Friday, September 19, 2014

Enjoy The Show

Most people find it boring and tedious to watch the stock market all day, and I understand that, but consider today, Friday, September 19th.

First, it is a Friday, always the most unpredictable day of the week.

Second, Scotland wisely voted to remain in the United Kingdom, saving the pound from dropping and saving the dollar from spiking up too much, hurting our exporters.  That should produce a relief rally!

Third, it is a triple-witching day, when futures, forwards, and options all reset.  This can sometimes produce unpredictable volatility.

Fourth, it is the day that Chinese giant Alibaba goes public.  As an extremely hot IPO, the animal spirits or dollar-lust will be hot and heavy on the NYSE floor today.  Remember Facebook's IPO?  This usually creates a rally -- another plus!

It is not a good day to enter trades.  It is a good day to lean back and enjoy the show.

Wednesday, September 17, 2014

"Considerable" Angst

Outgoing Fed Head Ben Bernanke did not want to be remembered solely as the Fed Head who greatly expanded the economic power of the Fed.  Last year, he.announced that his program to stimulate the economy known as Quantitative Easing (QE) would begin tapering, i.e., slowly decreasing monthly purchases of Treasury bonds and mortgage-backed bonds from $85 billion per month.  It is expected to end completely next month.

Wall Street immediately jumped to the next question -- not when will QE end, but when will interest rates begin to increase?  At her first press conference in January, incoming Fed Head Janet Yellen was asked that question and replied "Oh, six months or so," which she quickly came to regret.  The bond market convulsed as bondholders sold bonds maturing in more than six months, as those bonds would decrease in value once the announcement to increase interest rates were made.

She eventually recovered by changing her statement to -- it would be "a considerable period" between the end of QE and the first interest rate increase.  The bond market calmed down.

Two things have happened since then.  First, the end of QE is now upon us, and, two, the economic data has been strong enough to suggest that the economy no longer needs the "training wheels" of low interest rates.  Speculation has been increasing that the next meeting of the Federal Reserve Board, which ends today, would change the language, removing the word "considerable."

Yesterday, the market rallied strongly on rumors the Fed would stand pat, without dropping "considerable."  Today at 2:00 PM, the minutes will be released, and we will know.  If the word stays, I expect a modest rally.  If it is dropped, I expect a modest sell-off.

But, more importantly, don't watch the stock market reaction -- watch the bond market! 

Tuesday, September 16, 2014

Drinking From A Fire Hose

I just watched the monthly video of economic conditions from Wells Fargo.  They foresee continued GDP growth of roughly 3% thru the end of 2016.  If so, this would be the best two-year GDP expansion in a decade.  They also consider the disappointing Jobs Report earlier this month of only 142 thousand jobs to be an anomaly and expect it to return to a more normal 200 thousand level.  Importantly, they see the greatest risk to their forecast as being the Russia-Ukraine crisis.  An embargo of natural gas from Russia to Europe would have painful economic consequences to the West.  It was an excellent and timely video update, as usual.

However, while watching it, I kept thinking about the house guests from California that we enjoyed last weekend.  They're dear friends that we've known for many years, and I thought they understood my profession better.  But, then they asked how I could compete against the stockbrokers who have whole research departments.

I was flabbergasted!

A stockbroker only has access to the research of his employer and, whether he believes it or not, is required to follow that research.  An independent NAPFA-Registered financial advisor has access to more research than can be consumed.  It is truly like "drinking from a fire hose."  Plus, we can follow the research that makes sense to us, not solely whatever makes sense to the head of the research department.

I study the research from Wells Fargo, Goldman Sachs, several mutual fund companies, as well as Bloomberg, and the National Association of Business Economists.

I'm drowning in research!

Monday, September 15, 2014

The First Nihilistic Nation

The seemingly sudden arrival of the Islamic State upon the world's stage is disturbing in a number of ways.  After all, it even televises and broadcasts its atrocities and war crimes.  It truly celebrates a culture of death.  I suspect it is the first truly nihilistic nation - one that sees life as a mere waiting room for "nothingness."

Nihilism has been defined as moral and spiritual bankruptcy.  ISIL labels itself as guardians of Islam, but is it?  I know Islam as a religion of peace.  (Of course, like all religions, it has its radicals, but Islam has more trouble marginalizing its radicals, and I don't know why?)  ISIL is proud to be the deliverer of death, not peace.  That sounds like moral and spiritual bankruptcy to me.

