Monday, January 30, 2012

The Golden Cross

Market technicians put a great deal of faith in the "Golden Cross," which occurs when the 50-day-moving average of the market rises above the 200-day-moving average.  It is thought that momentum is then changing for the better.  Many technicians consider that cross to be a strong BUY signal.

We are getting close to that point.  It has happened 26 times since 1962.  Based on that experience, there is an 80% probability the market will rise 7% in the next six months.

I would normally be very bullish because of that, except for the European financial crisis.  As fit as the U.S. economy is getting, we could still have a "Jim Fix" moment, referring to the great runner who suffered from a heart attack.

Of course, we should be grateful it is not a "Death Cross," when the 50-day-moving average falls below the 200-day-moving average.  That is almost always a SELL signal.

Gold is better than death, right ??

The Summit-of-the-Month Program

Let's see . . . 24 divided by 17 equals 1.4.

There have been 17 summit meetings of European leaders in the last 24 months.  That sounds more like regular monthly meetings instead of important summit meetings.

Another is being held today, and it is important!  This crisis could take a major turn for the better if the Germans don't over-reach and try to take control of Greek fiscal policy.  The Greeks are understandably furious about this.  Imagine Canada, who has been more prudent and is in better financial condition than the U.S., trying to tell Americans how much they can tax and spend.

In addition -- and this is a little tricky -- when the ECB and World Bank starting supporting the bonds of Greece by buying them, they paid market prices.  Once this deal with bondholders is worked out, the value of those bonds will increase substantially.  The other bondholders, all private, will lose 60-70% in face value of the bonds.  Understandably, they don't think they should take all the losses when the public bondholders (ECB & World Bank) make a profit on the same investment.

I'm getting more optimistic they might actually pull this crisis out of the fire . . . let us pray!

Friday, January 27, 2012

Advance Estimate of GDP for Q4

On the last Friday of each month following a quarter-end, we get the advance estimate of GDP growth in the past quarter.  For the third quarter, the final estimate was 1.8%.  For the fourth quarter, which was just announced this morning, GDP growth was 2.8%.  While that was a substantial improvement, the market was expecting 3% . . . thus, a disappointment.

Closer examination reveals the shortfall was in government spending, which is not altogether a bad thing.  While it is not yet clear, the suspicion is that it was mostly Defense spending, which is not altogether a good thing.  Still, with the U.S. spending more on defense than the next twelve largest spenders combined, maybe it is time.

Nike says "Just Do It." 

I say "Remember the Nike Swoosh," as that is the shape of our economic recovery, i.e., a long slow recovery . . . but definitely a recovery.

Toe-Dipping Time?

Readers with gray hair may remember Jim Fix, the father of the "running revolution" and author of numerous books on running.  They will recall he was the paragon of fitness, very lean and trim, with a low resting heart rate.  Everything was fine, until the day he dropped dead from a heart attack while running.  (Those were the days before all males routinely began taking statins with their vitamin pills.)

I had Jim Fix in mind in December when I did my 2012 forecast, seeing great danger in the first half of the year.  While the U.S. economy is definitely improving, it doesn't matter how good the economy is -- if the financial system has a heart attack, like we did in 2008 when Lehman collapsed.  Likewise, there is a real possibility of a sovereign collapse in the European financial crisis.

Fortunately, the European financial system has received some imaginative "stints" in the last few weeks.  First, the ECB introduced a new three-year loan program, that effectively bought time to hopefully resolve the fiscal policy issues.  Second, we learned that 90% of the credit default swaps on Greek debt are already collateralized, meaning minimal shock to the system if Greece has a sovereign heart attack.  Third, the widely-hyped "troika" talks over Greek debt collapsed over the weekend, and the stock markets remained calm nonetheless.  Finally, the Fed on Wednesday announced they were also extending the period of artificially low interest rates another 18 months, until the end of 2014.  More importantly, they indicated a readiness to deploy the third round of quantitative easing if necessary.

All of this has considerably reduced the risk of financial collapse in the near term.  At the same time, the U.S. stock market has been enjoying a minor bull run so far this year.  That introduces a new risk, i.e., the risk of NOT having a caridac event in Europe and missing a major bull market in the U.S.  As is customary, as one risk has been decreased, another has increased.  To hedge this new risk, I suspect it is time to begin the incremental deployment of cash.

Thursday, January 26, 2012

The Real Class Warfare

A friend gave me a copy of an article that appeared in The Wall Street Journal last week called "The Great American Divide" by Charles Murray.  He looks at the world of non-Latino whites between the ages of 30 and 50, normally the prime working years, and sees it dividing into the two parallel universes of "white collar" (WC) and "blue collar"  (BC).  While the existence of these two universes is not new, Murray's contribution is how quickly they are growing apart.

