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: 

Wednesday, April 12, 2017

Today's #1 Worry ?

Stocks are drifting downward.  Gold is drifting upward.  Bond yields are trending lower, as investors seeks to reduce risk.  Why?  Is it just a general sense of unease?  Is it fear of another Syria-type military action?  Is it President Trump?

If you look at the price of credit insurance on debt of Korea, you will see it is spiking much higher.  All those hedge funds and pension funds that own bonds issued by Korea are suddenly very worried they will not be repaid, so they are bidding up the price of credit-default-swaps.  It is clear that investors worldwide are concerned about many things, but they are REALLY worried about South Korea being "nuked" by North Korea.  It is the #1 worry.

As usual, John McCain was right when he predicted the world's greatest geopolitical risk is the leader of North Korea, whom he understandably called a "crazy fat-kid".

Investors worldwide agree!

Monday, April 10, 2017

Gerrymandering 101

I have written many times that gerrymandering is a cancer on our body politic.  Originally developed by Democrats, Republicans have now become addicted to it.  It is good for nobody, least of all the voters.

An excellent tongue-in-check explanation of it can be found here: 

If you are offended by profanity and off-color humor, you should NOT watch it.

Reducing the Fed's Balance Sheet

While Wall Street is focused on geopolitical affairs, the Fed is debating something else that deserves more attention -- whether or not to decrease the Fed's balance sheet.  The Libertarian wing of the Republican Party has been highly critical of the Fed for this and insistent that the Fed "deleverage" or sell bonds off its balance sheet.

During the long, slow recovery from the Global Financial Crisis, the Fed experimented with quantitative easing or QE, which has the effect of increasing money supply.  Within reason, an increasing money supply is good for the economy.  Reducing the Fed's balance sheet is QE-in-reverse.

The mechanics are this:  The Fed buys existing bonds, which are added to the Fed's balance sheet as an asset -- to pay for the bonds, the Fed issues new money -- the new money increases the total supply of money in the economy.  The reverse is this:  The Fed sells bonds on its balance sheet and receives cash from the buyer, which removes that cash from the money supply, because it goes back into the Fed.

Ben Bernanke says the Libertarians are wrong, and that we should not reduce the Fed's balance sheet at this time, and I agree.

The Fed has already begun the "normalization" of interest rates or increasing those rates to more a normal level, which has a chilling effect on the economy.  Increasing rates slow enough not to slow down the economy is an art, not a science.  These waters are murky enough, without implementing any QE-in-reverse program that has never been done before.

Wednesday, April 5, 2017

Impeachment Lessons?

The conventional wisdom about the impact of impeachment on the stock market is that it will be temporary.  After all, the stock market rose 226% during the presidency of Bill Clinton.  My experience tells me the market will sink . . . until it is clear that the President will not be removed from office, as it is impossible to get a two-thirds majority.

Fortunately or unfortunately, history offers us little guidance.  The impeachment of Andrew Johnson occurred before a "real" stock market existed.  The Dow Jones Industrial Average did not even exist.  Also, it happened very quickly, which is very different from today.  The market, such as it was, actually rose 10% in the three months prior to impeachment but fell slightly during impeachment, before rising another 6% in the two months after the impeachment trial.

The impeachment of Richard Nixon accompanied a much more volatile stock market.  It started with a 10% loss in the first month of 1973, increasing to an 18% loss by August, when a two-month rally raised stock prices 15% -- only 6% below its record high.  Then, the market did nothing until Nixon's resignation in August of 1974, when the bottom fell out.  Stocks lost 27% in just two months.  However, in November, the market shot up 16%, before turning around the next month and hitting the bottom, down 45% from the peak.  Five months later, stocks were up an astounding 48%!  Whew!!

The Johnson impeachment tells us nothing.  The Nixon impeachment tells us that "nervous" investors should sit on a large cash position.  The Clinton impeachment tells us NOT to be nervous and just wait for it to pass.

Before "nervous" investors begin selling stocks, they would be wise to establish a trigger that will tell them when to start buying their way back into the market.

Tuesday, April 4, 2017

The Joy of Landing

I actually enjoy flying on airplanes but hate being in airports, where passengers are stripped of their individuality, forced to draw-between-the-lines, and to follow precise instructions exactly -- or else.  Unfortunately there is now another innovation to make air travel even more miserable.