The original nihilist was the Greek Gorgias (483-378 BCE) who said "Nothing exists. If anything did exist it could not be known. If it was known, the knowledge of it would be incommunicable."  The word is derived from the Latin word for nothing, and it was popularized by the Russian novelist Ivan Turgenev in the mid-nineteenth century.  The video for the hugely popular 1986 song by the Swedish band Europe entitled The Final Countdown showed crowds of young people joyfully awaiting the nuclear holocaust, which is the final step toward nothingness.  Many religious ministers have warned against the impact of nihilism on our culture.

But, ISIL is more than a nihilistic culture, it is the first nihilistic state.  It cannot exist without death.  When it runs out of people to kill, it will have to self-immolate.  Our job should be to facilitate them.  Contain them in a perimeter of carpet bombing, cut off their income, . . . and wait for them to achieve nothingness.

Wednesday, September 10, 2014

A Bad Sequel

It is a bad sequel to a great movie.  One can argue that the only good thing Mel Gibson ever did was the 1995 movie Braveheart, which won several Oscars, including Best Picture.  It shows the subjugation of Scotland by the English beginning in 1280.  That was a long time ago, but tribal memories are even longer.  The Scots still want to be independent, unfortunately.

With the markets focused on the Ukraine, Syria, ISIS, ebola, and so forth, nobody noticed that the Scots are finally getting to vote next week on whether they want to be part of Great Britain, ending 307 years of economic and political integration.  Nobody thought Scotland would really vote to succeed, but the first poll indicating the Scots would vote Yes to succeed was Saturday.  The second poll was Monday.  Suddenly, Great Britain is terrified, and the English Pound has started falling.

There are so many imponderables about this.  Will it be good or bad for the pound in the long run?  Will there be a fight over the oil revenue from the North Sea off Scotland?  Since Scotland is normally Labor (think Democrats) in the English Parliament, does this hand permanent control to the Tories (think Republicans)?  Will Scotland join the European Union?  Will it even be accepted into the EU?  Will it join NATO?  Will this election encourage other tribes to succeed, like Catalonia from Spain?

And, what does increased uncertainty do to stock markets?  It's not good, especially for the English stock market!!

It is an unfortunate coincidence that the current Scottish independence movement was born before England's austerity measures started to pay off.    Sometimes, economics drives politics.

Tuesday, September 9, 2014

A Chilly Similarity ?

My father likes to watch educational, non-fiction DVDs about World War II, which I order and often preview for him.  Last weekend, I watched the two-disc set of Apocalypse Hitler.  The first disc detailed the childhood and early adult years of Hitler.  It was interesting to me that he was such a "Mommie's Boy" and that his much younger niece killed herself to escape living with him.

The second disc, however, was more educational.  It detailed his rise to power.  He was obviously a great political strategist, as well as a great orator.  There was one speech in particular that gave me chills.  He gave it during the election campaign and warned of the evils of compromise -- pronouncing it a sell-out of the people and their values.  Compromise corrupts!  He promised there would be no compromise once he was elected.

Does that remind you of any current political party or partisan?

Monday, September 8, 2014

We're Number Three !!

Is the Wall Street bull getting tired?  After all, it has been running for over 2,000 days now.  It has been more than 2,000 days since March 9, 2009 when the Dow touched its low of 666 points.  It is now around 2,000 points after 2,000 days.  (Technically, the 2,000th day was August 30th.)

No, that is not the longest running bull, not even close.  The longest was 4,494 days from December 1987 to March of 2000, when the S&P 500 rose 582%.  The second longest 2,607 days from 1949 to 1956, when the S&P rose 267%.  We're number three and thankful there is still room to run.  This is NOT unexplored territory.

A few months ago, legendary Goldman Sachs advised its clients to cut back on their allocation to stocks.  They just reversed themselves, suggesting clients should increase or over-weight their allocation to stocks, predicting global stocks (ex-Japan) will rise 3.5% over the next three months and 12% over the next twelve months.  I guess they also expect the bull to keep running.

Just think . . . in another two years, we'll be NUMBER TWO !!

Sunday, September 7, 2014

Lessons From A Tragedy

I would gladly buy tickets to watch Bernie Madoff get executed.  After all, he betrayed thousands of people.  But, I would not buy tickets to watch Bob McDonnell get punished, even though he betrayed millions of people.  ("Bob For Jobs" McDonnell was the immediate past governor of Virginia, who was just convicted of eleven crimes involving bribery and corruption.)