94% of WC America was married in 1970, but that dropped to 83% by 2010.  84% of BC America was married in 1970, but that dropped to 48% in 2010.  In other words, marriage dropped 10 points in WC America but 35 percentage points in BC America.

An important aspect of marriage is single parenthood.  1% of births were out-of-wedlock in WC America in 1970, which rose to 6% by 2008.  In BC America, the percentage rose from 6% to 44%.

In BC America, the percentage of males "out of the labor force" grew from 3% in 1968 to 12% in 2008.  (Remember; these are the 30-50 age demographic.)  In WC Amerca, the ratio remained constant at 3%.

The number of people in WC America who identified themselves as disconnected from religion rose frm 29% to 40%.  In BC America, it rose from 38% to 59%.

The implications from this increasing class stratification are immense and not altogether positive.  One is political.  This morning, Politico announced a survey of those attending rallies for the Republican Primary next week.  It found WC Republicans at the Romney rallies and BC Republicans at other rallies.  (In his study, Murray found there are 50% more BC Americans than WC Americans, which doesn't auger well for Romney.)

I would like to see a similar survey between WC and BC Americans in the Democatic Party . . .

The big question is NOT what should the government do about this alarming trend but SHOULD the government do anything at all.  Ever the Libertarian, Murray says we as individuals have a moral responsibility to reach out to the other classes and mingle more. 

Maybe, there is more to discussing classes than mere tax rates?

Wednesday, January 25, 2012

The Fed as Co-dependent Enabler

Don't you love it?  The Fed throws a wet blanket on the good economic data recently and openly frets about the damage to the U.S. economy from the European financial crisis.  Wouldn't you expect the stock market to go down?

Nope, it was down about 50 points at the announcement but then closed up 85 points.  The reason for this irrational behavior is that the Fed said they would likely keep interest rates low until 2014, instead of mid-2013.  More importantly, Chairman Bernanke strongly hinted that QE3 is always an option.

Like a street junkie spying their next hit, the market then got overly-excited and bid up the prices.

Good Advice in 1968

A client in Texas emailed me a week or so ago, asking why I don't discuss politics on this blog.  I remembered the last few weeks of Officer Candidate School in the Army, when they tried to make gentlemen of their almost-graduated new officers.  They told us that a young officer should NEVER discuss politics, religion, or child-rearing.  (They never said if that advice applied to old men as well, or just young officers.)

That was back in the day when debate was more than spinning points, when opponents argued with each other, instead of merely reaching past their opponent for the hot buttons of their base.

Following the State of the Union address, it is tempting but wasteful to discuss it.  Both the Republicans and the Democrats have many good ideas that would really help our country.  Sadly, that doesn't matter.

I read an analysis recently, recalling there have always been a few conservative Democrats and a few progressive Republicans, who were the key swing votes and kept government relevant.  However, now the most conservative Democrat is far too liberal for the most liberal Republican and vice versa.  The swing votes in the center have been destroyed by redistricting.

Redistricting is the source of all evil in Congress.  Letting politicians set the ground rules for their own districts is like letting players on a football team act as referees of their own game.  Creating safe districts, which are then dependably Republican or Democrat, eliminates any room for moderates or swing votes necessary to keep government relevant.

When there is room for moderates in Congress, when redistricting is taken from the hands of politicians, and when debate becomes intellectual again instead of merely theatrical, it may be time for old men to discuss politics, but until then, I'm still a young Army officer.

Tuesday, January 24, 2012

Who's Afraid of European Headlines?

A few weeks ago, I wrote about the shape of bottom for the European financial crisis as being similar to the last U.S. recession, which was not V-shaped, nor U-shaped, but looked more like the Nike Swoosh, i.e., bumping along the bottom before beginning a long, slow recovery.

After such high expectations for a deal to be announced yesterday, the market has been very well-behaved and has not over-reacted to the disappointment.  Six months ago, the market would have dropped 200 points.  Market volatility has definitely decreased but why?

Sure, it may simply be crisis-fatigue.  Fortunately, this has been such a slow-motion train wreck that companies have had time to prepare for a modest financial collapse.  There have also been a surprisingly large number of small "stopgap" measures taken by the EU and ECB.  Or, it may be the way credit default swaps are collateralized.  The holder of the swap has the right to demand additional collateral under certain circumstances.  At this point, it is estimated that 90% of the swaps guaranteeing Greek debt have now been collateralized.  When the collapse of Lehman sent the U.S. financial markets spiraling down, almost none of the swaps on Lehman's debt were collateralized.  This could minimize the damage of a disorderly Greek default.