John McCain once said the worst part of being in a POW camp was being forced to listen to propaganda, which is just a fancy word for a mandatory sales pitch.

At home, you can turn off your television, change channels, or mute the sound, but not aboard an airplane.  For years, advertisers have been seeing all those eyes and ears just sitting on a plane and are willing to pay money to the airlines to put advertisements in front of those passengers.  Unfortunately, airline greed has now permitted the process to begin.  The passengers have been sold-out.  No more reading a good book or catching a few winks.

Today, American Airlines spends five --count'em, five - minutes regaling their passengers with the joy of some credit card.  Tomorrow, it will be soap powder.  Advertisers will pay princely to strut their commercials in front of all those innocent passengers.  And, the passengers cannot turn them off, change channels, or mute the sound.

Certainly, I would rather be a hostage on an airplane than a POW camp.  In both, you are no longer a human being.  You are merely a consumer of propaganda/mandatory sales pitches!

Friday, March 31, 2017

Selling Somebody Else's Money

One rainy morning in 1981, I was in a well-lighted conference room on a high floor of Citicorp Center in Manhattan.  The weather was so bad that we could not see the streets below.  Into the room walked Congressman St. Germain of Rhode Island.  For an hour, he explained the problem with bankers is that they thought their job was to allocate credit in the economy.   Instead, bankers should be well-dressed salesmen - selling the use of somebody else's money.  The next year, Congress passed the Garn-St Germain Act, which greatly expanded the powers of Savings & Loan Associations.

Seven years later, I was appointed to the Texas State Depository Board, which was a four-member board composed of the State Treasurer, the State Banking Commissioner, the State Controller, and myself.  Our job was to "save" as many of the states Savings & Loan (S&L) Associations as possible.  In the end, American taxpayers paid $330 billion to enable bankers to think like salesmen.

By 2008, bankers had learned they didn't need to take lending risk if they simply made loans and then sold the loans (actually bonds) to third-party investors across the country.  The bankers didn't make money by making good loans.  They made money by converting loans into bonds and selling them to somebody else.  Losses easily exceeded a trillion dollars.

As badly as the U.S. economy was damaged, no country was hurt worse than tiny island-nation of Iceland, with a population of barely 300 thousand.  They drank the poison that bankers should be salesmen and made huge loans all around the world.  When those loans collapsed, unemployment quickly tripled from a normal 3% to 9%.  Even worse, the Icelandic banks were desperate to collect outstanding loans and were brutal to their Icelandic customers.  Fiery protests filled the few streets of this little country, and the government promised to "do something."

By 2012, the Icelandic banks still ran the country.  After considerable effort,  a referendum was held to urge the government to re-write the Constitution along seven principles, winning at 67%.  The government promised to curb the banks, but the banks still run the country..

Nonetheless, GDP growth has gone from a negative 9.3% during 2009 to a positive 11.3% -- a huge, breathtaking swing!  The shiny object of great economic growth has shifted attention from the failure of the Icelandic government to curb the loan salesmen.  Expect the next recession to bring out even more protesters in the few streets in Iceland.

Bankers should not be salesmen.  There are already too many former bankers sipping tropical drinks on tropical beaches, without a thought or care about their former clients.  If they are salesmen, they should relax on the beaches of Iceland!

Wednesday, March 29, 2017


Just as no person is perfect, no political party is perfect.  The Democrats are wrong about interstate health insurance, and the Republicans are wrong about privacy.  Allowing internet providers to sell information on users, including browsing history and Social Security numbers is just WRONG!  It is morally repugnant!!

Tuesday, March 28, 2017

A 10% Correction . . . So, What?

Bob Doll of Nuveen is one of my favorite "thought-leaders."  After a 1.4% fall in the stock market last week, I was looking forward to his thoughts.  Obviously, he thinks the President's disappointment with the Obamacare replacement makes it more difficult to get badly-needed legislation on the tax code revisions and rebuilding infrastructure.  The much-heralded "Trump Bump" is dependent on the three pillars of healthcare reform, tax reform, and rebuilding infrastructure.  Now, with one pillar missing, the other two look more tenuous.

He would not be surprised by a 10% correction but still feels bullish on the stock market.  Another analyst thinks Trump is given too much credit and surging corporate earnings are given too little credit.  In fact, Trump's priorities have lifted the stock market only 5.4% since the November election.  The rest is due to the solid earnings growth.  He argues if Trump fails completely, the stock market response will be softened by our earnings growth, and I agree with that.

