Thursday, May 25, 2017

Youth Wasted ?

Conventional thinking about the current condition of the labor market is misleading.  That thinking is that unemployment is getting low, so low that it will pull discouraged workers back into the market to look for jobs.  They point to the low percentage of the population that actually has jobs, dropping from 63.4% in 2007 to 58.2% in 2010 although rising to 60.1% now.

The Republican viewpoint is that social programs, like unemployment & disability, are encouraging people to avoid jobs.  The Democratic viewpoint is that the decrease reflects the aging of our workforce.  Neither is correct.

Deeper analysis shows that the workforce contains more older workers (>54) than expected while the pool of discouraged workers (U-6 unemployment) contains more younger people that expected.   Normally, we stop counting people as eligible for work at age 55, even though many still hold jobs.  If included, the percentage of the population employed is about 62.2% -- close to the 2007 high.  This is a relatively simple measurement issue.

Not so simple, the problem is the large number of young people in the pool of discouraged workers.  This includes people who work part-time jobs, because they cannot get full-time jobs.  It is a more complicated problem, because it is structural in nature.  It is a reflection of an out-dated educational system, with huge legacy costs, that prepares young people for 20th century jobs, not 21st century.  It is a reflection of a parenting system, where a child's self-esteem is more important than his level of knowledge, and immaturity is unknowingly encouraged.  At this point, it is irrelevant what caused so many young people to find themselves in the pool of discouraged workers.  How do we get them out?

As the economy approaches very FULL employment, what companies can afford the training costs of hiring kids out of their parents' basements?

Tuesday, May 23, 2017

R.I.P. Manchester Kids

President Trump is correct in calling terrorists "evil losers," but I suspect they were losers first, who subsequently became evil.  Maybe, they were losers because they never had a chance to "hold a job or hold a woman's hand."  When the birthrate exceeds job growth, heartbreak follows.  Better birth control and more jobs would help.  Poverty often produces misfits, but religion can make them evil, and all religions feel persecuted.  Unfortunately, it is just too easy to blame their persecution and problems on Western civilization.

The most interesting thing on the President's first foreign trip is the impressive new Saudi center for monitoring terrorist recruiting on the internet.  There is very little public information on this new center, but I wish them well. The Sunni Saudis are finally getting engaged in the first against terrorism.  They even promised to crack down on their citizens funding terrorist organizations.  Better late than never.

Another day, another terrorist attack, another up day in the stock market, all is well . . . NOT!

Saturday, May 20, 2017

Gone But Not Forgotten

Young economists believe there are two types of economists.  There are those who STILL believe in the Phillips Curve, and then there are the young economists.  The Phillips Curve suggests there is a predictable relationship between inflation and unemployment.  Graphically, it looks like this:

Image result for phillips curve

In this academic example, if the rate of unemployment is 4%, it can be reduced to 2% by raising inflation from 3% to 6%.  Or, if you want to reduce inflation from 6% to only 3%, you can do so by increasing unemployment from 2% to 4%.

Our younger brethren argue that this is simplistic, in that other factors come into play.  AGREED!
They argue that it has broken down entirely since the global financial crisis.  AGREED!
They argue that the curve is not static but moves constantly.  AGREED but the relationship stays!
They argue that it cannot be proven mathematically.  AGREED, but you cannot prove the existence of God mathematically either.

The important thing is -- that the Phillips Curve still frames policy discussion.  Intuitively, it makes sense to me that inflation can be dampened by driving up unemployment, which removes spending power in the economy.  You can do this by raising interest rates.  This is exactly what Fed Head Paul Volcker did.  In March of 1983, inflation reached a nosebleed level of 14.8%.  Volcker drove up interest rates to a terrifying 20%.  The prime interest rate was 21.5%, and unemployment soared to 10%.  The economy promptly went into recession, but inflation fell to a mere 3% by 1983.  In the short-term, Volcker was condemned for putting the burden of ending inflation on the backs of the working poor.  In the long-term, he has been hailed as courageous.

Now, what should Chair Yellen do today, when neither unemployment nor inflation are problems?