Once we get past the baby bull market of January, when new funds flow into retirement plans, we may see a market that is even more resilient to European news.  I hope so!

Monday, January 23, 2012

Good Morning, Mr. Stockman

President Reagan's Director of OMB was David Stockman, a life-long Republican.  I've always had a good deal of respect for him.  He was on CNBC this morning, saying that although "Obama is a failure, the Republicans are even worse."

Because of that, he predicts the U.S. will face the same financial crisis next year that Europe is facing right now.  He warned we should keep our finger on the SELL button.

What a depressing way to start a Monday morning . . . the futures market indicates the Dow will lose twenty points at the open.

The Latest View of Economists

I've been a member of the National Association of Business Economists (NABE) for years.  One of the benefits is their Industry Survey,which was released this morning. 

Overall, it indicates a slowly improving economy, with the percentage of economists expecting sub-2% GDP growth decreasing from 70% to only 28%.

A year ago, there was considerable concern about deflation.  This year, the majority of economists expect neither deflation nor inflation.  I don't think I've ever seen such a strong belief in price stability before.  (The survey doesn't discuss the possibility that the pendulum was dropped from deflation and is passing through stability before swinging into inflation again.)

Nearly one-third foresee increasing profit margins, which should be good for the stock market.

Almost none see any significant improvement in jobs.  That's the bad news!

Most surprising, many economists don't expect significant damage from the ongoing European debt crisis, and I really pray they are correct.

Sunday, January 22, 2012

Adult-Onset Fantasies

It is said the fantasies of young men involve "wine, women, and song."  The fantasies of a much older man look like this:

Monday:  The European Union, ECB, IMF, and Greek government announce a definitive, binding deal to supply liquidity and institutionalize austerity in Greece.  The Dow rises 500 points!

Tuesday:  The European Union, ECB, and IMF announce a definitive, binding agreement to stimulate growth, supply liquidity, and institutionalize austerity in the PIIGS.  The Dow rises another 500 points.

Wednesday:  Congress and the President realize the cost of NOT passing the Simpson-Bowles Compromise last year is ALREADY $130 billion and rising.  They announce unanimous support for immediate implementation of that bipartisan deal.  The Dow rises another 1,000 points.

Thursday:  Our AAA credit rating is restored.  The Dow rises another 500 points and passes 15,000 for a new record high.

Friday:  China announces they will "forgive" the $900+ billion we owe them.  The United Nations annouces there will be "peace on Earth and goodwill toward men."  The Dow rises yet another 1,000 points into record territory, passing 16,000.

Saturday:  The whole world spends a well-deserved day celebrating!  There is much hugging, back-slapping, and high-5ing around the globe!

Sunday:  The world spends a day praying that we don't wake up and realize that this is just another old man's fantasy . . .

Saturday, January 21, 2012

Pop Test

United Capital is a California-based financial services company that has developed a pleasantly short online exam to determine your attitude toward money, which obviously has investment implications.  Understanding yourself is the first step to investing.  Are you a Giver . . . a Protector . . . or a Pleasure Seeker?  Now, to find out, go to:

You don't have to enter any personal information or get any phone calls from anybody.  It is just a free perspective on your attitude toward money. 

To comply with the non-existent Truth-in-Blogging Law, I am a Protector.  What are you?

Friday, January 20, 2012

A Little Optimism ?

The second, third and fourth weeks following a quarter's end are called "earnings season," when corporations report their quarterly earnings.   We are in the middle of that season right now.  So far, earnings have been strong, although the rate of increase is slowing. 

The stock market is often considered a predictor of the economy.  (Of course, January is usually the best month of the year, as new retirement money flows into the market.)  The stock market is indicating an improving U.S. economy

The stock market is becoming increasingly sanguine about the possibility of a European solution, with the notion that a Greek default is already priced into those companies that would be most affected.  Importantly, the negotiations between the Greeks and their bondholders, which broke down last week, are going much better now.  They are under pressure to wrap up a deal this weekend, before the European summit of finance ministers on Monday.

The Greek deal is important because it would be a template for future deals.  This could be a decisive weekend . . . keep your fingers crossed!

The real drop-dead date will be before March 20th.  That is the day Greece will have to have new funding.  But, the lawyers say it will take eight weeks to do the paperwork, which means we must have the deal very soon.  Also in March, the Italian government goes back for a huge bond re-financing.

One way or the other, I suspect we will have more certainty very soon . . . and that's a good thing!

