal Grandma's money in the dark of night!

No question, the financial sector has grown considerably and has contributed too much to political lobbyists, but that doesn't imply any sinister plot!

Yes, the financial sector now has a larger share of GDP.  Be thankful, as the manufacturing sector has a smaller share, and that cannot be blamed on the financial sector.  Actually, all service sectors (such as legal, accounting, and real estate) now have a larger share of GDP, not just the financial sector.

Yes, the financial sector has a larger share of GDP, because it is doing more.  It is now helping business manage risk in ways that were unexpected just a few decades ago.  Airline companies now manage the risk of fuel costs better.  More farmers can manage the risk of crop prices.  More people have life insurance and property insurance than ever before.  This is not a bad thing!

Yes, the financial sector has a larger share of GDP, but it was an unintended consequence of the decision to provide old people with income.  This caused a tsunami of money into pension plans, 401(k)s, and IRAs.  Managing all that requires expensive talent, plus the cost of complying with complex regulations.

So, Happy Birthday to the DJIA!  Celebrate today, but then start preparing for a very different future!  The long knives are out there, looking for YOU!

Wednesday, May 25, 2016

A Glass Half FULL

There are bears and bulls, of course.  However, my experience is that there are fewer bears and bulls than expected but more perma-bears and perma-bulls than expected.  In other words, some observers never change their view, e.g., they always think the stock market will rise or always think the market will fall.  Their opinion never changes.  They either see the glass as half full or half empty.

During the forty years I've observed the stock market, there has never been a single day that someone wasn't predicting a crash, like Stansberry or Schiff today.  They are usually deeply steeped in Austrian economics and often recommend gold.  They are perma-bears.

In contrast, Warren Buffett and Jeremy Siegel are often described as perma-bulls.  Buffet feels history is a reasonable guide to the future.  After all, the American economy has always gotten better.  Just think long-term.  My favorite pundit is Siegel of Wharton, who just wrote that we are over-reacting to the Fed raising interest rates in the near future.  He wrote:

As far as equities are concerned, it is very rare for the bull market to end on the first, or even the second rate hike.  After the 2001-2002 recession, the Fed began raising the funds rate in July 2004, but stocks continued to rise for another 27 months.  After the 1990-1991 recession, the Fed began to hike rates in early February 1992.  After a brief pause, we witnessed the start of one of the strongest bull markets in stocks in history.  In my opinion, stock investors are far more concerned about a rebound of earnings, which is the likely outcome of a stronger economy, than about a 25 bp hike in the short rate.

My point is that "Wall Street is always climbing a wall-of-worry."  That wall today is a pending interest rate hike by the Fed.  Buffett would argue that is a sign of an improving economy.  Siegel would argue the stock market is over-reacting.  Indeed!

Friday, May 20, 2016

Branding America

Nobody will ever say Donald Trump is not a great branding genius.  He easily branded Jeb Bush as "low-energy", Cruz as "lying-Ted, Rubio as "little Mario", and Clinton as "crooked Hillary."

However, the brand he built around himself is worth billions, probably 40% of his net worth.  He makes millions each year from others who use his brand.

There may be something that the ill-fated Trump vodka can teach us.  A businessman with no experience in vodka came to him with the idea of selling upscale vodka.  For a minimum of $2 million plus a huge share of the profits, Trump agreed to loan his name.  As the businessman tried to find a distiller to actually make the drink, Trump focused on the glass bottle design and introducing the marketing campaign.  During the launch party, blondes licked a large chuck of ice encasing a bottle of his vodka.  One topless lady was there wearing only the Trump logo painted on her chest.

After repeated efforts to manufacture the drink economically, the businessman walked away.  Naturally, Trump sued.  It is no longer sold in the U.S. and little is sold abroad.  Not much of a success, indeed!

The irony is that Trump never tasted his own product.  After watching a brother die from alcohol, Trump despises it and never imbibes.  None of his children touch alcohol.  Smart employees are never seen having a drink at parties.  He once admitted the hypocrisy on a radio show, saying somebody else would sell it, if he did not.

Is there anything we can learn from this experience?

Thursday, May 19, 2016

The Only Game In Town

Starting at 1400 hours or 2 PM yesterday, I'm sure the traders on the floor of the New York Stock Exchange were calling for motion-sickness bags, as the 200-point roller-coaster ride began.

That's when the Fed released their minutes from the last meeting of the FOMC or Federal Open Market Committee, which decides on changes in interest rates.  Those minutes said they were serious about raising rates next month.  Of course, the stock market did what it does best - it overreacted!

