Friday, July 29, 2016

Real Men Don't Cry

Real men don't cry!  Yet, tears rolled down my cheeks last night.  Nothing - absolutely nothing - brings me to tears quicker than our American soldiers.  I am sorry for the loss of every person, every adult, every child and even animals.  But, I don't cry . . . except for our soldiers.

Last night, the quiet dignity, grace and barely-contained-rage of Khizr Kahn from Charlottesville brought me to tears, as he remembered the brave death of his 27-year-old son in Iraq, a Muslim Army Captain who laid down his life for his Christian troops.  I felt his pain, I felt his rage . . . and I cried.

The powerful emotional tug was not surprising.  That it occurred during a partisan attack was both surprising and disturbing to me.  My unrelenting cynicism of partisan blathering just melted away.  With sunrise, my brain has now silenced my heart, and I can feel the cynicism returning . . . thankfully.

Thank you, Mr. Khan!  Thank you for sacrificing your son for us!  Thank you for your powerful speech last night.  But, I never want to hear it again!

Thursday, July 28, 2016

The Most Common Question

Everybody lives in fear . . . of something!  Investors live in fear of sudden market crashes (even though each has been followed a recovery).  They have vivid memories of the Crash of 1929, the Crash of 1987, and the Global Financial Crisis of 2008/9.  As long as the bulls run, there will be an increasing fear that "the end is near."  It is the most common question I receive.

The shorthand method of explaining whether the market is over-priced is by examining PE ratios.  A Price-Earning ratio is the market price of a stock divided by the earnings-per-share of that stock.  For example, if a stock is earning $10 per share, while the value of that stock is $100, then the PE ratio is ten.  Aggregating all those individual stocks into one number is a reasonable indication of whether the stock market is over-priced and likely to soften.  (While analysts have devised variations of a PE ratio, this is still the most common shorthand method.)

Historically, we've said the market is overpriced when the PE ratio rises above the 16 - 18 range.  Today, it stands at 20, making it overpriced.  However, the PE ratio for the energy stocks is a whopping 53.  That means the fall in stock prices of oil companies has not kept up with the fall in oil prices.  There is no equilibrium in the energy sector, causing an abnormally high PE.  This skews the average PE higher for the whole stock market.  If you factor out the energy sector PE, the overall PE ratio is only 16.

So, the market is not overpriced.

That does not mean the stock market will not soften, because IT WILL . . .  at some point.  It will strengthen and soften mildly with the normal ebb-and-flow of investment dollars sloshing around, but I don't believe the stock market will soften because it is overpriced . . . today!

Tuesday, July 26, 2016

Live Luggage

As anybody who has boarded an airplane recently knows, passengers have almost as many rights as their suitcases in the hold.  There is a website that follows this issue, i.e.,

Here is a copy/paste from today's email from them:

Dysfunctional Relationship
The Reason for Congressional dysfunction
July 26, 2016

To put it briefly, it's minority rule. In the House, under the Hastert Rule -named for a disgraced  former Speaker - legislation cannot be voted on unless a majority of the majority approve.
So, as little as 26% can block votes. In the Senate, as explained to me by former Senate Republican Leader Bob Dole, unanimous consent is required for most votes. Any one senator can place an indefinite and anonymous hold on legislation and the mere threat of a filibuster normally stops the Senate cold.

These congressional rules used by both parties thwart majority rule and popular will in a way never imagined by the Founding Fathers and not supported by anything in the Constitution.

They enable partisan factions, or even a single member of Congress, to block legislation and even shut down the government. When approval of a governing legislature sinks to single digits in other countries it often leads to revolution or a coup.

Short of that, or a state-called constitutional convention, both parties and both presidential candidates should make restoration of majority rule in Congress a cornerstone of reform for 2017.  

Otherwise it will be SOS going forward, as practical, popular and needed legislation is continually smashed, needed compromises cannot happen and American government will continue as by and for entrenched special interests. 

