Sniffing a Crisis ??

Let's take a look at economic data released in the last few weeks:

1.  Consumer confidence rose again in May.
2.  The increased gas prices are not expected to be impact consumer disposable income significantly,
3.  Existing home sales dropped 2.5% due to lack of homes to sell, which is a good problem.
4.  Home prices have risen 6.5% since April of last year and show no sign of slowing.
5.  Transportation orders are up 12.5% year-to-date.
6.  Other durable goods orders are up 7.3% YTD.
7.  Unemployment (U-4) is at a sixteen year low.

There is nothing in that data suggesting an economic recession is on the horizon, even though people worry about it constantly.  That is a waste of perfectly good worry!

If you must worry, then worry about another financial crisis, which is different than a recession.  They happen more quickly and do more damage than a recession (although recessions can be triggered by a financial crisis).

A plausible scenario leading to a financial crisis might, for example, involve a heavily-indebted, poorly run country, like Italy, for example?  The debt or bonds of that country is largely owned by banks.  Whenever repayment is in question, the value of those bonds go down. Since that is a direct charge against either earnings or capital, those banks then reduce lending.  Not by coincidence, that's what's happening right now to banks, especially in Europe but also in money-center U.S. banks.  Because bank stocks are a major component of the U.S. stock market and an even larger component of the European stock markets, those bank stocks can easily crush the whole market.

The "nice" thing about a financial crisis is that there are usually many false alarms.  I think today's Italy scare is just another false alarm, for several reasons, but it must be watched carefully.  If you read that a few derivatives, such as credit default swaps, actually default, then call your financial advisor immediately . . . as well as your priest, preacher, rabbi or whomever . . .

From An Unknown Source

Our flag does not fly because the wind moves it.

It flies with the last breath of each soldier

who died protecting it!

God bless them, every single one!

An Earned Salute

When I was a boy, I remember my father telling me many times I should get a "do-nothing government job."  It was an extra bonus that nobody could ever be fired in such a job.  That never made sense to me, as I strongly believe that work is good for the mind, body and soul.

Those abusive practices continue today, as numerous government-worker-friends have assured me.  Each one has a story of some incompetent or lazy worker who keeps getting shifted around, because it is too difficult to fire anybody.  The pendulum has clearly swung too far.

So, it does my heart good to read that President "Jerk Who Trashed John McCain" has signed three new directives aimed at this problem.  It is unclear how much muscle these directives have.  It may just be rhetoric to feed his base, but it is nonetheless a hopeful sign.

As much as it pains me to salute this President, I do so!

HA HA !

I will not say . . . I told you so.
I will not say . . . I told you so.
I will not say . . . I told you so.

We've all seen those new home gadgets from Amazon, called Alexa, which allows the homeowner to ask questions, both big and little, as well buy things conveniently.  Google has a similar gadget.  They just sit on your counter, waiting for instructions.  Of course, it is listening to everything being said.

In fairness, it really is convenient to sit on the sofa and say "Alexa, please order a 46-pack of Starbucks Veranda k-cup pods."  Like magic, it will show up at my door two days later.  Amazon wants to free me from the awful inconvenience of sitting down at my computer and typing.  For that minor convenience, I have to surrender the privacy of my conversations.

Friday, it was learned that, in at least one instance, the gadget recorded a conversation between a husband & wife, before sending a recorded copy of that conversation to a third-party in the husband's contact list.  How embarrassing!?!

The continuing flow of increased conveniences comes at the cost of decreased privacy.  CNBC star Jim Cramer labelled naysayers as "privacy fanatics," which is a label I proudly wear.

I thought everybody in high school was forced to read George Orwell's iconic book 1984, but I guess not.  If he was still alive, he would be saying . . . I TOLD YOU SO!

Indignation Evolution

I recall writing years ago that "if we are free only to be respectful, then we are not really free at all."  Yet, I was quite angry when the NFL players refused to stand during the national anthem.  It was disrespectful to a symbol that is intensely important to me.  I reacted too strongly to that slight.

After evolving, I realize a lack of respect is not the same thing as actual disrespect.

The new NFL rules now require players to stand during the national anthem if they are on the field.  If they chose NOT to respect the flag, they are free to remain in the locker room, until the national anthem is over.  That way, they are not DIS-respectful on the field.

I would modify that rule, requiring players to remain in the locker room, if they cannot refrain from spitting, swaying, and gawking at cheerleaders during the anthem.  Show respect for the flag or stay in the locker room!

Look, It's Alive !

