Sunday, July 23, 2017

The Peace of Small Sounds

As I watched my father adjust to his hearing aids, I focused on his embarrassment, the inconvenience, and the cost.  Yesterday, I took a two-hour walk in Seashore State Park and wondered why I did not also focus on the deprivation -- he was slowly being deprived of life's little pleasures.  There are more bird sounds than I can catalog.  Tiny waves make very little sound, but it is such a soothing sound.  Gentle breezes not only feel good, they sound slightly haunting or even alive.  A pine cone dropping into the swamp water sounds more like a blast than a drip.

Not hearing such sounds is a form of deprivation.  Hearing aids are not sensitive enough to capture most of the sounds I savored yesterday, but I'm grateful for what they can do.  That's a good thing, because my wife swears there is one in my future . . . someday.

Saturday, July 22, 2017

Pence Agenda

Since the days before air-conditioning, when Wall Street moved en mass to the Hamptons to escape the heat, pundits have been saying "sell in May and move away" until the Fall.  Summer swoons are not unusual.  Given how "hot" the market is now, I have been expecting it to cool off during this Summer.  At the same time, it is increasingly apparent that the President is not going to be able to enact his agenda of  (1) healthcare reform, (2) tax cuts, and (3) the rebuilding of infrastructure.  If belief in that agenda drove the "Trump Bump" last November, why hasn't removal of that belief weighed on the stock market?

One reason is that second quarter earnings have been better than expected.

Another reason is the inflow of cash from increasing global profits.

Yet another reason is that the market believes the worst case is that Trump is impeached and resigns.  So what?  That turns Vice President Pence into President2B Pence, who has the same agenda as President Trump.  He is the experienced Washington insider who can ride into the White House on a white horse with the political capital to actually accomplish something.

The most significant difference between the Trump Agenda and the Pence Agenda is the latter contains socially conservative goals, which have a low probability of passage.  If he advances those social goals first, like Trump advanced healthcare reform first, his agenda will likely become stalled as well.

But, what happens to the Trump/Pence Agenda when President Pence takes over, if either the House or the Senate is then controlled by the opposition party?  Their agenda remains in greater peril than Wall Street seems to recognize.

Thursday, July 20, 2017

More Than A Mere Politician

There may only be one person in Washington that I truly respect -- John McCain -- and I am profoundly sad to learn he has an aggressive brain tumor.  Although I've never met him, it would be an honor to salute him.

There is nothing I can write that is half as poignant as this short note from his daughter:

Statement regarding my father @SenJohnMcCain:

Fight on, John, your country needs you NOW more than ever!

Wednesday, July 19, 2017

Enigma Solved

I have been expecting a traditional "summer swoon" in the stock market, especially since the "Trump Bump" no longer exists, if it ever did.  While second quarter earnings have been somewhat stronger than expected, those earnings were not enough greater to justify new market highs, especially during the summer doldrums.

When things seem illogical, look abroad!  Sure enough, $119.7 billion flowed into the U.S. from foreign private buyers during the month of May alone.  This also suggests the global economic recovery is real and that foreigners are starting to make real profits, which they ship to safety in the U.S.  Remember:  increased demand for U.S. equities drives the price of those equities higher.

At the same time, U.S. residents only moved about $3.6 billion into foreign equities, suggesting it is not too late to increase our allocation to foreign stocks.  We'll see . . .


Sunday, July 16, 2017

Land-Lines and Dinosaurs

Classical economic theory suggests that, as demand for a product decreases, then the price of that product will also decrease.  Why then is the price of land-line telephone services going up?

There was a time, back when dinosaurs roamed the Earth, that early-adaptor American households had a rotary telephone.  As they began putting telephones into other rooms, as new technology allowed touch-tone dialing, caller-ID, call-waiting and numerous other "bells & whistles", more Americans got land-lines.  As the base cost of providing land-line service was spread over an ever-increasing base of users, the cost per land-line started going down.

The introduction of cell phones stopped the growth in land-lines.  The introduction of smart-phones with internet started to decline in land-line usage.  With millennials avoiding land-lines en mass, the future of land-lines looks uncertain at best.  So, why are land-line prices increasing?

