Friday, July 18, 2014

Quarterly Column

For anybody waiting breathlessly by their mailbox for the latest issue of Inside Business, so they can read my quarterly column, you can also read it online at:

When It Rains . . .

Yesterday, a civilian plane was shot down over the Ukraine, killing all 298 passengers.  Within the hour, Israel invades Gaza.  The Dow drops 161 points, the biggest drop in two months, reflecting the increased uncertainty.

In addition, the civil war in Syria still rages on.  Despite our investment of lives and treasure, Iraq is sub-dividing itself.  We're still not out of Afghanistan, and they cannot agree on who won their Presidential election.  Massacres of the weak are still routine in the Sudan.  Only Putin knows why he has not already taken the eastern half of the Ukraine, to go with his seizure of Crimea.  The Shining Path is still alive and murderous in Peru.  Argentine is dangerously re-writing the rules of international finance.  Even the U.S. has a thorny invasion issue on its southern border.  And, just for good measure, there is another outbreak of Ebola in Africa.

I recall a professor in college saying it was not a constitutional requirement that the President of the United States be intelligent.  In fact, it is such a lousy job that no intelligent person would want it.  Anybody who actually wants the job is inherently unqualified for it.

The bright side is that this uncertainty spike may finally cause a much-needed dip in the stock market.  On average, the market experiences a 10% or more dip every 18 months.  We haven't had one in 32 months now and are long overdue.  (Frankly, I was surprised the Dow dropped less than 1% yesterday, which may indicate the underlying strength of the bulls.)

Without insensitivity to the human heartache involved, this uncertainly spike will resolve itself to a more normal level, and the stock market will resume its more normal long-term growth.  Until then, let it rain, let it rain . . .

Thursday, July 17, 2014

Fretting Each New High

The Dow set a new high yesterday.  Today, the world is worrying whether the stock market is over-valued and ready for a replay of 2008.  The answer is NO.  Take a look at this chart:

Chart of the Day

If you take the price of a share of stock and then divide it by the earnings per share of stock (EPS), you have the Price-Earnings (PE) Ratio, which is the measure of how "over-valued" the stock is or is not.  In other words, how many years of EPS are you paying for a single share?

Looking at this chart, you'll see the trend line is that the market becomes fully valued when each share of stock costs about 23 times the earnings per share.  Today, we're at 20 times, which means the alarm bell is not ringing yet.

Does that mean the stock market cannot take a bear swoon right now?  Of course not!  A dip of 5-10% is always possible at any time and is indeed healthy for the market in the long-run.  Since yesterday's new high was the fifteenth new high of the year, why is a sixteenth new high hard to imagine?

Paraphrasing the iconic Warren Buffet, I don't know where the market will be tomorrow, but I do know where it will be in ten years . . . UP!

Wednesday, July 16, 2014

Such Sweet Justice

If you live long enough, you might get to see history repeat itself.  When I first started studying economics, forecasting had a heavy dose of person-to-person interaction, where the thoughts of other thought leaders were at least as important as any independent information I might discover.  When I took my first course in statistics, I thought it would be an interesting sideline to either confirm or dispute a forecast.  Little did I know that statistics would evolve into econometrics, beginning a reign of terror over the whole field of economics.  Nothing mattered if it didn't have a formula.

Yes, I know that armies of Ph.D. economists have spent their lifetime constructing mathematically pure models of economic behavior.  I also know that the very best models of the Fed and other central banks did not foresee the Global Financial Crisis.  Of course, their response to this failure has been to construct "new & improved" economic models.

In fairness, all those things I was forced to learn about econometrics have been helpful in explaining market volatility to clients, but other than that . . . oh, yeah . . . it also helps me to understand political polling.

Still, it was with a certain glee when I saw the head of Canada's central bank admitted his disappointment with their economic models and instructed his economists to get on airplanes and go talk with industry executives face-to-face.  Econometrics may once again be used to test a hypothesis -- but not to make decisions or forecasts.

Oh . . . such sweet satisfaction . . .

Tuesday, July 15, 2014

Shooting The Survivors . . . and/or Shareholders

Another major bank just agreed to pay a $7 billion fine for actions leading up to the Global Financial Crisis (GFC).  In total, banks have now paid roughly $100 billion in fines, which is certainly a great deal of money.  However, estimates of the damage done by the GFC vary between $5 TRILLION to $20 TRILLION.  Assuming even the lower estimate, how does the $100 billion payment of fines make Americans whole?  All it does is make the current shareholders $100 billion poorer.

Corporations have a "legal" identity, but that still doesn't make them human.  No corporation said they were going to "put lipstick on this pig," as one banker described a security just before selling it to his clients.  It was a human being, who was never charged with any crime and then retired with his millions.  He was not unique.  All the decisions to knowingly sell trash to clients were made by human beings.

My conclusion is that a person can do things legally inside a corporation that would be illegal outside the corporation.  The logically-absurd-conclusion is that I can kill somebody when I'm employed but not when I'm unemployed.