As we witness the highly partisan attacks on such institutions as the FBI and EPA, it is easy to overlook some surprising life in our long-dead Zombie Congress.

Last August, the Senate passed "right-to-try" legislation, which permits terminal patients to try unproven drugs.  The House passed it this week, and it goes to the President, who is expected to sign it into law.  I applaud this!

The Republican argument was that individuals should be able to make as many decisions for themselves as possible.  The Democratic argument is that dying individuals make easy targets for unscrupulous drug providers.  Further, the Democrats said a dying person is a useful statistic in medical studies.  That's where the Democrats lost me.  It is one thing to be denied a medical choice because the drug is too expensive, but it is an entirely different thing to be denied because my death might or might not be a useful data point.

Now, if Congress can just do something about the exploding deficit, without sinking into the Keynesian or Supply-side swamps . . . 

Fear of Peasants

When I went to China a few years ago, my strongest impression was just how frightened the central government is -- afraid of their own people.  That makes the tightest controls on freedom necessary.  After all, with a minimal middle-class, China could have a billion poor people take to the streets -- how scary is that visual image?

Three years ago, they started the Asian Infrastructure Investment Bank (AIIB).  Because that overlapped the World Bank and Asian Development Bank (ADB), the purpose was not obvious.  Today, the AIIB only has loans outstanding of about $4 billion, compared to $139 billion for ADB and $185 billion for the World Bank (globally, not just Asia).  Digging deeper, AIIB has $19 billion of paid-in capital and a capital base of $95 billion.  Yet, total loans are only $4 billion?  Why isn't AIIB making significant loans?  They raised a huge amount of capital and then chose to do nothing with it.

It was not so long ago that China had aspirations of their currency challenging the dollar as the dominant world currency.  The huge AIIB could lend only yuan, thus making the yuan more prestigious.   However, that also increased demand for yuan, which in turn caused the yuan to be become more valuable.  That appreciation in their currency naturally caused import prices to rise and exports to fall -- a potential disaster for a government afraid of its own people.

As President Trump negotiates the new trade paradigm, I hope he will play on the Chinese fear of Chinese people.  After all, the U.S. could begin buying the yuan to push up the exchange rate, causing problems for the Chinese.

The difference between a trade war and a currency war is similar to the difference between a recession and a financial crisis.  A trade war and a recession send signals they are on the horizon.  A currency war and a financial crisis happen relatively quickly and do more damage.

I hope the president will let the Chinese that know we are aware of their soft underbelly but nothing more.

Rat Poison Squared

Warren Buffett was wrong!  He recommended against buying both Amazon and Google.  He was wrong!

So what?  There is also a rumor he might actually be human!

One of his primary rules is to buy what you understand.  Who understood Google when they heard about it the first time?  Techies just delight in saying that non-techies are Luddites,  I'm proud to wear that label, alongside Warren Buffet.

Earlier this month, he predicted that crypto-currencies like Bitcoin "will come to a bad ending" and referred to them as "rat poison squared."  Words matter but not much!  I described crypto-currencies as "an elegant solution to a non-existent problem." 

It is the wild, wild West for currencies, indeed!  You will not see Warren nor myself there!

Yet Another School Shooting

Gun lovers (like myself) say "This is crazy!"
Gun nuts say "This is crazy!"

Gun lovers say "There's too many guns!"
Gun nuts say "There's not enough guns!"

Gun lovers say "Conduct real background checks!"
Gun nuts say "Background checks give the government too much power!"

Gun lovers ask "Does everybody have the right to have guns!"
Gun nuts say "It's already illegal for crazy people to have guns!"

Gun lovers ask "Do you really think the government could confiscate 330 million guns from 120 million people?"
Gun nuts respond "Yes, that's why they have black helicopters and storm-troopers!"

Gun lovers ask "Which is more important:  the Second Amendment or your kid?"
Gun nuts respond "What a rude, stupid question - to rude & stupid to answer!"

Gun lovers say "You do know the Second Amendment is not absolute?  You cannot own a bazooka or a tank or a bomb."
Gun nuts say "The Second Amendment should be absolute, but the Feds are infringing on our rights!"

Gun lovers say "This is crazy!"
Gun nuts say "This is crazy!"

Loving the Pampered?

How can anything so routine and mundane put so many smiles on so many faces worldwide?  I've been bewildered by this all my life but am finally starting to understand . . . maybe.

The British Royal family is arguably the best known family on the list of the world's ten most pampered families.  Despite that elite status, working class people worldwide cheer whenever a Royal gets married or has a baby.  There is obviously some emotional need being satisfied by this fascination with Royals.