Arguably, McDonnell's crime was much worse than Madoff's crime.  Bernie was just another thief, albeit on a grand scale.  However, Bob cheapened the highest office in the state and confirmed our worst suspicions about politicians.  This gives me no joy.

Every tragedy produces lessons to be learned, even this one.  For young people, your choice of marriage partners is far more important than you suspect.  For older people, you always remain responsible for your own actions and cannot blame somebody else . . . not even your spouse.

Saturday, September 6, 2014

Concrete Good News . . . but vague worries

The continued flow of economic news in this country is relentlessly good.  Last week, the ISM Manufacturing Index showed that the factory sector has accelerated.  Indeed, the ISM Non-Manufacturing Index of the service sector has reached a nine-year-high.  In addition, reflecting our emergence as an energy-exporter, our trade deficit actually decreased.

Of course, the first estimate of the August "Jobs Report" was lousy at only 142 thousand, and the trade deficit is expected to rise,  Yes, that Jobs Report was disappointing, but I know of no economist who does not think it is understated, almost universally expecting it to be revised higher next month.  Even if not, we are still averaging better than 200 thousand new jobs being created every month of this year.  And, by the way, unemployment is still dropping, now at 6.1% and expected to drop to 5.9% by year-end.

The reason our trade deficit is expected to increase is due to the slowdown in Europe.  We expect they will be less able to afford American made goods, largely because the Euro is weakening against the dollar, thus making American good more expensive to Europeans.  Fortunately, as the Fed's monetary policy has pulled the U.S. economy out of recession, Europe's ECB is preparing to do the same with their monetary policy

As I said, the continued flow of economic news in this country is relentlessly good, which makes some people worry even more.  An old Wall Street adage is that Wall Street is always climbing a wall of worry.  A corollary to that adage is the wall of worry gets higher as the good news continues.

Yes, the national debt is $17.7 trillion and still climbing.  Yes, the Fed's balance sheet at $3.5 trillion is way-too-big.  Yes, fiscal policy (AKA Congress) is still a useless drag on the economy.  Yes, our employment health is not as good as the numbers indicate.  Yes, there are many things to worry about, to fret about, and reasons to lay awake at night.

But, another old adage is that the trend is your friend.

Enjoy the ride, knowing a correction is coming . . . which you will survive.

Thursday, September 4, 2014

Today's Bible Lesson

The Lord works in mysterious ways.

We've all heard that or some iteration of it.  It came to mind reading that Andrew Madoff had died from cancer.  While I'm sorry for him and his immediate family, I do remember that his father was Bernie Madoff, who infamously stole billions of dollars from his clients.

The appropriate punishment for Bernie would have been to be locked in a room with his victims, each holding a rubber hose.  Of course, in our polite society, the victim is the government, not the people who actually lost their life savings.  And, the government's need for justice was satisfied by providing Bernie with a lifetime of free food, housing, support, and even health care, all at taxpayer expense.  That is certainly a mysterious way for the Lord to work.

Then, his wife divorced him.  Then, his eldest son committed suicide, in shame of his father's illegal actions.  Lastly, his youngest son died of cancer.  Although Bernie was spared any physical discomfort, I cannot image the emotional agony of losing all your children.  While I would not wish that on anybody, it wouldn't bother me if Bernie Madoff suffered intense emotional agony for many years, before dying a miserable death.

Maybe, when the legal system fails us, it is true that:

Vengeance is mine, saith the Lord.

Wednesday, September 3, 2014

Wishing For Bad News

This stock market rally does not get the respect it deserves, probably because it is significantly weaker than the average rally.  But, as this graph shows, it is now the 7th longest rally since 1932.

Chart of the Day
While I do respect the rally, I sure wish we could get a meaningful correction.  A correction cleans out the froth and the weak, leveraged holders of stock.  It builds a stronger base for continuing the market rally.  We normally get a 10% correction every 19 months on average, but we haven't had one since the 19.4% correction in 2011.  We're overdue!  We deserve it!  Bring it on, please!

Tuesday, September 2, 2014

Must-See Conversation

Existentialists are often accused of being dour pessimists who are obsessed with death.  Of course, they then laugh heartily, saying that it is not them but society that is obsessed with death, attaching far more significance that it deserves.  Existentialists see death as merely the over-hyped end of a relatively meaningless life.