Painfully few people have done the "perp walk."  Of course, I recognize it is a waste of time and money to allocate legal resources towards hopeless causes, but fairness sometimes demands it.  The defense asks "Did a senior employee decide to sell trash to clients because his boss told him so?"  That defense should be as useless as the Nazi defense that senior generals had no guilt because they were just "following orders."  They were executed.  Fairness demands "perp walks," if not executions.

  If we cannot punish the guilty employees, is justice then served by punishing the shareholders?

Saturday, July 12, 2014

Latest NABE Survey

I could join the American Economic Association (AEA) but find them to be too academic and detached.  Instead, I belong to the National Association of Business Economists (NABE), where the everyday work of members depends on their knowledge of economics.  Their latest survey of members was just released and is briefly discussed.below.  The latest survey of the AEA is not.

Following the unexpectedly lousy first quarter, when GDP shrank a whopping 2.9%, most NABE economists have reduced their full year forecast from 3.5% growth to only 3.0%.  This is reasonable.

Full Year 2014 export growth was reduced from 3.0% to 2.5%.  (It was estimated at a whopping 5.5% as recently as March.)  This is a big drop but is reasonable.

Only 8% of NABE economists think there is even a 25% probability of recession this year or in 2015.  Over 60% think there is less than a 10% probability.  This is reasonable.

Over half believe the Fed will begin tightening in the first half of 2015, with the majority thinking it will begin in the second quarter.  I'm in general agreement with these survey results except for this one.  I don't expect monetary tightening by the Fed until late next year, probably Q4.  When tightening begins, two bad things start to happen.  One, the budget deficit gets worse because the Federal government must pay increased interest expense on the almost $18 trillion of debt.  Two, inflation gets constrained by money tightening, and we need inflation to help make the national debt more manageable.  So, why would you invite this trouble before absolutely necessary? 

Friday, July 11, 2014

The Final Word on Iraq

Greg Wright is a good friend and client.  A retired attorney, he is now a successful writer.  (You should visit his blog at )

He was also a former Marine infantry officer and knows the horrific details of war too well.  Sadly, as a father, he knows that the "full measure of devotion" in war can mean losing your son on the battlefield, and he did.  There is no greater pain!

His son paid that last full measure and was killed almost nine years ago.  A year later, Greg wrote the most penetrating and intellectually fierce analysis of the war that I have seen.  Even though that analysis is now eight years old, it is still THE definitive analysis.  With his permission, I am proud to post it below:


When we were getting close to invading Iraq in March of 2003, several friends came to me to ask my opinion about the Administration’s venture.  The men in my family, which is a Navy-Marine Corps family, discussed the subject at great length.  Our discussions centered on not whether we should go in, but when and why.  Evidently, we were going to bring a new and democratic dynamic to the Mid-East.  We were going to eliminate those dangerous weapons of mass destruction.

For my part, I always counseled caution.  Having been in the Marine Corps at the end of Vietnam War, and having made a serious study of my profession, my take was simple.  Before we saw fit to expend one Marine’s life, I said, we had better measure the risks; we had better define the strategic objectives and we had better know what the odds of achieving the end game were.  In the end, like most Americans, I trusted that the Bush Administration had, in mature fashion, made those calculations.  I supported our regime’s effort to change the other guy’s regime.  This was before I knew that one of the precious lives expended in the effort would be that of my own son.

Since he was killed in Iraq in December of 2005, I have been trying to make sense of my son’s death in the wider context of this question: “Was his death in vain?”  And further, both before and since the November 2006 election results, “What do we do from this point forward to ensure that our nation’s blood and treasure are spent wisely?”

As to the first question, I have long since come to the conclusion that, in the greater scheme of things, no American who, like my son, sacrificed his life for his buddies and this nation, has died in vain.  To think otherwise is like saying that those who “gave the last full measure of devotion” at the battle of Gettysburg died in vain.  They did not, because, as Abraham Lincoln foretold, from those honored dead, this nation celebrated a new birth of freedom.  Our government, of, by, and for the people, did not perish from the face of the earth.

So from this perspective, and because I do not think that this nation shall perish but will continue to flourish (although I question any “new births” of freedom), I do not think that the three thousand American lives spent in Iraq have been spent in vain.  But moving to the next question, I ask, “Have they and shall they be spent wisely?”

While I have always been interested in foreign affairs, and while I have lived in or visited a number of countries, I knew that I was unprepared, by training and experience, to answer this question.  From December 2005 forward, I have studied everything that I could get my hands on to become familiar with the Iraq campaign.  I read articles and news accounts in at least three papers weekly.  I have read or listened to the opinions of alleged experts - the opinions of Smart Men of all factions and perspectives, both American and foreign, both military and civilian.  I have come to think of most them as Sadducees and Pharisees.  That is, while they may know what they are talking about from the viewpoint of their particular fields of expertise, most of them have missed the Big Picture.

I do not intend to impugn the motives or character of any administration official or military officer whose influence or decisions have gotten us to this point.  My opinion is that the great majority of them have served honorably and to the very best of their abilities.  Any attempt at an accounting by the average citizen (or a Democratic House or Senate) would now not only be futile, but counter productive.  Understanding this, I ask that the reader allow me to reveal my bitterness at my loss to this extent:  I do not like Donald Rumsfeld because he cheats at racquet ball.  I despise Dick Chaney and his former minion, Scooter Libby, the intelligence abortionist, because they are not truthful.