You'll recall the Fed finally raised interest rates by a quarter-point last December, for the first time in nine years.  They also said they expected to raise rates four times in 2016.  At the time, I wrote they might raise rates once, maybe twice, but certainly not four times.  As much as I hate to agree with Goldman Sachs, the Fed will NOT raise rates next month.  Would you raise rates without knowing Q2 GDP growth nor the BREXIT vote?  Not a chance!

Their intentions are good.  They want to normalize interest rates as the U.S. economy stabilizes, following the Great Recession.  Increasing interest rates in the U.S. by a whopping one percent should not be a big deal, but the Fed has become the de facto central bank of the world.  Because the U.S. is once again the economic engine of the world, any increase in interest rates in the U.S. will impact the whole planet.  To be clear, slowing down the U.S. economy will slow down the whole world, and that is why the head of the International Monetary Fund has pleaded with Fed Head Yellen not to raise rates.

Under the old economic order (everything prior to 2008), the stock market watched Fed actions carefully and overreacted only slightly.  In those days, the market had the opportunity to overreact to fiscal policy (by Congress) as well as monetary policy (by the Fed).  With monetary policy the only game left in town, the stock market's overreaction to monetary policy is here to stay, unfortunately.

Wednesday, May 18, 2016

Advice 4 Young Advisors

Everyday, I receive emails from various firms that offer to teach me how to network and get referrals from centers-of-influence, such as attorneys, CPAs, and insurance agents.  My advice to young advisors is to hit the delete key.

Over many decades of experience, I have received a handful of referrals from attorneys and exactly zero from either CPAs or insurance agents.  Almost all insurance agents are your competitor, with their array of mutual funds, and many CPAs maintain "sweetheart" arrangements with other advisors.

Of course, one can argue that just proves that I did need their service in getting referrals.  My experience has been that existing clients are the best source of additional clients, especially those additional clients who are worth keeping.

Don't waste your time . . . and don't waste your money!

Moderation In All Things

I like, enjoy, and respect Warren Buffett.  He is not an advocate of frequent trading, especially to time the market ups-and-downs, and he has said his favorite holding period for a stock is forever.  His comments are frequently cited as corroboration for the "buy-and-hold" approach to investing.  Unfortunately, this approach has become more than a theory.  It has become a religion to some advisors and their clients.

Frankly, it is difficult to deny the impact of market timing.  Take a look at this graph:

 Chart of the Day

While it is true that a clairvoyant investor with perfect knowledge could have realized a gain of 119%, IF they had invested all their money at the market's nadir on March 19th, 2009 and held it until today, NOBODY actually did that.  It is strictly a theoretical possibility!

But, if a less clairvoyant investor had invested in December of 1999 at the peak, the Dow is up a mere 7.4% on an inflation-adjusted basis - over SIXTEEN years -- so, how happy is that "buy-and-hold" investor? 

Like most things in life, moderation is more appropriate than the extremes of either "buy-and-hold forever" or frequent trading to "time the market."  Some advisors insist their clients always remain fully-invested.  I subscribe to the notion that your cash level should reflect your anxiety level.  As your fear rises, so should your cash level.  Yes, that may hurt your investment performance in the long run, but it will also protect your health if you can sleep better at night.  After all, what is more important -- your investment performance or your health?  No, seriously??

"Buy-and-hold" investing ignores a person's shifting risk tolerance.

Monday, May 16, 2016

Uncertainty = Inflation ??

Back in the good old days (you know, the 1970's), inflation was a real problem.  The solution to solve that problem depended on your economic dogma.  The Monetarists argued that inflation occurred when you had too many dollars chasing too few goods.  The goods available for purchase would soak up whatever dollars are available for those goods.  The Keynesians argued that inflation occurred when the demand for a good was greater than the supply of those goods.  The demanders bid up the sales price of the goods.

The non-dogmatic economists noticed the relationship between wage growth and productivity growth.  When wages grew faster than the productivity (output per man-hour), inflation occurred.  So, to cure inflation, simply slow down wage growth or improve productivity.  There are two ways to improve productivity, i.e., employees can work harder, or management can buy machines/computers to make workers more productive.

Monetarists have been screaming for years that the rapid increase in money supply will ignite inflation.  Keynesians have been disagreeing, arguing that demand is far too weak to cause any increase in prices.  Non-dogmatic economists have said it is a purely academic discussion, since there is no inflation today, despite popular misconceptions.   However, things may be changing.

Over the past twelve months, wages have grown slightly over 1%, while productivity has increased only 0.6%.  Given increased awareness of the rising income inequality, few will argue wages are rising too rapidly.  This discrepancy between wage and productivity growths suggests business is a drag on the economy, and this could ignite inflation.

This is not to suggest business is somehow evil for not increasing business investment faster.  It is to suggest that business is fearful of increasing their cash outlay in the face of uncertainty.