One reason is the growth in home-based businesses that need fax support.  This creates an artificial level of demand for land-lines.  However, once cellular technology improves enough to offer fax support reliably and simply or once scanning technology gets more widespread, this support for land-lines will go away.

The main reason is the low-profile of land-line charges in the numerous "bundling" choices offered by land-line providers.  Bundling was a brilliant strategic move to save land-lines and land-line companies.  If getting rid of your land-line means getting rid of your internet, it will not happen.  However, as we start accessing the internet in different ways, the value of bundling will decrease.

All of my career, AT&T and Verizon and other land-line providers have been considered "blue-chip," but I suspect that will not continue, unless they move more rapidly to jettison their land-line businesses and expand their cellular businesses.

. . . tick, tick, tick . . .

Saturday, July 15, 2017

Boomers' Youthful Impression

Generalizing, the "greatest generation" makes the assumption the economy is weak and weakening, which reflects their youthful impressions during the Great Depression.  Baby-boomers make the assumption that inflation is wracking the economy, which reflects their youthful impressions during the late 1970's and early 1980's.  Millennials/Gen X'ers make the assumption that the economy can never be trusted, which reflects what happened to their parents during the Great Recession.  Only technology can be trusted.

Focusing on the Baby-boomers, just try telling them that inflation is non-existent.  The popular Consumer Price Index continues to run about 1.6%.  Stripping out energy and food, it is even less.  In February, it was 2.7%.

The only sectors showing any inflation are the usual suspects, i.e., health care and rent.

So, if inflation is non-existent, why talk about it?  Because that largely drives the decision to raise interest rates by the Fed.  At the beginning of the year, Wall Street expected four rate increases this year.  It got one and now expects only one more this year.  Savers can expect little relief from the low rates.  Savers lose if we do have inflation, because the purchasing power of their savings is reduced.  And savers lose if we not have inflation, because their interest income is stagnant.

Sorry, Baby-boomers, but you cannot complain about inflation.  Of course, you could complain about the low interest rate on your savings accounts.

Friday, July 14, 2017

On Cleaning Out

Dust-bunnies multiply even faster as eyes age.
Trash cans are harder to "hit" -- or even find.
Finding the right file becomes a hunt in the dark.
It becomes further to bend over to pick up any droppings.

Maybe, dust-bunnies become pets?
When does clutter become comforting?
One can never have too much paper laying around.
Does one ever get over that "depression-mentality"?

As a financial planner, I help people prepare financially for old age.
But, what is the point if they are not also prepared emotionally?
Hoarding mementos is still hoarding!
As Art Linkletter said "old age is not for sissies."

Thursday, July 6, 2017

Hiding Behind Statistics

Long ago, Mark Twain realized that the truth is often hidden by "lies, damn lies, and statistics."  Of course, he was right then and still is.

Jack Bogle is the crusty, venerated founder of investment giant Vanguard Funds.  He has long argued that investment returns are badly hurt by high fees.  Of course, he was right and still is.

For the last 15-20 years, there has been considerable controversy on the question of fees, and marketing types have been quick to confuse the situation by asking if "active" managers actually earn their higher fees.  Or, would clients be better served by simply buying super low-cost index mutual funds or exchange-traded funds (ETFs)?

Passive investing means "owning the market" and not trying to beat it.  Active investing means trying to beat it.  A passive investor, for example, will just buy SPY which replicates the S&P 500 and nothing more.  It owns the 500 stocks of the S&P and holds very minimal cash.

Intuitively, smart educated analysts could avoid weak stocks and concentrate on the strong stock performers.  Active management "ought" to outperform passive index investors.  There have been numerous "definitive" studies on this.  The most recent appeared in The Wall Street Journal in April, showing low-fee ETFs beat high fee mutual funds over the last fifteen years and did so by convincing margins.

Not to get into the weeds too much, but this is where "lies, damn lies, and statistics" start making a difference.  There is such a thing as "survivorship bias," meaning that time matters -- firms come into the market with new mutual funds and then close some of them.  (A few ETFs have done the same but few).  This latest study looked at all funds on the market on January 1st, 2002.  As the weak funds closed down over the next fifteen years, their closing values became zero, badly skewing the performance of the entire group of mutual funds.  In the real world, I've never seen a fund go to zero value or 100% loss of client money.  Usually the fund drifts down for a few years, the fund is closed and the remaining investors are paid whatever remains.  That money returned to the investors is not accounted for, which certainly hurts the performance of mutual funds.