Although there are several options being discussed at the moment (all are grasping at the seventy-nine straws of the just-released findings of the Iraq Study Group), the most serious discussions being batted around in the mainstream press are: 1) troop strength levels, and the derivatives thereof, that is, should we train, fight, or both, and when do we bring the boys home, 2) negotiating with Iraq’s neighbors, particularly Syria and Iran, to bring about a modicum of stability, and 3) preventing tripartite division of the country.

1.  Troop Strength Levels

As to the issue of troop strength levels, it seems to me that because we refused, at the outset, once the combat phase was over, to follow the most basic military dictum of “seize, hold, and consolidate”, we have been overtaken by events.  The guerrilla that does not lose, wins.  Because we could not or would not send in sufficient troops to fully interdict the insurgents’ major supply and reinforcement routes, to occupy and police the major cities with overwhelming forces, to protect critical infrastructure (and museums), we did not and have never furnished sufficient security to minimize our own casualties or to permit political processes to flourish.  In short, because we never furnished an occupied population with a militarily secure environment, we have permitted the insurgents to deflect loyalties of most Iraqi factions away from our goal of a unified government.  The insurgents have effectively sabotaged our efforts to establish a semblance of order.  Significantly, once the Shiite mosque in Samarra was blown in February of this year, the civil war so desired by (the now deceased) al-Zarqawi was truly born.

I submit that by now events have so overtaken us that it may not much matter what mission our troops outside of Al Anbar Province are given.  The guerrilla that does not lose, wins.  The conflict between Sunnis and Shiites has become so polarized that the Iraqi government, whose writ goes unheeded in the critical provinces, has become an instrument of Shiite extremists, megalomaniacs, criminals, and goons.  Its sole underlying interest is consolidating Shiite power in strategically important areas, not in achieving federalist compromises with the Sunnis.  This means that the Iraqi government’s primary interests vis-a-vis the United States is to milk us for everything it can and to direct our troops to hot spots where its own forces or militias lack the wherewithal to restore order (or detain and murder Sunnis).

Caught in the middle of this dog fight, our mission of suppressing the 30,000 strong insurgency is pretty befuddled.  While the Marines can hold Al Anbar Province for now, the Iraqi Army will never hold it. Given the country-wide chaos that has emerged, it is hard for our military commanders to concentrate on destroying the Alqeda network and its allies, the remnant Baathists.  This brings us back to the domestic U.S. discussion of “What to do?”  The only serious question being debated among the most influential of our political class is how and when to withdraw the troops.  We may call this the “Plan For a Graceful Retreat”, or, more accurately, the “Unmitigated Disaster Plan”.

You may note that I have dismissed the issue of embedding our troops with the Iraqi Army as an effective tactic.  The proposed Study Group deadline of removing most of the combat arms from the country by March of 2008 makes that task an impossible one.  We simply cannot train the 15,000 to 20,000 troops that would be needed and get them embedded in time to have any lasting effect.

The most punted about scenario is one that envisions gradually drawing down the U.S. forces (by stated “benchmarks”) to a rump army of 50,000 whose mission would be to act as a kind of logistics unit and fire brigade. Its most urgent role would put out conflagrations that the Iraqi army cannot.  Let us call this descent of military strategy “Whack-a-Mole Lite”.   In other words, the guerillas or insurgents would be permitted to choose a battleground at their leisure, then ensure that we would be called upon by the Iraqi government to fight the battle on their terms.  I think that a Dien Bien Phu is a Dien Bien Phu by any other name.

I think too that this idea of a gradual draw-down of troops is another part of the recipe for disaster.  As our response capabilities decrease, the guerrillas will progress their insurgency (as theorized by Mao Tse Tung) from Phase I to Phases II and III.  They will increasingly mount larger and larger campaigns by regular forces, seeking to hold discrete territories, most likely in Al Anbar Province, which they could then govern.  Whether these attempts individually succeed or fail is, in the end, immaterial.  The perception among the populations of Iraq would be that the guerrillas’ eventual success is inevitable.  Allegiances held by important sheiks would shift.  At some point, Al Anbar Province’s entire population shall rise against us or the “unified” Iraqi government.

For these reasons, I think that the only sane solution is to firm up the Iraqi government as best as we can for some period of time (six months, perhaps), then pull our people out quickly and entirely.  We might want to plan for this evolution.  As of today, in our hubris, we have already betrayed every Iraqi who voted for a unified government and who proudly displayed a purple finger in proof thereof.  To be fair, and to avoid useless finger-pointing, we should understand that the ultimate purpose of our experiment may never have been achievable.  Who could have predicted the intractability of the Sunnis or that they would prefer murderous strife to a unified government with ascendant Shiites?

I also suggest that we make arrangements to extract the many Iraqis, both Sunni and Shiite, who have aided us.  If we do not remove them from the scene, we shall have consigned many of them to certain death.  For their sake, and ours, and for all the world to see, we should not repeat the 1975 travesty of flight from our embassy roof in Saigon.