Young economists say that proves the Phillips Curve is irrelevant, since neither unemployment nor inflation are problems.  It is irrelevant only inside the bubble that has existed since 2008.  As economic conditions normalize, with higher interest rates and lower budget deficits, it will become increasingly relevant.  Of course, exactly when will that happen?

Friday, May 19, 2017

. . . On With The Show

It was March 21st that I predicted the President would be impeached.  My objective then was to study how impeachment might impact my clients' portfolios.  After studying the impeachments of Andrew Johnson, Nixon, and Clinton, I concluded there is no predictable pattern.  (Still, as the market goes down when uncertainty goes up, I felt it would be appropriate to remove some risk by raising cash.)

At the time, I expected Republicans to lose the House but retain the Senate in next year's midterm elections.  In that case, the President would be impeached by the House but not convicted in the Senate and therefore not removed from office.  (In Clinton's case, the market started rising as soon as the Senate trial began, as it was obvious he would not be convicted.)

Now, I suspect there is a greater likelihood the President will resign before he can be impeached.  His former ghostwriter says the President doesn't understand right or wrong, only winning or losing - that's a huge difference.  When he realizes he cannot win, he will just declare victory and resign.  Jeremy Siegel, the legendary professor at Wharton, predicted the Dow would suddenly jump a thousand points when that happens.

Right now, the Republican goals of tax reform and infrastructure stimulus are seeping out of Wall Street dreams.  A President Pence would reduce the drama and restore the GOP dreams.  It might cause the bear market I expect to occur sooner but to be less severe.

If so . . . on with the show, please!

Wednesday, May 17, 2017

Silent Costs

Economists are fond of discussing opportunity costs.  According to Investopedia:  (1An opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action.  Put another way, the benefits you could have received by taking an alternative action. (2.) The difference in return between a chosen investment and one that is necessarily passed up.

In other words, the cost of an aircraft carrier is not $10 billion.  It is 10 regional hospitals, plus the value of improved regional health, plus the incremental additional tax revenue produced by healthier people, plus . . . plus.  You get the picture.

As we begin wading into the deeper waters of the Trump presidency, the media will be blamed for his problems, ignoring the fact that media exists only to please advertisers.  Coverage of this train-wreck will be 24/7 because it brings eyeballs to advertisements.  If Americans would watch the Lifetime channel or National Geographic or anything else on cable, instead of news/opinion programs, the media would chase those eyeballs.

But, there is another silent cost.  We are not debating a new tax plan, we are not debating an infrastructure/stimulus program, we are not debating minimum jail sentences, nor a host of other important issues.  The oxygen is being sucked out of the room, and that's a shame!

Impeachment is bad for the economy, and it is not a one-time charge.  There will be a cumulative effect on the economy that continues for years.  Perhaps, that is the opportunity cost of democracy.

And don't expect the stock market to be happy about this!

Tuesday, May 16, 2017

The Right to Quibble

I don't know how many generations of my family have served in the military, except that we have served during every war since the Civil War.  We were always taught to love this great country, which makes it difficult for me to understand Republicans or Democrats.

When Democrats get in trouble, they blame rich people, like the Koch brothers.  When Republicans get in trouble, they blame the media.  (Sometimes, people just get themselves into trouble!)

Republicans believe "that government is best which governs least," and they are right.  Democrats believe "we are a village" including the "least among us," and they are right.  Why then is the partisanship so bitter?

Is it because we live in the separate echo chambers of Fox News and MSNBC?  Is it because we have nothing to bind us, like an old-fashioned war?  Is it because we have no "lift of a driving dream?"

But, we have passed the point of silly!  I remember when sexists would watch a beauty pageant and comment on the beauty of the ladies, while feminists would watch and comment on how accomplished the participants are, as well as their wardrobes.  The latest Miss USA produced a winner who was raised in Virginia Beach and has a degree in chemistry and a job with the U.S. government in nuclear engineering.  She is a very accomplished person, indeed!  Yet, there is a controversy between Republicans and Democrats, over her belief in health care being either a right or a privilege.  Is there anything partisans will not quibble about?

Which is worse . . . chauvinism or hyper-partisanship?

How many mothers's sons died to protect our right to quibble?  Or, is it a privilege?

