Monday, September 30, 2013

Another 1 - 2 Punch

As if today's government shutdown was not enough bad news, watch out for Italy.  Sore-loser Silvio Berlusconi, who hasn't been funny since his famous "boom-boom" comments, looks like he is pulling out of the ruling coalition.  He just ordered five cabinet ministers to resign, who promptly did as told.  This is just what Italy and Europe don't need.  The Italian stock market is down sharply, and their interest costs are rising rapidly, which is critically important.  If he must go to jail, this ego-centric and egotistical politician appears willing to take his country down with him.

The shutdown doesn't worry me.  A collapse of Italy does.  Failure to raise the debt ceiling scares me!

Sunday, September 29, 2013

What Shutdown?

Imagine sitting in a high-powered car in the parking lot of a school when classes are dismissed for the day and putting the car into Drive just before jumping out.  Imagine giving Roman Candle fireworks to teenagers living in a shantytown.  Imagine being in a large crowd and firing hundreds of rounds from an AK-47 straight up.  In each case, it is unlikely to have a good ending.

That's how I think about a debt default, if Congress does not raise the debt ceiling within the next thirty days.  All sorts of bizarre scenarios are possible, and none of them are good, at least in the short run.

Certainly, the stock market will drop, as uncertainty increases.  Certainly, the cost of credit default swaps on ALL U.S. bonds will increase, driving down the market price of those bonds, which increases interest costs to taxpayers.  Certainly, the dollar will fall, as investors attempt to decrease their exposure to a dysfunctional government.  Certainly, the price of oil will drop as future demand can be expected to drop.  Certainly, gold will increase, because it is the last bastion.

While we do know this much with great confidence, we don't know how severe the reaction will be, nor how long it will last.  Many nations have defaulted on their debt before, but no nation with a reserve currency has ever defaulted.  The dollar has been the world's only reserve currency since the end of World War II.  (In fact, the U.S. used its dominant position as victor, some say unfairly, to require Europe's international contracts be expressed in dollars, insuring supremacy or reserve status of our currency.)

Besides credit default swaps, other types of derivatives scare me the most, since they are not traded on any transparent exchange.  This is part of the Dodd-Frank bank reform that is still not implemented, due to stonewalling by the industry.  Nobody, and I mean nobody, knows what is out there in derivative form.

Once we default, we will set into motion a great many things we cannot control.  With great respect for the highly innovative Ben Bernanke, not even the mighty Fed will be able to insulate us.  That is why I expect the stock market to trend down for the next two weeks, at least.  If you are an income investor, you can probably expect a big paper loss but no change in income.  If you are a growth investor, you can expect some great buying opportunities ahead.  But, be prepared for sudden, violent changes.  Only high frequency traders, who trade in milliseconds, will benefit from all this.  Long-term investors will eventually be fine, except long-term may become longer-term.

Congress has been frequently accused of protecting Wall Street instead of Main Street.  That is certainly not true now, as they are NOT protecting investors from a debt default!  Wall Street will be harmed quickly, but Main Street will have time to adjust.

And, no, I'm not interested in the government shutdown.  That is so unimportant, compared to a default on U.S. government debt.  Depending on your politics, you may be happy or sad that -- the longer the shutdown, the stronger the President's hand in demanding the debt ceiling increase.  I don't care who "wins," as long as there is no default.

Saturday, September 28, 2013

Wish I Had Said That . . .

"The primary function of sports is to provide advertisers a way to sell beer and unhealthy stuff to losers who  go to sports bars and pretend they have friends."

OK, that's definitely an ouch!  But, it does hint at the importance of advertising, which is widely ignored in economic theory.  Economists like to talk about consumers (and investors) making informed decisions in their own self-interet and ignore the fact that consumers will NOT always act in their own self-interest, because of advertising.

Friday, September 27, 2013

In Praise of Imperfection

Long ago and far away, I used to teach a junior level course at the University of Texas at Arlington called "Economics of Money and Banking."   During that course, I would teach that the risk/reward principle (higher risk deserves higher reward) applies to the pricing of loans as well.  That explains why a successful doctor might get a car loan at 8%, while a person with two bankruptcies on their credit report might pay 18% for a loan on the same car.  That is largely still true.