Living With Volatility

This is an interesting chart.  It shows that the earnings history of the S&P 500 companies since the Great Depression. 

At first blush, it appears that an all-time high is approaching and is a good reason to be bullish on the stock market.  But, if you look at it awhile, you'll also notice that volatility is greater than anything we've ever seen before.

Warren Buffett believes his ideal holding period for any investment is "forever."  That is the "buy and hold" strategy of investing, where you just hold it until the price/economy recovers.  The current argument is whether increased volatility makes this strategy more or less useful.

My thinking is that the level of cash in a portfolio should have some relationship to the level of anxiety about the market.  As anxiety increases, so should cash. 

Thursday, January 19, 2012

A Green Shoot

During the last quarter, one of the best performing sectors was homebuilders, such as Pulte and Ryland.  Last week, Jamie Dimon, CEO of giant JP Morgan, said the housing sector had hit bottom and was improving.  Yesterday, the Builder Sentiment Index rose to its highest level since June of 2007.  This morning, housing starts were down, which helps to clear the supply of competing foreclosed homes.

Since most economists agree that a vigorous economic recovery is not possible until the housing market stabilizes and turns around, this could indicate the U.S. economy has indeed found a bottom and the recent bull rally is sustainable.

Now, if only Europe would find its bottom . . .

Wednesday, January 18, 2012

The Joy of Inflation

The third week of the month is often called "Inflation Week," because we get data on both the Producer Price Index (PPI) and Consumer Price Index (CPI).  Wednesday is PPI-Day, and Thursday is CPI-Day.

This morning, we learned that producer prices actually fell 0.1% last month, while core prices were up 0.3%, the highest since July.  The first number was a little weaker than expected, while the core looked a little hot.  But, overall, inflation looks pretty sanguine right now.  For last year, PPI rose 4.8%, which is high, but it has been trending down.  Tomorrow's CPI is expected to be up, by a mere 0.1% as well.

What this tells me is that the Fed was right in being so scared of deflation two years ago.  They embarked on a quantitative easing program on a scale that would have produced serious inflation in normal times.  Deflation is much more self-reinforcing than inflation, which makes it much harder to control. 

Frankly, I was hoping to see more inflation.  That is one way to manage our debt burden.  We can pay off the debt, grow out of it, or inflate it away.  Right now, we are not really doing any of these . . . just adding to it.

Thin Air

Thanksgiving Day comes once a year, but being thankful everyday is very good.!

I was reading a survey by Yahoo! Finance.  As we know, Yahoo is a troubled public company that owns the highly-popular web portal, Yahoo!  A related website is an excellent financial research tool, called Yahoo! Finance

Although not discussed in the survey, I would expect Internet users of the portal would be younger and more technically proficient than the general population.  Further, I would expect users of their financial website would also be more financially aware than the general population.  That suggests a more optimistic sample for this survey, maybe even the best and brightest?

Yet, over 40% believe the "American dream" is out-of-reach for them.  One-third believe their financial situation is poor.  One-third have less savings now than last year.  37% have no retirement savings and plan to live on Social Security alone.

63% think the U.S. economy is doing worse, which is clearly untrue.  62% have serious concern for their own job security, while 90% are worried about overall unemployment.  Only one of four are confident the government has any ability to fix the economy. 

Because my circle of friends is older and more affluent, it was shocking to see such despair among the young, technically proficient, and financially aware.  Maybe, the air becomes too thin as our comfort level rises, but the loss of the "American dream" is a great loss indeed . . . for the whole world!

While I am thankful, I also feel confident there is nothing wrong with these young Americans that a good, long bull market wouldn't fix . . . at least, I hope so!

Tuesday, January 17, 2012

Gears Shifting

Europe is going thru a well-publicized transition from a welfare state to forced austerity.  At the same time, China is going thru a barely-publicized transition from an export-driven economy to a consumption-driven economy, like the U.S.

Despite the credit downgrade of nine European nations last Friday, the European markets are up nicely overnight.  In fact, sovereign bond rates actually dropped slightly this morning, and the Euro has firmed against both the dollar and the Yen.

Also overnight, China released its fourth quarter (Q4) GDP growth rate.  The bad news is that China is growing at the slowest rate in 2 1/2 years.  The good news is that the actual growth rate of 8.9% is better than the expected 8.7% growth rate.  The  risk of a "hard landing" has decreased.  Not surprisingly, Asian markets were up nicely overnight as well.

At 4AM, it looks like the Dow will open up about 120 points.  Absent bad news out of Europe, it should be a good day on Wall Street.