Saturday, May 13, 2017

Rainy Day Gratitude

Sitting here on a cold rainy morning contemplating the political turmoil ahead of us, I am grateful for those who manufacture smiles: 

Friday, May 12, 2017

Ignoring the Economy . . .

A recession is coming!  There is ALWAYS a recession coming.  We just don't know when or how severe it will be.  But, we can ignore that!  This is not about the economy.  It is about the stock market.  They are certainly related but still different.

The economic data is a fairly even stream of good, if not great data.  It gives no indication of a recession in the near future.  Unfortunately, there are other factors than the economy, such as geopolitical issues, as well as stock market data.  Some analysts even seek guidance in history.

Geopolitical weight on the stock market is increasing.  It was April 5th that I predicted the President would be impeached in 2019.  (Some readers thought that was a partisan belief.  But, given enough accountants, I could find reasons to impeach anybody, especially somebody with complex business relationships.)  It is fortunate that corporate profits have been rising as geopolitical weight on the market has been increasing.  Also, a coordinated global recovery may be carrying some of that weight.  The stock market is holding up well.  But, the weight of impeachment will continue to increase.

However, one piece of market data worries me.  That is the Volatility Index (VIX), which measures the volatility in prices of options.  It is often called "the fear index."  As the VIX rises or as volatility rises, the stock market usually weakens.  As the VIX falls, the stock market strengthens.  Up to a point, that is!  Once the VIX gets low and stays low too long, it suggests the stock market is too sanguine or "asleep at the wheel."  A certain limited amount of fear is a good thing, not a bad thing.

The last time the VIX was this low was February of 2007,  A year later, the market was down 7.33%.  And, that was only the beginning of a terrible collapse.  This suggests there is no immediate danger.

While history is a poor predictor of stock market behavior, it has been a long time since March of 2009, when the recovery began.  I also cannot forget the old adage of "sell in May and go away."

Bottom Line:  Extra cash in your portfolio right now might be good for your long term financial health.

Thursday, May 11, 2017

Treadmill Thoughts

At the gym today, I was lucky enough to find a treadmill that could see two separate televisions, with Fox News on one and MSNBC on the other.  As you know, they are slightly different.  After all, one speaks Greek, and the other speaks Polish, i.e., languages coded to their particular viewers.

The Fox screen showed much consternation about the hypocrisy of Democrats,who cursed fired FBI Director Comey last year and love him this year.  The MSNBC screen showed much consternation that the probe into Russian ties to the Administration was threatened.  Fox is right that Democrats are being hypocritical, just like all politicians, including Republicans.  MSNBC is wrong to suggest Republicans don't care if Russia interferes with our elections.

My first thought is that it is vitally important for Republicans to watch MSNBC more often and for Democrats to watch Fox News.  (It is also important to avoid all news shows one day a week, particularly on Saturdays.)

With respect to Comey, he probably deserved to be fired, but that is wholly irrelevant.  What matters is the probe into Russian ties.  I was comfortable with Comey leading that probe, as I felt Americans could be confident with his findings.  Now, we do need a special prosecutor, which is expensive and crippling to the process of governing but more necessary than ever.  What good are findings by a bunch of politicians, now that the process has been so politicized.  No, it doesn't matter which party politicized it.  The only way to de-politicize the probe at this point is to appoint a special prosecutor.  The goal is to produce findings that both sides have confidence in!

Wednesday, May 10, 2017

Cheating Graph

Like most commodity prices, the price of oil reflects basic supply & demand for the commodity plus currency fluctuations.  In the case of oil, rising price has traditionally been an economic indicator of improving international growth.  Up to a point, rising oil prices have always been viewed as positive.  So, how would you interpret this graph:

Chart of the Day

A technical analyst would interpret this as saying oil prices are close to breaking out to the upside and could get much higher.  If so, that would indicate improving economic growth.

That might be correct in the textbooks, but I suspect the textbook needs to be updated.  Today, the greatly-increased oil production from the U.S. has made OPEC a weak "swing-producer," whose production causes oil prices to change wildly.  This graph now reflects OPEC honesty.