Paul Hudson
Sarasota, Florida

Aging Investment Clubs

Years ago, I had lunch in the historic Old Ebbet Grill across 15th Street from the White House and next to my office at the corner of New York Avenue in Washington, D.C.  I was with two security analysts - genuine nerds - who got into a rather heated argument as to whether Merck (MRK) or Pfizer (PFE) was a better stock to own.  From memory, they were actually quoting footnotes from the financial statements of the two companies.  I was amazed.

To me, it was the perfect example of classic security analysis, originated by legendary Benjamin Graham in his aptly-named Security Analysis back in 1934, who was incidentally the mentor to Warren Buffett.  He advocated extensive, never-ending analysis of all financial statements.  There is still general agreement among investment analysts that this is very important - important as the basic foundation of general security analysis.

Investment clubs sprouted all over the country, composed of individuals willing to share the work of studying so many different financial statements.  Over time, they earned a good reputation for investment performance, often beating the professionals.  Club members were justifiably proud of their portfolios.  But, their performance has started to falter.  Unfairly, some has suggested the problem is the advanced average age of the investment clubs, but that is incorrect.

The real problem is that basic security analysis started developing after the year 1934, during the industrial age and long before the information age.  (Read Alvin Toffler's The Third Wave.)  It was during this period that generally accepted accounting standards (GAAP) were also developed.  Despite honest efforts of the accounting standards board to evolve, GAAP just doesn't help very much in the evaluation of non-industrial companies.

When the company name is so ubiquitous it becomes a verb, like Google (now Alphabet), what is the value of that asset?  When the company name becomes dominant in an industry, like Facebook dominating social media, what is that worth?  How do you amortize the front-end costs of getting new subscribers, like Netflix?  Industrial age accounting is actually an obstacle to evaluating information age stock.

My advice to all investment clubs is to put down the financial statements, take off your bifocals, recruit more teenagers, and actually listen to them.  (I know, I know . . . I don't like doing that either.)

Wednesday, July 20, 2016

R.I.P. (Run-In-Peace)

Thirty-two years ago - today - one of my personal heroes died, at the tender age of 52.  Like many veterans, my physical conditioning slowly faded away after leaving the military.  Then, in 1977, Jim Fixx wrote The Complete Book of Running, helping me lose 20 pounds and regain some of that lost-fitness.  Ironically, when he died, the lean, muscular runner . . . was running.  One day, everything was fine, and the next day, it wasn't.

In 1996, Hyman Minsky died.  He was an American economist, arguably a Keynesian economist, even though he often sounded like an Austrian economist.  He developed the notion that borrowers would keep borrowing money until they couldn't.  In other words, the balloon will keep expanding until it finally bursts.  That moment of bursting is now called "'the Minsky moment."  We saw such a moment in 2008, following the subprime crisis.  One day, everything was fine, and the next day, it wasn't.

In 2007, Nassim Nicholas Taleb wrote the instant classic Black Swan:  The Impact of the Highly Improbable.  He explained the advent of bad things as (1) surprising, (2) sudden and (3) obvious only in hindsight.  The global financial crisis of 2008/9 illustrated his theory perfectly.  One day, everything is fine, and the next day, it isn't.

The philosophical point might be to enjoy every minute of every day, as everything could change in a heart beat.  The investing point is that the "buy-and-hold" strategy -- holding investments throughout all bear markets because the stock market always comes back -- applies only during normal garden-variety recessions, not during Black Swan events.

Now, get out there and enjoy THIS day!  Do it for Jim . . .

Tuesday, July 19, 2016

A Stumbling Giant ?

Italy is one of the ten largest economies in the world, and it is the weakest.  Real GDP is the same now as it was fifteen years ago.  The heart of any economy is the banking system, and Italy may have the weakest.  Remember how low stock prices were in January of 2009?  The share prices of Italian banks are already 60 percent lower than that!  Bad loans (which become direct charges against the capital account when written-off) stand at 8 percent and could rise to a staggering 15 percent this year.  If so, watch out!