A recent movie called The Broken Circle Breakdown has been described an existential triumph.  It is not!  It is instead a heartbreaking story of how the relationship between a husband and wife is traumatized by the death of a beautiful five-year-old daughter.  Except for the overuse of flashbacks, it is an excellent well-made, well-acted, memorable movie, but not an enjoyable movie.  Don't watch it to learn about existentialism.  Watch it only if you're in need of a good cry!

A more existential film is a documentary entitled Consider the Conversation, which costs about $30 on Amazon, but is nonetheless required viewing.  It is a dispassionate but very sensitive discussion on a subject that is difficult to discuss.  I am convinced that it is easier and less emotionally traumatic to die, if there has been some honest discussion about it.  But, it is difficult to get such a discussion started.  This film can really help.  I am giving my copy to a client who just entered into hospice care.  

Monday, September 1, 2014

Dorky Economists

Trust me, if you have any sense of humor . . . watch this: 

Workers-of--the-World . . . thank you!

I have a relative whose only ambition in life was to NOT work.  It didn't matter what else he did in life, as long as it was NOT work.  It was a negative ambition.  I've struggled for a long time to understand but have failed.

A few years ago at a dinner in Florida, I sat next to a young entrepreneur, who had sold his internet company in 2000, right before the internet crash.  At age 36, he had already netted $24 million. as he informed me in a too-loud voice.  I asked him what kind of work he did now.  He seemed terribly offended by that question, as it implied he might be a member of the working class and not a member of the aristocracy, I assume.  Anyway, we skipped dessert, just to get away from this person.

Both as a society and as individuals, we have a complicated relationship with the notion of work or labor.  Maybe, it is no more complicated than "idle hands are the devil's tools?"  Maybe, we teach our kids that their only identity is their job?  Maybe, we are afraid we'll spin-out-of-control if we don't work?  Maybe, we prefer work to spending more time with our spouse?  Maybe, we hope we won't die, if we don't retire?  Maybe, retirement results in too much self-involvement?  Whatever it is, I do believe that old maxim that "work never hurt anybody."

So, to those who work, whether they need to or not . . .
To those who want to work but cannot find a job . . .
To those who want to work but have physical or mental limitations . . .
To those who retire but volunteer for charity work . . .
To those who carry the burden of family while others benefit . . .
This day is for you . . . enjoy it!

But, tomorrow . . . get back to work!

Sunday, August 31, 2014

Seconds of Silence

Since redistricting made barbarians out of politicians, I have not really cared what promises they make to win office.  However, President Obama made one that I really care about, i.e., controlling loud TV commercials.  In 2011, he did get Congress to pass the Commercial Advertisement Litigation Mitigation or CALM Act, which reduced the average volume level of commercials.

Did you notice?

The key word is average.  Since CALM, advertisers introduced a few seconds of silence in their commercials and increased the volume of other seconds . . . pretty clever, huh??  The Federal Communications Commission (FCC) just ruled that a new "loudness measurement algorithm" will be employed, beginning June 4, 2015.  It will eliminate the silent seconds in computing the average.  My guess is that advertisers will introduce just the minimal measurement amount of sound into the formally silent seconds, to hold the average down.  Next year, I'll bet you will not even notice the difference.  After all, if they cannot make commercials loud enough to get your attention, why would they pay for our TV programs?

The advertising industry can stand up to Congress.  It can stand up to the President.  It can make children and their parents believe that unhealthy food tastes good.  It is the single most powerful industry in the world.

Vlad's Market

It is often said that corporate earnings are the "mother's milk" of stock prices, which grow faster when the corporate earnings are flowing.  While there are other secondary factors, corporate earnings growth is the primary factor . . . over the long term.

Over the short term, however, anything could happen.  Which individual has the power to create billions of dollars in value on any given day?  Or, destroy that much wealth on any given day?  Actually, there are quite a few, but the most important one right now is Vladimir Putin.  If a thousand points on the Dow is worth about $800 billion, how much value would be lost if Vlad formally invaded Ukraine and then embargoed natural gas to Europe this winter?  Your guess is as good as any!

Of course, there are many other world leaders with this power.  But, right now, tell me what Vlad is doing, and I'll tell you how the stock market is doing.  Without him, I expect the market will continue to rise.  With him, who knows?

But, don't blame your financial advisor for whatever Vlad does!