You'll recall early last year that oil prices collapsed, as all producers were maxing production.  OPEC got together and agreed to limit their production.  That worked for awhile, until prices got over $54/bbl, but then the pent-up greed easily overwhelmed OPEC discipline.  When individual OPEC producers started cheating or supplying more than they promised, oil prices got stopped rising and became volatile again.

It would be racist to call the price of oil an Arab honesty index, but it is fair to call it an inverse OPEC cheating index.  The more they cheat, the lower the price of oil.

Monday, May 8, 2017

Partisan D.E.W.

Traditionally, financial advisors have been strongly Republican.  My unscientific feel is that they are split about 60% Republican and 40% Democratic.  So, it was slightly surprising to see 50.6% of financial advisors disapprove of the President's first 100 days, while only 40.6% approve and 7.9% have no opinion.

Far more surprising to me is the difference between those who strongly approve or strongly disapprove.  40.3% of financial advisors strongly disapprove of the President, while only 20.3% strongly approve.  The strength of this emotion is surprising to me and should be worrisome.

It reminds me of the famous Distant Early Warning line in Alaska or screaming "INCOMING" on the battlefield.

Saturday, May 6, 2017

Shameful Parity

During the Obama Administration, I marveled at the sheer, blinding and irrational hatred that some Republicans had for him.  They would not support the President, even when they agreed with him.  While it was not entirely racial bigotry, it was still bigotry, and it reflected badly on Republicans!

Now, with the nascent Trump Administration, I see the same bigotry - from Democrats toward the President.  I didn't vote for President Trump but think Stephen Colbert's shameless berating of the President is in bad taste, and that he should apologize.  While it is obviously not racial bigotry, it is still bigotry, and it reflects badly on Democrats!

If Colbert has a political stand he needs to convey, he should take a lesson from Jimmy Fallon's memorable and classic takedown of Trumpcare.  If you haven't seen it already, you can at: 

A Beautiful Tragedy

A beautiful tragedy is still a tragedy.  That's the way I see the U.S. territory of Puerto Rico.  I fell in love with her beauty in 1970 when I first visited her, with her lush hills surrounded by white beaches and crystal-clear azure water.  I worried about her in 2006 when the U.S. withdrew the income tax credits that had transformed her agricultural economy into a growing manufacturing one.  In 2013, Detroit became the largest municipal bankruptcy in history at $8.9 billion.  This week, beautiful Puerto Rico became the largest at $73 billion - over eight times worse than Detroit.  That's a tragedy!

It has been a long, slow slide for this island of less than 3.5 million, beginning in 2006.  It is the only predominantly Catholic nation that has been losing population.  With gallows humor, residents joke that some citizens leave their key in the front door and their car in the airport parking lot, when they leave, for the benefit of those that cannot leave.  

Despite this "bankruptcy" filing, hope for Puerto Rico is on life-support, as the negotiations unfold with bond-owners, that include numerous "vulture" hedge funds and contentious bond insurers.  And, nobody has addressed the additional $45 billion in unfunded liabilities from their overly-generous pension obligations.  Again, it has been joked among economists that Puerto Rico existed for the sole purpose of paying pensions.

A comparison with Venezuela, another Latin American nation-state that is circling the drain, is both interesting and useful.  With the large tax credits in Puerto Rico and the oil riches in Venezuela, both economies boomed.  Some of that new wealth was spent on infrastructure and healthcare, but most was of it was wasted on providing unnecessary jobs and lavish pensions.  There was no financial room for an economic slowdown, which is always inevitable.  That is the similarity between them.

Their differences are obvious. Venezuela became just another socialist dictatorship, while Puerto Rico retained democracy as its political system and capitalism as an economic system.  Puerto Rico will suffer but survive without killing its people.  Venezuela is already killing its people.  It will not survive, as we know it, and will disappear into the drain.  If you have family or friends in Venezuela, just send them a one-way plane ticket.  If you have family or friends in Puerto Rico, send them a round-trip ticket.

Puerto Rico was a beautiful place and will be again . . . but not for years.  Venezuela will be a bloody state . . . hopefully not for years.

Thursday, May 4, 2017


My monthly spending was cut today,
because my grandson has a "pre-existing medical condition" and
because his parents are proud entrepreneurs, who depend on Obamacare and
live in the deep red state of Texas.