In a perfect world, or at least the world before 2008, that would be true for governments as well.  When Congress was dysfunctional over the debt ceiling in 2011, I didn't really think the Republicans would allow a default, because we cannot afford to pay more on our enormous national debt.  Remember, a 1% increase in our debt service on $15 TRILLION debt (2011) would be additional spending of $150 BILLION, which digs our hole even deeper.

There are no moralist overtones here.  Bad credit doesn't pay a higher rate of interest as punishment.  They just need to pay more to entice somebody to loan them money or buy their bonds.  If we prove ourselves either un-creditworthy or un-governable, buyers of Treasury bonds will naturally shy away from us and not buy our Treasury bonds,

However, even though we lost our AAA credit rating, the interest rates we pay did not increase.  Why?

In our imperfect world after 2008, Ben Bernanke and the Fed came to the rescue by buying our bonds, which is called quantitative easing.  If some buyers of Treasury bonds shied away from us, the Fed would simply buy those bonds.  In other words, the demand of our bonds or debt did not decrease, and we didn't have to pay more in interest cost to sell them.  Because of this, we have paid much less in debt service than we deserve..

Nobody knows how long this can continue, as the Fed's balance sheet has grown geometrically.  But, the sooner we stop, the sooner we can stop begging the question.

For the past two weeks, the stock market has been factoring in a government shutdown and now expects a shutdown on Monday to happen.  The market will drop on Monday but not frighteningly so.  It will continue to drop each day until the end of the shutdown becomes clear.  However, the market has not factored in a default or failure to lift the debt ceiling.  It still expects a deal.  If the market is wrong and the government actually defaults, we can expect a rush for the exits and a big drop in stock prices.

Like most riveting arguments, both sides are right.  The President is right that no president should have to deal with a Congress for permission to pay the bills Congress has approved.  The Republicans are right that every tool must be used to restrain entitlement spending.  Because the President has already indicated some entitlement reforms he would accept, such as chained-COLA increases, I pray he will offer those entitlement reforms and cost savings now in exchange for permanently ending the harmful charade of debt ceiling negotiations, thereby sparing future presidents, both Republican and Democrat .  And, I pray the Republicans would accept that.  But, of course, both sides would find that solution imperfect!

I regret NOT teaching years ago that the world is NOT perfect, and that imperfection MAY not be all bad.

Tuesday, September 24, 2013

Not Evil ?

President Reagan never referred to Goldman Sachs as "the evil empire" but some of us think he could have.  He was referring to the old Soviet Union, not the giant investment banking firm that is too-big-to-fail, unfortunately.

Nonetheless, their research is good, and here are their most recent predictions:

1.  GDP growth will be 1.6% this year but a whopping 2.9% next year.
2.  Unemployment will drop to 6.6% by the end of next year.
3.  Core inflation will remain flat.
4.  The S&P will end this year at 1,750 and next year at 1,900.
5.  Gold will fall to $1,050 by the end of next year.
6.  The euro will strengthen and the yen will weaken.

I'm surprised they don't charge a fee for their predictions . . . ??

Monday, September 23, 2013

Less European Uncertainty

Missing another bullet, the stock market is relieved that Angela Merkel's political party did slightly better than expected in the German elections, maintaining a steady hand at the top for another four years.  If she had been repudiated by the German voters, the market would be suffering badly today.

The only hiccup is that her coalition partner was repudiated, meaning Merkel will have to rebuild her coalition.  This shouldn't take more than a month, but it is now safe to assume the primary savior of the Euro will become the primary savior of Europe.

There is a famous line in J.R.R. Tolkien's Hobbit trilogy that "there will be one ring to rule them all."  A recent cover of prestigious magazine The Economist shows Merkel standing on a lone pedestal column with the title "there will be one women to rule them all."  Merkel is now the de facto leader of all continental Europe.  She is the most powerful woman on Earth!