Wednesday, August 27, 2014

The Male Maternal Instinct

I have a client in Naples, Florida, and fret every time a hurricane slams into south Florida.  I also have another client in Napa, California and have been fretting since she experienced her first earthquake last weekend.  The Naples client is a big, macho ex-CEO type and doesn't need or want anybody worrying about him, but I do anyway!  The Napa client is a tiny medical professional with worldwide experience, who is probably one of the best people to have around whenever there is an earthquake.  We've heard from her once that she is okay, but I'll be glad when I actually talk with her again.

What is it about being an advisor that makes you feel so responsible for your clients?    If you are very careful about whom you accept as a client, then maybe you fret because they are also good friends?  Maybe, a client is more than a portfolio of numbers and is actually a real person with all those familiar hopes and fears?  Or, maybe because you  know them so well that you fret like a mother?

Long-Distance Running Bull ?

Assuming there are people-people and there are numbers-people, only people-people are impressed by the fact that the S&P 500 finally broke thru the 2,000 barrier.  To numbers-people, that number is no more important than 1,999 or 2,001.

But, this graph means something even to numbers-people:

Chart of the Day

The stock market has been trading within a relatively narrow range and shows no sign of breaking out, either to the upside or to the downside.  I understand the logic of "this time is different," but I also know the market averages one bear drop of 10% or more every 19 months, and we haven't had one in 34 months.  We are definitely over-due. 

Bears claim this graph merely documents the influence of quantitative easing, and the market will drop when the Fed begins raising interest rates, probably the middle of next year.  However, history tells us the stock market handles the first few interest rate increases just fine, although the bond market doesn't.

The evidence remains overwhelmingly bullish to me that the bull run will continue . . . until it doesn't.

Tuesday, August 26, 2014

Wharton Wisdom

I've said many times that my favorite professor at Wharton is Dr. Jeremy Siegel and read his Weekly Commentary faithfully.  Since it is so succinct, I am quoting the first paragraph of last week's commentary.

"This was one of the best weeks for economic news in months. Every single economic growth indicator
came in above its estimate: The NAHB housing sentiment index at 55 against 53 estimate, Housing starts
well above expectations (as well as permits); Jobless claims dipping below 300k, the Markit PMI
estimate well above expectations, and existing home sales and the Leading Economic Indicators also
above forecasts. To boot, the CPI came in at or below expectations. Furthermore, oil and commodity prices
continued to decline. Gasoline prices have now retraced more than half of their 58 cent climb from $3.18
a gallon last November to $3.70 in May. Despite stronger growth indicators, interest rates remained tame.
It is not at all surprising that stocks would rally sharply under these circumstances. There is a sense that the
economy is now strengthening to a 3+% growth path and earnings are likely going to show a healthy
increase this year. The rally is particularly noteworthy since August has been the weakest month for
stocks over the last 20 years, eclipsing September, which is the weakest month when we include all the Dow
data back to the late nineteenth century."

Any questions?

Monday, August 25, 2014

Strait-Jacketed Protectors

It was 2:45 PM on May 6th in 2010.  I was watching the stock market as usual, when the thoughts suddenly racing thru my mind were . . . everything is cool -- that was odd -- something is wrong -- no, something is very wrong -- now, RUN!  That became known as the great "Flash Crash," when the Dow dropped a thousand points in 15 minutes . . . and then recovered before the close.

I didn't think this was "the big one," when the stock market utterly collapses, never to rise again.  To be that severe, market jitters would have been rising in the days leading up to May 6th.  Instead, market jitters had been decreasing since the market had bottomed-out 14 months previously.  Still, I had to be in position to preserve as much of my clients' wealth as possible.  As I prepared to sell their stocks, I worried that I would be locking in whatever losses they had already incurred that day.  Plus, I would be creating a huge tax bill for them!  Sweat creased down my forehead, tracing the eyebrows into my crow's feet and down my face.  I tugged on my shirt collar to release the build-up in heat.  If I sold their stocks, some clients would be happy, and some would be very unhappy.  I hesitated . . . feeling this crash was not real and that reality would return.

Thankfully, the market recovered as it always has and went on to new record highs.

The SEC eventually determined that a trader had a "fat finger" and sold $4.1 TRILLION of derivatives in general and futures contracts in particular -- by mistake.  This caused a cascade of automated selling.  Market traders immediately suspected that.  But, it took the SEC four long months before they figured it out.