The risk to today's market is that we see a repeat of the bad earnings report we saw on Friday from JP Morgan, when Citigroup and Wells Fargo report today.  Readers know I have been negative on money-center banks for some time.  If we have another Lehman-style financial crisis, it will show up in the money-center banks first, which would be a propitious time to increase cash.

The risk to the long-term market is how does the world's first capitalistic engine adjust to a weakened Europe and a changing Asia?  To shift gears and become the primary exporter to China's consumers, we need the dollar to weaken.  QE3 (quantitative easing) would actually help that.  To compete against newly-lean European companies, we need the dollar to weaken.  QE3 would help that as well.  To "inflate-away" our own huge soverign debt, we need inflation, which weakens the dollar.  In other words, we need QE3

Monday, January 16, 2012

Quarterly Column

For those who do not receive the print edition of Inside Business, you can read my latest column here:

Yes Ma'am !!

As every husband knows, women are definitely the smarter gender.  Years ago, I studied some research that showed all-female investment clubs signficiantly out-performed all male investment clubs.  That difference was attributed to overly-confident males who make investment decisions too quickly.

Last night, I was studying some more research that showed women are less likely to sell.  A study of single-party investment accounts at a discount broker showed men have an annual turnover rate in their portfolios of 77%, compared to only 53% in the portfolios of women.  In other words, women are more likely to study a stock longer before buying it and then stick with it during downtowns.  Again, women showed higher investment returns than men.

Now, what would your mother say about this research?

Saturday, January 14, 2012

A Golden Oldie Newsletter

Decades ago, I enjoyed reading The Kiplinger Letter, as it was passed around the office.  When I left that job, I didn't read it again until recently, when an old friend asked me if I'd like to read his copy.  Since then, he has faithfully shared each copy.  I always appreciated the clarity of Kiplinger's expectations, which means it was not written by a lawyer.

Today, I read the most recent issue.  They expect the economy to grow slowly in 2012.  While they expect unemployment to rise in the early part of the year, they expect it will be below 8.5% by year-end.  Consistent with that, they believe full year GDP growth was 1.8% last year but 2.5% this year.  Not so consistent with that, they believe the benchmark 10-year Treasury bond rate to rise from 1.9% to 2.5% by mid-2012.  Either they do expect greater GDP growth or they expect inflation to break out.   I just do not see serious inflation breaking out that soon, especially since the Fed is still worried about deflation.

Separately, they expect Obama to approve the Keystone pipeline after the election, either as a second-term President or as a lame-duck.  Either way, I see that as a good thing.

Also, they addressed the problem of election spending, after the Citizens United decision by the Supreme Court.  They believe the expense of the presidential election will increase from $1.6 billion in 2008 to $2.5 billion this year.  You can only give $2,500 to a candidate and $5,000 to conventional PAC, but anybody can give any amount of money to these new super-PACs.  Most importantly, donors to super-PACs are not disclosed.  And, I thought sunshine was good . . . for everything except politics, I guess.

Friday, January 13, 2012

Rearing An Especially Ugly Head

As you know, I've been expecting the market to suffer in the early part of this year, which has been generally good so far.  Today, negotiations have broken down over the Greek debt.  The probablility of disorderly default has increased considerably.  This afternoon, it is expected that France will also lose its AAA credit ratings and rumored other European nations will also be downgraded.

As a result, all the European markets (except Greece??) are down, and the Dow is down almost a hundred points.  The Euro has dropped below $1.27, which drives up the dollar, which drives down gold and, over the long-term, our exports.

Is this the beginning of the bear market I feared?  Nobody knows . . .

Walking Away From Responsibility

Last night, I listened to a juvenile court judge describe his job, mentioning how painful it was for him to remove a person's parental rights or taking away their child.   Before removing a parent's rights, it is customary to order the individual to go thru psychological counselling or drug counselling.  Failure to do so is grounds for removing the child permanently.  He even mentioned one father who stated clearly that he preferred taking drugs than having a child.

He further remarked that, the more poor the parent, the more likely they are to lose the child, primarily because they couldn't afford the counselling or transportation to counselling or whatever.  In that case, he normally puts the burden on social workers to find the dollars somewhere, but it usually is not enough to change the outcome.

The discussion reminded me of an old college professor who often remarked that "you have to have a license to have a dog, but anybody can have a kid."  However, could any action by the government be more intrusive than telling a person they may not have children? 

Still, I am bothered by paying any tax dollars for counselling people who probably never should have had a baby in the first place.   (It is not even clear to me whether this is discretionary spending or entitlement spending.)