Because I know his health insurance costs are going up and
because I will have to help his parents
because I don't know how much I will need to help,
I do know that I will need to start saving more money for that uncertainty and
decrease our monthly spending.

Just don't tell my wife . . .

Advisor: Heal Thyself

USC professor Cary Frydman has been doing some interesting research into "neuro-finance" or how the workings of the brain impact investing.  His latest research suggests that the two biggest mental blocks to successful investing are the Disposition Effect and the Repurchase Effect.

The Disposition Effect is that investors are so afraid of losing their book-profit that they sell too soon, thinking it is important to lock-in a little profit now than taking a chance of a bigger profit later.  They often cite the old trader's adage that "nobody ever went broke taking profits."  They cannot "buy-and-hold" for the long term, because they are fearful in the short term.

The Repurchase Effect is a hesitation to buy back a stock that has hit bottom and started to rise again in price.  To them, this may seem like a repudiation of their earlier decision to sell, but it compounds the mistake of having sold out earlier.  Of course, a slow decision is often lost profit.

In other words, investors are too quick to get out and too slow to get back in, especially if a sold-investment has started to rise..  They tend to cite the old adage "once burnt, twice shy."  My thought on this is that the financial advisors are particularly prone to the Repurchase Effect -- in fact, even more prone than investors.  That was especially prevalent after the global financial crisis in 2009.

If advisors do a good job of holding their clients' hands during a crash, which protects their clients from the Disposition Effect, they also preclude the Repurchase Effect, which protects both the client and the advisor.

If advisors do a good job of holding their clients' hands during a market boom, which protects their clients from the Disposition Effect and minimizes taxes, they again preclude the Repurchase Effect, protecting both the client and the advisor.

Monday, May 1, 2017

Economic Intuition

I've never been called a man of superstition, as far as I know.  I flatter myself, thinking I'm more a man of science, despite the fact that I do have respect for intuition.  According to Psychology Today, intuition is described as: 

"We think of intuition as a magical phenomenon—but hunches are formed out of our past experiences and knowledge. So while relying on gut feelings doesn't always lead to good decisions, it's not nearly as flighty a tactic as it may sound."

At a popular nightspot in Dallas years ago, my wife suddenly said "we have to leave now."  In the newspaper the next day, we read about the riot that broke out shortly after we left.  She just knew something was wrong.

That's the way I feel about the latest GDP reading, which showed economic growth slowed to only 0.7% in the first quarter, down from 1.7% in the fourth quarter.  The preliminary data showed the turndown was primarily in consumer spending.  This is despite the robust level of consumer confidence  Digging deeper, it looks like a slowdown in auto sales, which has declined for four straight months pulled down overall consumer spending .  But, I just know something else is wrong.

For the last three years, GDP growth has fallen suddenly in the first quarter, only to bounce back in the second and third quarters.  There is a problem with the data -- maybe in the collection of data, selection of the data, smoothing of the data, aggregation of the data, or analysis of the data.  Having confidence in the data is important, as politicians love to attribute partisan motivations to data.

If you strip out the impact of changes in trade and inventory replacement, the economy grew at a more routine 2.2%.  Is there no way to annualize this data or adjust trade for dollar strength?  Apparently, we used to handle this differently.  How has it changed during the last three years?

Just because I cannot put my finger on the problem doesn't mean there is no problem.  Whether you call it an educated guess or intuition, something is wrong with one of our most important economic datapoints.

Saturday, April 29, 2017

The Best Bad Option

This week, I sat quietly and listened to several discussions among intelligent people about the Gordian Knot that is North Korea.  Such discussions usually recite a laundry list of things we cannot do, because it would involve the loss of human life.  It seems to me that the loss of human life is inevitable in this geopolitical tar-baby.

Eventually, the "crazy, fat kid," as Senator John McCain referred to Kim Jong Un, will develop an intercontinental missile capable of delivering a nuclear weapon to the western United States. That is the worst option.  Precluding this reminds me of President Truman's argument that the massive loss of life in Hiroshima and in Nagasaki was justified, because it prevented the deaths of uncountable Americans landing on the shores of Japan.