Early this year, I was worried about Glencore, the U.K.-based commodities giant, posing a global financial threat.  Fortunately, they sold enough assets quickly to avoid that fate.  Now, I'm worried about the Italian banks.  The combination of under-capitalized banks with as much as 15 percent non-performing loans in a nation with no productivity growth, an aging population, and lavish entitlements . . . . . what could go wrong?

What could go wrong are the credit default swaps, sold to protect bondholders against losses in bonds issued by the Italian banks.  Nobody knows who is "holding the bag" and must absorb those losses.  Therefore, nobody knows which of these derivatives may "blow-up."

Analysts point out that direct U.S. exposure to Italian banks is only 0.4 percent of bank assets, but that reminds me of Ben Bernanke saying subprime mortgages only represented 1 percent of all mortgages in this country and look what happened.

The next pivotal date is July 29th, when European authorities will release results from a stress test of their banks.  If it calls for a major re-capitalization, the stock market will over-react.  If it does not, I will be even more worried.

Monday, July 18, 2016

Pet Peeve #139

Are engineers the only travelers permitted to take showers?  When I grew up, it was easy to turn the shower on and set just the right temperature.  Today, in an effort to be "new and trendy," hotels compete on having exotic hardware in the bathrooms.  I'm sure that costs the hotel a little extra, which is embedded my bill somewhere, which means I'm paying more to rent a shower I cannot figure out.  After all, I only have three college degrees and two certifications . . . but I have no degree
in engineering.

Remember:  Don't just innovate - design something totally unnecessary!

Pet Peeve #207

Is there no place to hide from pollution?  I'm talking about political pollution!  Are we so polarized that we must carry our political leanings onto the beach with us?  Does beautiful weather on a July Sunday afternoon compel true-believers to strut their opinions?  What is the point anyway?  Do they think they will change somebody's opinion?  Do they think this is just another silly game?

Of course, in a state where you can carry a gun into church, why wouldn't you demonstrate your politics on a beach?

Merely being legal . . . does not mean it is in good taste!

Sunday, July 17, 2016


Warren Buffett has said you should buy the stock of a company when you like it and sell it when you don't like it.  His point was to ignore the stock market as a whole.

Some investment managers like to invest on the basis of "drivers" or things that will drive the value of a stock upwards.  Examples are stock buybacks, takeover rumors, or activist interference.  (This is sometimes called "factor-based" investing.)   Guess what -- so far this year, 82 percent of those investment managers have under-performed the Russell 1000 index, which is huge!

It appears there are too many investment managers chasing the few companies that have one of these characteristics or "factors."  These causes stocks with those characteristics to become "crowded."  The ten most crowded stocks under-performed the ten least crowded stocks by a whopping eighteen points so far this year, which is also huge.

This re-ignites the long-running debate as to whether professional investment management is worth the cost or whether the investor should simply buy the index.  The research on this is voluminous, and it is easy to argue both sides.  My observation is that simply buying the index is fine in a bull market but not in a bear market.  Of course, it is always convenient to have a professional manager when making that decision.

Besides, if 82 percent of managers did not beat the index this year, that means 18 percent -- or one out of five managers -- did beat it.

Friday, July 15, 2016

Justice ?

The Dow would be a breath-taking 1,200 points higher today, except for the twelve companies that have been LOSERS since its last high in May of 2015.  The biggest LOSER is the investment giant, Goldman Sachs, which is quite highly respected at Goldman Sachs.  It's value has dropped a whopping 23% and accounts for 327 of the 1,200 points.

One answer to the rhetorical question of "why do bad things happen to good people" might be . . . that bad things sometimes happen to bad people.