However, he feels even more bullish about markets outside the U.S., and I also agree with that -- but not yet.  I will not be sanguine about the European market until the April 23rd French election is behind us.  If Marine La Pen wins, she will likely end the European Union, at great economic cost.   This would make emerging markets more attractive.

As the U.S. stock market re-calibrates to a less successful Trump agenda, as well as surging corporate earnings in foreign companies as well, it may be time to start looking abroad.

Caveat:  Some investors avoid mutual funds because they suspect the extra fee is not worth the result.   One can argue about that for domestic stock funds, but not for international funds.  You don't want any U.S. advisor, no matter how smart, buying stocks in Slovenia or Poland for you!  That expertise is not cheap!

Sunday, March 26, 2017

Unthinkable -- Part Deux

There has been some interesting criticism of the "Unthinkable" blog last week.  It was NOT a call for the impeachment of President Trump.  Quite the contrary, I stated impeachment was indeed bad for the country.  But, I predicted it would happen nonetheless, reflecting the poisonous partisanship, the massive egos in Washington, and the lack of a clear definition of "High Crimes."  My objective was to start thinking about the unthinkable from an investment standpoint..

First, how much time do we have?  Impeachment cannot happen before 2018, when the opposition party historically gains seats during mid-term elections, and that's in a normal year.  If the Democrats gain significantly during that election, they will likely be motivated to file charges of impeachment early the following year, but it will be late in 2019 before any impeachment trial could begin in the Senate.  By that point, I expect the stock market would already be recovering.

Second, vast armies of investment advisors, including Warren Buffett, argue the time to be 100% out of stocks is . . . never!  It is more important to shade or shift allocation between asset classes.  While an impeachment would likely reduce stock values worldwide, the damage would be greater in the U.S.  This would make international stocks more attractive on a relative basis.

Currently, international stocks are trading about 10% below their 2014 highs and 20% below their 2007 highs.  Corporate earnings have been rising nicely in the U.S. since Q3 of last year but rising even better abroad.  It is time to start increasing international exposure, to get some assets away from the risk of impeachment.

Friday, March 24, 2017

Stepping on Rattlesnakes

Years ago, I ran the Rattlesnake Roundup 10K in Sweetwater, Texas.  All along the road, rattlesnakes were positioned on one side or the other.  Fortunately, each was tended by a "snake-charmer" who had a long tool to control the rattlesnake.  At the beginning of the race, the announcer gave us some advice I never forgot:  "If you must step on a rattlesnake, step on its head, not its tail."  The reasoning was that the rattlesnake would turn around and bite your leg if you stepped on its tail.

While Democrats invented the sin of gerrymandering, Republicans perfected it.  Unfortunately, they stepped on the tail and are getting poisoned by it.

The reliably Republican Wall Street Journal opined today, in an editorial titled "The Freedom-From-Reality Caucus" that "by insisting on the impossible over the achievable, these self-styled guardians of conservative purity could become the worst friends of conservative ideas and free markets have had in decades."

Extremist Republicans are no worse than extremist Democrats, but they are in power now.  Extremist Republicans are hurting the Republican Party more than extremist Democrats are hurting the Democratic Party.  For their own good, Republicans should renounce gerrymandering.

Wednesday, March 22, 2017

We're # 14 !!!

The latest "Happiness" survey listed Norway as the happiest nation on Earth.  It may be just a happy coincidence that Norway also has the highest financial literacy, compared to the U.S., which was 14th, just behind the Czech Republic.

So, should high school students be required to take a financial literacy course?  I doubt anybody would object to increasing financial literacy before students enter the adult world, but the courses I have reviewed for high school students look more like a laundry list.  It is not overly-important that a young person distinguish carefully between a preferred stock and a zero coupon bond.  My experience suggests that knowing your behavioral type is more important.  Are you an aggressive 18-year-old who is bullet-proof and can easily pick the next Apple, but who panics at the first pullback or market dip?  If you are, how do you manage your portfolio?  How will you learn to have a strong stomach?

Memorizing a laundry list of financial products is nice, but studying the different investment behavioral types is more important.

Physician - heal thyself!  Investors - know thyself!!