The "Soviet" option seems to be the most popular right now, which assumes we can bankrupt North Korea in an arms race they cannot win, like we did to the former Soviet Union.  First, I cannot see their egocentric leader leaving gracefully under any scenario -- without a blaze of glory. Why should he?  Second, the Chinese will be stuck with many of the 25 million North Koreans streaming across the border in search of food.  How many North Koreans will die in a regime collapse?

Rather than simply checking off a laundry list of options, we need an analytic discussion of how many people will lose their lives with each option.  How can any option be chosen without that information?  Of course, estimating the unknowable is always difficult, but that doesn't mean we shouldn't try.  Operating under "conditions of uncertainty" is not new.

There is an unfortunate racial dimension to any such discussion.  Is it better to let 1,000,000 North Koreans and another 3,000,000 South Koreans get killed now, in order to prevent the death of a million Americans in five years?  Well, is it?  What would Truman do?

One consideration is that South Korea was irresponsible in allowing enormous population growth in Seoul, which is only 35 miles from the DMZ and is within easy range of an estimated ten thousand long-range cannons.  They had a large country to the south of Seoul, outside cannon range, that could have been developed far more safely, to minimize the inevitable loss of life from the fanatical North Koreans.  They should be "hardening" their people right now, with fortified bunkers and such.  They can afford it.  After all, their economy is growing much faster than our economy (3.6% vs 2% in the US).

Like President Truman before him, President Trump must "play God," and I pray he makes the right decision.

Friday, April 28, 2017

Wages Up, Healthcare Costs Down?

As the economy has fairly-steadily improved since the global financial crisis in 2009 and as the stock market has risen nicely since then, worker-pay has remained stubbornly unchanged.  However, the latest data is much more optimistic.

The Employment Cost Index has just posted its best quarterly performance since 2007!  Undoubtedly, this reflects the tight labor market . . . finally . . . and probably explains the recent rise in Consumer Confidence.  Maybe, the weak retail sector will see some improving sales.  They need it!

One small but interesting data-point is that wages in the private sector rose 0.9% in the first quarter, compared to 0.6% in government.  It is unusual for the private sector to grow 50% faster than the public sector.  We can expect public unions to become more strident soon.

Another small but interesting data-point is that salaries are rising faster than benefits.  At first, it was assumed that employers realized that benefits can become unbearable during a recession and are fighting hard to control legacy costs.  Closer examination shows that healthcare costs are rising much more slowly than the overall rise in benefit costs.  In other words, non-healthcare benefit costs are rising faster than healthcare costs.  Does this tell us anything about Obamacare?  

Sunday, April 23, 2017

Changing Dance Partners

In this country, we tend to see people as members of the Republican Religion or the Democratic Religion.  In other countries, we tend to see people merely as members of the conservatives or the liberals/progressives.  That has been a convenient way to pigeon-hole or label individuals for a long time.

But, maybe that is changing?  The Brexit election in England last year was the first where voters were either nationalists or globalists.  To a large extent, our own presidential election last year divided us the same way.  The French election today will shed more light on this. ( La Pen represents the nationalists and is a direct threat to the future of the euro and possibly the eurozone.)

It is not news that "politics makes for strange bedfellows," but I find myself agreeing with a strange new group and disagreeing with an equally strange group.  To be permanent, political parties must support the realignment, and I have trouble imagining the Republican faithful giving up on regulatory relief and Democrats giving up on fairness.  Of course, it is not a simple matter of giving up on existing goals but is instead a matter of re-prioritizing goals.

I'm not sure who I am currently dancing with . . . ?

Are you a nationalist or a globalist?

Friday, April 21, 2017

Faith Restored

In the 1963 movie of Bye Bye Birdie, there was this wonderful song that begged the question of "what's the matter with kids today?"  It quickly became a standard refrain asked by grown-ups who are confused by non-grown-ups.  I have heard that particular question asked all my life.

I know, kids watch too much television and are more interested in their cell phones than their dinner.  They have little interest in learning the old, boring standard "stuff."  They are disrespectful and don't realize how lucky they are, because they are so entitled.  Everybody is a winner and has a trophy to prove it.  Punishment is too great a threat to self-esteem.