Clearly, no child should suffer for the sins of their parent!  But, should we allow parents simply walk away after dumping their kid on the welfare rolls or another parent?  (Should we allow them to have more kids?)  Obviously, we cannot extract money from them (you know, blood out of a turnip), but why not extract labor?  If we can require some offenders to provide a certain number of hours for community service, why not these people?  There is always a roadside with litter to be picked up or something . . .

Maybe, this is unfair as it is more likely to impact the poorest citizens, but there still should be a non-financial penalty other than jail-time.

Thursday, January 12, 2012

Just A Reminder . . .

If you haven't been to lately, it is your duty to check it periodically.  Of course, it might be useful to keep a supply of barf-bags handy.

A Movie Review ??

Over the years, I'm confident I have written over a million words, probably way more.  But, I've never written a movie review . . . until now.

Last night, we went to see The Descendants starring George Clooney.  The only reason I went is because Investment News magazine did their first-ever movie recommendation, urging wealth managers and trust officers to see the movie.

The law against perpetuities was well established under common law, going back to the 17th century in England.  The general rule was that trusts must terminate not later than 21 years after the last person dies, who was living when the trust was created.  It was later decided that the time would include gestation period, and the rule become "lives in being plus 21 years and 9 months.  (There has been substantial changes in this general rule since the development of dynasty trusts.)

In the movie, George Clooney is a beneficiary of a large trust owning a large, valuable piece of real estate that needs to be sold soon, as the trust is coming up against the law against perpetuities and must distribute either cash or undivided interests in the parcel.

Because Clooney is the sole trustee of the trust, he is under pressure from his large extended families to make the decision to sell the property quickly.

And, Clooney's wife suffers a boating accident and is put on life support.  Fortunately, she had executed a Physician's Directive or Living Will giving her husband the right to "pull the plug."

As a long-time trust officer who has settled many estates and managed hundreds of trusts, I was fascinated by the easy portrayal of complex subjects.  Any person who sees this movie will have a better understanding of the law against perpetuities.  They will better understand the importance of picking the right trustee, as trustees have so much power and responsibility.  Lastly, they will have a more nuanced appreciation of why everybody should have a Physician's Directive.

Of course, I doubt many women need a recommendation to see George Clooney?

Tuesday, January 10, 2012

Shape of the Bottom

A few years ago, economists argued over what shape the bottom of the recession would be.  Would it be V-shaped, which suggested a quick recovery?  Or, would it be U-shaped, which suggested bumping along the bottom for awhile before starting the recovery?  I argued the bottom would look more like the Nike Swoosh, which suggested bumping along the bottom before starting a slow recovery.  I think I was right.

It is not too early to ask the same question about the European crisis.  Because it is a financial type of crisis, it has terrified the financial markets.  We have been hoping for a V-shaped recovery, which would only happen if Merkel, Sarkozy, Draghi, and Monti walked into a press conference and shared a big, sloppy kiss.  Let us pray for that bazooka-approach.

Or, the trajectory may have changed with the decision of the ECB a few weeks ago to guarantee liquidity in the banking system by virtually eliminating any near-term debt when they issued three-year loans at low rates to member banks.  Now, Merkel has finally realized that economic growth will do more to resolve the crisis than austerity will.  That is not to say austerity is not necessary.  It is saying austerity is only one half of the one-two punch.

I suspect she is using this growth discussion to cloak the transfer of budget approvals for the weak nations into the care of the stronger nations, like Germany.  If so, she is mighty smart indeed.

This is a good example of why portfolios should not be all-cash right now.  Resolution of this financial crisis may also resemble the recovery of our economy, i.e., a Nike Swoosh.

Saturday, January 7, 2012

Over-Regulated But Under-Punished

During the current Congressional recess, the President used his authority to appoint the head of the new Consumer Financial Protection Bureau, whose appointment has been languishing in Congress for months.  Immediately, there was much huffing and puffing, which is all that Congress does anyway.

The Republicans justifiably objected that this recess appointment bypassed the Senate's constitutional responsibility to "advise and consent."  The President justifiably responded that Congress was opposed to the Bureau and wanted to cripple it by leaving it headless.  White House sources say the President has concluded it is simply a waste of time to negotiate with Congress, which would be a tragedy for the country, especially if is true.

My thinking is that we don't need another agency to protect consumers, nor do we need more laws.  We like to think we are a nation of laws.  Instead, we are a nation of lawyers, and their first response to any problem is to throw more paper at it. 

If we create ten million new laws, we will have created no new protection unless the punishment is swift and certain.  The ethically-challenged will take a chance and commit a crime, since there is scant chance they'll be caught and will only serve relatively short jail terms, even if convicted.  Besides, with prisons overflowing with minor drug-related criminals, paroles are quite common.