Also, the longer the time period, the more likely funds are to disappear.  All past comparisons between actively-managed funds and passively-managed funds (both mutual & ETFs) have been studied over ten year periods.  By extending this study to fifteen years, it increased the survivorship bias, against mutual funds and favoring passive-investing vehicles like ETFs.

The study also did not distinguish between bull markets and bear markets.  Any statistic that says - increasing cash during a falling market is a bad idea - is a bad statistic.

Another factor not accounted for -- is the impact of the investor stampede out of actively-managed funds and into passively managed funds.  There is a self-fulfilling issue.  As more investors "drink the Kool-aid" and move into ETFs, it becomes more difficult for mutual funds to remain in business.

Importantly, the study also found that low-fee mutual funds with active management often beat ETFs, but shouldn't that be the headline?

This is not to defend high-fee mutual funds nor low-fee ETFs.  I have watched feverish debates about large-cap stocks, and I don't believe there is any benefit to broad mutual funds in this space.  Although the WSJ survey shows that active investing is not more helpful than passive investing in the small-cap space.  I simply don't believe it!  They don't receive the analytical scrutiny that large-cap stocks receive.  I like passive-investing for broad sweeps of the market but not for narrow segments.

I enjoy attending the church of index or passive investing, surrounded by all those true believers, and find much to believe in, but I don't think I will join.

Tuesday, July 4, 2017

Wisdom of Jay Leno

In 1998, Tom Brokaw permanently branded the generation that fought in World War II as "the greatest generation."  Given the enormous historical sweep of the war, it is not surprising.  They returned home to parades and hugs.

The generation that fought the Korean War went almost un-noticed, dwarfed by the sheer number of World War II veterans and lost in their shadow.

The generation that fought the Vietnam War got plenty of recognition, if not the type they wanted.  Being called a "baby-killer" is not a hug.

The generation(s) fighting the Iraq/Afghan wars feel trivialized by the perfunctory "thank you for your service."

Comedian Jay Leno has a different viewpoint.  He believes whatever generation is currently wearing the uniform to protect our nation is the GREATEST generation.

Good point!

Monday, July 3, 2017

As we approach the 242nd birthday of the Great American Experiment, there is a new study by the Pew Research Group, suggesting that partisan intolerance now exceeds racial intolerance.  One-third of all Democrats would be upset if their child married a Republican, and fully one-half of all Republicans would be upset if their child married a Democrat.  This is crazy!

As a boy, I remember the adults discussing politics without getting mad at each other.  How did we ever get so polarized and incapable of polite conversation?

The first cause is gerrymandering, which discriminates against moderates in favor of extremists. Moderates can talk, while extremists just scream.  I have written extensively about this.

Another cause is the separate echo chambers we inhabit.  Republicans limit their news intake to their safe providers, and Democrats do the same.  Related to this has been the death of debate.  Safe news providers regularly stage "fair and balanced" debates on every subject, by inviting two political hacks to spin their talking points.  Nobody has ever accused news anchors of being good debate judges. Debate is more than mere pugilistic spin.  As this pugilistic spin increased, honest debate decreased.

One analyst thinks the Republicans are slavishly devoted to their ideology, while Democrats are slavishly devoted to their constituencies.  Maybe?  But, discussing such a question will anger both sides.

The explosion of news sources had the unintended consequence of commercializing news.  Now, the sole purpose of news is to sell advertising.  Do you think Rupert Murdoch would have allowed Roger Ailes to create the conservative juggernaut of Fox News if he couldn't make a profit?  He saw a large segment of the population feeling under-served.  He served it by selling advertising and made more billions.

If I had to point the finger at any one person most responsible for the polarization of political discussion, I would say Newt Gingrich.  He encouraged Republicans to avoid fraternizing with Democrats, such as for drinks after work or dinners or family cookouts.  It is hard to demonize your friends.  He did the country no great service.

Over the last 242 years, we have survived enemies abroad and enemies within.  In 1970, Alvin Toffler wrote the classic Future Shock , predicting the rate of change would keep increasing -- enough to threaten the stability of a slower moving political system.  Maybe?