Short-term, this means it is likely that she will continue to bail out southern Europe with the resources of Germany.  (Be thankful!)  Long-term, it will be interesting if any leader of a strong economy, who enforces austerity on other nations, can begin the unpopular process of enforcing austerity on her own country.

Unemployment in Germany is now at a two-decade low.  Enjoying a juicy level of expensive entitlements that only a strong economy can afford, it will be interesting to see how Germany sustains those entitlements with an aging population that is actually decreasing in size, a result of a low birth rate and lack of immigration.  If Merkel wants to build a legacy, she will have both to save Europe and to bring austerity to Germany.

For the present, investors should just thank the voters of Germany for "saving" Europe by saving Merkel.

Sunday, September 22, 2013

Guns and Lunatics

I like guns.  I own several.  I even have my father's old shotgun.  I am very experienced with them.   I also have a concealed weapons permit and usually carry one in my car with me.  I feel safer with guns than without them.  And, I genuinely think other people around me are safer because I have guns.

While I am probably a gun-lover, that does not mean I am a gun-nut.  I strongly believe in background checks before purchasing a gun and other reasonable safeguards.

Now, the juxtaposition of two news stories this week has made me think more about this.  First was obviously the tragedy in the Washington Navy Yard.  Some people just shouldn't have guns.  Second was an op-ed column in The Virginian-Pilot about funding for mental health in this state.

Following the gun tragedy at Virginia Tech in 2007, the state legislature wisely increased mental health funding $42 million, basking in the glory of doing the right thing.  Under cover of budget restraints, they then reduced it by $37.7 million in the dark of night.  At this point, we have the same number of state psychiatric beds as we did in 1850 despite the huge increase in the total population.  Is there no shame to having our mental health system graded as a D by the National Alliance for the Mentally Ill?  We wouldn't accept such a lousy education system.

Maybe, we need an identified funding stream for the mentally ill?  Since we gun-lovers insist on giving guns to every lunatic who wants one, we should bear some of the cost of caring for the lunatics by paying an extra tax on the sale of firearms, magazines, and ammunition.  Economists like to talk about "elasticity of demand" or how responsive is demand for a product to a change in price.  As a example, does the demand for cigarettes go down when the price goes up?  Surprisingly, no!  I suspect the demand to own guns is also inelastic or unresponsive to any change in price or tax.  Gun sales will not drop, and funding for mental health services will improve.

Besides, while the dollars raised to fund mental health are important, it is also important to more firmly link guns and mental health.  We gun-lovers should not ignore that relationship!

So, tax me . . . please!

Saturday, September 21, 2013

September 29, 2008

That was the date the House voted down TARP, a $700 billion nation-saving economic bailout (which was fully repaid with interest).   As the House voted, I watched the Dow lose a heart-stopping 777 points.

I thought about that yesterday as the House voted on the budget to kill ObamaCare.  The futures market indicated the Dow would lose a mere 30 points at the open, which it did.  (It normally has a down day after reaching a new market high.)  However, as the House voted, I watched the loss increase to 120 points.

In fairness, the Dow lost about 185 points by closing, but some small part of that loss must be attributed to Friday's quarterly "triple witching" which makes the market unusually volatile.  (This will be explained in a future blog.)  But, it caused none of the 90 point loss suffered as the House voted.

The market was reminded yesterday that, if Congress must choose between losing the purity of their ideology or losing yet another credit rating, it cannot be trusted.

After surviving the Fiscal Cliff, after avoiding the annual European collapse this year, after anguishing all year over the GDP growth rate of China, and after reaching a new all-time record high despite all the headwinds this year, the stock market now faces another new drive-by shooting by people trying to help us . . . or at least help their own reelection.

Forever the optimist, assuming the German election doesn't produce any ugly surprises next week, I do think the stock market will suffer the next few weeks before rallying into the end of the year.

Maybe, we should just stop televising House votes . . . ??

Thursday, September 19, 2013

Spare The Rod . . . For What??