Wednesday, July 13, 2016

Grizzled Faces

The Veterans Administration receives much well-deserved criticism, but I value it anyway and chose to receive my own medical care there.  Veterans are only 7% of the U.S. population, a all-time low.  Yet, inside the VA system, it is 100%, and I enjoy the company.  Veterans tend to treat each other with respect and care.  It is not an "I love you" kind of care and more of a "how can I help you, man" kind of care.

Whenever you generalize, you are likely to be both factually wrong and morally wrong.  All people, even veterans, are unique.  Nonetheless, I will generalize about the differences I've observed in the generations of veterans.

The World War II vets were younger when they entered the war and usually did so with "unit integrity".  That means they trained as a unit, went to war as a unit, and returned from the war as a unit.  They were indeed a band-of-brothers.  Their initial mindset was one of shock at the enormity of the war.  Upon discharge, they seized "their American Dream" of a house, a family, and a pension.  Today, they bask in an ocean of accolades and gratitude.

The Korean vets are the invisible vets of an especially brutal war.  You seldom run across them in the VA system, probably because they are few, relative to other war veterans.  They were older than WWII or Vietnam vets when they entered war.  They were step-vets of the WWII vets and followed in their footsteps upon discharge.  Today, they have contented themselves in the reflected glory of the WWII vets.

The Vietnam vets were also young but rotated in-and-out of units, with no unit integrity and no opportunity to bond with others -- no band-of-brothers for them.  Their initial mindset was one of "what am I doing here?"  Upon discharge, they used too many drugs and drank too much alcohol, before reluctantly getting on that American Dream stuff.  Today, they often simmer in resentment and betrayal.

The Iraq vets and the Afghanistan vets are very different.  They were older when they entered war.  They did enjoy some unit integrity and found some brotherhood in their units.  Because they have often served multiple tours, they have a more resolute grimness than other veterans.   Their attitude is professional -- maybe too professional.  They know the horror of war and have accepted it.  It has become part of them -- part of who they are and what they are.  They resent the hollowness of the perfunctory "thank you for your service."  I worry about these vets and am not surprised PTSD is killing so many of them every day.

My father always told me that "a person has to live in their own time."  The same is true for veterans, but the times may have changed the veterans.  The Korea vets and the Vietnam vets will never get the respect they deserve, but I pray the Iraq vets and the Afghanistan vets get the medical care they need and deserve.

Tuesday, July 12, 2016


If you are confident, then you are more inclined to invest more of your hard-earned cash into stock investments.  If you are uncertain, you are less likely to do so.  That is the reason the stock market hates uncertainty so much.

Historically, the stock market just drifts the first half of presidential election years and then rallies strongly, as uncertainty about the election decreases.  That uncertainty usually begins to decrease well before the election.  It is irrelevant if a Republican or Democrat wins, as long as uncertainty about the election begins to decrease.

A few days ago, I wrote about the reasons for the strong, post-Brexit "melt-up" in stock prices.  Since then, I've become suspicious that the stock market has become convinced that it knows the winner in November and expects it to be Clinton.  If that is correct, there is every reason to believe the stock market will end the year higher.

Of course, don't forget the Brexit election!  If the stock market gets surprised with a Trump win, it could repeat the frightening stock drop -- but larger.  Hopefully, an unexpected post-Trump election win and resulting market drop would be followed by another post-Brexit rally like we have just seen.  Wouldn't it be fun to ride that roller coaster again??

Sunday, July 10, 2016

The Only Game In Town

Given that the stock market over-reacts, the reaction of the stock market on Friday was interesting.  The monthly jobs reports indicated 287 thousand jobs were created last month, compared to expectations of about 170 thousand jobs.  It was a great surprise, and the Dow picked up 250 points that day.  At first blush, 250 Dow points was just the market over-reacting to one monthly report.

But, it is more interesting than that.  Friday was the same day the world was reacting to the tragedy in Dallas.  How many more points would the Dow have picked up without that tragic overhang?  A bigger over-reaction, maybe?