Maybe, they fill a void in our lives, which seem dull in comparison, I guess?
Maybe, we need to see it is possible to float above the gnawing fray of daily life?
Maybe, we need to see that the most pampered among us still have emotional problems?

Because I tend to be dismissive of people who are unfamiliar with work, I tend to be dismissive of the Royal family.  However, when I see so many smiles on so many faces, I am thankful to the Royal family.  I don't need to understand it -- I will just enjoy it!

So, good luck and best wishes to the new bride and groom . . . and the next bride and groom as well!

Just keep those smiles coming!

Capital Punishment

I have long urged investors to make sure there is always a custodian (TD, Schwab, Pershing, etc.), because that keeps their advisor honest.  But, I'm increasingly despondent, as I was just reading about yet another Ponzi scheme, based in Boca Raton, stealing $1.2 BILLION from 8,400 investors, mostly in Florida and Colorado.

It is a travesty to measure a Ponzi scheme by the dollars stolen.  It should be measured by the number of suicides, early deaths, divorces, college degrees lost, hearts broken, etc.

The article was styled "Sanctioned Schemers Keep Shilling."  In this case, there were 17 unregistered "salesmen" representing the "perennial problem:  insurance agents with problematic histories selling securities, who market themselves to individuals as wealth and retirement advisors."

"problematic histories" . . .

Punishment for these crimes is usually little more than loss of license, being barred from the industry, and maybe a little time at some country-club prison.  Then, they are free to destroy the dreams of even more investors.

Some crimes are so heinous, that offenders don't deserve a second chance.  Investors do!

In the beginning . . .

. . . there was Benjamin Graham, the father of investment management and author of the dryly titled Security Analysis.  He was the mentor for Warren Buffett.  Graham advocated a "bottoms-up" approach to investment management, which requires exhaustive analysis of all financial statements, physical inspection of all facilities, and probing interviews with senior management.  The criticism of this approach is that investors get the best companies but maybe in the worse sectors or countries.  Most Chartered Financial Advisors (CFAs) are disciples of this approach.

Then, there was Harry Markowitz, the father of Modern Portfolio Theory (MPT), which won the Nobel Prize.  He advocated that a portfolio of stocks should be shaped to get the best return for the amount of risk taken.  He found that a portfolio of both large and small companies offered the best return for the least risk, but in a constantly-changing ratio.  It is a "top-down" approach, finding the worst-performing stock in the best-performing sector will out-perform the best-performing stock in the worst-performing sector.  Most Certified Investment Management Analysts (CIMAs) are disciples of this approach.

Since then, there has been an endless stream of improvements to MPT, such as "passive versus active" investing, factor-based investing, etc.  But, these improvements were designed to improve the growth prospects of portfolios, ignoring the fact that an increasing number of investors are more focused on income than growth.

Now, along comes Dedicated Portfolio Theory (DPT), which calls for two portfolios - one dedicated to growth and one dedicated to income.  The income portfolio contains individual bonds, not bond funds.  Assuming at 4% distribution rate, an investor could, for example, put five years or 20% into the income portfolio, preferably with zero-coupon bonds maturing once a year.  Maintaining this dedicated income portfolio is more important then the growth portfolio.  At the end of each year, one must decide whether to roll funds from the growth portfolio by a technique called Critical Path, which is beyond the scope of this blog.

My impression is that DPT offers some cold comfort to those investors who fret endlessly about having enough income.  DPT is an interesting but over-hyped concept.  MPT will still be employed to manage the growth portfolio . . . thankfully!  DPT is no big deal!

Rising Interest Rates ??

It is widely assumed that the Fed will continue raising interest rates, and they will.  They want to "normalize" the level of interest rates, as well as having some "dry powder" in case the economy stumbles and needs lower rates.  Plus, they believe higher rates will encourage increased savings.

There is also a technical reason to believe interest rates will increase.  Now, take a look at this graph:

Without getting too technical, the London-Interbank-Offered-Rate (LIBOR) is unusually higher than the Fed Funds rates.  That means the spread between the two rates is too large.  Stated differently, That also means that the Fed Funds rate is too low, relative to LIBOR.  With the flood of U.S. Treasury debt now in the pipeline, from the 2018 tax cut, those new bonds will not sell nor be absorbed into the bond market without an increase in the rates they pay, which decreases the spread between the two rates. 

Yes, higher rates are coming.