But, America is more than a nation.  It is an ideal -- a durable ideal.  We will continue celebrating our birthday for many years to come!  I just pray we can evolve our political system as the times evolve.

Sunday, July 2, 2017

Warren Buffett Is Right

Bitcoin is a solution in search of a problem.  Warren Buffett called  bitcoin a mirage, urging investors to "stay away."

Railing against the cost, slowness, and open transparency in the international movement of money, bitcoin was one of the original crypto-currencies, which are stateless currencies backed by nothing, not even by bankrupt governments.  They are the ultimate "fiat" currencies, which means they have no value unless someone is willing to accept them as currency.  Just try to buy groceries or a tank of gas with bitcoin.  Amazon will not accept bitcoins.  Yes, they have recently risen dramatically (up 300% this year) in value, but look at the wildly volatile charts.  It is no place for retirement assets.

The total value of crypto-currencies has increased SIXFOLD so far this year.  It reminds me of the tulip bubble in 17th century Holland.

In a world with too many currencies already, why do we need more?  Europe consolidated their myriad currencies into the euro.  Many nations have simply nailed their currency to the dollar, effectively abandoning their own currencies.  If we need more currencies, maybe each city and state should issue its own currency??

Of course, criminals, drug lords, and terrorists love bitcoin, because they can receive value while maintaining their secrecy.  Now, why would I invest in something like that?

Those who believe market value is determined by "supply and demand" assure us that the world cannot be flooded with bitcoin, because there are only 21 million that are possible to "mine" in the internet by complex algorithmic puzzles, and 14 million have already been mined.  Of course, that ignores newer crypto-currencies, like ethereum, ripple, nem, litecoin, dash and other new currencies appearing almost daily.  (Bitcoin's share of the market dropped from 85% of the crypto-currency market in the first quarter to only 41% now.)

The only plausible business model of crypto-currencies is the blockchain, that secretive ledger that records all transactions without identifying the players.  Again, why would I invest money in
something with no redeeming social value?  I have no desire to own any business for the benefit of criminals, drug lords, and terrorists.

I may be wrong, and crypto-currencies may someday become a legitimate asset class commanding a percentage of a modern portfolio, but that is definitely not today.

Thursday, June 29, 2017

Still NOT Different This Time

A respected Wall Street analyst just predicted the Dow would end the year at 27,000.  This would require 25% growth in six months.  I cannot quite get my head around that.

For the nerds out there, the formula most commonly used to forecast the stock market is to multiply  earnings-per-share (EPS) times the price-earnings (PE) ratio.  To find EPS, you take average net earnings and divide it by the average number of shares outstanding.  To find PE, you take the current index value (say, the S&P) and divide it by the EPS.  It answers the question of how much will an investor pay for $1 of earnings?  A PE of 18 means an investor will pay $18 for each dollar of EPS.

The analyst's forecast was based on his belief that EPS would continue to increase at a 6-8% year-over-year rate and, that the PE of last year's EPS would increase from 18 to 20 times next year's EPS.  That EPS growth rate is more hope than analysis, I believe.  EPS bottomed out in Q1 of last year, especially for energy companies.  So, year-over-year comparisons will look less and less attractive.  While the PE of last year's earnings looks fully priced, the PE for next year's earning looks historically high.  Take a look at this graph:

Chart of the Day

(This graph uses last year's EPS, causing a higher PE than using next year's higher estimated EPS.)  

The point is that anything above 21 or 22 times EPS is getting into thin air.  That doesn't mean it cannot continue to increase, only that it can not be sustained for an indefinite period.  As before, the PE multiple must return to Earth . . . but not today.

Monday, June 26, 2017

Repealing A Foundation

What would happen if they repealed laws under cover of darkness and didn't tell anybody?

When I learned economics, one "law" was that  there was a relationship between unemployment and inflation.  It was a trade-off.  If you wanted less unemployment, you had to accept more inflation and vice versa -- if you wanted less inflation, you had to accept more unemployment.  (This was illustrated by the famous "Phillips Curve.")

Since the crash of 2008/9, unemployment has dropped from 10% to 4.3%.  Inflation should have increased dramatically.  While there are always some examples of inflation, overall inflation has been dormant.  Has that economic law been repealed?  If so, why?