Did you, for example, read the agreement you signed for your credit card?  If you did try, I seriously doubt you understood it.  Now, will you be better protected if the credit card agreement is twice as long?

Because financial crimes are hard to prove and because the criminals tend to be educated white males, the punishment should be more horrific, more public, and more common.

I'd vote for fewer regulations with greater punishment . . . because we're over-regulated and under-punished!

2012 Forecast Redux

For anyone who would rather read my forecast directly from the editor instead of reading it here, the link is

Friday, January 6, 2012

Saving the Services

As a former Army officer, I feel very protective of the military, especially the Army.  When I read of major re-organizations, especially by a Commander-In-Chief who is not a veteran, I become very worried, indeed.

But, when I put on my economist hat, I understand the urgency.  The inability of Congress to either raise taxes or cut entitlements strangled our military.  We could preserve the military if we raised taxes or cut entitlements or preferably both.

Still, the military has to do its own soul-searching.  It was recently described as an HMO that occasionally kills a terrorist.  They too must cut their entitlements.

In addition, we cannot afford to fight two traditional heavy-metal wars on different fronts, like Iraq and Afghanistan, even if the Chinese are willing to lend us the money.  When I was in Special Forces school in 1968, I was taught the ultimate weapon is not the nuclear bomb, nor aircraft carriers, nor bombers, nor heavily-armored tanks.  The ultimate weapon is the guerrilla fighter, which is what we've been fighting, in both Iraq and Afghanistan.  The military has to stop "fighting-the-last-war."

Fortunately, this gutting of the military will be a slow-motion train wreck, and I'll be watching it carefully.

Good News For 200 Thousand Americans

The most closely watched economic report each month is the Jobs Report, which was just released, and it was good news.  A survey of economists expected 155 thousand jobs were created in December.  Instead, it was 200 thousand.

Most of us were expecting the unemployment rate to increase from 8.6% last month to 8.8% this month, as discouraged workers returned to the labor force.  Instead, last month's rate was revised upward to 8.7%, and the current rate is 8.5%.

The average number of hours worked per week also increased, as well as average hourly earnings.

The U-6 rate, which includes those workers working part-time because they cannot find full-time work, dropped from 16% to 15.2%, which is a BIG drop.  (This is a better measure of economic distress than the headline number of 8.5%.)

Over the last year, 280 thousand government workers have lost their job, which would have been hard to imagine just a few years ago.

Interestingly, the number of people quitting their job now exceeds the number of people laid-off, which suggests increased confidence among workers that they can find another job.

All-in-all, it was a good day for anybody named Barack and a not-so-good day for anybody named Mitt or Newt or Rick or . . .

Thursday, January 5, 2012

Too Good To Be True ?

The most important economic data is jobs.  Tomorrow will see the release of the all-important monthly Jobs Report by the Department of Labor.  A survey of economists shows expectations are that 155,000 thousand jobs were created in December.  This morning, the Challenger, Gray headhunting firm said the number of job cuts continues to decease.  After that, ADP, the huge payroll company estimated a whopping 325 thousand jobs were created in the private sector, over twice what economists are expecting.  Then, the BLS announced initial jobless claims dropped about 15 thousand more than expected.  It marked four straight weeks of declines.

While I hope all this data is correct, I'm suspicious.  First, December is historically the hardest month to predict due to the Christmas hiring/firing season.  Second, the ADP doesn't include government.  Normally, at this point in a recovery, government would be hiring 20-25 thousand a month.  However, in this recovery, that sector has been steadily losing jobs.  Third, most of the new jobs were created by small companies (148 thousand), which is typical of every recovery except this one.  Is this recovery becoming more normal, I hope?

Still, the evidence is clearly that the job market is improving, albeit slowly.

That doesn't mean the unemployment rate will necessarily decrease tomorrow.  Last month, it decreased from 9.0% to 8.6%, which was hard to accept at face value.  Normally, when the job market starts to improve, many people who had given-up looking for a job will then return to the labor force, which drives up the unemployment rate until they finally get a job.

Not surprisingly, the market likes this data, as Dow futures improved from an 80 point loss at the open to only a 25 point loss.

Sometimes, the trend is your friend!

Wednesday, January 4, 2012

The January Effect

Historically, January is the best performing month for the stock market.  When the S&P is up for the month, history tells us there is a 90% probability, it will be up for the year.  When it is up the first five days of the year, that is also a favorite bullish indicator.  Yesterday, the Dow was up almost 180 points.  So, we're off to a good start . . . or not.