Is there any relationship between the Dow's reaction on Friday to the amazing "melt-up" since the aftermath of the Brexit vote?  Yes, money is leaking out of Europe and coming to the U.S.  Yes, investors around the world are moving funds out of Europe.  They do not have the option of switching to "less risky" bonds in Europe or Japan, because interest rates are negative.  That means the investors are guaranteed to be repaid a smaller amount than they loaned out.

And, since the average dividend paid by the S&P 500 stocks is not negative, it is a much better return than negative-interest-rate bonds in Europe and Japan.  Indeed, S&P dividend rate is higher than the interest rate investors can earn on 10-year U.S. Treasury bonds.

If you are an investor with funds in Europe, where will you move those funds to negative-interest-rate bonds in Europe or Japan or dividend-paying stocks in the U.S.??

Duh . . . !

Saturday, July 9, 2016

Feeling For Big D

When I worked for New York-based banking giant Citibank in downtown Dallas, it was a common joke that America was simply "fly-over" country between big cities that actually matter, like New York, Chicago, Dallas, etc.  It was stereotypical to think of the urban cities as civilizations with barbarians banging on the gates.  Indeed, we referred to Dallas as "Dallas, USA" because it didn't seem to really belong in extremist Texas.

The ambush of Dallas police officers leaves me heartbroken.  It was not an external assault by the great unwashed, uneducated masses in the Texas countryside.  It was an internal assault by a different set of unwashed, uneducated crazies.  The fact that this tragedy was just another crazy guy with a gun should not obscure the cancer of race relations in America, which has been growing all my life.  It defies cliche-thinking.

The problem of race relations is not a simple matter of racism.  One other factor is that police departments have been saddled with myriad anti-terrorism duties and supplied by the Federal government with more and better weaponry than I ever had in the Army.  The mindset of police is "to serve and protect."  The mindset of the infantry is "to kill and destroy."

Another problem is that some things really can desensitize an impressionable mind, especially young impressionable minds.  I doubt the Founding Fathers imagined freedom of speech would ever be used to produce games that glorify killing, especially to young impressionable minds.

Perhaps the biggest obstacle to solving the big problem of race relations is that it is not a unique big problem that we don't solve.  There are other big problems that we don't solve, such as reforming the tax code or making any tiny adjustment to the Second Amendment.  We cannot even schedule a vote on big problems, much less solve them.  The object of democracy is to win elections, not to solve big problems.

Mostly, I just grieve for my wife's hometown!

Sunday, July 3, 2016

National Sock Day

America is not a perfect nation, as we are reminded relentlessly, even during our national holidays.  But, the Fourth of July is different.  Unlike Veterans Day when we thank veterans for the service and unlike Memorial Day when we honor those who laid down their lives for the rest of us, Independence Day is the only day of the year, when we can simply rejoice as one nation and embrace our collective experience.  It is a good day to be happy and joyful.  You have 364 other days to complain about our imperfections.

So, as you get your hamburgers and hot dogs ready for the gluttony, grab a sock from the dirty clothes hamper and put it in your pocket.  As soon as somebody starts trash-talking America on that special day, stuff the sock in the their month and tell him to keep it there until the Fifth of July!

It really is okay to love your country . . . warts and all!

Saturday, July 2, 2016

Tension Control

Just as there is an unhealthy tension in Washington between Republicans and Democrats, there is another unhealthy tension developing on Wall Street -- between "bottom-up" financial strategists and "top-down" economic strategists.

It began after the 2008/9 global financial crisis, when the financial strategists looked at the rapidly-recovering balance sheets of corporations, who were refinancing their debt at much attractive levels.  Along with that, their income statements improved with the improving economy.  The future was bright, indeed!  Economic strategists, however, argued that this improving economy was the gift from the only functioning branch of government, i.e., the Fed, and would only last so long.  We saw Wall Street improving, at the same time as the potential for economic collapse was increasing.