In the four years since the Flash Crash, the SEC has been designing a new computer system to better track the market . . . four years . . . and they still haven't even estimated the cost, much less put the contract out for bid.  Called CAT for Consolidated Audit Trail, it is not expected to function before 2018 at the earliest.  (By comparison, it only took 16 months to construct the Pentagon.)

The goal of the SEC to protect the small investor is a vital part of capitalism.  At some point, most organizations become too ossified or too constipated to function.  I pray that is not true for the SEC, but suspect that it is!  If there is another Flash Crash, don't be surprised . . .  and don't lose sleep!

Sunday, August 24, 2014

Great Aim, Wrong Target

During my mother's final years, she was wracked with constant pain.  One of her many ailments was acute arthritis.  Every movement of her body caused pain.  Naturally, we took her to a pain-management doctor.  Unfortunately, the process of getting her into a wheel chair to be lifted into a van to be pushed into the doctor's office was extremely painful for her.  I can remember vividly the tears in her eyes.  He prescribed pain pills for her, which did help somewhat but made her sleepy.  When her 30-day prescription was exhausted, we asked for a refill but were informed she had to return to the doctor's office for another examination.  Thinking it was a money issue, I offered to pay the doctor for an office visit without the pain of actually transporting her to the office.  I learned that it was necessary to cause pain in order to get pain relief.  The first objective of pain-management doctors is to comply with drug laws.  If they happen to also lessen pain, that is nice but secondary to compliance with drug laws.  Unfortunately, my mother never received any more pain medicine and died a miserable death.

In last week's Wall Street Journal, there was an article about new rules to prevent abuse of Vicodin by making it more difficult to get.  The article went on to note "most people who abuse prescription drugs illicitly obtain them from friends or relatives with legitimate prescriptions."  So, we prevent abuse of this drug by inconveniencing or punishing the legitimate user, like my mother, and not the illegitimate user?

Last week, Bank of America joined the parade of banks paying hundreds of billions of dollars (yes, hundreds of billions in total) as fines for the Great Recession.  The global financial crisis began with the big banks, so they must be punished, right?  But, did anybody go to jail?  Many crooked bond salesmen, who made millions every year leading up to the crash, are now sitting on beaches, sipping fruit drinks with umbrellas.  Again, we punish the many shareholders who did nothing without punishing those bankers who knowingly sold trash-bonds.  It is much easier to punish the many than the few.

Although I don't understand why 320 million Americans need 450 million guns, our attempt to reduce gun violence is aimed at inconveniencing the many lawful gun owners and not promptly executing those who use a firearm in the commission of a crime . . . any crime.  Again,the aim of reducing gun violence is laudable, but our laws target lawful gun owners, not the bad guys.

To a hammer, every problem looks like a nail.  In a nation ruled by lawyers, every problem looks like we just need more laws . . . instead of simply more executions.

Friday, August 22, 2014

"Shrinkflating" Our Debt

Every year during the hot, miserable days of August, central bankers from around the world gather in the cool mountains of Jackson Hole in Wyoming for their Economic Policy Symposium.  It is always a fascinating time for economic nerds.

This year, it looks like there will be friction over which priority of the Fed is most important right now.  You'll recall the U.S. Federal Reserve System is the only central bank in the world with a dual mandate -- control both unemployment and inflation, which is more difficult than it sounds.  Generally speaking, those policy moves to control inflation tend to increase unemployment, and those policy moves to reduce unemployment tend to increase inflation.

Janet Yellen is expected to stress the unemployment problem.  Some of the regional Fed presidents are expected to stress inflation.  I see it as a contest between good data and bad data.

It is clear that millions of people are still unemployed, but at 6.4%, we have already made a great deal of progress. However, the long-term unemployed present a special problem for policymakers, especially for monetary policymakers.  Of course, there is lots of good data to document these problem, and this unemployment problem has dominated economic discussion for some years.

With respect to inflation, the data does not reflect any problem.  In fact, the data suggests that deflation might be more of a problem, which is far more pernicious than inflation.  Despite the data, a number of surveys have shown that consumers don't believe this, as they see actual inflation in consumer prices.  In fact, inflation does seem to be more apparent in consumer prices than in industrial prices.  The popular new term being tossed about is "Shrinkflation" where consumers still pay the same price for a product, but that product is now slightly smaller.  For example, paying $1.59 for a 10-oz candy bar is cheaper than paying $1.59 for an 8-oz candy bar.