Marshall Gore woke up in the cell on death row in Florida earlier this month, knowing it was his last day on Earth, as he would be executed that night.  Imagine the absurdity he felt when he learned he would be allowed to live one more day, so that the state Attorney General Pam Bondi could attend a political fund-raiser.

That was my feeling yesterday when the Fed announced they were not prepared to begin tapering the quantitative easing, which is the purchasing of $85 billion in government and mortgage-backed bonds every month.  The economy is not so weak it could not survive a $10 billion decrease.  The stock market was fully prepared for it, as the 147 point relief rally in the Dow proves.

It was time for the Fed to start unwinding a successful program before it does actual damage to the American economy by igniting inflation.  Unfortunately, the Fed blinked.  Interest rates fell, the dollar sank, and gold soared,  The likelihood of inflation just increased by some percentage.  If Janet Yellen does take Bernanke's place, as expected, the likelihood of inflation will again increase.

We also need to get the Fed out of the stock market.  Their actions whipsaw the market with every comment they make.  Analysts then ignore business realities, like earnings, growth rates, management changes and so forth, focusing instead on the Fed.

Some pundits think Bernanke postponed tapering because he knows the economic damage from a government shutdown next month would only be aggravated by tapering ahead of it.  Maybe?

While I religiously avoid discussing anything even remotely religious, I would remind the Fed of the wisdom in Proverbs 13:24, which states "whoever spares the rod hates their children, but the one that loves their children is careful to discipline them."

Tuesday, September 17, 2013

A Fat Lady Sings Tomorrow

For the last three months on Wall Street, the most important guessing game has been -- when will the Fed reduce quantitative easing (QE) and by how much?  The guessing game started immediately after the Fed's Open Market Committee (FOMC) last quarterly meeting, when Bernanke used a press conference to telegraph their intention to "take the punch bowl away from the party."  The stock market promptly threw a "taper tantrum," losing around 500 points in the Dow, as nobody really knows how dependent the bull market has been on QE; thus increasing uncertainty.

The FOMC's quarterly meeting begins today.  Tomorrow, they are expected to end this guessing game.  The stronger the economy, the more likely they are to reduce QE.  Recent economic data has been mixed as usual -- but mostly positive.

The weaker inflation, the more likely they are to reduce QE.  Inflation data released just this morning show inflation weaker than expected.

Bernanke's term ends in January, and he wants to begin the tapering before he leaves.  He seems to feel he got us into QE and would like to start getting us out.  (Of course, if the economy weakens afterwards, they have promised to increase the amount of QE at that time.)

The stock market has already priced in the decision that the Fed will being tapering this month by $10 billion eacg month, with 75% of that decrease in the amount of Treasury bonds they buy in each month and 25% of that decrease in the amount of mortgage-backed-bonds.  This ratio allows them to start weaning off Treasury faster than the housing market, where mortgage credit still retains a stranglehold on the home market.

If the FOMC delays tapering, I expect the market to rally.  If they taper more than $10 billion a month, I expect the market to weaken.

Then, the most important guessing game will be . . . what will the FOMC announce after their next quarterly meeting?  And, another fat lady will have to sing then.

It also shows how difficult it is, when the government is such a huge player in the economy, for the stock market to function like a stock market, which worries mostly about company earnings instead of monetary policy.  While I think Bernanke did a heroic job of preventing an actual depression, I'll be happy when they are finished saving the world.  Maybe, we can then get back to the textbook stock market we have studied for so many years.

Monday, September 16, 2013

Larry Yellen or Janet Summers

Names are not important.  Thoughts, words, and policies are.  The surprise announcement that Larry Summers was withdrawing his name as a candidate for Chairman of the Federal Reserve, replacing Ben Bernanke, leaves the door open now for Janet Yellen to become the first female Fed head.

Appointing the head of the Federal Reserve is one of the most important appointments Presidents make. President Obama was reportedly backing Summers, as they had worked together closely during the darkest days of the global financial crisis.  Advantage:  Summers!  Yellen is currently Vice Chairman of the Fed.  Both are brilliant economists and intimately familiar with the details of the Fed.  Advantage:  Yellen!