2. Talking With the Neighbors

To paraphrase Von Clauswitz, diplomacy is merely war carried on by other means.  This means that negotiating from a position of weakness is never a desirable option, and that it should be done only as a last resort.  It may be properly done, for example, when a war is lost.  In our case, bringing Iran and Syria to the table, having in our heyday warned them to keep their fingers out of Iraq (to no avail), means that we shall have to make real concessions to gain the pretence of their cooperation in establishing the stability we seek.

What Syria wants is plain for all to see.  It wants, with no interference, full control of the northern half of Lebanon.  Both Syria and Iran want the southern half held in the grasp of their client, Hesbollah.  If James Baker means what he says about “not just talking to our friends”, he shall have to reassure us often that the sacrifice of many patriotic Lebanese, both Christian and Muslim, and Israeli Jews is indeed for the Greater Good.  And never mind the promotion of democracy in the region.

As for the Iranians, we shall have to acquiesce, to some degree, to their self-proclaimed “peaceful pursuit” of The Nuc and their goal of achieving hegemony over Shiites in the entire Mid East.  So much for deterring nuclear proliferation anywhere.  And, again, never mind the promotion of democracy in the region.  But perhaps we can persuade the Iranians to stop shipping Non-Improvised Explosive Devices to their clients in Iraq.  This, at least, would be helpful.

I think too, that the idea of talking to Iran ignores their strategic interest in having Iraq remain in chaos or becoming divided.  They feel that they would have a natural ally in a Shiite dominated and oil rich government in the south of Iraq.  Why should they fear an Al Anbar Province that is a staging ground for Al Queda?  The United States is the Mullahs’ ultimate and consummate enemy; likewise, the United States is Al Queda’s natural enemy.  What is there for Iran not to like in this scenario?

3. Dividing up the Country

To paraphrase Julius Caesar, another military man, all Iraq is already divided into three parts.  The task of deciding territorial disputes in the process of this ongoing division is already underway in the form of a nascent civil war.  The process will continue to be very messy, very deadly, very prolonged, and very tragic.  At the end of this road, the only remaining vestige of democracy will be in the north, in the new Kurdistan.  Who knows what the Sunnis and Shiites will make of the rest of the country?  Not I.  Not anyone.

The nub of this particular subject of debate is that we can do nothing to stop the process.  We cannot change the facts on the ground.  As hard as we may try, Iraq is no longer a place where we can successfully participate in the experiment of nation building.  Our troops and our contractors no longer have a role in this regard; they are simply in the way.


In sum, Iraq, to all intents and purposes, is a world lost to us.  This statement is not made to malign the commanding officer of our forces, General John Abizaid, who is dedicated to his given mission, who is far-seeing, and who is extremely capable.  This is not to impugn our ambassador, Zalmay Kalilzad, who has been brilliant in his efforts to bring the contending parties together to solve their common problems, and to form a unified and effective Iraqi government.  Sometimes, you can lead horses to water, but you just can’t make them drink.  At this juncture, the Sunnis and Shiites of Iraq will not partake of peaceful power sharing.  Instead, many scoundrels seek power and will sacrifice their children and anyone else to achieve it.

So, the game is over.  In leaving Iraq, we shall leave behind an unfulfilled dream and a sanctuary for our enemies.  More regimes will fall than we ever imagined.  We shall, somehow, have to start anew on our quest to make the world safe for freedom loving peoples and from the forced imposition of a universal Sharia.

I return now, to the remaining questions before us:  “Have the lives of our young men and women been spent wisely? and “What do we do now?”  My wife, who is much wiser than I, has suggested that I not answer any of these questions in the negative, as we know so many who are still fighting and who deserve to retain hope in their cause.  But I feel that I must be honest in my appraisal because I was taught in the Marine Corps that the prudent commander does not send reinforcements into a losing battle.

Iraq is a lost battle.  Therefore, we ought not put any more precious young men and women in harm’s way.  In this light, I can only conclude that the lives of those already lost were not spent wisely.  Further, that we should leave Iraq soon and in good battle order, so as to better prepare for the next phase of this clash of philosophies, this war against terrorists.  For example, in Afghanistan, it is already half time and we are down by three points.

In parting from this subject, I wish to offer one last note.  Will someone please invite the very patrician John Kerry to spend an afternoon in Section 19 of Quantico National Cemetery?  Should he make the visit he may, if he is very still, hear a whisper upon the wind telling him why my son, a VMI graduate, chose to serve his country in a very difficult place.

Gregory R. Wright, Sr.
December 12, 2006

Thursday, July 10, 2014

JOLTing Jobs

Five or six years ago, I attended a conference in D.C. on problems with economic measurement.  Of course, there was a great deal of focus on the monthly "jobs report" issued by Department of Labor, because Wall Street invariably obsesses about it.  One of the problems is a lack of agreement about who is really a part of the labor force and who is not -- making any percentage of that number very suspect.

Increasingly, economists and Fed watchers are focusing on the JOLTS report, which stands for Job-Opening & Labor-Turnover.  The latest report supports the normal Jobs Report that the labor market is improving significantly.  Job openings are now almost at the high during the last expansion, before the global financial crisis.  This is a good sign.