Yes, I fret about this country that I love.  There are so many problems.  I don't know how to solve all those problems and don't know anybody who does, certainly not a "slacker" in his parents basement.

But, sometimes I get a peek into the future.  Today, I was fortunate enough to attend a benefactors luncheon at the Virginia Military Institute in Lexington, Virginia.  I sat next to a cadet.  He was a tall, strapping quarterback in high school and a tight end now.  He was respectful.  His sentences were punctuated with "sir" and "ma'am."  He is a serious student and aware of how Lady Luck has smiled on him.  He knows that intelligence deserves education, which in turn requires that leadership be provided to others.

Just when I was ready to nominate this cadet for King, I looked around and realized there were hundreds of other respectable and respectful students (both male and female) just like him.  My faith in the future is restored!

Yes, there are so many problems, and I don't know how to solve all those problems, but I do know America is manufacturing new leaders today as they have always done.  America will be just fine!

Thursday, April 20, 2017

Does Time Matter?

It is difficult to complain about something you love and adore, but capitalism has failed us in the pharmaceuticals market.  Republicans reflexively allege this failure is due to too much government influence, while Democrats focus on who should pay for this failure.

I am one of the lucky ones.  The Veterans Administration provides my medications at a nominal cost.  They are permitted, unlike Medicare, to negotiate bulk prices from the large pharmaceutical companies.  Of course, I don't have access to the fancy, new, expensive drugs you see on television constantly, but seem to be just fine anyway.  Importantly, it is simple!  They check me every six months and then renew my meds, which arrive in the mail.  It is simple!

My wife is not one of the lucky ones.  She has suffered from frequent migraines for many years and unfortunately has to rely on private insurance.  From one month to another, she never knows which migraine meds will be approved for discounted prices.  Nine pills can swing from $30 one month to $370 the next month -- without explanation.  I assume such price swings reflect variable volume pricing from drug companies, which may be very capitalistic but is also very disorienting and confusing.  In addition, drugs approved last month may not be approved this month -- again, without explanation.

The Internal Revenue Service is required to list on each form the amount of time it takes an average person to complete that form.  Drug companies should be required to list how much time it takes the average person to understand their drug choices and drug prices.  Insurance companies should be required to list how much time it takes an average person to compare and contrast their different plan choices every year.  Should capitalism require a warning label that vast quantities of analytical time are necessary?  How much analytical time is possible or reasonable?

I have three degrees from three different colleges, but I am not qualified to distinguish between numerous, ever-changing drugs or insurance plans.  How does the average person?  The obvious answer is that they don't, but why do we expect otherwise?  Because capitalism requires that we believe analytical time is infinite?

You don't hear this very often . . . but, HOORAY for the VA!

Wednesday, April 19, 2017

Chicken or Egg?

Along the lines of which of "the chicken or the egg," does partisan identity precede or follow economic identity?  Are all Keynesian economists Democrats?  Are all Democrats also Keynesians?  Are all Austrian-school economists establishment Republicans?  Are all establishment Republicans Austrian.  Are all Supply-side economists closet Tea Party members?

Of course, the key word is "all."  There are exceptions to each of those broadly-true generalizations but not nearly enough.

Mark Zandi is one of my favorite Keynesian economists.  Backing Clinton last summer, he predicted a long, severe recession if Trump was elected.  Yesterday, he said . . . "never mind."

Now, he feels the economy will continue to roll along with a modest 2% GDP growth rate, despite the weak start in Q1.  He thinks job creation will continue at about 200 thousand monthly.  He sees no sign of recession in the foreseeable future.  Is this solid Democrat agreeing with Republicans?  Who knows, maybe he will evolve into the Austrian-school of economics??

I agree with his comments that the economy is not as good as the pro-Trump crowd expects, nor as bad as the anti-Trump crowd expects.  Hyperbole belongs in political discussions, not economic ones.

Tuesday, April 18, 2017

Briar Patch

There are thorny problems, and then there is the problem of North Korea, which has enough thorns to be an entire briar patch.

