Wednesday, December 31, 2014

Long Live 2015

As we are ruled, collectively and individually, by time, it is appropriate to mark the end of each year.  Since 1422 when French king Charles VI died and was replaced by Charles VII, the expression of "the king is dead, long live the king" has been used to assure us that the throne is never empty.  We remain ruled by time --- 2014 is dead, long live 2015 ---

As 2014 dies, don't forget 2015 is a fresh start, a time of new opportunities.  Take the opportunity to forgive somebody who has hurt you.  It will help you more than it helps them.

From an investment standpoint, only once since 1885 has the stock market gone down in any year ending in the number 5, as in 2015.  That doesn't mean it won't be a rough ride, because it will be, given all the geopolitical uncertainty.  In addition, the third year of a presidential term is historically the best, and 2015 will be the third year of Obama's second term.

Party on . . .

Tuesday, December 30, 2014

Advice For Your Grandchildren

I have been reading The Kiplinger Letter most of my career and appreciate its optimistic, plain-talk outlook.  They have just published a letter of advice to their grandchildren, and it is excellent.  I recommend giving it to your grandchildren.  You can find it at: 

Monday, December 29, 2014

Paying The Piper

The current president of Turkey is Recep Tayyip Erdogan.  He once said the "democracy is like a streetcar.  When you get to your stop, you get off."  I've wondered about this for a long time.

That quote came to mind when reading about the snap election just called in Greece.  The Greeks were arguably the most pampered people on the planet, with universal health care and very, very liberal retirement packages.  It was a classic case of generational irresponsibility, where one generation puts the following generations into debt.  Retirement at age 55 at the government's expense is probably immoral.  It is clearly imprudent financially.

The Greek economy has already been rescued twice by the European Union, who demanded increasing austerity.  Now, the Greek voters have said they have had enough austerity and want to return to their profligate ways.  It jeopardizes the third and final tranche of help from the EU.  The Greek stock market gave a prompt response -- it dropped 10% in one day.  Imagine the Dow dropping 1,800 points in one day!

The Greek voters have been so spoiled for so long that they cannot vote in their own best interest.  Is this the stop that Erdogan identified as the end of democracy?

Or, is democracy just another social welfare program that can never be removed?

Saturday, December 27, 2014

Lessons Not Learned From TV

Other than business shows and news shows, there is little I watch on television.  However, in 2007, I became fascinated by a show on CNBC called American Greed.  It described true stories about how innocent people got cheated, usually by a financial advisor running a Ponzi scheme.  At first, I was amazed that investors didn't realize how essential a custodian is, to independently hold the assets managed by the financial advisors and to prepare honest financial statements, which are sent directly to the investor.  But soon, it became tiring to watch the same mistake repeated over and over, and I stopped watching.

A few years later, I started watching it again.  This time, I became focused on the financial advisor and occasionally researched the advisor after the show, to see if there were any clues to predicting their dishonesty but never found any meaningful clues.  Again, it soon became tiring -- watching financial advisors doing the same dishonest things, and I stopped watching.

Recently, I returned to the program . . . for the last time, hopefully.  This time, I was struck by the asymmetry of punishment.  Most of the victims were damaged for the remainder of their lives.  In addition, their children and grandchildren were cheated out of their inheritance.  Yet, most of the criminals received only 8 to 14 years of prison time.  They will be out of prison while their victims are still suffering.  There is something patently unfair about this!

But, what is the point of locking up everybody forever, especially at a cost of $50 thousand per year per inmate?  The taxpayers also become victims.  Existentialists argue that modern society is overly-reverent about life under any and all circumstances.  There has to be a point where the benefit of life outweighs the cost of maintaining it, but where is that point and who gets to decide?

How about putting the death penalty for dishonest financial advisors on the ballot, for everybody to vote?  If so, I'll be going door-to-door soliciting votes for passage!

Let us vote!

Friday, December 26, 2014

HO HO HO . . . NOT

Congressmen should never be allowed to decorate a Christmas tree, as they would hang or hide the most ugly and most dangerous ornaments both on and under the poor tree!

As a minor example, the latest budget bill repealed limits on the number of hours a commercial trucker could work.  As someone who spends way too much time on interstate highways, I am not happy that the guys driving these huge monster trucks will still be sleepy.  It was repealed before it even took effect and is an ugly holiday ornament indeed.

More importantly, following the global financial collapse in 2008/9, it was obvious that collapse was made larger and more dangerous because of the lack of transparency and the unsupervised nature of derivatives.  Congress tried to contain the problem, but the big money-center banks hired every lobbyist on Connecticut Avenue to combat Congress.  Four years after passage, the Treasury Department has still not be able to even define the problem, due to the intensive and expensive lobbying.  No, nobody is saying that the money-center banks want to destroy America.  They just want to maximize their personal incentive plans.

Alan Greenspan, ever the libertarian, believed corporations would never do anything that threatened their own existence.  He recalled a bygone era when employees mirrored the loyalty of their employers.  Unfortunately, that two-way loyalty is very bygone, and the loyalty of employees now lies with their incentive plan, not the employer.  "If the company craters, I'll just go somewhere else and take my money with me."

Thus, another ugly and dangerous ornament on the 2014 budget Christmas tree is a repeal of the limits on derivatives, so we can avoid knowing which banks are exposed to which risks.  It is like lending money your next-door neighbor without knowing anything about him.

However, in the shadow of that poor mistreated Christmas tree, there is always more to hide.  Congress is trying to require that the Congressional Budget Office (CBO) use "dynamic scoring."  The CBO has earned a good reputation for non-partisan estimates of the costs of legislation.  Congress now wants to require CBO to use Supply-side economics to make those estimates.  To economists, that is like Congress telling Presbyterians, Catholics and Jews that they all have to be Baptists (no disrespect to any religion intended).

There is a time and a place that Supply-side economics works better than Austrian or  Keynesian economics, but it is not always and not everywhere.  Dictating "religion" to economists is just stupid and counter-productive!  Doing unpopular things under the cloak of the holiday season is just rotten, even if predictable.  I can't hardly wait to see what is done under the cloak of the 2015 holiday season!

Happy Holidays to Congressmen has a very different meaning . . . it is a time for skullduggery!

Wednesday, December 24, 2014

With Open Arms

Merry  Christmas 

Happy  Hanukkah

Happy  Kwanzaa

Warm  WinterFest

Tuesday, December 23, 2014

Your Homework Assignment

Some have described the U.S. economy as the only clean shirt in the dirty clothes hamper, meaning the rest of the world is in worse shape than we are.   True!  While I wish nothing bad on the people of Russia, their current economic woes do give me some unseemly degree of satisfaction.  And,while I wish nothing bad for the people of Venezuela, I have described that country as "circling the drain."

Wells Fargo has prepared an interesting study, which ranks the emerging markets most likely to default on their national debt, taking into consideration (1) the ratio of externally-held debt to Gross National Income, (2) the ratio of external debt to foreign exchange reserves, (3) the ratio of debt service on external debt to exports, (4) the percentage of depreciation in their currency against the dollar since September 1st, and (5) the ratio of their current account divided by GDP.  It is an impressive study, indeed!

Their conclusions are surprising.  The five nations most likely to default are Ukraine, Serbia, Turkey, Hungary, and Belarus.  I'm a little surprised by Ukraine but very surprised to see Turkey in such bad shape.  The five nations least likely to default are China, Philippines, Nigeria, Thailand, and Vietnam.  China is certainly not a surprise, but it is a little distasteful that oil-exporter Nigeria, which doesn't even protect its school girls from thugs/terrorists, can be so strong economically.  Of course, I'm simply speechless that Vietnam now has such a good economy . . .