Fed Head Yellen focuses on quits or "voluntary labor turnover" in particular.  You probably know the market for jobs in your skill set in your town better than anybody, and you won't quit your job unless you're confident you can get another.  Therefore, a higher number of jobs quit reflects a healthy job environment.  That number has been falling but seems to have finally stabilized at 61.6% of jobs separated.  In comparison to May of last year, an additional 329 thousand workers felt confident enough to quit -- this is a good sign.

When good news in the old methodology like the Jobs Report is supported by the new methodology like the JOLTS report, this is a great sign!

Wednesday, July 9, 2014

Living In The Present

To an extent I’ve never seen before, it seems the divide between bulls and bears is increasingly along partisan lines – not completely but increasingly.  Republicans tend to view the market through the lens of Austrian economics, where government budgets must be balanced every year.  Democrats tend to view the market through the lens of Keynesian economics, where budgets must be balanced in the long run, not every year.  (Of course, neither political religion is always faithful to their economic religion and strays whenever expedient.)  Republicans are more likely to argue the stock market is on a “sugar-high,” courtesy of deficit spending and the Fed.  Democrats are more likely to argue the stock market merely reflects an improving economy. 

My perspective is that the Democrats are probably right in the short run.  Since “the trend is my friend,” it is a time to be bullish.  But, the Republicans are almost certainly right in the long run.  Named after Keynesian economist Hyman Minsky (1919-1996), the “Minsky Moment” occurs when the debt bubble expands to the point it can no longer expand and then suddenly collapses.  That Minsky Moment will prove the Republicans are right . . .  but not in the short run.  

Isn't it ironic that a Keynesian economist could prove Republicans were correct?

Monday, July 7, 2014

An Extreme Tarheel

I was reading about the Libertarian candidate for the U.S. Senate seat in North Carolina and saw that he subscribed to the Murray Rothbard wing of the Austrian school of economics.  While I think Austrian economics is an under-utilized but useful tool in the toolbox of economists, I loosely subscribe to the Ludwig von Mises wing, which seems quite moderate compared to the Rothbard wing.

Rothbard (1926-1995) was opposed to the Federal Reserve System and argued strongly that the dollar should be linked to gold, which effectively removes almost all control over the economy.  Recessions would be much more frequent, and economists would have fewer tools to fight them.

Libertarians also tend to be supporters of Ayn Rand, feeling there are super-humans among us, known as "Job Creators."  Still, their political philosophy is very appealing with its emphasis on individual choice, even to the point of legalizing drug use.

I can take Libertarianism and von Mises and even Ayn Rand . . . but no Rothbard, please.

North Carolina, we're counting on you!

No No Doz Needed

One of those little noticed news items from last month has been keeping me awake.  That is the probe into the huge “dark pool” run by Barclay’s Bank.  Sometimes, when large institutional investors need to buy or sell large stock positions, it can cause the stock market to move suddenly and irrationally.  So, “dark pools” were developed where these positions could be traded in private, which is quite legal.  Large banks handle the BUYS and SELLS between their customers directly, avoiding the sunshine at the New York Stock Exchange and other exchanges.  Today, 37 percent of all stock trades are secret. 

Of course, secrecy breeds conspiracy theories, and there have been many.  This probe also involves high-frequency trading (HFT), which has been discussed in this blog frequently.  HFT is also not illegal, but this unholy marriage of high-frequency trading inside secret pools does keep me awake at night!  

Unfortunately, this probe is not aimed at the practice but is instead aimed at whether Barclay’s was honest about it.  I wish it was instead aimed at the unholy marriage .

Sunday, July 6, 2014

Still Proud

Memorial Day is the saddest American holiday, as we mourn those who died for our way-of-life.  Veteran's Day is probably the second saddest holiday, as we remember those who could have died to save our way-of-life.  But, Independence Day is probably our happiest holiday, as we congratulate ourselves on having a way-of-life worth dying for.

Since it's debut in 1984, no Independence Day would be complete without hearing that proud American Lee Greenwood perform his classic song God Bless the USA.  It used to make me want to wear my now-shrunken Army uniform.  But maybe, I've aged enough now to let younger people wear that uniform, and I hate that!  The young soldier inside me recoils from General Douglas MacArthur's commencement comments at West Point when he said "Old soldiers never die, they just fade away."

At least, this conflation of emotions does answer . . .  for me anyway . . . the annual question of whether our way-of-life is worth dying for, and the answer is . . .  Absolutely!

Tuesday, July 1, 2014

"Mad Men"-In-A-Box

If you don't understand that Facebook is just another advertising firm, you don't understand Facebook!  And, if you think advertising firms have any ethical compass, you haven't watched Mad Men.

Today, it was learned that Facebook conducted an experiment on almost 700 thousand of its users, to see if the company could manipulate the emotions of those users.  Some users were shown depressing stories and photos, while others were shown positive stories and photos.  Not surprising, those shown depressing stories then demonstrated evidence of being depressed.  (I just pray nobody killed themself?)

Why would this company use its clients as lab rats without telling them?  Because Facebook users are not the clients.  They are the product.  They are just lab rats.  The clients of Facebook are the advertisers who use Facebook to reach the lab rats.  Social media exists to identify data on the lab rats which it sells to clients.  The clients then pay to advertise in front of certain lab rats but not other lab rats.