Here are the most often-cited reasons:

1.  That relationship between unemployment and inflation never really existed.  The many instances of it in history were all coincidental.

2.  Intuitively, it makes sense that employers would have to pay more for fewer available workers when unemployment is low.  With the percentage of workers belonging to unions has dropped from 20% in 1983 to only 11% now, workers no longer have enough bargaining power to negotiate higher pay.  Globalization has also decreased the negotiating strength of workers.

3.  Workers were so frightened of losing their jobs during the crash of 2008/9, they have learned to be happy living without raises.

4.  Workers are simply worth less.  This is probably not the fault of workers.  Productivity has dropped in four of the last six quarters -- actually dropped, reflecting less capital investment in machinery and software to make workers more productive!  With corporate profits stashed offshore to avoid confiscatory taxes, there has been less money for capital investment in US workers.

5.  Wage growth is not correctly measured.  Employers have become creative in providing benefits like more vacation, as well as paying upfront signing bonuses, which are not normally counted as income.

6.  Wage growth can be expected to explode very soon.  It is a coiled cobra!

Now, all of this puts the Fed into a lawless state of confusion.  Should they raise interest rates to combat a non-existent problem with inflation?  NO!  This increases the cost of buying homes, as well the carrying costs of our national debt?  Should they raise interest rates just to be prepared to drop them the next time we have a recession?  YES!

I think the confidence level of most economists has decreased, with the realization that one of our most fundamental laws (the relationship between unemployment and inflation) has been repealed and nobody knew it.

Sunday, June 25, 2017

One Kudo, Mr. President.

My parents worked for the Federal government.  One was a good, conscientious worker, who received multiple promotions.  The other felt that any minimal effort was "good enough for government work."  I am intimately familiar with both perspectives.

The Veterans Administration has about 350 thousand employees.  I don't think of 50% of VA employees are useless and should be terminated.  I have met many, many fine employees in the VA.  But, I do think roughly 10% need to terminated immediately.  They clog the flow of health care.

Greatly complicating the problem is that the VA is the largest minority employer in the Federal universe.  To make sure minority employees were not fired as racial discrimination, the public employee union makes it unreasonably difficult to fire anyone, no matter how useless.  Minority protection might be a good primary function of the Federal government, but medical care of veterans is the primary function of the Veterans Administration.  Anything else must be secondary.

President Trump should be commended on signing new legislation that will make it slightly easier to fire the useless.  It is a step in the right direction, but much more needs to be done.

Saturday, June 24, 2017

Mind Maintenance

Philosophies can be described as overly-intellectualized coping strategies or ways to deal with the world and other people.  Maybe.  My intellectual drug-of-choice has long been existentialism, which sees the world through the prism of absurdity.  I have read many books on the philosophy, some were good and some were awful.  Still, it colors my views.

Recently, when I predicted the President would be impeached, my Republican friends started smelling a Democrat, while my Democratic friends rushed to welcome me.  One perceptive friend noticed my lack of emotion on the subject and suggested I was more stoic than existentialist.  Maybe.  It was less a partisan observation and more of a fiduciary observation, i.e., how will this expected outcome impact my clients?  Not every conclusion is partisan, and not every thought is an emotion.

Existentialism and stoicism are now collecting dust in philosophical waste bins and probably should be there.  Meanwhile, psychology seems to have taken the place of philosophy   Maybe.

A friend and client is exploring mindfulness, which Wikipedia defines as "the psychological process of bringing one's attention to the internal experiences occurring in the present moment, which can be developed through the practice of meditation and other training."  There is no doubt in my mind that mindfulness will definitely increase your years, as well as your enjoyment of those years!  That is the easy part, but it doesn't come easily.

Just as marathoners run a real risk of over-training, a person can work their mind too much for too long and exhaust it.  Mind maintenance requires a periodic shutdown before being refilled.  Mindfulness is a great help -- and healthy too.  But, it is not a light switch to be suddenly flipped on.  It is a way-of-life to be pursued.  If you only learn one exercise, learn to breathe.  

Think you already know how to breathe?  Nope!

Monday, June 19, 2017

A Spade

According to Wikipedia:  "Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating."

I would only add one word . . . Airlines . . . 