The basics are that a young, irrational leader of an small nation who has been tutored to think he can be important to the world only by threatening the U.S. with nuclear weapons, that his country cannot afford.  In reality, he is a military threat only to his neighbors, primarily South Korea and, to a lesser extent, Japan.

The Trump Administration has announced the end of the failed "strategic patience" with North Korea, and I applaud that decision.  But, there is still a need for "tactical patience" -- enough patience to harden the defenses of South Korea but no more.

Kim Jung Un is too unschooled, too insulated, and too irrational to survive.  He will unwittingly let his country be destroyed to prove his brilliance.  He will also show no mercy toward South Korea and will kill as many South Koreans as possible.  We cannot save North Korea, but we can save South Korea.

And, we should!

The aftermath will be messy.  South Korea might want control of or reunification with North Korea as compensation for their losses.  China does not want a common border with a U.S. ally.  I expect another buffer nation like North Korea will be established at considerable cost, which China and South Korea can afford.  At least, the next leader of North Korea is likely to be rational and stop threatening the U.S..

Monday, April 17, 2017

A Fulfiled Prophecy

In 1949, Robert Merton wrote a book entitled Social Theory and Social Structure.  In it, he coined the expression of "self-fulling prophecy", which is a prophecy, even a false one, that is made true by the actions of people.

For example, the value of a stock reflects supply and demand for that stock.  If Warren Buffett predicted that a certain stock was going up, other people would increase their demand and hurriedly buy that stock, which would drive up the price of that stock.  His prophecy would come true because of what people did.

A friend and client owns stock in a small public company and was wondering what impact it would have on the stock price if they became part of the Russell 2000 index.  I assured him that it would only help his  stock and not hurt it.  The reason is that all indexers or ETF managers or passive investors would be required to own his stock.  Right now, nobody is required to own that stock.  Thus, being included in the index increases the demand for that stock, which increases the price of that stock.

There have always been good investment managers, bad investment managers, and some really bad ones.  Indeed, there have always been times when an investor was better off just throwing a dart on the stock page (called the Random Walk theory) than paying an investment manager to pick stocks.  Eventually, some investment managers realized it would be a great marketing theory to argue that passive ownership of stocks arbitrarily listed in an index was superior to the active management of a portfolio.  The fear of picking a bad investment manager was therefore eliminated.  It was a great marketing scheme, and the argument has been raging for decades since then.  But, no more?

Recently, Standard & Poor's published their analysis of the last fifteen years, which demonstrated the superiority of not picking stocks over actually picking stocks.  The conclusion is pretty obvious, but I wonder if it was always that way, or it has become that way, due to the marketing success of such giants as Vanguard.  Think about it -- as more people were buying index products like SPY, which owns only the 500 stocks listed in the S&P 500, there were relatively fewer people to buy the thousands of other stocks that were NOT listed in the S&P.  (Some smart lawyer could argue that was discrimination against stocks outside the blessed 500.)

Much has been written in the academic literature recently about "over-fitting" or "p-hacking" which are statistical techniques used to bend data to support a predetermined conclusion.  While it does have some statistical rigor, it is intellectually ambiguous, to be kind.  Mark Twain was ahead of his times when he complained about "lies, damn lies, and statistics."

My disappointment with the latest analysis is that it is all statistics and doesn't explain why logic has no place in the discussion.  For example, since passive investors (index investors) have to remain fully-invested and cannot increase their cash level, how can passive investing possibly out-perform active investing during a bear market?  Yet another question is that, while investment data for the largest companies is widely known and offers no information advantage to investors, that is certainly not true for small companies, where information is very unevenly distributed.  Passive investing should not work nearly as well for small companies as large companies.  Is there no room for logic in statistics?

Although the Tipping Point is apparently behind us, where the notion that passive investing is better than active investing is made true by the actions of people, important questions remain.  One is whether investors are better off if they own indexes and don't know the companies they own . . . and don't own?  Is American business better off when there is a semi-permanent class of stocks that get an unfair advantage, just by being in the index?

Of course, the Standard & Poor's published analysis must be correct.  After all, I did read it on the internet.

Saturday, April 15, 2017

First Quarter Column

My quarterly column for Inside Business can be found here: