Sunday, November 23, 2014

"Red, White & Blue" From "Ol Blue Eyes"

As a introduction to his song, The House I Live In, Frank Sinatra said he loved this country, even more so because it is NOT a perfect country.  His reasoning was that it so much "fun" trying to make it perfect.  I don't know if he would still say that today, but I still love every word of the song:

What is America to me?
A name, a map, or a flag I see;
A certain word, democracy.
What is America to me?

The house I live in,
A plot of earth, a street,
The grocer and the butcher,
Or the people that I meet;
The children in the playground,
The faces that I see,
All races and religions,
That's America to me.

The place I work in,
The worker by my side,
The little town or city
Where my people lived and died.
The howdy and the handshake,
The air and feeling free,
And the right to speak my mind out,
That's America to me.

The things I see about me,
The big things and the small,
The little corner newsstand,
And the house a mile tall;
The wedding and the churchyard,
The laughter and the tears,
And the dream that's been a growing
For a hundred-fifty years.

The town I live in,
The street, the house, the room,
The pavement of the city,
And the garden all in bloom;
The church, the school, the clubhouse,
The million lights I see,
But especially the people;
That's America to me.

The house I live in,
My neighbors white and black,
The people who just came here,
Or from generations back;
The town hall and the soapbox,
The torch of liberty,
A home for all God's children;
That's America to me.

The words of old Abe Lincoln,
Of Jefferson and Paine,
Of Washington and Jackson
And the tasks that still remain;
The little bridge at Concord,
Where Freedom's fight began,
Our Gettysburg and Midway
And the story of Bataan.

The house I live in,
The goodness everywhere,
A land of wealth and beauty,
With enough for all to share;
A house that we call Freedom,
A home of Liberty,
And it belongs to fighting people
That's America to me.

All I can add is . . . Amen!

Saturday, November 22, 2014

Trouble Next Door?

Just two years ago, optimism about Mexico was high and rising.  The new President, Pena Nieto, seemed truly committed to reforming the hidebound and corrupt country.  He opened the oil business to foreign investment, which has long been a sacred cow to the Mexican people, who vividly remember exploitation by foreign corporations.  With an improving economy and a falling birthrate, even illegal immigration to the U.S. decreased markedly.

Now, something is starting to smell.  Yesterday's release that GDP growth in Q3 was only 2.2%, far below expectations.  While still respectable, the leading component was construction, which is often fleeting and not dependable.  Mining was way down, for the fifth straight year.  The transportation sector only grew 1.1%.  (Remember Dow Theory?)  Even government spending was substantially less than expected.

In addition, protests over the 43 student-teachers who were mutilated and massacred has spilled over from the province into the nation's capital.  The outrage over the powerful drug cartels seems to have found a lighting rod.

If that wasn't enough, there is now some existential absurdity to the revelation that President Pena Nieto and his TV-star wife have a "sweetheart" arrangement with a government contractor for their private mansion.  So much for his reputation as an upright reformer of corruption.

This is worth watching, but I wouldn't travel to Mexico to watch it . . . 

Friday, November 21, 2014

For History Students Only

When we look at stock market cycles, we know the current bull market is getting old -- over five years old.  However, if you look only at bull markets that follow at 30% decline, it is a very different perspective.  The deeper the bear drop in the stock market, the longer and strong the bull recovery.  Our stock market drop of 52% in 2008/9 was terrifying, but it did set the stage for an impressive bull run since then.  Now, take a look at this chart:

Chart of the Day
Over the last 114 years, there have been 13 recoveries, averaging 8.8 years each.  Of those 13 bull runs, 6 had a shorter duration than the current one, and six had a longer run.  We're in the middle.  However, because our 52% drop was substantially greater than the 30% minimum, one can easily argue that this recovery will be much longer and stronger than average.

I hope so!

But, please note one big difference:  Never before have we sustained a major economic recovery on such a sea of debt -- except for the longest and strongest recovery of all, labelled 1942 above.

Thursday, November 20, 2014

NOT Our Finest Hour

In Infantry Officer Candidate School, we were taught that, whenever your men come under fire, it is critically important to give a command.  It doesn't matter if you holler - hit the dirt or climb a tree or drop your pants - just give a command, even if it is wrong!  Just make a decision . . .

It doesn't matter if you think the President is a corrupt usurper of Congressional power, determined to be the Emperor, OR if you think the impotent Congress has had enough time, since they haven't made any decisions on immigration since the Executive Orders of Reagan in 1984 or Bush in 1991 - a few numbers always helps.

Since 2007, the number of undocumented persons in this country has dropped from 12.2 million then to 11.5 million now.  As the Mexican economy has improved and as their birth rates have decreased, their in-migration has dropped from 700 thousand annually in 2001 to only 160 thousand in 2012.  In fact, the number of undocumented Mexicans in this country dropped from 7 million in 2009 to 5.6 million in 2012.  (Of course, more immigrants are coming from Central American countries now, instead of Mexico.  Almost all undocumented workers in Virginia are from Central America.)

In 2012, there were 8.1 million undocumented workers who were either working or looking for work in our country.  That was 5.1% of our total labor force.  We're hardily being overrun.  This is not a metastasizing economic cancer that is growing.  It is a moral issue.

Making a decision on immigration is not rocket science.  It doesn't take twenty years to study.  It just takes courage.

Certainly, it would be much better if the Republican leadership of Congress would personally agree to a deadline of March 31st, when they will control both houses of Congress, but if not . . . well, it just takes courage.

I assume we will have a Republican president in 2016, but we will still have a useless, gerrymandered Congress, because that cannot be fixed until after the next census in 2020.  I hope he will use his executive authority to make decisions that Congress cannot make . . . if he has the courage.

Wednesday, November 19, 2014

Keynesian Malpractice

A few years ago, the flaccid Japanese government decided to take a Keynesian approach to end their "lost decade(s)" and applied a huge stimulus, using deficit spending.  Predictably, the economy strengthened and their stock market boomed.

Now, a "true" Keynesian knows that deficit spending has to be temporary, followed by budget surplus, to keep the debt level low.  Given that their debt-to-GDP is almost twice as problematic as the U.S., they really did need to start reducing the debt.

So, earlier this year, they raised the sales tax by 60% from 5% to 8%.  Of course, it was expected consumers would respond with less spending, but economists were stunned by the large 7.2% drop in Q2 GDP.  They argued it was a one-time response and predicted Q3 GDP growth of 2.1%.  Instead, GDP dropped 1.6% last quarter, and the economists were stunned again.

My first thought was -- how can Japanese economists be so bad?  My second thought was that -- what, governments can do something, anything?!?!  But, the more important thought is - sure, the economy strengthened after the stimulus package but they didn't give it enough time to normalize before applying a LARGE tax increase.  While I applaud their courage in applying the unpopular part of Keynesian economics, i.e., raising taxes, a responsible Keynesian would have given the economy more time to strengthen before applying a much smaller tax increase.

Tuesday, November 18, 2014

Involuntary Mercenaries

Vladimir Putin is the greatest danger to the United State, far more dangerous than ISIS or Ebola.  He is also a danger to the Russian people.  Yet, they still love him.  Vitaliy Katsnelson has written an excellent article on the Private Portfolio website, proving that -- perspective is everything.  Yes, their access to information is highly restricted but is very effective in presenting Putin as working hard for the Russian people.  Nothing could be further from the truth.  Putin is working for himself.

He has essentially run that nation for twenty years and is now rumored to be one of the world's wealthiest men, at about $40 BILLION.  During that time, Russia's petro-economy has gone from largely dependent on oil to one that is almost entirely dependent on oil.  He had the opportunity to make it better but has made it worse!  During the years of high energy prices, this increasing dependence was not obvious to the Russian people.

So far this year, the Russian ruble is down 27%.  Imagine what would happen in this country if the dollar dropped 27% so rapidly!  Yet, the Russians inexplicably still love their unsavory leader.

Don't forget that Hitler knew it was time to start the war when the bond markets cut him off.  Putin is getting closer to that point, where Russia can no longer borrow enough to stay afloat.  However, instead of starting a war, he could throw Russia into the arms of China.  Already this year, he has announced two huge deals with China, which analysts agree are very favorable to China.  Russia could become the spear held by China.  The patriotism of Russians would serve their Chinese masters well.

Monday, November 17, 2014

On Glory-Hounds

Much has been written recently about an unwritten code that exists among members of Special Forces, whether Army or Navy.  That code is based on a deep respect for and obligation to your fellow soldiers.

Robert O'Neill is a former member of Seal Team Six, who has gone public and taken the glory for killing Osama bin Laden.  If this is a technically criminal act, I hope he will be tried and buried under the jail.  In my opinion, he does not deserve to be buried with the good men in a veteran's cemetery.

If it is not a technically criminal act, he is still "dead" to other Special Forces troopers.  Although Mr. O'Neill has thrown out a few platitudes about his fellow Seal Team members, it only takes one blowhard glory-hound to denigrate, cheapen, and disrespect the other soldiers who took just as much risk as he did.  Personally, as an old Special Forces officer myself, I would not throw him a life-preserver if I saw him drowning.

Besides, what kind of man puts his family at risk, just for his own glory?

Saturday, November 15, 2014

Quittin' Time

With the executive and legislative branches of our government being utterly useless, if not worse, the role of chief economic caretaker has defaulted to the head of the Federal Reserve System, who is Janet Yellin.  She has two prime directives:  (1) control inflation, and (2) control unemployment.

The "trick" is that those two directives can often conflict.  The Fed's cure for high inflation is higher interest rates, which can reduce inflation but can easily slow down the economy as well, raising unemployment.  Conversely, low interest rates to reduce unemployment may ignite inflation.

Since the 2009 collapse, unemployment has been a far larger problem than inflation.  Janet Yellin is described as a "dove," meaning she is more concerned about unemployment than inflation.  A "hawk" is more concerned with inflation than unemployment.

The unemployment indicator most favored by Chair Yellin is the JOLTS report.  In that report, we find the number of "quits" each month.  Because workers don't normally give up their jobs unless they think the market for their skills is strong enough that they can routinely get another job.  An increasing number of quits is a good indicator.  Last month, 2.74 million workers were confident enough to quit their jobs.  This is the highest since 2008 and is a very good sign.

In addition, the number of job openings is now the highest since 2001 -- that is not a typo -- the highest since 2001.  It is small wonder that workers feel confident enough to quit their jobs.

With the labor market looking so strong, Wall Street believes Yellin will begin increasing interest rates in the second quarter of next year.  While I think it may be somewhat later than that, I don't expect the stock market to necessarily turn down as a result of the increased interest rates for two reasons:  (1) it is not a surprise, and (2) the increase will be a modest quarter point.

We'll see . . .

Friday, November 14, 2014

"Supply & Demand" Spoken Here

The Law of Supply is that sellers are more anxious to sell at higher prices and will bring more supply to the marketplace.  The Law of Demand is that buyers are less anxious to buy at higher prices and will buy less of the product.  If too much supply comes into the market at high prices, the price will  collapse.  If there is too much demand, the price will rise, as buyers outbid each other.  Eventually, a point of equilibrium will be reached where buyers will demand all products supplied at that price.  This can often last for years.

Beef consumption in the US has gone from 90 pounds per year in 1970 to only 54 pounds in 2013.  This means per-person demand growth has dropped significantly.  It is expected to decrease another 2.3% this year, further reducing demand.  This suggests that the price of beef should fall.  Instead, it has increased considerably over the last two years, better than 6% yearly (compared to 2% for chicken).

During that time, the supply growth of beef has fallen faster than the demand growth for beef has fallen.  The droughts of 2012 and 2013 reduced the size of cattle herd more than expected.  Compounding this supply shortage, the kill-level has been reduced to allow the size of the herd to grow again.  The currently cheap price for corn makes it less expensive to keep cattle alive.

The point of equilibrium will be reached when the herd size and the kill-level are restored and the market price is affordable by enough buyers to buy all the beef being brought to the market.

What does this mean?  Beef prices are going up for awhile, probably two years, assuming the price of corn doesn't spike.

Of course, this is good news for producers of chicken and pork, which are now the "proteins of choice."  But, that's an entirely different story of supply & demand . . .

Thursday, November 13, 2014

Another Veil To Pierce

Some of the best advice my father ever gave me was to NEVER talk about religion or politics.  I have rarely strayed into discussing subjects that had political tones and then only when I could do so from a bipartisan, economic perspective.  I have taken his advice on religion and avoid any discussion of it.

This week however, I attended a lecture on Islamic Finance, curious how their perspective is different than our Christian/Capitalistic perspective.

It is apparently a growing market with nearly $2 trillion of assets being managed in accordance with Islamic principles, mostly in Dubai and increasingly in London.

 Islamic Finance begins with Five Pillars, which are the basic platitudes that all people are to be treated fairly, yada, yada.  Then, they list the prohibitions.  Anything not prohibited is permitted.

I already knew that one prohibition is that they are forbidden to pay or receive interest and wondered how they could possibly ever make a loan or issue a bond without somebody paying for it.  You can "borrow" money and you don't pay interest but you do pay a percentage of profits, because the loan is called an investment.  A duck by any other name is apparently NOT a duck.

An example is getting a car loan.  You go to the dealer and negotiate a sales price.  Then, you go to the bank and ask them to buy the car from the dealer at this price.  After the bank buys the car, they sell it to you at a higher, marked-up price (on a monthly installment plan).  Therefore, it is not interest.  The bank is merely booking profit from a sale to you, not interest from a loan to you.

Another prohibition is that you cannot sell anything you do not own. Therefore, you cannot invest in options, futures, or certain other derivatives.  Getting around this prohibition is overly-complicated, meaning it is seldom done.  This is the single biggest disadvantage to being an Islamic investor, but, given my anxiety about the power of unregulated derivatives to destroy capitalism, this is the only advantage that Islamic finance offers the world.

I came away with the impression that the Koran is just another nuisance that Capitalists routinely side-step or work-around, not unlike national regulatory authorities, such as the SEC.  Is this the purpose of religion . . . of any religion . . . to get in the way of Capitalism?  Is religion . . . any religion . . . trying to empty the Atlantic Ocean with a spoon -- by trying to getting in the way of Capitalism?

Is Capitalism "the one-true religion?"  God forbid!  Or, is it just more powerful than any religion?

Wednesday, November 12, 2014

Room To Run

Five or ten years ago, there were frequent commercials on business TV networks to use "trend-channel investing."  I always chuckled, as it was just a minor variation of traditional technical investing, which relies solely on chart patterns to determine a stock's value.  Nonetheless, while I think technical investing is more akin to voodoo investing, I still find it interesting.

From a technical standpoint, the Dow has plenty of upside.  Take a look at this chart:

Chart of the Day

You can easily see the dramatic drop in October and sudden reversal to record-highs now.  It bounced off the green support line but still has plenty of room to run before it hits the red line.  If it does hit the red line, technicians will likely argue it is time to sell.

A similar chart for small-cap stocks would be more interesting.  Historically, they out-perform large-cap stocks over the long-run but are more volatile.  This year, small-caps are greatly under-performing large-cap stocks and are due for a reversal.  

Yesterday, the National Federation of Independent Businesses (NFIB), which represents really small businesses, released their survey of small business optimism and it show improvement, especially in (1) higher expected rel sales, (2) current job openings, and in (3) the number of "hard-to-fill" jobs.  What else really matters?

As long we remain in the upward-sloping channel between the green and red lines, the forecast looks good.  So, enjoy the ride up . . . but remember to remain calm when the ride down begins! 

Tuesday, November 11, 2014

Changing Face of Veterans

Decades ago, my father observed that some families have veterans and some do not.  Because I could quickly think of a couple of exceptions to this, I dismissed it.  But, over the years, I have found that it is indeed more often correct than incorrect, and I don't know why.

I suppose that parents in non-veteran families put more pressure on their kids to stay out of military service than do veteran families.  In addition, because there is no family tradition of military service, it is probably never even considered as an alternative. That does not mean that non-veteran families are less patriotic.   It does mean the kids of those families have less opportunity for growth.

As my years of military service surely galvanized me, it is sad to see young people today missing that opportunity, but the needs of the military must come first, and the military just doesn't need to raise young kids for a few years.

In my family, it was always assumed that I would eventually serve.  My grandfather served in World War I.  My father served in World War II.  It never crossed my mind that I would not serve at some point.  That point came after a minor football injury required me to stay off my feet for a week, during which time I listened to Day for Decision and Ballard of the Green Berets - over and over - on the radio.  When that week was over, I enlisted.

Since then, I do think the percentage of American families with veterans has decreased, as so many more of our servicemen & women are now full-time adult professionals, and there is no more draft.

As much as I applaud Secretary McDonald's efforts to reorganize the Veterans Administration, he is doing so at a time of peak usage.  The number of veterans is expected to decrease from about 22 million to only 14 million over the next thirty years, as the World War II and older Vietnam-era members die off.  And, as a percentage of the population, the number of veterans will continue to decrease even more.  Unless, of course, we have a few more large-scale wars . . . 