Friday, June 16, 2017

Little Lessons

I was a teenager when I read Leon Uris' classic Exodus, about the Holocaust survivors making their way to Israel and building their own nation.  Though it was fiction, I enjoyed the story and learned a great deal of history.

As a young veteran when the Yom Kippur war between Israel and Egypt broke out in 1973, I was massively impressed with Israel's defense capability.

When I lived in Washington, I briefly shared an office with a Palestinian refugee and was reminded how there are always two sides to every story, which tempers my enthusiasm.

In 2009, I read Dan Senor's eye-opening book Start-up Nation, describing a nation born in 1948 with no natural assets and surrounded by enemies, yet it lifted itself up by its own bootstraps, albeit with a little help from the U.S.  The takeaway from Senor's book was that Israel's success was due to their choice between military/economic success and loss of national sovereignty.  He did not attribute any of their success to a lack of institutions.

I just finished a new book by Katz and Bohbot entitled The Weapon Wizards, which is an excellent, more narrowly-focused, sequel for Senor's book.  Describing Israel sixty years ago as primarily an exporter of oranges and false teeth, its main exports today are electronics, software and medical devices.  It is also the world's sixth largest exporter of weaponry, about $7.5 billion annually.  Israel spends 4.5% of GDP on Research & Development, the most of any nation, and 30% of that goes for military R&D, compared to 17% in U.S. and a miserly 2% in Germany.  The authors quote the man behind their satellite program, who famously said "the shadow of the guillotine sharpens the mind," as a reason for their success.

I find it hard to believe that the 8 million people of Israel are any more innovative than the 330 million people in the U.S, but I am impressed by the number of Pentagon officials trekking to Israel for inspiration.  I am even more impressed that tiny Israel has 1,100 defense companies and has the third-most companies listed on the U.S. Nasdaq stock exchange.

The book would be improved by a comparison of new product life cycles.  From the moment of inspiration, how long does it take for the plans & specs to be approved, for initial funding, for beta-testing to begin, for formal approval, for sustained funding to be identified, and for the annual audit process.  In a nation as large as the U.S., institutions play an important role, up to the point when they become crippling.  How will we know when we have reached that point?

The elephant can learn from the mouse, indeed!

Thursday, June 15, 2017

Cause vs. Symptom

While I wish a full and speedy recovery, both physically and psychologically, for those victims of yesterday's horrific attack on Republican politicians as well as their families, I also hope this tragedy will jump-start a discussion on our worsening inability to disagree.

Some see the attack as another example of our gun problem.  One sarcastic pundit said, since there are more guns than human beings in this country, there is no excuse for the politicians NOT to be carrying a concealed weapon during baseball practice, so they could return fire at any time.  Also, since it was the Republican party that foiled Obama's efforts to control gun violence, another pundit suggested that the photos of the baseball-field tragedy would do more than the photos of the Sandy Hook school tragedy.  Hyperbole!

Some see the attack as another example of the infotainment industry and the opinion shows that started on AM radio, migrated to satellite radio, and now appear on cable "news."  The bombastic Rush Limbaugh now seems almost quaint and tame, compared to some on-air "infotainers," such as the hyperbolic Alex Jones.

I see both the gun problem and infotainment as mere symptoms of the real cause, which is gerrymandering.  That is the act of drawing political districts in a particular manner, so as to insure the election of a particular political party.  The objective is to make those districts safe for either Republicans or for Democrats.  A district that is safely Republican is likely to elect the "most Republican" candidate and unlikely to elect a moderate.  Of course, the Democrats are also less likely to elect a moderate Democrat in a safe Democratic district.  Partisan purity is an advantage in a safe district but is a disease in Congress!

Gerrymandering discriminates against moderates and favors extremists, who cannot compromise and therefore should not govern.  As more extremists are elected, more hyperbole shows up in Congress, in the papers and on the airways.  Increasing hyperbole seems to precede increased gun violence.

Politicians cannot be trusted to draw their own district lines.  That heavy responsibility should be given to an independent commission of voters.  If politicians won't let voters decide the district lines, that responsibility should be given to the courts.  Anybody but the elected politicians!

Some things are too important for politicians!

Wednesday, June 14, 2017

Interest Rates 101

A reader asked why Wall Street obsesses constantly about interest rates?  Whenever the Fed changes interest rates, they only do it by a quarter point, so what's the big deal?

