Disappointment

As 2018 dawned, it looked like we were enjoying synchronized global growth.  The U.S. had led the world out of the recession and now looked forward to the increasing growth in Europe and Asia.  But that didn't happen.  Instead, the U.S. has gotten stronger, while the others fell further behind.

For example, the Chinese central bank cancelled a scheduled increase in interest rates.  Capital Investment and Retail Sales both weakened last month.  The Chinese slowdown slowed the rest of Asia, as usual.

However, Europe has been an even bigger disappointment this year.  Eurozone growth has dropped from 0.7% in Q4 of last year to only 0.4% in the first quarter of this year.  The ECB has reduced its full year Eurozone growth estimate from 2.4% to 2.1%.  One big reason for this slowdown is Germany, the world's third largest exporter, the level of exports has fallen in three of the first four months, dropping 2.5% in April alone.  Germany's estimated full year GDP growth has been cut by half.

One minor reason was the surprisingly widespread flu epidemic.  A major reason was the populist takeover of the Italian parliament, which strengthened the wait-and-see attitude of corporations across Europe.  (Everybody remembers the fiscal crisis in 2010 precipitated by Greece.)  In January, 26% of German consumers expected economic conditions to deteriorate, compared with 43% today.  There is considerable anecdotal evidence that corporations are hunkering down and conserving their resources to survive a possible trade war, which is prudent. Rising caution is a wet blanket on the stock market.

This is not to suggest an investor should sell their international stocks.  Don't forget -- A well diversified portfolio will include some exposure to international stocks.

The President said trade wars are "easy to win." 

Let us pray . . . for a quick peace!

Suicide Mission ?

Republicans abuse Supply-side economics, which argues that a tax cut increases the budget deficit in the short run but decreases the deficit in the long run.  They are hostage to the baseless belief that all tax cuts are beneficial at all times.  Republicans are not aware that a tax cut will not cure the common cold.

Democrats abuse Keynesian economics, which argues that budget deficits are good during recessions, which are repaid when the economy improves.  They are hostage to the baseless belief that deficits don't matter.  Democrats have never experienced an economy good enough to pay down the debt (except for Bill Clinton, who did.)

Unfortunately, both Supply-side economics and Keynesian economics have become religions.  Austrian economics remains mere accounting, i.e., debits and credits.

For some reason, bond specialists in particular are true believers in Austrian economics.  In a recent speech, the current "Bond King" Jeffrey Gundlach, said "This is almost a suicide mission.  At some point, with debt and its service cost increasing, there will be a collision.  There could be a solvency problem."

Think about it:  interest rate increases are appropriate during the latter stages of business cycles.  Budget deficits are more appropriate during the early stages.  Assume you had an adjustable-rate mortgage, and you get notified that the rate will increase from 4.5% to 5.5%.  Would you want to increase your mortgage amount, or would you want to start paying it down faster?

Our national debt is increasing while interest rates are increasing, which is very rare.  A 1% increase in debt service on $20 trillion debt is $200 billion each and every year.  That would be enough to fund the beloved "Wall" and build a dozen hospitals . . . each and every year.

The inevitable train-wreck is not in the foreseeable future, but it is out there.

Mixed Blessing

Those old enough to remember the U.S. economy during 1970's will remember the panicky headlines about runaway inflation.  Do you remember the stories about elderly women eating dog food?  Do you remember Gerald Ford's WIN Campaign, which meant Whip Inflation Now?  Nobody wishes for a return of that level of inflation again!

But, a little inflation is a big blessing, and it looks like we're getting a little.  The Producer Price Index (PPI) was just released and shows 3.1% over the past year, while the Consumer Price Index (CPI) showed 2.8%.  Of course, the recent rise in oil prices boosted both indexes somewhat, but the "core" level of inflation was still well above the 2% goal of the Fed.  In fact, a little more would be good!

Why is inflation a good thing?  In a macro sense, it reduces the burden of debt.  The rule-of-thumb is that national debt should not exceed the GDP.  Our national debt of $21 TRILLION is a little over 100% of GDP but rising.  (The 2019 deficit alone is expected to add another 4.5%.)  To bring that ratio back below 100%, we need to inflate GDP.  If you worry about the level of national debt (and I do), then pray for more inflation.