A famous Keynesian economist, Hyman Minsky, sounded very much like an Austrian economist when he wrote that debt bubbles grow and grow . . . until they burst suddenly.  This is very much on the minds of the "top-down" economic strategists.

So, should you crawl into a cave, guarding your little pile of gold?  Or, should you ignore the increasing likelihood of economic collapse?  Unfortunately, that is binary "either-or" thinking.  Getting out of the market entirely is a foolish 100% bet.  Ignoring all likelihood of economic collapse is also a foolish 100% bet.  Developing the discipline and determining the triggers to exit from the market is a much more appropriate investment strategy -- one that is consistent with both the financial strategists and economic strategists.

As long as the music keeps playing, just keep dancing . . . it keeps the tension down.

But, don't fall asleep!

Friday, July 1, 2016

Just Another Long, Strange Journey

Following a very minor surgical procedure, there was a very long night, in the middle of which I watched the film adaptation of Andrew Lloyd Webber's 1970 rock opera, the iconic Jesus Christ Superstar.  Having seen the stage adaptation decades ago, I recalled the almost-humorous stylizing of the very well known classic story into the language, music, and clothes of my generation, and I appreciated that very much.  But, another thing happened -- religion became technicolor for me.

My travels through religion have added greatly to the tapestry of my own faith.  I have many Catholic and Jewish friends.  Two Shiite Muslims have even stayed in my home before.  For many decades, I've worn a small bronze medallion around my neck given to me by a Buddhist priest.  The worst hangover of my life followed an all-night drinking bout with a Shintoist priest.  The kindest soul I ever met was a tiny Quaker lady.  My tapestry is rich and nuanced indeed, for which I am grateful.

Early in this journey, I tried to absorb dogma of other religions but came to believe there was too much emphasis on form, instead of substance.  I rejected the notion that any omniscient God would care so much about trivialities.  I came to believe in the universality of frightened people trying to find some meaning for life and some reward for its tribulations.  Religion offers an elegant vehicle for that.

So, thank you Andrew Lloyd Webber.  I suppose I should also thank the doctor for doing the minor procedure, for keeping me up all night, and for allowing me the opportunity to remember how truly blessed I am!

Thursday, June 30, 2016

What, Me Worry?

The increase in consumer confidence during May surprised me.  It rose a healthy 5.1 points to 118.3, the highest since last September.  The consumers were polled following the lousy jobs report earlier this month, leading me to expect a lousy report on consumer confidence, as is normal.  (Of course, the polling took place prior to the Brexit vote, which badly frightened stock markets worldwide.)  Subsequently, the personal income report showed a 2.4% annualized increase in both income and personal consumption expenditures.  No wonder their confidence soared!

This was a good sign, as the consumer has not bounced back from the 2008/9 financial crisis as well as the economy has bounced back.  The recovery has not been widely distributed.  Maybe, that could be changing, I hope.

Further, the Fed's preferred inflation indicator, the PCE Deflator, held at 2.4%, which reassures the Fed that deflation is not sneaking back.  (Remember, it is easier to defeat inflation than deflation.)  This theoretically makes it easier to raise interests rates, which is still a very low probability in this environment.

The open question is whether the Brexit vote will damage consumer confidence in America.  I doubt it, because Brexit was just a temporary tremor to "Joe Sixpack," who doesn't see the long-term threat. And, that's okay!  Be confident and SPEND!

Wednesday, June 29, 2016

Sideshow or Slideshow ?

For those of you smart enough to miss my June 14th presentation to the Hampton Roads Association for Financial Professionals, here is a link to their website, where you can click on the slideshow: 

It could be worse . . . they might have put the video online!

Tuesday, June 28, 2016

Miscellaneous BREXIT Thoughts

First, polling in the U.K. has never been as scientific as it-used-to-be in this country.  With the tsunami of cell phones and the now-stylish disdain for anything remotely "establishment," the percentage of the population actually surveyed has been dropping steadily for years in both countries.  In the U.K., it was thought that the betting odds were a more reliable indicator of the pending BREXIT vote than the polls.  Both indicated that the REMAIN voters would prevail, and both were wrong.  Next time, lick your finger and hold it up in the breeze!

Second, power, influence, and money normally transition from one generation to another in a slow, quiet, predictable manner.  In the U.S., there is considerable resentment among millennials toward "the greatest generation" which has burdened the millennials with unimaginable debt to pay for entitlements like Social Security and Medicare benefiting the seniors.  That resentment also existed in the U.K., but it just got much worse.  The young voted to REMAIN, while the old voted to LEAVE.  The U.K. millennials are now almost certainly facing a recession, courtesy of the older Brits.  Will this widening generation-gap upset the normal "quiet, predictable manner" of generational transfer?

Third, the European Union must do a better job of coordinating its compartmentalized fiscal policy with its unitary monetary policy.  Just as gerrymandering is the root of all political evil in the U.S., the lack of coordination between fiscal and monetary policy is the root of all economic evil in the E.U.  Optimists pray that BREXIT will drive home that point and start fixing that problem.  Let us pray!

American know-it-all Jim Cramer calls BREXIT "the dumbest financial mistake I've ever seen."  Another American know-it-all, Jim Flinchum, calls the lack of a unitary E.U. fiscal policy "the dumbest economic mistake I've ever seen."

Sunday, June 26, 2016

Intellectual Scapegoating

The last chapter is almost every textbook on introductory economics discusses international economics.  Unfortunately, many courses don't get to the end of the textbook, and the students miss the most interesting area of economic study.  One subject in that last chapter is always the Law of Comparative Advantage.

A full discussion is beyond the scope of this brief blog, but that law demonstrates that nations become more prosperous when they make and export their high-margin goods and import low-margin goods.  It is the intellectual basis for globalization, which I enthusiastically support.

But, notice that nations become more prosperous, not necessarily individuals, and certainly not equally.  It was always known that governments would have to provide political solutions for job retraining and relocation assistance to displaced workers.  Unfortunately, only token efforts were made.  As the misery of those displaced or disadvantaged workers increased worldwide, immigrants became an increasingly convenient scapegoat, which demands a political response, not an economic one.  Trade policy has also become a popular scapegoat, usually on both sides of the trade agreements, but that also demands a political response, not an economic one.

The bad news is that government gridlock has prevented the political solutions.  That gridlock now drives the call for political action from the halls of an impotent Congress to the bellicose campaign trail.  Government has failed to release some of the expected pressure building from globalization.  Now, we have Trump, Sanders, and Brexit!

Yes, the bathwater has been soiled with immigration and trade issues by the politicians, but I pray we don't throw out the baby, which is globalization.  Once you understand Comparative Advantage, globalization will become YOUR baby too! 

Saturday, June 25, 2016

Brexit Questions

Q.  Will the Brexit vote lead to a depression?
A.  Of course, anything is possible but is not likely:

Q.  Why did the stock market react so strongly about the vote?
A.  Wall Street likes to worry but hates surprises.

Q.  Did the British voters make a mistake?
A.  The mistake was not going far enough in creating the European Union originally.  It has control over monetary policy but no control over budgets.  That remains the fatal flaw in a worthy project.

Q.  Do you suspect the European Union will become a "slow-motion train-wreck?"
A.  Unfortunately, it already is.

Q.  Where does something like Brexit fit into your tidy little economic concepts?
A.  Recessions are normal and not to be feared.  A financial crisis is sudden and should scare all of us.  Brexit was a political "2x4 applied forcefully against the head" of the global economy.

Q.  What is the best case?
A.  There is the possibility the British voters will reverse themselves very quickly, AND the E.U. will correct their fatal flaw.

Q.  What was the most telling demographic in the vote:
A.  Young people wanted to remain in the EU, while older people wanted to leave.  I guess older people have had enough change, while younger people were thinking about the future?