Sunday, November 9, 2014

The Cornered Rat

Most psychologists believe that a healthy male ego is good for a man.  It makes them more confident, competitive, and committed to doing a good job.  Most women believe a little may be good but too much is awful.  At some point, a healthy male ego can morph into egotism, which is characterized by an exaggerated self-worth.  Sometimes, egomaniacs can also be egocentric egomaniacs, which is characterized by an exaggerated self-worth combined with insensitivity to others.  The world revolves around them, or so they think.

Vladimir Putin is an egocentric egomaniac, which makes him very dangerous.  If you think a cornered rat can become vicious, just imagine how a cornered egocentric egomaniac would react, especially one with nuclear weapons.

Russia is in terrible shape and getting worse.  Just last week, I gave a lecture and talked about the 20-20-20 problem of Russia.  The Russian ruble was down 20%, their stock market was down 20%, and their unofficial unemployment rate was 20%.  I lectured that no leader can survive in the long term in such a bad economy.

Since then, it has gotten worse.  The ruble is now down 30% and still dropping.  This is inflationary for the Russian people, as the price of imports has risen 30%.  It is called "importing inflation."  To control this descent, the Russian central bank has started spending their precious national reserves to buy rubles.  It is estimated they spent $10.5 billion last month alone and only have $428 billion left.  That $428 billion amount is meager, as it is used to pay for all their imports.  They simply cannot afford to support the ruble very long.

Another means of supporting your currency is to increase interest rates in your country, which keeps more money from leaving the country and hopefully attracts money from outside the country.  Russia has already done this, increasing 1.5% last month without slowing the descent of the ruble.  Russian borrowers cannot be happy about paying higher interest.

Although it cannot be documented, it is widely believed much of those selling rubles and buying dollars, driving down the price of the ruble in the process, are Putin's "friends" who are deserting him due to his inevitable downfall.  Sometimes, economic sanctions work, and sometimes they don't.  They have worked very well in this case.

To keep the Russian people from focusing on their economic misery, Putin has undertaken military adventurism to dominate the headlines and cause the Russian people to "rally behind the flag."  He sent tanks into the Ukraine last week.  He sent Russian fighter jets on unauthorized over-flights of western allies.  Norway has been searching for what they believe is a Russian submarine in their waters.  The margin for error increases with military adventurism.

From an investment approach, one could increase the share of their portfolio allocated to defense companies.  It is not prudent to sell the S&P short without "insider information" from Putin himself.  The only other defense is to sell and sell quickly to hide in cash.

But, don't forget the old admonition from the Napoleonic wars -- to sell on the rumors of war and buy on the sound of cannon-fire.

Just be glad you don't have the problems of Putin!  Of course, egocentric egomaniacs believe they can handle any problems.  Too bad that's not true . . . 

Saturday, November 8, 2014

Denim Dependency

Among my many blessings is that I don't suffer from Denim Dependency.  This dreadful disease is very painful to victims, who experience great pain when their legs are not wrapped in denim.  Apparently, it is quite painful to pull up any pants that are not made of denim.

Worse, the disease is spreading wildly.  Victims of Denim Dependency can be found anywhere.  In pursuit of more customers, most fancy restaurants now permit victims to wear jeans while dining.   Recently, I saw two couples wearing jeans to the memorial service for one of their relatives.  Last Sunday in church, I saw three couples wearing jeans and said a little prayer of thanksgiving that they were wearing jeans and therefore not suffering.

Fortunately, victims of Denim Dependency already have the right to marry, but I have noticed their children also frequently suffer from this disease as well.  Maybe, they should not be allowed to marry and pass this disease to their children?

Apparently, the only known cure is golf.  I say that because the club where I play does allow jeans into their fancy dining room but not on the golf course.  Therefore, I assume the desire to play golf helps to overcome this dreadful dependency, but that is only speculation.

Predictably, as the number of sufferers increases, they have now begun asserting their civil rights.  These victims become quite indignant if told they cannot wear jeans EVERYWHERE.  Any place that prohibits wearing jeans is guilty of discrimination against victims who NEED denim.  It is inevitable that we will soon see the National Jeans Party, whose objective will be to defend their right to wear jeans in all places and at all times, even to the presidential inauguration.  Wouldn't that be nice?

Friday, November 7, 2014


That is the headline -- 5.8% unemployment rate last month!  While that's certainly good, it is not enough of the story.  It is a good story!

Total jobs produced last month were 214 thousand, of which 209 thousand were in the private sector, leaving only 5 thousand government jobs being produced.  Certainly, no "make-work" job creation!