At the corporate level, the same thing happens.  Whatever the level of debt, it is being paid with cheaper dollars, because inflation devalues currency.  As an example, if the level of debt payments is fixed while income is driven up by inflation, the debt payments require a smaller and smaller percentage of the rising income.  Likewise for the consumer level.  A little inflation is your friend!

Economists argue incessantly about the desired level of inflation, but all agree anything below 2% is bad, and anything above 8% is bad.  It is a big sweet spot, and it will be sweet to "inflate away" our debt.

Braking While Accelerating

Traditionally, increases in interest rates in one country draw money from other countries, seeking the higher rate, which causes the currency of the first country to appreciate and the currency of the second country to depreciate.  For example, to move funds from Japan to the U.S., you have to sell your Yen to buy dollars, which drives up the value of the dollar, because the demand for the dollar increased while the demand for the Yen decreased.  So far this year, interest rates have risen and the dollar has strengthened.  With today's expected increase by the Fed, it is expected the dollar will continue to strengthen.

But, to an unusual extent, currencies are reacting less to interest rates and more to political expectations.  When Italy spooked the market recently, there was no change in interest rates by the ECB.  Yet, the euro took a beating.  The increase in interest rates in the U.S. is too small to explain the big rise of the dollar.  Geopolitical enthusiasm for the Trump Tax Cuts (AKA the Trump Fiscal Stimulus) increased demand for dollars to buy equities more than the increase in demand to buy bonds.  That geopolitical enthusiasm was rocket-fuel to the dollar already propelling upwards by interest rates.

It is not happened in U.S. history before, that we have the Fed applying monetary brakes, while the central government is hitting the accelerator with a stimulus plan. In the short run, it doesn't matter but could be important in the long run.  That means, in the short run, the dollar will remain strong, but, in the long run, who knows?

R.I.P. The Right Thing

For far too long, investors have been confused about investment advisors and stockbrokers.  Investment Advisors are just that -- stockbrokers are just salesmen.  Stockbrokers have loyalty to their companies.  Investment Advisors have loyalty to their clients. 

Also, stockbrokers can charge hidden fees.  Investment Advisors can NOT!  For example, stockbrokers can invest your money into mutual funds that pay "kickbacks"  (12b1-1 fees) or send the stockbroker and spouse to Hawaii or whatever.  Stockbrokers do NOT have a fiduciary responsibility to their clients.  Investment Advisors do!

A fiduciary responsibility does not mean an Investment Advisor cannot do something stupid.  It does  mean we can NOT hide anything from the client!  (No mutual fund company ever pays us a dime.)

For years, we have asked that stockbrokers stop selling and adopt the fiduciary standard.  They fought vigorously.  However, Congress was on our side and instructed the SEC to establish the regulations, which would require stockbrokers to be fiduciaries.  After years of inaction by the SEC, the Department of Labor (DOL) finally acted and issued rules requiring the fiduciary standard for all retirement accounts (but only for retirement accounts).  Stockbrokers fought back, delaying implementation for over two years.  But, neither the President nor the DOL Secretary stood up for the fiduciary standard.  Investment Advisors then resorted to the courts, but it looks like that effort was killed by the Fifth Circuit Court of Appeals last month. The Trump-controlled SEC still says they will do something, but it is unclear what or when.  More confusion, not less confusion is expected.  The Right Thing will wither away . . .

The battle has been lost.  Stockbrokers are free to keep getting hidden fees and withholding the truth about their conflicts of interest.  They won, and investors lost!  

The 13th Step

I know, I know . . . America is going to pot, and the young Millennials will only make it worse!  They're lazy know-it-alls.  They eat healthy but don't attend church?  They even have premarital sex!  I know, I know!  However, they do see one thing clearly -- the vileness from the Republican Party and the Democratic Party. 

They also clearly see the vileness of Fox and MSNBC, the propaganda arms of the Republican and Democratic Parties.  That's why Millennials created "Newsy" for themselves, but you can watch it too.  (Channel 136 on Cox.) 

Republicans will call it Fake News, because Newsy does NOT have the Republican slant.  Democrats will be condescending about Newsy, because it does NOT have the Democratic slant.  Therefore, it must be just right for Millennials . . . and me!

As part of a 12-Step Program, I've often recommended that "news addiction" be treated by avoiding news one day each week.  Maybe, we should first ease into our addiction recovery by spending the day watching the laconic news of Newsy as the first step.  It doesn't have the breathless anxiety of Fox nor the indignation of MSNBC.  Newsy lacks emotions, which is refreshing! 

Just the facts, ma'am!

Friend or Foe

Most people realize their knowledge is limited when discussing stocks, bonds, and other types of investments.  But, everybody thinks they're an expert on cash, probably because they use it everyday.

Our currency says "In God We Trust."  It does NOT say "In Cash We Trust!"  There is nothing sacred about cash.  It is just another asset class.

But, it is an asset class that impacts the rest of the portfolio.  Too much cash limits portfolio growth, in the long run.  Too little cash limits portfolio losses, in the short run.  (If you are so scared of short term market gyrations that you cannot sleep, then you are too timid to be a long term investor anyway.)

As a portfolio manager, I see cash as insulation, like you have in your attic.  It stays the same year-round, about 5% of the portfolio, even in the face of recessions, which come and go.  However, I do like greater insulation in the face of a financial crisis and try to increase cash then, to maybe 25%.  That gives a little "dry powder" for when the crisis passes, which it will. 

There is nothing sacred about cash.  It is neither friend nor foe.  It is merely a portfolio tool to maintain minimal liquidity and insulate risk over the long term.  Love your portfolio, not your cash!

Just Say No

I was visiting with one of my Democratic friends, and she said "Scratch any Republican and they will automatically complain about the lamestream media."

The irony of this is that, she said, since the viewership of Fox News exceeds the viewership of CNN and MSNBC - combined - that Fox is now the lamestream media.

She went on to say Republicans laugh at their allegiance to Fox, while Democrats have little allegiance to CNN or MSNBC.  Democrats are not united by CNN or MSNBC, but they are united in their revulsion at Fox . . . interesting!

It is well-known that we choose our political cocoons.  Republicans choose Fox, while Democrats choose anything but Fox.  But, she said political cocoons are as addictive as street drugs.  "Just say no" doesn't work with drug addicts or partisans.  We have twelve-step programs for drug and alcohol addiction, but how about our addiction to partisan news?

How do we get Republicans to watch less on Fox, while Democrats watch more on Fox?  She strongly agreed with my practice of a news-free day each week.  It builds discipline.  I agreed!

But, news-free is not the same thing as non-partisan news.  The best we can do is balance partisan news between Republican and Democratic news sources.  Or, as she styled it – “Break out of your cocoon!  Watch both!”

YTD Snapshots

From time to time, it is useful to look for underlying trends in the market.  Looking at the YTD data through May 31st, it would be hard to miss the impact of two trends, i.e., a possible trade war and the increase in interest rates.

The large multinational companies would be more impacted by a trade war than smaller companies.  To prove the point, large cap stocks were up 2.2%, while small cap stocks were up 8.17%.

When interest rates rise, investors wait for the higher rates and slow down their purchases of those stocks that are normally bought for the stable dividend income.  To prove the point, S&P growth stocks were up 6.62%, while value (dividend-paying) stocks were down 2.84%.

To further prove the point, technology stocks (which pay little or no dividends) were up 11.26%, while consumer staples and telecoms (which usually pay handsome dividends) were down a whopping 12.49% and 10.48%, respectively.

There is no obvious impact from the Mueller-malaise hanging over Washington.  As the November elections approach, I expect uncertainty to increase, which is a weight on the market, but I expect a robust "Santa Claus" rally late this year.

More Good News

Today's "Jobs Report" was simply great.  Headline numbers are:

1.  New jobs created in May was 223 thousand, substantially more than the 188 thousand estimated.
2.  The previous two months were revised higher by another 15 thousand jobs.
3.  The unemployment rate is only 3.8% - the lowest since the global financial crisis
4.  Under-employment (U-6) dropped from 7.8% to 7.6% - also the lowest since the global financial crisis of 2008/9.
5.  Unemployment among blacks dropped to an all-time low of 5.9%.

The futures market were largely unchanged.  For every investor delighted with the American job engine, another investor was frightened that a good jobs report makes the Fed more likely to raise rates, and they balanced each other.

I am concerned that the President, who is always given the number late the day before, tweeted this morning that he was excited about the jobs report at 8:30 AM.  I'll give him the benefit of a doubt that he was not telegraphing the good report to his Wall Street buddies, but hope he will learn that his tweet was inappropriate and doesn't do it again.  Every investor should get the news at the same time, whether they read the President's tweet or not.

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?