Q.  What really worries you about Brexit?
A.  It happens at a bad time in the U.S.  Our economy has long been the economic engine of the world and could pull the global economy along with us, but our fiscal policy is painfully gridlocked.  At least, China can make decisions.

Friday, June 24, 2016

The Morning After . . .

During election night in 1968 between Nixon and Humphrey, I was so fascinated by the role of demographics in elections that I stayed up all night, watching the returns.  The next day, I felt so lousy that I swore to never do that again.

Last night, I stayed up all night watching the Brexit election returns in the U.K., because I could see the reaction ricocheting around the globe.  First, the pound dropped like a ten-pound rock, driving up the relative strength of the dollar.  Then, Asia currencies went . . . well . . . wacky, if that's a technical enough term.  Asian stock markets opened up strongly, following the U.S. lead, but turned around dramatically when the first election results started to come in.  Oddly, the U.S. futures market turned down before the European futures did, which I will study further.

Regardless, both the U.S. and European stock markets will take a beating today.  As promised, they will overreact.  There may be minimal structural change in the English economy for the next two years, while they negotiate a painful withdrawal from the European Union.  Hopefully, the period of ambiguity will be as brief as possible, as the stock market hates uncertainty.  If anything, English businesses may be more inclined to deal with U.S. businesses during the interim, because our trade rules with England are not changing.

I do like the stock market at this "over-reacted" level!

Okay, I confess . . . I watched the election returns all night from the couch with my eyes closed part of the time . . .

Thursday, June 23, 2016

Binary Betting

Remember:  the only guarantee about stock market behavior is that it WILL overreact!  Judging from the number of questions I've received about today's BREXIT vote in the U.K., I expect a very volatile stock market in the short term.  This is a good opportunity to ask yourself whether you are an investor or a trader.  Warren Buffett is an investor.  Traders seldom live enough to become famous.

Here is an investing rule:  Don't make binary bets!

That is a vote when there are only two outcomes - positive or negative, in or out.  In the BREXIT vote, the polling is that U.K. will stay in, and the markets are already adjusting to that.  If the actual vote is to leave, the long-term economic implications will still be unclear, but the short-term stock market reaction will be ugly.  Do you really want to bet your hard-earned dollars strictly on a vote in another country?  Are you ready to place your bets/investments on the November presidential election in this country yet?

I think the only way to play this exogenous event is to hope for the U.K. vote to leave the E.U. and then to buy your favorite stocks when the market drops.

Tuesday, June 21, 2016

R-Rated Fiduciary Explanation

The National Association of Personal Financial Advisors (NAPFA) has long been opposed to "hidden fees" being charged to clients.  One example is the sales commissions paid to stockbrokers when clients buy into mutual funds.  Another is the mysterious "12b-1" fee paid each year to stockbrokers.  Another is the value of exotic vacations for stockbrokers and their spouses for putting client money into the favored funds.  Another is selling bonds into a client portfolio for more than the purchase price, making a substantial profit on each investment of client funds, which is called a "mark-up."  And, the list goes on . . .

That is one primary reason that all investors should have a "NAPFA-Registered Financial Advisor" and the confidence they are not being charged any hidden fees.

NAPFA has encouraged the adoption of a "fiduciary standard" which means the stockbroker must put the clients interest first . . . and not a free exotic vacation with their spouse, for example.  The choice of a mutual fund should actually be based on the needs of the client.  After years of lobbying, the Obama Administration ordered that all retirement accounts be managed according to a fiduciary standard beginning next January.  Of course, stockbrokers are fighting mad!

But, the notion of a fiduciary standard has confused many investors.  Leave it to a comedian to explain it in a way that is both funny and understandable.  Unfortunately, the messenger can sometimes over-shadow the message, especially with coarse language.  If such language offends you, please don't click on this link for a 20-minute explanation: 

But, do you understand it better now?