The labor force participation rate increased slightly from 62.7% to 62.8%.  This is the percentage of the labor force that is either employed or looking for a job.  As the job market improves, those who have given-up slowly return to the workforce.  Think about this:  only 2 out of 3 people between ages 18 and 65 are employed or looking for a job.  One out of 3 either work in the home, are students, or are just too lazy to work in a candy store?  Some are simply psychologically dysfunctional.

Happily, the U-6 level of unemployment dropped from 11.8% last month to 11.5% now.  It was 13.8% this time last year.  This measure includes the 5.8% who are unemployed plus those people who are working part-time but want to work full-time.  It has been the most stubborn measure of employment to recover from the Great Recession.

There is no hiding from the fact that the job market continues to improve at a good, sustainable rate.  Nonetheless, a survey last month showed that 62% of those surveyed thought the economy was either somewhat poor or very poor!

I just don't understand that 62%.  Do you?

Thursday, November 6, 2014

Improving Cure-All

All schools of economics believe the magic cure-all for almost everything is productivity growth.  If the rate of inflation is too high, increasing productivity will tame it.  If the national debt-to-GDP ratio is too high, productivity growth will tame it.  It could probably cure the common cold as well?

It is one of the most important of the 130 pieces of economic data released each month, and I watch it closely.  It has averaged 1.6% since the current recovery began in 2009.  The latest data is a stronger-than-expected 2.0%.  That is much more than a "green sprout."  It is a small green tree!

Increasing productivity means business is getting more results with the same amount of resources.  It means workers are producing more products at a faster rate than their wages are increasing.  It means an improved profit margin.  It means greater corporate profits, which is the "mother's milk" of stock prices.  It means a rising stock market.

Because there is so much agreement on the importance of productivity growth, it is not surprising that government has tried to boost it.  Unfortunately, there is little they can do.  Every few years, they look at an investment tax credit for machinery purchased to increase productivity, but beyond that, there is little else the government can do.

Frankly, it doesn't look like it needs any help from the government.  Productivity is growing nicely.

Lowering The Bar

One of the more perplexing things about our wonderful country is that any fat, undisciplined, under-educated, morally-immune thug has the right to vote, to buy a gun, to own a dog, to become a parent, and to make a living.  If they have the gift of gab, that thug can be promoted to media thug.  If they can use simplistic sound-bites, instead of a nuanced discussion, to demonize anybody who disagrees with them, then they can become a fabulously wealthy media thug.

I was appalled to hear a fabulously wealthy media thug say the new Republican mandate was not to govern but simply to destroy the President!

Whatever happened to the Republican Party of Ronald Reagan?  He was so strongly opposed to greater government involvement in our lives.  He described America as a "shining city on the hill."  But, I don't recall him ever demonizing anybody.  He raised the bar, the standard by which politics would be conducted.  Today, Reaganites are derisively dismissed as mere "country club Republicans."

If WWJD means What Would Jesus Do, then WWRS means What Would Ronnie Say . . . especially about his standards being lowered so shamefully?

Wednesday, November 5, 2014

Getting What We Wish For

Students of the Weimar Republic invariably remind us that the seeds of the next war are planted in the ashes of the last war.  A fair paraphrasing of that would be:  The seeds of the next defeat are planted in the ashes of the last victory.

Now that the Republican Party has full control of Congress, there is an understandable urge to over-reach.  But, how will we know when they are over-reaching?

No, stop for a minute!  How will we know when they are over-reaching?  What has to happen before we know they have over-reached?  Because . . . that is the point when they start planting the seeds of defeat in 2016.

Have you answered the question yet?

Timing Is Everything

The more I think about it, the more impressed I become with the Fed's timing to end quantitative easing (QE).  When they ended QE1, the stock market dropped scarily, and the Fed quickly resumed quantitative easing with QE2.  The stock market soared.  When they ended QE2, the stock market took another ugly spill, and the Fed felt forced to resume quantitative easing once again with QE3.  Again, the stock market soared, suggesting to some that the stock market had become dependent on the liquidity afforded by quantitative easing.

However, I am convinced the Fed wants out of quantitative easing permanently and does not want to conduct QE4.  So, when should the Fed get out of QE3 without upsetting the stock market?

The months of November, December, and January are historically the best months for the stock market.  So, ending quantitative easing just as the best three months for the stock market begin makes a lot of sense.  But, what else?

As mentioned in an earlier blog, the new liquidity rules for money-center banks require enough immediately-liquid securities be held to cover 90-days of operation, which increases the demand for Treasury bonds by money-center banks at the same time that the Fed is buying less.  (A special exception also included mortgage-backed securities within the definition of immediately-liquid.)  The result is that liquidity in the marketplace should not be reduced with Fed's reduced purchase of Treasury bonds.

Last week, the European Central Bank quietly announced that the large banks of Europe would have to hold a full-year of operating cash in the form of immediately-liquid securities, which further increases the demand for U.S. Treasury bonds.  This virtually assures stock markets worldwide will continue to have plenty of liquidity.

Yes, it is possible all these events are mere coincidence, but I don't believe that for a second.  Maybe, not everything that happens in backrooms is bad?

Monday, November 3, 2014

Jumping the Shark

In 1977, there was a scene in the popular television show Happy Days where the always-cool "Fonzie" was water-sking in his trademark leather jacket and literally jumped over a shark.  Afterwards, the television show went into decline and soon disappeared into TV history.  But, the phrase has come to mean a "tipping point" in cultural acceptance.

Sunday, we attended the "Book of Mormon" play and wondered if we had witnessed a "jumping the shark" moment or not.  That play is brutally funny about all things religious, maybe more brutal than funny.  If it was a "jumping the shark" moment, would that mean that stereotypes of all things, people  and symbols religious have peaked in popularity and will decline, or does it mean that caricatures of those stereotypes of those things have peaked in popularity and will now decline?

Written by the creators of the TV program South Park, which is either brilliant or stupid but always politically-incorrect, I do suspect that the "Book of Mormon" represents either the zenith of disrespect for organized religion or the nadir of respect for it.  Either way, it is a cultural tipping point, indeed.

Thursday, October 30, 2014


You'll remember the basic logic from Economics 101 that decreasing demand for a product will cause the price to fall, assuming the supply of that product is relatively fixed.  Likewise, increasing demand will cause the price to rise.  On the other hand, increasing supply will cause the price to fall, assuming the demand for that product is relatively fixed.  Likewise, decreasing supply will cause the price to rise.

The same basic logic applies to U.S. Treasury bonds.  The announcement by the Fed that Quantitative Easing (QE) will end this month means the demand for bonds will decrease by $15 BILLION next month, which suggests that interest rates (the price of the product) will fall.

Then, the basic logic breaks down.  It has never happened that the Federal government was unable to sell all the bonds it wanted, because they simply raise the interest rate enough to entice more buyers.   The bad news is that paying increased interest expense is taking money out of taxpayers pockets.

So, who will take the place of the Fed to maintain demand for Treasury bonds and mortgage-backed-securities (MBS), to keep interest rates from rising too much?  Conveniently, one of the new banking requirements is increased holding of liquid securities, such as Treasury bonds and MBS.  This liquidity requirement is at least 30 days of operation held in highly liquid assets, and banks must be "mostly compliant" by year-end.

(At the same time, don't forget the supply of new Treasury bonds has fallen by two-thirds since the global financial crisis.  In other words, the Treasury doesn't have as many bonds to sell each month as they did when QE started.)

In mid-November, there is a meeting of the G-20 in Australia, which is likely to also require some increased liquidity requirement on banks worldwide, further fueling demand for U.S. Treasury bonds and MBS.  Isn't that convenient?

While the end of QE does frighten the stock market, it will pass.  Interest rates will not soar.  The world will not end. 

Wednesday, October 29, 2014

He Said -- She Said

There are at least 130 economic indicators each month, but there has never been a time when all 130 indicated the same condition of the economy.  Considering all the different organizations producing all these indicators using different methodologies, it should not be surprising, but it can be confusing.

For example, the latest report on durable goods disappointed with a 1.3% decrease, despite the fact it was expected to increase 0.5%.  This is a significant difference and could suggest a turning point in economic growth.  The same day, we learned that consumer confidence rose unexpectedly to 94.5, which is the highest level since 2007.  This could suggest a strengthening economy, since consumer spending is 67% of GDP.  So, what is a person to believe, with two economic indicators indicating different things?

One approach is to do a "deep dive" into the data, where you would find the durable goods number was skewed by the wildly volatile category of non-defense aircraft, which fell 16.1%.  The other categories were relatively as expected.  So, the drop in durable goods is not as alarming as it first appears.