Simple question?  Yes.  Simple answer?  No!  Entire text books have been written on interest rates, but here are a few factoids.

Interest rates determine the amount of interest you pay on mortgages and other loans.  They also determine how much income you earn on bonds and savings.

Interest rates may be fixed or floating.  As the word implies, fixed rates are determined by a third party, usually the government, such as U.S. Savings Bonds, and those rates do not change until maturity.  Floating rates are determined by the supply and demand for those particular types of financial instruments, such as Treasury bonds.  Those rates fall when the demand for those bonds increases more than the supply of those bonds.  Remember, the value of bonds fall as interest rates rise, because the amount of interest paid remains constant, regardless of the value of the bonds.  (Dividing the constant payment by increasing bond value produces decreasing yield.)

Interest rates have many lengths or maturities.  Short-term rates are usually lower than long-term rates, because long-term lenders take more risk than short-term lenders, such as inflation.  The risk of inflation is greater over the long-term than the short-term.

Interest rates are economic indicators.  The relationship between short-term rates and long-term rates is one economic indicator.  An increasing difference means the marketplace thinks that either inflation is rising, which is bad, or economic activity is increasing, which is good.  A decreasing difference is often indicative of a pending recession.

Interest rates indicate the amount of fear in the market.  When the yield on Treasury bonds drops suddenly, it is because investors got scared of stocks, sold their stocks, and used the cash to buy bonds, which means the demand for bonds increased, which increases price, but which drives down the yield.

Interest rates are economic tools.  The Fed can control short-term rates easily, but not long-term rates.  If the economy is over-heating, the Fed raises interest rates to reduce corporate profits and growth.  If the economy is weak, the Fed does the opposite, as they did in the face of the recession in 2008/9.

Interest rates change currency values.  Suppose you are a German earning nothing on your cash-euros but you can earn 1% if your savings were in US dollars.  To take advantage of that increased earnings, you would have to sell your euros, which drives down the value of euros, and then you would have to buy dollars, which drives up the value of dollars.  So, increasing interest rates increases the value of the currency.

A mere discussion of interest rates can change the stock market.  If Fed Head Janet Yellen said that interest rates need to be "normalized" (read:  3%) quickly, the stock market will suddenly sink.  She doesn't need to do anything except talk.

Libertarians believe democracy is never safe, when the Fed is meeting.

The Fed is meeting this week . . .

Monday, June 12, 2017

A Foreign Perspective

When the President withdrew the United States from the Paris Accord on Global Warming, he understandably argued that the U.S. had tougher goals than China, which is the world's greatest polluter.  Why shouldn't they have the tougher goals?  It is a good argument.

From the Chinese perspective, the U.S. has historically been the world's greatest polluter.  The U.S. grew wealthy and powerful by burning fossil fuels for 150 years.  They argue it is not fair to those newly industrialized nations not to have the same benefit as the United States.  That is also a good argument.

It is also significant that the Chinese are already fighting pollution aggressively.  I was in Beijing a few years ago and could barely breath.  Neither could the Chinese.  They have cancelled over a hundred coal-burning electricity facilities this year alone.  Two-thirds of all workers in the world, who are involved in the production of solar energy, already work in China.  That's about two million workers, and it shows, because solar energy production has increased a whopping 80% so far this year.  From a geopolitical standpoint, oil-vulnerable China is seriously committed to freedom from oil and is committed to both solar and wind energy.

At the same time, we are protecting the jobs of 400 thousand coal workers, who might as well be digging buggy-whips out of the ground.  Coal has already lost the battle to natural gas.  Coal production has dropped every year since 2013 and will continue to do so.  Natural gas is both cheaper and cleaner.

As the world's new leader in the fight against global warming, China will now be able to attract the best and brightest young engineers and technical workers.  They will also attract rivers of private financing.  Coal mines don't need any more financing.

The Chinese did not need the Paris Accord to get serious about fighting pollution.  They just needed to breath in Beijing.  

Saturday, June 10, 2017

Mental Health Advice

For some years, I have advocated a "news-free" day.  Most of us keep close tabs on the news provided by our favored news source.  Of course, it is essential to gather news from those news sources that both agree AND disagree with your point of view.  However, it is also important to maintain perspective.  To do so, you must be free of the news habit from time-to-time.  News-gathering is addictive, and I am clearly a victim.