Trading volume was light yesterday, mostly the inflow of new IRA funds.  Still, the economic data was also good, with manufacturing up for 26 straight months.  More importantly, there was no bad news out of Europe.

At this hour, futures suggest a slightly negative opening.  I expect this week to trend listlessly upwards, marking time until the next meeting of Merkel and Sarkozy on Monday.  But, when the warm after-glow of the holidays collides with the continued intransigence of Merkel and the ECB, I expect the downtrend to start next week. 

307 and counting . . .

The Iowa caucus is over.  The long-expected winner won, albeit barely, proving once again the importance of money and organization.  Whether you approve or not, I'm sure you're exhausted by the withering 24/7 breathless news coverage.  The bad news is that there are still 307 days of that 24/7 breathless news coverage ahead, before the presidential election.  Can't we just vote tomorrow and get it over with? 

Is it really any less intellectual to mindlessly watch NFL football games on Sunday afternoon?

Monday, January 2, 2012

The Spanish Perspective

The United States is the only nation that embraces Supply-Side economics seriously.  Thus, the debate in this country is framed in terms of whether we can reduce the deficit by increasing the tax on "job creators".

Now, compare that framework with Spain, where they take Keynesian economics more seriously.  Spain is a nation in a severe recession with extremely high unemployment and crushing national debt, having their credit downgraded several times.  Their debate is framed in terms of whether too much austerity will prevent an economic recovery, which is a legitimate question for nations without a crushing national debt.

Spain has a written goal, i.e., to reduce their budget deficit to 6% of GDP.  (The U.S. has no such agreed-upon goal.)  When the latest reports showed the deficit was running closer to 8%, they didn't take the Supply-Side approach of cutting taxes on high-income earners.  Instead, they increased those taxes.

Wisely, they also cut spending but unwisely took the Tea Party approach of slashing discretionary spending instead of entitlement spending.  In fact, they even preserved inflation adjustments for pensions, which is inexplicable to me.

I wish them well but worry they have framed the debate incorrectly and taken the wrong road.  The well-travelled and well-maintained road of Austrian economics would have raised taxes on everybody and cut both discretionary spending and entitlement spending.

Sunday, January 1, 2012

2012 Forecast -- A Year of Two Halves

For the second year in a row, the United States will be the best-looking horse in the glue factory, which means the dollar will remain strong for awhile. For the fourth time in the last five years, the political tail will wag the economic body of the world, meaning politicians are more important than “job-creators.” But, the first half of the year will be very different than the second half.

The Economics

The U.S. economy will not go into recession, unless pulled into one by a depression in Europe, (which is already in recession). Our GDP will continue to grow, albeit slowly at about 2 percent during the first half, increasing to 3 percent in the second half. Our unemployment picture will continue to improve, despite the fact that the unemployment rate will actually increase. Residential real estate will be only marginally improved. The emerging nations will continue to enjoy operational advantages over the developed nations, but inflation will become a bigger problem, which the U.S. will begin importing with our imports from those nations.

The Politics

The government of the U.S. is almost as useless as the “government” of Europe. Our Fed Head Ben Bernanke recognized the uselessness of our government and acted alone to save the U.S. economy. The new head of the European Central Bank is Mario Draghi. When he recognizes the uselessness of European government, he will have to act alone to save the European economy. Unfortunately, the bond vigilantes will not give him much time. Within six months, he will be forced to “save” Europe.

In the long run, however, good monetary policy can never fix bad fiscal policy.

Secondly, the stock market hates the uncertainty of presidential election years. Historically, presidential election years tend to be good years for the market, but the market rise begins later in the year. The sooner the winner becomes obvious to the market, the sooner the market will rise. How much it rises will be influenced by who the winner is.

The Stock Market

Modern investment theory tells us that different asset classes, e.g., large companies, bonds, commodities, etc. will not change value at the same time or in the same direction. That theory will be wrong for the fourth time in the last five years, as the precarious state of world politics overwhelms everything else.

Before Europe pulls out of its nose dive and the U.S. presidential election reduces uncertainty, I expect the Dow will approach 10,000 points but not below, and that the Euro will drop to $1.22, driving up the dollar. Both currencies will reverse before year-end.

The Year-End

While 2012 will be an emotional roller-coaster, the politics, the economics, and the stock market will all look much better late in the year.

Thank You Blog

For those of you who share the same curiosity about the world of investing, who can chuckle at life's many absurdities and still face the future with caution instead of fear, I thank you for reading my blog during 2011 and especially for sharing your thoughts with me.

For each of you, I wish a happy, healthy, and prosperous New Year . . . in that order!