Popularity played a bigger part in this drama than I have ever seen in choosing a new Fed head.  Yellen was considered a conciliator, who was thoughtful and gracious.  Summers could be expected to tell a U.S. Senator he was stupid, which makes great television but is not helpful.  Summers claims he withdrew his name because so many members of Congress have already promised to vote against him.

But, it is ironic that Republicans lined up against Summers, because the choice was not a question of economic brilliance, nor a personality issue, not even a male-female issue.  The real choice is between a hawk and a dove, relatively speaking.  Republicans blocked the hawk, the more conservative choice.

Summers, who grew up in an extended family of Nobel-winning economists, is more hawkish than Yellen, which means he would end quantitative easing or the buying of Treasury and housing bonds sooner and let interest rates rise faster.  Yellen is more dovish, which means she will taper more slowly and keep interest rates lower for a longer period.  Because Wall Street is nervous about the tapering of quantitative easing, stock markets around the world are giddy with joy that Summers withdrew.

My thought is that since both Summers and Greenspan were so instrumental in the deregulation of derivatives, neither should ever be or have ever been Chairman of the Federal Reserve System.  Both argued that derivatives are self-regulating, and they are . . . until they aren't!

Friday, September 13, 2013

Reader Reactions

Yesterday's blog noted the list of serious worries has dwindled over the past year.  One reader questioned why there was no mention of the tapering problem.  Briefly, the Fed is now buying $85 billion worth of Treasury and housing bonds each month.  This has been very good for the stock market, obviously.  Three months ago, Bernanke suggested the time to decrease the monthly buying was coming to an end, and the stock market promptly had a "taper tantrum," causing the lull we saw this summer.  Next week, it is expected to begin, with the Fed decreasing its purchases from $85 billion to $75 billion.  There is fear that this could let the bear out, creating stock market losses.  I didn't include this as a serious concern, because it has been a concern for only the last three months and, more importantly, because it is already priced into the market.  Of course, if the Fed reduces the monthly purchases from $85 billion to only $50 billion, you can expect the market to react negatively . . . but the Fed won't do that!

Secondly, one reader took issue with my repeatedly referring to members of Congress (and Administration) as "elected children" who demand everything be done their way.  Maybe, the problem is not the immaturity of the legislators (agreed), nor the gerrymandered political districts (which I do believe).  Maybe, it is a structural problem.  Here are his comments, and I couldn't say them better:

I heard on a recent Fareed Zakaria CNN show several "experts" talk about how on both the national and state levels there seemed to be enough space between the politicians and the citizens that real gridlock could result.  At the local level, however, the politicians were often so close to the issues they were dealing with that practicality could prevail and something constructive could be done.

Maybe the problem isn't gridlock or "this Congress."  Maybe it is that too many problems are being addressed at too high (distant) a level.  (That isn't to say that there are not some problems that really must be addressed at the broadest level.)

I believe many business people believe that once a plant gets to be beyond a certain number of employees that something fundamental changes.  I think the same applies in other places - think high schools.  Maybe we would all be better off if there was less governing and legislating and the people in Washington (and Richmond) spent more time at those cocktail parties where they could actually get to know one another.

That is good old-fashioned, but currently unfashionable, Reagan Republicanism.  All I can add is . . . amen!

Thursday, September 12, 2013

Whittling Worries Away

Every Wall Street analyst knows the stock market normally falls during the Fall, with Septermber/October being particularly ugly before rising at year-end.  This year, however, history may not be a reliable guide to the future.  After a lousy August, September has already gotten off to a great start.  Why?

Have corporate earnings suddenly improved dramatically?  No, they continue to grow nicely, even though the rate of increase is slowing, due to the Law of Large Numbers.  The U.S. economy is still "the little engine that could" and continues sputtering upward.  But, something must have changed to explain this bull market?

Remember this time last year.  We were living in terror of the Fiscal Cliff, another European collapse, and a severe recession in China.  Since then, we somehow avoided falling off the cliff.  Europe calmed down, with bond yields dropping nicely.  And, there is plenty of evidence the Chinese economy will pick up steam.

The terror of the Fiscal Cliff has morphed into terror of the debt ceiling negotiations, but Wall Street believes "the fix is in."  Over in Europe, Greece probably needs another bailout and Italian bond yields have started increasing again, but Wall Street believes Merkel's re-election is secure.  In China, the debate is not about recession but whether their GDP will grow 4.5% or 7.5%.  Importantly, it is now clear China is actually revamping its economy, not just talking about it, from an export-driven model to a consumption-driven model, like the U.S. and European economies.

It is often said that Wall Street always faces a "Wall of Worry."  That is their job, i.e., to be worried.  But, it looks like the worries are being whittled away.  They will never be eliminated, as we must always worry  about the future.  But, Wall Street seems to have lost its fear . . . temporarily.

Of course, if we get sucked into Syria, if Congress prefers a credit downgrade to expanding health coverage, if Berlusconi tries to take Italy alonog down with himself, we should expect a severe sell off . . . and then a gradual recovery . . . again.

Personally, all other short-term worries are manageable at this point . . . except for the elected children in Congress.  After all, it is my job to worry!

Monday, September 9, 2013

Sound of Silence

I love my wife!  Yes, I know that is a bizarre way to begin a blog.  Of course, after the next sentence, every husband knows why I opened with . . . "I love my wife."

When she informed me she was going to Houston to see family, my first thought was serenity, and I started making rules for my highly anticipated alone-time.  First, television was limited to one hour of news daily.  I broke that rule, just by going to the gym, which has televisions everywhere.  Then, I found out the Cowboy game was televised Sunday night.  First rule clearly broken!

Second, I was going to concentrate on my next book by studying some new books on "human finance" but they didn't arrive on time.  So, I only worked on it a little.  Second rule partially broken!

Third, I was going to be reclusive, avoiding human contact.  I saw lots of people at the gym but talked with no one.  But, the nice people at Subway who prepared my tasty dinner both Saturday and Sunday nights asked me several questions, and I ended up talking with them.  Third rule too stupid not to break!

I guess that making bachelor rules is not in my skill set.  With all due respect to Simon & Garfunkel, the Sound of Silence can be over-rated.  They were smart not to call it the Joy of Silence.

She'll be home tomorrow, and the silence will be gone . . . and that's just fine!

Over-Thought And Over-Wrought . . . over nothing

Have you heard the joke about the existentialist who says to his doctor "I have liver disease."  The doctor asks "how can you know that, since there is no discomfort of any kind with liver disease?"  The existentialist replied "I know, I know, those are my exact symptoms!"

OK, OK, nobody ever said that existential humor was funny.  So, imagine my curiosity when I read that Hollywood actually produced an existential comedy.  I've seen lots of existential movies, like Apocalypse Now in 1979 or Leaving Las Vegas in 1995.  But, I could not imagine an existential comedy.  It is titled I Heart Huckabees.  But, with Dustin Hoffman, Lily Tomlin Mark Wahlberg, Jude Law, Naomi Watts, and Shania Twain, why wouldn't I watch it??

One of the most popular tenets attributed to existentialism is that every person is an island -- removed and cutoff from the rest of humanity and the world.  Jumping from that tenet, the movie shows the faux debate between "everything in the world is connected" . . . and "everything is atomized, random,and chaotic."  Obviously, both positions are both correct and wrong simultaneously.  But, the movie's humor is about the struggles of everyday people trying to deal with weighty subjects.  It is surrealistic to think everyday people even care about, much less struggle with such issues, and, believe it or not, that actually becomes quite funny.

Because I expected the movie to be nothing more than some amusing intellectual fluff, I thoroughly enjoyed it.  But, would I recommend it for others?  Well, no . . . unless you're an existentialist.

Sunday, September 8, 2013

Certainty Denied !

Friday's Jobs Report was widely anticipated.  Wall Street was holding its breath.  It has been tying itself into knots worrying that the Fed was about to "take the punch bowl away" or start tapering quantitative easing (QE).  A good Jobs Report will be the trigger to start this tapering or reducing the amount of QE each month.