But, I suspect the fear of higher interest rates is unreasonably high, as the Fed will not raise rates too much too fast.  First, real estate developers hate higher rates, as that drives down real estate values (study "cap rates").  Ask our President about that one.  Second, every percentage point increase in interest rates increases our annual debt service expense by $200 billion.  Do the math -- 1% on $20 TRILLION of national debt.  Imagine creating a new annual expense that large without Congressional approval.  Lastly, the stock market doesn't do well when interest rates increase too much.

The future of interest rates is obvious . . . but it is not scary.

Rich Folks Hoax

The moon is hanging in the purple sky
Baby's sleeping while its mother signs
Talking 'bout the rich folks
Rich folks have the same jokes
And they park in basic places

The priest is preaching from a shallow grave
He counts his money, then he paints you saved
Talking to the young folks
Young folks share the same jokes
And they meet in older places

So don't tell me about your success
Nor your recipes for my happiness
Smoke in bed
I never could digest
Those illusions you have going

The sun is shining, as it's always done
Coffin dust is the fate of everyone
Talking 'bout the rich folks
The poor create the rich hoax
And only late breast-fed fools believe it

So don't tell me about your success
Nor your recipes for my happiness
Smoke in bed
I never could digest
Those illusions you have going

(c) by Sixto Rodriquez on "Cold Fact" in 1970

What I Wished For ?

Long time readers will recall ten years ago or so that I lamented the death of democracy when Republicans and Democrats could not even do the things they agree on -- for fear of "cooperating with each other."  I pondered endlessly about Erdogan's famous comment that "Democracy is like a train - when you get to your stop, you get off."  I longed for a Strongman-type leader who would break the logjams and Make American Democracy Great Again.

For awhile, I hoped that Donald Trump was that leader -- that Bull in a China Shop who would break everything and then put it back together.  But, I never wished for a Bull in the pharmacy next door, nor a Bull in the grocery, nor a Bull in the gas station, nor a Bull in the church, nor a Bull anywhere else.

I feel partially responsible.  How much breakage is too much?

The Rubicon

There is no American I respect more than John McCain.
Therefore,

there is no American I respect less than Donald Trump.

Your Personal Roadblocks

The media reports the unemployment rate each month, which is currently about 4%.  Economists normally look at the JOLTS report, which shows the number of job openings is a record high 4.2%.  In other words, there are more job openings than there are workers to fill those jobs.  This is a all-time record.  The job market is TIGHT!

Equally important, workers rarely quit a job without having another, almost always at higher pay.  A high number of quits suggests a tight job market.  About 2.2% of workers quit their jobs last month, the highest since 2001.  This also puts upward pressure on wage expenses.  The job market is TIGHT!

The increased job openings are pretty much across the spectrum.  Transportation, warehousing, information, and construction are producing the most jobs.  Education, health, wholesale trade, and finance are producing the least, relatively speaking.  The job market is TIGHT!

If you cannot find a job in this market, there is something wrong.  Either your job expectations are unreasonable or you won't get the right training or you are unwilling to go where the jobs are and expect the jobs to come to you.  All of these reasons are called "self-sabotage," where potential workers create their own impediments to work.  They sabotage their own job prospects.  Do you know anybody like this?

If you cannot get a job today, it is because you do not want a job enough to remove your own impediments or roadblocks .

A Planner Too Long ?

In 1985, I watched the classic Out of Africa movie with Meryl Streep and Robert Redford.  She played a wealthy Danish woman who came to Kenya and fell in love with a professional game-hunter.  By the end of the movie, she had lost her wealth, and he had lost his life.  A sad love story, the film nonetheless won seven Academy awards.

In 1988, I earned my certification as a financial planner.

For some odd reason, I wanted to see the movie again last night but saw it this time through the eyes of a long-time financial planner.  Instead of seeing a wealthy Danish woman, I saw a hopeless romantic, who wanted to plan everything in detail, including her love life.  Instead of seeing an impossibly handsome professional game hunter, I saw an unstructured vagabond this time, who lived only for the day, abhoring any long-term planning.

Instead of seeing star-crossed lovers this time, I saw a couple with different planning needs.

How do you reconcile these different planning needs?  While not very romantic, it is essential to talk about the need to plan.  How do you tell your kids to find a mate who is a good financial planning candidate?  Well . . .  good luck on that!

Take A Stand !

Suppose I owe you a lot of money and then suppose I only pay you 77% of what I owe you.  How happy would you be?  Now, suppose you knew 20 years before that it would happen.  Would you try to do something about it?

Social Security is a pay-as-you-go entitlement, meaning money paid into the system immediately goes out to recipients.  Up until 1965, there were roughly ten workers to support each retiree.  Today, there are about 3.4 workers who are paying my monthly Social Security checks.  Thanks, guys!

The demographics are that men are living longer,while the birth rate is declining.  Either we start having more babies and allowing more immigrants, or men have to stop living so long.  (While older women still outnumber men on Social Security, the gap is closing.)  The demographics are not helpful.

The revenue provided by workers has been less than entitlements paid since 2010, and we are already dipping into the "reserve funds."  And, the trend is getting worse, with the fund being dissipated by 2034.  At that point, it is estimated your monthly check will be reduced to 77% of what it is now.

Our options are to increase the labor pool, increase Social Security taxes on workers, scrap the Social Security fund and simply pay entitlements out of the government's general revenue fund (which moves the deficit from one account to another), start decreasing the monthly checks, cutting off people like myself who don't need it, or the politicians' favorite -- just do nothing and hope something good happens.  What would you do?

As long as Republicans believe that "what works in theory will work in practice" and as long as Democrats want to obviate poverty and unhappiness in every identity group, Congress will remain impotent.  I marvel that this subject has not been discussed with Republicans in control of all three branches of government.  Would Democrats have done any better with control of all three branches?

I recall a Congressman who said the job of Congress is to "do nothing, do nothing, do nothing, and then over-react!"  Sadly, he was being honest.

But, what would you do?

The Joy of Regulation

It is fashionable to "trash-talk" regulations, and some of that is fair.  However, some regulations are better than others and are actually good for America!

Famously described as "financial weapons of mass destruction" by Warren Buffet, derivatives have posed ever-greater risks to the financial system and were largely responsible for the global financial crisis of 2008/9.  I have often said I would sell 25% of stocks when the first derivatives blow-up occurrs and the remainder when the second derivative defaulted.  That's how big and real the risk has been.

One real problem in regulating derivatives is that they are traded off-the-exchanges, meaning we could not be sure how big a problem they presented.  This lack of transparency made it difficult to estimate the threat.  Fortunately, bank regulators rode to our rescue.  As they audited bank statements, they hounded the bankers to justify every investment decision involving the use of derivatives.  As a result, the value of derivatives actually employed has fallen markedly.

Going into 2008, there were about $35 TRILLION, declining to $15 TRILLION at the end of 2016 and "only" an estimated $11 TRILLION today.  This is great progress!  Federal auditors should be applauded, for reducing the risk of these "financial weapons of mass destruction."

But money hates transparency, and nobody is confident how much of a problem "dark pools" are becoming.  These are large pools of money that some banks, particularly offshore banks, and some offshore money managers to trade stock positions without transparency.  In other words, you can buy or sell stocks and other assets, while nobody knows it.  More pointedly, nobody knows how much leverage was used for each of those purchases.  U.S. bank regulators have far less regulatory authority with these offshore dark pools.

Like water flows to the lowest point, money flows to the lowest point of regulation and transparency. 

Stay tuned to this potential problem . . .

The Need To Please

On a long flight recently, I took the opportunity to read a biography on Tiger Woods. Everybody knows the story of Tiger, but I am interested in father-son relationship between Earl-Tiger.    Earl was a former Green Beret, who was determined that his son could change the world, literally.  He had a disciplined focus on that objective.

Earl taught Tiger the disciplined focus of Special Forces - accomplish the mission.  I remember a Colonel saying “you may have to go through hell to accomplish the mission and, if so, I expect you to go to hell!”  For example, Earl would shout obscenities at Tiger as he was swinging at the ball, simply to break Tiger’s concentration.  It is no surprise that Tiger became such a focused competitor.

The difference between father & son was that the son had a need to please his parents.  Earl had no need to please anyone.  (Any such need by Earl would have been extinguished in Special Forces.). Tiger’s need to please his father probably made him the greatest golfer of our time.  I suspect that also made him emotionally vulnerable, making him different from his father.

Teaching disciplined focus to an emotionally vulnerable person is problematic.  Normally, the more focused you are, the less people are pleased with you.  In Tiger’s case, the normal response was overwhelmed by the millions of dollars suddenly flooding into his family, as well as the glory and adulation by millions of fans.  Tiger thought he was pleasing the whole world and was proud of that.

As they say, pride goeth before the fall, and Tiger fell hard.

Maybe, the lesson learned is that hard-charging Alpha-male fathers can, with the very best of intentions, do real damage to their sons - at least sons with a need to please.