I hope Yellen is successful on keeping the focus off inflation.  Keep the focus on the unemployment problem, which is backed with good data,  by attacking the bad, inconclusive data on inflation.  A little inflation is good for debtors, and the United States is the world's biggest debtor.  There are always individual winners and losers with any economic policy, but the country-as-a-whole wins with a little inflation.  Yes, breaking inflation later is more painful than breaking inflation before it takes hold, but that pain is less than the pain of not deflating our debt -- by allowing a little inflation now.

Thursday, August 21, 2014

Summertime with THE Squid

Some people might describe Goldman Sachs as the most highly self-respected company in America.  I would argue their economics research department actually deserves to be respected.  Here are some of their latest predictions:

1.  GDP growth in the second quarter was a whopping 4.0%.  For the full year, it will only be 2.9%, due to the lousy first quarter.  Next year, full-year GDP growth will be a respectable 3.1%.

2.  Unemployment will drop to 5.9% by year-end 2014 and 5.4% by year-end 2015.  This is very close to full employment, which is normally described as 5% unemployment.

3.  Inflation remains nominal, with core CPI growing a mere 2.2% next year.

4.  The benchmark 10-year-Treasury rate will increase about half a percent before year-end 2014 and another half a percentage point next year.  (I disagree with this.)

5.  Corporate profits per share will rise 7.8% next year.

6.  The S&P 500 will end this year at 2,050 or up another 3%.  Next year, it will end at 2,100 or another 2.5%, which is a significant slowdown in growth.

7.  Oil will continue to fall both this year and next year.

8.  Gold will fall to $1,050 per ounce by year-end 2014 but bounce back to $1,200 by year-end 2015.

9.  The dollar should continue to strengthen.

10.  Small-cap stocks are very attractive now.

There is no mention of distant fires or bubbles building.  It is a bullish set of predictions.  Maybe, it is safe to go to the beach after all, but watch out for the "great vampire squid wrapped around the face of humanity,"  as Goldman Sachs was described in Rolling Stone magazine.

Wednesday, August 20, 2014

GDP Envy

I'm not sure it is human nature, but we always seem inclined to fret about how bad the economy is.  Does anybody ever rejoice about how good the economy is?

Consider the case of Finland:  It was one of the rapidly-growing Scandinavian bears until 2007 when Apple introduced the iPhone.  Huh?  What does the introduction of the iPhone have to do with the decline of Finland, you ask?  Well, Nokia was 4% of the country's GDP, and that company got killed by Apple and Samsung.  Over-reliance on any one company is begging for trouble, and they got it.

In addition, the country was overly-reliant on another industry -- paper.  Their two paper companies were two of the largest companies in Europe.  However, with the shift to digital media, the demand for paper has dropped worldwide.  Countries dependent on paper have suffered, like Finland.

Also, Finland is geographically flush against Russia, who is sinking into recession.  Ten percent of Finland's exports go to Russia and will be further hurt with the imposition of trade sanctions.  The future is not bright.

Instead of falling, unemployment is at 9.8% and rising.  Unemployment claims are up 15% over last year.  Their GDP fell 8.3% during the global financial crisis (much worse than the U.S.) and their economy is still stalled -- seven long years later.  I doubt there is a person in Finland who would not love to have an economy like the U.S.

The next time you're sitting around with people, fretting about the American economy, tell them to move to Finland.  At least, they still make the world's greatest vodka!

Tuesday, August 19, 2014

Ferguson Focus

Have you ever seen such a divergence between the mainstream media and the business media?  CNN and MSNBC are covering the Ferguson riots non-stop 24/7?  (Fox News is a little more balanced but not much.)

On the other hand, CNBC, Fox Business News, and Bloomberg allocate no more than 10% of their air time to Ferguson, instead spending their air time on geopolitical risks that actually matter to business and stock markets, such as the Ukraine, ISIS, Chinese purges, or even the spread of Ebola.  Most of their air time is allocated to corporate earnings, M&A, and other business matters.

Does that mean the business community does not care about any alleged injustices in Ferguson?  No, of course not!  It just means that this story of racial injustice is not new and certainly not news-worthy.  We've seen this story many times over the last 50 years without ever causing a recession or stock market crash.  It is just business-as-usual.  Is that right-or-wrong?  Well, you already know that answer!

It is just one of those times when the only place to hear "fair & balanced" news is on the business channels.