Diving deeper into the consumer confidence, it is clearly dependent on two factors, i.e., the improving job market and falling gas prices.  Reverse either and the level of confidence will decrease.  One worrisome piece of data is that the percentage of people planning to buy a house dropped from 5.5% last year to 5.1% now.  So, the increase in consumer confidence is not a reassuring as it first appears.

Another approach to understanding conflict among the 130 economic indicators is to simply talk with your friendly neighborhood economist and ask for his/her "gut-feel" only.  If you ask for more than his/her gut-feel, grab a cup of coffee and sit down -- you'll be there awhile.

Saturday, October 25, 2014

The Joy of Spanking?

My father used to joke with other parents that the reason I was such a good student was because he would spank me every week, whether I needed it or no.  His logic was that it was good for a kid to be humbled ever so often.  Of course, he was joking!

But, I still think about that with respect to both the economy and the stock market.  Both need to be humbled ever so often.  Over the long run, a recession is good for the economy, and a correction is good for the stock market.  We're overdue for both!

The Index of Leading Economic Indicators (LEI) was released this week, and it was surprisingly strong.  There is still no recession in sight.  There are ten components to the LEI, and nine were up, especially bank lending.  (Some think the huge reserves generated by Quantitative Easing has finally overloaded bank balance sheets so much they HAVE to make loans.)  The only component that was down slightly was consumer expectations, which is not surprising, given the steady force-feeding of PIE (Putin, ISIS, and Ebola).

The stock market enjoyed a scary, brief 6% correction (which is technically not a correction at all), but the bulls seem to be in-charge once again.  As a kid enjoys the reprieve between spankings, I guess we shouldn't complain.

Wednesday, October 22, 2014

View From THE Vampire

The excellent Research Department of the once-excellent Goldman Sachs has released their latest projections.  Here is a sampling:

1.  The U.S. economy is the economic engine of the world again.   (Agreed!)
2.  Our economic recovery still has room to run.  (Agreed!)
3.  GDP growth next year was reduced to 3.1%, which is still good.
4.  Unemployment will end 2015 at only 5.4%, which would be great.
5.  Inflation this year & next year will remain less than 2%.  (Agreed!)
6.  Ten-year-Treasury yields will end this year at 3.0% and next at 3.5%.  (Disagree!)
7.  The S&P 500 will end this year at 2,050 and next year at 2,100.
8.  Gold will end this year at $1,050 but rise to $1,200 next year.  (It's about $1,240 now.)
9.  The dollar will continue to appreciate through next year.

I do wish they would discuss how long monetary policy can propel this country alone, with no help from fiscal policy.  However long that period is, it is getting shorter every day.

Monday, October 20, 2014

Don't Ask Me Why

Despite being born and raised in the South and despite being named to play "Uncle Remus" in an elementary play due to my strong southern accent, I have never considered myself to be a "southern boy" or "good ole boy" of any type.  But, it troubles me that employment data from the South is less clear than employment data from the rest of the country.

Generally speaking, the rate of unemployment has been dropping all across the country since 2009.  But, in the last six months or so, it has risen in three southern states, i.e., Georgia, Tennessee, and Louisiana.  The predictable political response from the three Republican governors was that the Democratic administration was "fudging the numbers" for political purposes.  Of course, that not only assumes set-for-life-bureaucrats will choose to become criminals but also begs the question of why fudge the numbers for those three states and not other states with Republican governors, such as Texas.

Digging deeper, the other employment indicators, such as new unemployment filings, home purchases corporate hiring, etc., don't support the higher unemployment rates in those three states.  The economy in each of those three states is definitely growing.  The most common belief is that the labor force participation rate is increasing.  In other words, people in those three states are now more optimistic about getting a job and returning to the labor force but at a faster rate than they are being hired or absorbed into the labor force.

Digging still deeper, the unemployment rate is a blend of two survey techniques, i.e., the payroll survey and the household survey.  Now, the payroll survey is based on payroll taxes paid, supplemented by phone calls.  That survey shows continued job growth and falling unemployment in those three states.  On the other hand, the household survey is conducted by calling random phone numbers and asking how many people in that household are looking for work or have jobs.  It is the household survey that is driving up the unemployment rate in those three states.

Does that mean the phone canvassers have called disreputable random numbers for six straight months?  That is a remote mathematical possibility -- very remote.  Or, does it mean that random households in those three states hate the government so much that they lie as a matter o f principle?  But, why only those three states?  I don't know . . .