Let's see -- if I'm selling cremation services in a particular area, could I pay Facebook to flood local lab rats with depressing stories and photos to make them more likely to purchase my product?

Facebook is not alone.  I doubt anybody collects more data on lab rats and then sells that data to advertisers than Google.  Just remember:

Social Media = Advertising Firms.

Monday, June 30, 2014

Bypassing Washington

Q.  What happens when you put three Republicans in a room to write a report?
A.  BS
Q.  What happens when you put three Democrats in a room to write a report?
A.  BS
Q.  What happens when you put a Republican, a Democrat, & a Independent in a room to write a report?
A.  Sadness

I salute the efforts of Republican Hank Paulsen, former Treasury Secretary under Bush, and Independent Mike Bloomberg, former Mayor of New York City, and Democrat Tom Steyer, hedge fund executive and fundraiser.  They tried to marshall all the evidence on climate change or "global warming" and then drive home the consequences.  As someone who lives on the beach, I encourage you to visit their website at:  

They did not make any policy suggestions to be undertaken by politicians.  They did argue for more aggressive involvement by business, by investors, and by consumers . . . but not by politicians.  Frankly, I agreed with every suggestion they made.  But, it makes me sad that they also believe politicians are worse than useless and are part of the problem.  To deal with climate change (ignoring the cause of it) we need to -- first -- accept the impotency of politicians and -- second -- to overwhelm Washington.

Sadly, Ronald Reagan was right in saying that Washington is not the cure but is instead the problem, at least with respect to climate change.

Sunday, June 29, 2014

Just One More Death

My father was a proud veteran of World War II and participated in the liberation of the Auschwitz concentration camp, where countless Jews were murdered.  He never talked about the horror of it, except to recall how hard the ground was (as only a farmboy would) .  The fact that he wouldn't talk about it and chose instead to focus on the hardness of the ground naturally made me even more curious.

As I learned more about incredible horror of it all, I was stunned to read actual justifications for it.  How could the murder of six million people ever be justified?  Obviously, it cannot -- but it did introduce me to the notion that any horrible thing can be rationalized and made to sound reasonable.

The Carolina HealthCare System operates over 900 facilities including hospitals, nursing homes, and physicians offices.  According to The Daily Ticker, that huge healthcare system is already watching credit card transactions for purchases of cigarettes and unhealthy foodstuffs.  Imagine getting a phone call from the hospital that they see you're still smoking cigarettes and need to stop!  Imagine sitting in your doctor's office when he asks you to explain the purchase of some Hostess Twinkies on June 29th?

Here is the rationalization:  People with unhealthy lifestyles waste the money of healthcare insurers until they go on Medicare and then waste the money of taxpayers.  Why should either my healthcare premiums or my taxes paid be used to subsidize your affection for Twinkies?  To protect my dollars, Big Brother is watching your credit card transactions!  How about if they call you and ask about some local hotel charges, since AIDS is an expensive disease to treat?

Maybe, ranting about the loss of privacy is like ranting about the loss of a loved one thirty years ago, as privacy also died long ago.  Maybe, some things are still worth fighting for -- even fighting like Don Quixote.  Killing innocent people is clearly wrong, but killing the human right to privacy is also wrong!

According to Austrian economics, if you want more of something, you should subsidize it.  If you want less of something, you should tax it.  If we want less smoking, we should tax it to the point that the cost of smoking cessation programs seem modest.  We shouldn't pay for less smoking with less privacy!  

Friday, June 27, 2014

Dallas Buyers Club . . . sorta

In the vein of Freakonomics or finding economic principles in everyday life, please enjoy this review of the Oscar-winning movie: 

A Good Probe

Suppose you own $200 million of XYZ Company stock and want to sell half of it.  If you simply hit the SELL button and flood the market with stock, the price will go down, reducing the value of the stock you sold, plus the stock you kept, plus the value of stock held by other stockholders.  That is because all transactions on the public stock exchanges are public information.  Every buyer will see the market for those shares is being flooded and will therefore offer less.  There is nothing sinister or illegal about this.

So, large banks operate what are called "dark pools."  In this example, you would give your $100 million of stock to the bank who would then sell $5 million to twenty other clients.  By doing this, you get the best price for the stock you sold as well as the stock you kept. Plus, this is good for other shareholders who are keeping their stock.  All this is possible, because the transactions are secret.  No buyers realized the market was being flooded with shares to sell.  Mutual funds and pension funds are the primary users of these dark pools, and  38% of all equity trades are now done in them.  There is nothing sinister or illegal about this either.

Of course, secrecy breeds conspiracy theories, and there have been many rumors about what else happens in these dark pools.  There sure is a lot of smoke . . .

This week, we learned that the New York Attorney General is probing the second largest dark pool.  Apparently, they are focusing on whether the bank was honest in what was happening inside the dark pool, with the suspicion that they allowed high-frequency trading (described as petty larceny on a grand scale). While I believe it is sinister to allow high-frequency trading in a dark pool, I know it is not illegal.  But, it is illegal to tell clients you are not doing it when you really are.

It is good that this dark pool is being probed and is focusing attention on all dark pools.  These huge secret pools could easily pose a systemic risk to our financial system and need to be better regulated.  My suggestion would be annual audits by the SEC and criminal liability of Chief Investment Officers who abuse the secrecy.

Now, what happens if a rouge dark pool loads up on European derivatives, for example?  Well, that's why God invented the SELL button!

Thursday, June 26, 2014

Gold Reflections

After a ten year bull market, gold has been leaking value for the last three years.  However, technical analysts think it may be getting ready for another bull run, because it is pushing up against the red resistance line in this graph.

Chart of the Day

To a fundamental analyst like myself, I see the recent strength in gold as a normal reflection to increased anxiety in Iraq . . . and in Syria . . . and in Iran . . . and in Jordan . . . and in Lebanon . . . and in . . .

A Tiny Right Saved ?

For most of us, there is no greater pain than the loss of a loved one.  Fortunately, psychologists assure us that the pain decreases over time.  But, what about the loss of a right?  Felons tell us that losing the right to vote, for example, is always an annoyance.  The elderly tell us that losing the right to drive is an annoyance.

However, since losing our right to privacy, my annoyance has morphed and now grown into resentment.    Young people certainly don't agree with me, and most don't even understand the question.  After all, they get to see advertisements more relevant to their interests.  And, does it really matter anyway . . . if Google knows what temperature you prefer on the thermostat?  Does it matter that Google can track your movements during the day?  Would it matter if the Federal government was tracking you instead?  Why, what's the difference?

So, I was both surprised and delighted yesterday when the Supreme Court ruled that police may not search your telephone without a search warrant!  While I am not worried the police will ever find anything remotely interesting in my cell phone, it was a reminder that there is still some tiny privacy somewhere.  Unfortunately, the Supreme Court ruling did not apply to Google.

Wednesday, June 25, 2014

OMG !?!

Let's see . . . the labor market is improving, albeit slowly but steadily improving . . . corporations are highly profitable and sitting on a trillion dollars in cash . . . May home sales were the highest in seven years . . . consumer confidence is at the highest point since the global financial crisis . . . what, the Dow lost 119 points yesterday!?!  The sky must be falling!

I don't know if this is the beginning of the perfectly normal "June swoon," but we are due for a 5-10% correction and shouldn't be scared of it.  It is good for the stock market in the long run.  And, don't forget the stock market always over-reacts to geopolitical events, and we have a potential "humdinger" of a geopolitical event coming up.  It too shall pass . . .

Now, take the summer off and go to the beach!

Monday, June 23, 2014

A Grand Framework for Mundane Issues

Some twelve years ago, I read The Clash of Civilizations and the Remaking of World Order by Samuel Huntington.  It was a brilliant book and became a framework for much of my thinking, even for more mundane things.  He argued that civilizations have become more important than nations or states.  An example would be our Western Civilization speaking romance languages, compared to the Eastern Civilization or to the Islamic Civilization as examples.

My takeaway was comparing civilizations to tectonic plates on the Earth's surface.  Remembering your college class on continental drift, these tectonic plates drift around on the Earth's surface very slowly.  However, when they do collide in very-slow-motion, several things can happen.  One tectonic plate may rise on top of the other, explaining the Himalaya.  Or, they may begin touching each other, despite their continuing movement.  Because they are still "drifting," pressure builds up wherever they touch.  If that pressure is released slowly, it is barely noticed.  If that pressure continues to build, it will eventually be released -- as an earthquake, explaining California.  Civilizations are the same.

Carrying the concept of clashing non-tangibles is also useful for more mundane thoughts.  Most everyone can readily see the clashing of religions, but how about the clashing of cultures or mundane social patterns?

I keep thinking about a young lady we met on our last trip, who is bright, cheerful and should have a good future -- except she is heavier every time we see her and dresses more like a farmhand than a bright, cheerful young lady who could have a good future.  It is not her fault.  She knows nothing about nutrition and healthcare.  Her parents also know nothing about nutrition and healthcare, except you shouldn't eat foods that don't taste "good."  Her school may have an elective course in nutrition, but it should be required.  I know the Republican position is that parents should be the "mommy-state" and not the school, and I agree, but the parents were never taught anything about nutrition either.  When does the chain of ignorance get broken?

With respect to dress, public schools are not charm schools, I understand that.  Yet, I remember the last three weeks of Officer Candidate School in the Army had several classes on table manners and appropriate off-duty behavior, including clothes.  Even the Army thinks it is important enough to spend tax dollars teaching what is not obvious to most.

When pressure between the tectonic plates of health and healthcare builds, a premature and slow death is more likely to occur.  When pressure between the tectonic plates of social expectations and social awareness builds, missed opportunities result and at what cost to GDP?

There is a cost to doing something, and there is a cost to doing nothing.  Which is greater?

Saturday, June 21, 2014

Ignoring Air-Pockets

The Conference Board has been around since 1916 and is a private, non-governmental research body funded mostly by corporate contributions to do economic research.  It is well-respected and well-known for two reports in particular.  One is the Index of Consumer Confidence.