Tuesday, March 21, 2017

The Unthinkable

Q.  When is it time to start thinking about the unthinkable?
A.  When you find yourself awake at night, staring at the dark ceiling, and worrying.

Q.  Will the President be impeached?  If so, for what impeachable offense?
A.  Yes, but the offense doesn't really matter at this point.  "High crimes" can include most anything.  Impeachment is not about right or wrong.  It is about power.

Q.  How many presidents have been impeached?
A.  Three - Andrew Johnson, Richard Nixon, and Bill Clinton.  Johnson and Clinton faced a trial in the Senate and were acquitted.  Nixon was the only president to ever resign, and he was quickly pardoned by Ford.

Q.  Does it matter if the President is removed from office?
A.  Yes, it would, but it has never happened.  Plus, two-thirds of the Senate can agree on exactly nothing.  Think of an impeachment trial as another "OJ" trial, except everybody is angry.

Q.  Would impeachment be good for the country?
A.  No.

Q.  Would it be good for the stock market?
A.  Not at first, but the market would rebound when the outcome becomes more clear.

Q.  When will it happen?
A.  Not until 2019, following the midterm elections, when Republicans lose control of Congress.

Q.  What should investors do?
A.  An old Wall Street adage is "the trend is your friend."  Enjoy the ride for now, but be sensitive to the 2018 midterm elections.  If it appears likely the Democrats will regain control, increase cash levels.  When the House Judiciary Committee begins impeachment hearing, increase cash substantially.  When the actual trial begins in the Senate, start buying.

Friday, March 17, 2017

Another Good JOLT

Wall Street, politicians, and the media pay very close attention to the monthly "Jobs Report" on the first Monday of each month.  Announcing the rate of unemployment, it is the "headline news" on the labor market.

On the other hand, economists pay closer attention to the JOLT report, which stands for Job-Openings, Labor-Turnover.  An increasing number of job openings is always a good thing, of course, and an increasing labor turnover tells you the attitude and confidence level of workers.  Job openings can increase but workers may be too afraid to give up their current jobs to look for another one.  How do you measure the amount of worker confidence?  Look at labor turnover.

The latest report shows about 5.6 million open jobs, which is the highest level this century.  In addition, about 3.2 million workers gave up their jobs, which is the most since 2001.  The labor market is solid.  (Even President Trump admits the labor reports are no longer "fake.")

Normally, a tight labor market would encourage the Fed to increase interest rates at a faster rate, but the average hourly earnings of workers is still not increasing enough to be inflationary.

A strong labor market with little indication of inflation is not a bad economy for a President to inherit . . . is it?

Wednesday, March 15, 2017

No Pomp and Circumstance ??

Do you remember the mixed emotions when your kid graduated from high school?  There was pride that they had accomplished something worth doing.  There was relief that your efforts to get them functioning in the real world had some measurable success.  There was excitement that they would now be standing on their own two feet, facing their own challenges.

That's how I feel about the Fed raising interest rates today.  Since the global financial crisis nine years ago, they have single-handedly sustained the economy, with no help from Congress.  Every move was scrutinized too-closely by everybody.  But, with today's increase, I feel they are graduating and passing the baton back to Congress where it belongs.  Fiscal policy returns to center-stage today.

Like high school graduates, the Fed will face continuing challenges.  Their next challenge will be accusations of  playing politics with interest rates.  The stock market clearly sees this increase as a vote-of-confidence in the strength of our economy.  But, no president has ever wanted higher interest rates, and President Trump will be no different.  He will soon be criticizing the Fed for raising rates and making the dollar too strong, which hurts our exporters.  There is zero possibility that he will reappoint Janet Yellen to the Fed chair when her term expires next year.

Now, where is my hankie??  Sniff, sniff . . .

Tuesday, March 14, 2017

Only Five ?

Bobby Doll is the Chief Equity Analyst for giant Nuveen Asset Management and has long been one of my favorite thought-leaders.  An affable, humble man with an ability to write succinctly, he remains confident in both the economy and the stock market.  However, his most recent commentary lists five risks we should pay attention to, and they are quoted as follows:

1.  U.S. Politics: Despite growing signs of disunity between President Trump and the GOP Congress, investors still appear optimistic about prospects for pro-growth economic policies. However, we expect investors may lose patience if specifics about issues such as tax policy and health care reform are not forthcoming.