Seeking to flee the breathless 24/7 coverage of the Trump-Comey conflict, I actually watched RT, which stands for Russia Today.  It is a propaganda machine of the Kremlin.  I expected it would mirror US coverage -- saying there was NO Russian interference in the 2016 presidential election.  To my surprise, the subject was not even covered.  Instead, it was full of  "US-led airstrikes in Syria target scores of women and children."  Ignoring such patently-absurd headlines, their coverage is full of military strategy, i.e., what kind of forces are deployed where and how their supply lines function.  From a military standpoint, it was actually quite interesting.

But, the point is -- take a break, preferably a "cold-turkey" break and avoid all news for one day every week.  Play golf!  Go to the beach!  Listen to your kids!  Amuse your spouse!  It might even be fun . . .

Neither Trump nor Comey care what you do -- only you care!  Now, pick up that remote . . . yes, you CAN do it . . .

Wednesday, June 7, 2017

Soothsaying 101

I have been a member of the National Association of Business Economists for many years and always read their quarterly survey of members.  Here are some of their latest forecasts:

1.  There has been a minor slowing of economic activity.  Despite a weak Q1, they expect Q2 to bounce back with a 3.1% growth rate.  Full-year GDP growth is estimated at 2.2% this year and 2.4% next year.  Both estimates are down a minor 0.1% from the last survey.

2.  We will continue producing about 170 thousand jobs each month, and inflation will remain quiet.

3.  Nine out of ten economists believe there is less than a 25% probability of a recession this year, while three out of four believe there is less than a 25% probability next year.

4.  The Fed will raise interest rates twice this year and three times next year.

5.  By a large majority, members assume the Trump Administration will be successful in both tax reform and infrastructure spending by late next year and will be good for the economy, but the effects will not be visible before Congressional elections next year.

Any questions?

Tuesday, June 6, 2017

Crossing My Fingers

Dr. Jeremy Siegel of Wharton has long been one of my favorite thought-leaders.  His comments on the latest Jobs Report are that it was a disappointment, as the number of jobs created was less than expected.  Plus, there were downward revisions to two previous months.  (Still, unemployment at 4.3% is at a 16-year low,).  He is mildly surprised that the stock market did not have a negative reaction to the report and concluded it was offset by falling interest rates and the depreciating dollar, which is especially supportive of large cap stocks.

More important to me, as someone who confesses a certain fondness for Dr.Siegel, he looks terrible!   His face is suddenly thin, and he has lost most of his hair,  Today, his weekly commentary begins with an ominous "Over the coming months, while Professor Siegel receives treatment for health  related matters . . ."

I wish him well, as it would be a less-bright and a less-bullish world without him!

Monday, June 5, 2017

The Dollar Matters

Following the December increase in interest rates, the dollar has increased in value, which makes dollars more expensive to buy for foreigners and makes the goods of foreigners cheaper for Americans for buy.

The data on the April trade data has just been released, and the stronger dollar shows up clearly, as Americans bought more goods from foreigners (which increases our imports) and foreigners bought fewer goods from us (which decreases our exports).

Exports fell by $483 million, and imports rose by $1.9 billion.  The monthly trade deficit increased by $2.3 billion to $47.6 billion.  If we convert those numbers into percentages of GDP, exports fell 0.4% and imports rose 1.3%.  This is important, because a trade deficit is a drag on GDP growth -- a minor one, but still a drag.

The value of the dollar has now slowed.  If the Fed doesn't raise interest rates this month, we may actually see a little welcome depreciation in the cost of the dollar.  With respect to our short-term trade deficit, I hope so.  However, with respect to normalizing the long-term level of interest rates, I hope they do raise interest rates.  Yes, the U.S. economy can afford it!

Friday, June 2, 2017

20 Years Wasted


Since the Kyoto Protocol in 1997, diplomats have been negotiating a treaty to limit carbon dioxide in the atmosphere.  I'm proud to say that those long, tedious negotiations were led by the United States, which produced a treaty acceptable to 195 nations.  Yesterday, we abdicated that leadership role, in favor of China and Russia.

Ronald Reagan called on us to be "the shinning city on the hill" . . . and we were!

I am sad . . . too sad to write.