To refresh your memory, QE is when the Fed purchases bonds issued by the Treasury Department.  Because this increases the demand for those bonds, they are easier for the Treasury to sell the bonds at lower interest rates.  This has been a primary tool for the Fed to keep interest rates low.  If the Fed tapers or reduces its monthly purchases of Treasury bonds, then the Treasury will have to issue those bonds at higher interest rates in order to sell them.  So, beginning any reduction in monthly purchases by the Fed equals the beginning of interest rates increasing.

All of this was in the back of Wall Street minds on Friday, when the Department of Labor announced 169 thousand jobs were created last month.  The market was expecting about 175 thousand, so that was close enough for economists, but not Wall Street.  If it had been 200 thousand, the Fed would be tapering soon.  At 150 thousand, the Fed would not begin anytime soon.  At 169 thousand, it was not too hot, not too cold -- just perfect for Goldilocks maybe, but not Wall Street, which craves more certainty.

Coincidentally, Wells Fargo just released some interesting research on jobs.  It confirmed the widely held belief that most of the jobs being created were the low-paying jobs.  However, it also found that average real wages for the low-paying jobs was still dropping despite rising job creation.  Further, it found average real wages for high-paying jobs were rising fast despite weak job creation.  Certainly, increasing wage disparity is not good for what remains of the middle class, but nobody ever said capitalism was not cruel, only that it is efficient.

This rising income disparity tells me that the long-term unemployed have lost marketable job skills and will take whatever pay they can get, while businesses cannot find enough people to hire for high-paying jobs and are paying their current employees better to make sure they don't leave.  That's efficient, isn't it?

Anyway, the Jobs Report is issued at 8:30 AM on the first Friday of each month.  Wall Street will be holding its breath again on October 4th . . . so will I!

In the meantime, the Fed meets again next week, and who knows what they'll do?  That's the problem!

Saturday, September 7, 2013

Losing Sleep Over Syria ?

Interestingly, I have received a surprising amount of feedback that yesterday's blog, which listed my concerns for the market this Fall, did not include anything about Syria.  The reason is that I don't expect anything to happen, i.e., that the U.S. will not attack Syria.

I wish the President had immediately lobbed a couple of dozen Tomahawks into Assad's back yard and then apologized for his haste later, before his political opponents got organized and the very real counter-threats from other countries could develop.  Unfortunately, that didn't happen, and it is too late now.

The President will be weakened politically in the U.S., but his Nobel Peace Prize will shine even more brightly abroad.  (Like his Democratic predecessor, Bill Clinton, he will always be more popular abroad than here.)  When Assad massacres more women and children, as he certainly will, Obama will be in position to remind us, both here and abroad, of his moral outrage.

However, I am somewhat concerned that his resulting weakness here will cause the Republicans to over-reach during next month's debt ceiling negotiations.  That would be unfortunate for all of us!  The President's moral indignation is probably quite high now, following his embarrassment over our impotent response to the last Syrian massacre, and this might make him more difficult to negotiate with.

If I am wrong, the market will drop dramatically, e.g., several hundred points on the Dow, as soon as the market believes a strike is certain.  That will be a great buying opportunity.  Of course, it would be a better opportunity if . . . oh, yeah, we still have gridlock . . . never mind.

Friday, September 6, 2013

Decreasing Uncertainty ?

Readers know I have been concerned about the market over-reacting this Fall to the rising uncertainty. The primary cause of this uncertainty is the impact of the Fed tapering its quantitative easing (QE3).  We will know much more about it on Friday when the monthly "Jobs Report" is issued.  If the economy created over 200 thousand new jobs last month, we can expect tapering to begin almost immediately.  If less than 150 thousand, we have a few more months before they start.  The important thing is that the stock market is already expecting it soon, which is depressing the market somewhat now but taking some future volatility out of the market when it happens.

The second cause of the uncertainty this Fall is the pending budget/debt ceiling debate.  The scuttlebutt I've been hearing is that the budget battle will be delayed until next month, so that debate can be combined with the debt ceiling debate.  But, the fix may be coming together, so that everybody can claim victory even though precious little is accomplished.