2.  European Politics: Perceived risks in Europe have faded as Marine Le Pen’s standing in the French polls has dropped. But the rise of such nationalist candidates may pose a risk to economic growth and equity markets.

3.  Earnings: Corporate earnings have improved over the past couple of quarters, but
forward-looking expectations may be too high. Consensus expectations are for a double-digit advance in earnings growth for 2017.4 That level will be difficult to achieve, especially since profit margins remain under pressure.

4.  Economic Growth: We have seen an almost uninterrupted string of positive growth surprises in the U.S. economy over the past several months. We don’t expect growth to slow, but more bumps are likely in the coming months.

5.  The Fed: Investors have largely shrugged off prospects for higher rates, but rising rates could eventually dampen equity market momentum. Additionally, we see a great deal of uncertainty surrounding who Donald Trump will nominate to the Federal Reserve Board of Governors.

Now, about all those other things you were worrying about . . . STOP IT!

Saturday, March 11, 2017

Freaky Libertarians

Easily, the most readable book on economics in this young century is Freakonomics by Levitt and Dubner.  There is also a Freakonomics podcast (which is available in the App Store).  I often listen to one of those podcasts when running.  A recent one concerned the Libertarian political party, complete with an interview by Gary Johnson, who ran on the 2016 ticket and garnered a slightly surprising 3.2%.

Libertarians are usually those who prefer less government in their life, both in their wallet and their bedroom.  This is in contrast to the stereotypical Republican who wants less government in their wallet but doesn't care how much government is in their bedroom.  It is also in contrast to the stereotypical Democrat who doesn't care if the government gets a little deeper into their wallet, as long as the government stays out of their bedroom and personal life.

Don't you wish life was that starkly simple?  That's why stereotypes are occasionally useful -- for drawing contrasts.  But, which is worse -- stereotypes or purists?

This podcast focused on the purist or extreme positions of Libertarians.  They would abolish most of the Departments in the President's cabinet, including the IRS, in favor of a regressive tax on consumption.  They would legalize most currently-illegal recreational  drugs.  The U.S. would practice isolationism from the rest of the world, like it was a religion.

The conclusion was that the purists of the Libertarian party have more control over that party than the purists in either the Republican or Democratic parties, but there is now a movement among Libertarians to shed their purists.  Maybe then, they can garner 3.3% of the popular vote?

I hope so!

Thursday, March 9, 2017

Oh, What A Relief It is . . .

During the Era of Gridlock, the United States was a one-armed boxer.  Gridlock made fiscal policy useless, as Congress was unable to do anything that mattered.  All we had was monetary policy, which is controlled by the Federal Reserve.  Therefore, Wall Street held its breath every time the Fed met to decide any changes.  If the Fed did anything unexpected, Wall Street invariably over-reacted.

Next week, the Fed will meet and is expected to raise interest rates.  Before the election, the stock market would have taken a swoon.  Now, we realize that increased interest rates are both needed and acceptable to investors.  This is a healthy sign.  It will actually be a relief to be able to raise rates without the market over-reacting!

When the Fed raised rates in December, they expected to raise rates three or four more times this year.  I didn't believe that then, as Chair Yellen is a dovish labor economist and has another year in that job.  Now, I think the stock market rally may have "sucker-punched" the Fed into believing the economy is better than it is.  It is only good but is not great!  The tepid signs of inflation are not enough to make that assumption.  One or two increases this year would be good.  Three or four would be bad.

Also, there is another important difference between fiscal and monetary policy.  Fiscal policy is the right arm of a right-handed boxer.  It is stronger than monetary policy.  During the Era of Trump, the United States is now a two-armed boxer.  As long as we don't punch ourselves, we are either more powerful or just more dangerous.

Tuesday, March 7, 2017

Arithmetic Matters ?

I would like a tax cut.
Who doesn't want more spending money in their pocket?

I would like Obamacare replaced with something "better," as the President promised.
Who doesn't want better health care?

I would like a stronger military forces.
Who doesn't want stronger defense?

I would like a modern infrastructure.
Who doesn't want better roads, bridges, port, airports, etc?

That's a nice wish list that collides with the reality of
Have you been there lately -- go now!

Keynesians don't mind the increasing debt.
Supply-siders assume growth will always cover deficits.
Austrian or classical economists believe arithmetic matters.