The other is the Index of Leading Economic Indicators or LEI, which predicts economic conditions during the next few months, generally assumed to be six months or so.  It has been positive for four straight months now, which is very bullish.  But, most investors don't know that it is composed of ten "sub-indicators."  They are:

1. the average weekly hours worked by manufacturing workers
2. the average number of initial applications for unemployment insurance
3. the amount of manufacturers' new orders for consumer goods and materials
4. the speed of delivery of new merchandise to vendors from suppliers
5. the amount of new orders for capital goods unrelated to defense
6. the amount of new building permits for residential buildings
7. the S&P 500 stock index
8. the inflation-adjusted monetary supply (M2)
9. the spread between long and short interest rates
10. consumer sentiment

This month's LEI would have been ever more bullish, if building permits had not been such a drag, but that was easily offset by the strengthening labor market.  However, the increasing spread between long term and short term interest rates (#9) is driving the LEI, and that is very bullish.  A flat yield-curve is one where interest rates for debt maturing in ten years is about the same as debt maturing in three months.  That is not good.  A negative yield curve is one where ten year debt pays a lower rate of interest than three month debt.  That is very bad and is a strong bearish signal.  A positive yield curve is one where borrowers pay a higher rate of interest for longer-term debt, which is normal.  It is a signal that the economy is improving so much that borrowers are willing to pay a higher rate and is very bullish.

The generated optimism from the economic data continues to push the stock market to new highs, surprisingly immune to the geopolitical risk of an Iraqi collapse.  In the list of ten sub-indicators above, geopolitical risk is not mentioned.  The LEI is certainly a good indicator of the U.S. economy and probably an indicator of the U.S. stock market, but it ignores what happens when we hit a geopolitical "air-pocket."  Like the pilot says . . . always keep your seat belt fastened!

Friday, June 20, 2014

On Being The Fed Head

Just imagine that your congressman stood on the House floor and proposed spending another $175 BILLION that is not providing any new service to Americans nor enhancing any existing service nor building any infrastructure nor financing any new wars.  Would you ever vote for him/her again?

A one percent increase in interest rates on our national debt will cost us an additional $175 BILLION every year, and many analysts estimate the "natural" rate of interest is at least 3 points higher.  Will the Chinese continue loaning us money to pay interest back to them?

Now, just imagine you are Janet Yellen and need to raise interest rates to control inflation.  Then, imagine your congressman back on the House floor again, but this time he is condemning her for this arbitrary and harmful decision to impose a huge new unfair tax on the American people, suggesting the Fed should be terminated.  Frankly, I feel sorry for her.  She is damned if she does and damned if she doesn't.

I expect she will start raising interest rates later instead of sooner.  

Wednesday, June 18, 2014

Asset Protection & Crooks

Asset Protection Trusts (APT) are designed to protect assets from lawsuits and ex-spouses and have existed for many years.  During my trips to Switzerland in the 1990s, I studied them closely and also became convinced that there are more crooked financial advisors pushing these trusts than any other field in financial planning.  Normally, I urge clients to avoid APT for a host of reasons -- but particularly because you must give up title to your own assets permanently, in order to create the trust.

However, there has been a recent court case, which allowed an individual to create such a trust in the Cook Islands after litigation had begun but before damages were assessed against that individual.  He got to keep the money in that trust, and the creditors got nothing.

Personally, I think this is unconscionable and hope it will reversed on appeal.  In the meantime, I expect these same old crooked financial advisors to crawl out from under their rocks and start pushing APTs like cotton candy.


Fed Day Forecast

Wednesday is a Fed Day, which means the stock market will continue to simply churn, as it waits for some statement from the Federal Reserve Bank, usually at 2:15 PM.  As is normal, they have to make an important decision based on incomplete and contradictory economic data.  And, by the way, they are also human.

You'll recall the Fed is the only central bank that has a DUAL mandate to curb both inflation and unemployment.  All other central banks worry about inflation only.

The "unemployment rate" has dropped nicely, which suggests the Fed does NOT need to be stimulative.  However, the mandate doesn't distinguish between the normal "unemployment rate" and the "long-term unemployed."  This latter is still terribly high.  Wasting five years of your life NOT working is a waste of a NATIONAL resource.  Not working reduces GDP.  Thus, the Fed does need to remain stimulative.

The inflation rate has been worrisome because it is too LOW.  Deflation is much more pernicious and dangerous than inflation.  We have been fearful of falling into deflation, which is one of the primary reasons the Fed has been so stimulative, i.e., trying to CREATE inflation.  Tuesday's CPI release was up 2.1% over last year, which is close enough to the Fed's goal of 2.0%.  Does that mean the Fed can become LESS stimulative -- Nope!  The Fed doesn't care about CPI.  They care about the PCE deflator or Personal Consumption Expenditures Index, which is only up about 1.5% - well below the Fed's target of 2.0%.  Does that mean the Fed should continue being stimulative -- Yep!

At 2:15 PM Wednesday, I expect the Fed will continue to hold interest rates stable and will again decrease the monthly quantitative easing by another $10 billion.  This would still be stimulative but slightly less so.  More importantly, the market also expects this.  Anything different will create a market reaction.