Look for a decrease in farm subsidies, increased fees for government services (imagine application fees for Social Security or filing fees charged by the IRS, if you don't file electronically), increased Medicare co-pays for high income (not high asset) taxpayers, and slower cost-of-living increases.  This decreases the rate of growth for entitlement spending, plus it decreases subsidies for high-income taxpayers, which includes those receiving farm subsidies.

If all of that simply continues Federal spending at the current level, we will have stabilized the annual deficit at about 4% of GDP, compared to the 10% we experienced a few years ago during the global financial crisis. The elected children from the Republican Party can claim they prevented another tax increase on the "job-creators," despite allowing increased Medicare costs and decreased farm subsidies for them.  The elected children from the Democratic Party can claim they took more money from "the rich" and also prevented cuts in monthly benefits of Social Security and other entitlements.

Although this will not happen until the last possible minute, it certainly does reduce uncertainty, which will help the stock market.

The third cause of uncertainty is Europe, of course.  Now, it looks like Merkel will win re-election easily. Despite her hardliner talk during her campaign, it is believed she will be in a stronger position to re-fix Greece, as she has done twice before.  Of course, Italy has become even more problematic, with the former president threatening to pull out of the ruling coalition.  So, who knows . . .

So, while it is still too early to hear the fat lady sing, I am feeling more optimistic about the stock market's traditional ability to predict the future.

Thursday, September 5, 2013

Barack O'Claus

Thank you, Mr. President, for the early Christmas present!  As someone who had come to the reluctant conclusion that Congress was a failed institution that needed to be "repealed and replaced," it was refreshing to witness the behavior of our Elected Children -- after you tossed Syrian question to them.  They actually acted like adults, imagine that?

Watching the Senate Foreign Affairs Committee take testimony was absolutely refreshing!  With a few comical exceptions, they treated each other with respect.  They asked thoughtful questions.  They listened to the witnesses and even listened to each other.  They behaved as one would expect from the "world's greatest deliberative body" as the Senate was called long ago.

I guess the difference during that hearing was that there was no preexisting partisan position to follow. The senators were wrestling with what was right for the country, not what would assure their reelection efforts -- by fending off a primary competitor.

Thank you, Mr. President, for reminding me of how great our Congress used to be . . . and could be again, if we could just un-gerrymander political districts so that they elect centrists, instead of extreme "true believers."

And, that would be sooooooo good for the stock market . . .

Monday, September 2, 2013

Loving To Hate . . . or, just hating to love?

Republicans probably think these numbers are too low.  Democrats probably think these numbers are too high.  Because these numbers can be spun by politicians on both sides endlessly, they must be "in the ballpark."  So, here are the numbers:

The economic nerds at the San Francisco Federal Reserve Bank have estimated that the economic cost of Washington's indecisiveness and gridlock is about two million full-time jobs and even more part-time jobs. Because businesses are paralyzed by fear of the active Washington regulators and the inactive Washington legislators, they are not expanding their workforces fast enough.  If they became confident that Washington was no longer a direct threat to them, they would begin hiring, and the unemployment rate would drop 1.3% to just 6.1%, which is almost down to our 20-year average rate of unemployment.  In other words, the only thing keeping us from a normal economy is Washington.

Two million people no longer receiving unemployment benefits and actually paying income taxes instead -- that would also be very good for the annual budget deficit as well.

Some pundits have speculated that the President's decision to make Congress decide on a Syrian response would cause so much strife among both Republicans and Democrats that they might accidentally talk to each other again (Heaven forbid) and actually break the gridlock before next month's epic budget battle! That might be the bravest or the dumbest political calculus in history.

Lots of people find it pleasant to hate Washington and blame all our ills on it.  I find Washington is just another fact of life, deserving neither to be loved nor hated.  However, the two million individuals who are denied jobs, people who are denied benefits, who cannot feed their family or pay their rent -- they are entitled to hate Washington.  The rest of us should just count our blessings and our relative immunity from Washington.