As the world in general and emerging markets in particular adjust for lower oil prices, it is clear to me that those investors who invest primarily for income and have a weak stomach for volatility should make sure they don't have any global bonds or, even worse, bond funds in their portfolio.

Are you that type of investor?  Then, why are you just sitting there??  Go check your portfolio -- NOW!

Saturday, December 20, 2014

Human Capital

In survey after survey, we see that the concentration of wealth in fewer people continues to increase.  The latest Pew Research study shows the net worth of the top 20% of Americans doubled from $318,000 in 1983 to $639,400 last year, while it actually dropped for the bottom 20% of Americans from $11,400 in 1983 to only $9,300 last year.  In a rare moment of agreement, nobody thinks this trend of increasing concentration is good for our nation.  At some point, social instability becomes inevitable.  Unfortunately, that is the end of agreement.

Some say that the rich are just working harder, while the poor are getting lazier, but that is not very helpful.  The Christian religious community does not help very much.  Some point out that the Bible reminds us that the poor will be with us always, so why worry about it.  Other Christians maintain we are our brother's keeper.

In economics, the supply-side disciples argue another tax cut for the rich would free-up capital which would be invested to produce more jobs . . . maybe.  Keynesian disciples pose the double-negative rhetorical question of "how can we NOT help the poor?"  Austrian disciples argue the problem is not about economics but about politics -- just don't create any new regulations.

In politics, the always-persecuted Republicans ask how can we be sure we don't help one single undeserving poor person?  The always crybaby-Democrats insist the poor are merely victims of Republican indifference.  (Then, there was the stunningly simple assertion of 1972 presidential contender George McGovern that people are poor because they don't have money, so let's give every poor person one thousand dollars.)

It may be more useful to look thorough the lenses of social science, where they study social or human capital, which are non-quantifiable, non-monetary assets of some people.  Nobody disagrees that intelligence is better to have, than to NOT have.  It is a type of human capital and has value, but cannot be expressed in dollars.  Other types of human capital include being raised by educated parents, so that children can absorb education, perspective, and even speech patterns.  Being taught traditional manners has a value to certain humans that is likewise not measurable.  Does anybody doubt the value of connections or the power of a fat Rolodex?  Likewise, you cannot measure that value nor put it on your financial statement.

French/Swiss philosopher Jean-Jacques Rousseau wrote The Social Contract in 1762, saying that a person is merely the product of his environment.  (The immortal opening sentence is "Man is born free, and  everywhere he is in chains.")  We can look at environmental capital as human capital.  It is non-monetary and non-measurable.  Environment can be a type of predestination.  While it doesn't necessarily have to be a predestination into chains, it usually is.  

Now, what should be the policy response to the social problem of increasing concentration of wealth?

No, "let them eat cake" is not a policy option!  Ask Marie Antoinette . . .

Friday, December 19, 2014

Waiting At The Altar

Free Enterprise is the happy marriage between the economic system of capitalism and the political system of democracy.  They are a cute couple and look like they belong together, but apparently not everybody agrees.

For those of us who worship at the altar of Free Enterprise, we were excited with the introduction of capitalism into Russia and China, confident that it cannot exist in the long-term without its connection to democracy.  Yes, we know that democracy was happily married to socialism in Israel for many years before moving on to capitalism, which only proves our belief that capitalism and democracy just naturally belong together.

In Russia, that marriage was never consummated, as democracy was stillborn and capitalism subverted into something else, i.e., "crony capitalism" or a "thugacracy."  In China, capitalism successfully brought hundreds of millions of people out of poverty, while waiting impatiently for democracy to show up.  There have been sightings of democracy, such as in Tiananmen Square in 1989 and more recently in Hong Kong, but capitalism is still lonely in China, waiting to meet democracy.  Unfortunately, it looks like a very long wait.

Now, it appears that capitalism is a camel with its nose under the tent of Cuba.  Those of us who are still worshiping at the altar of Free Enterprise are still hopeful that democracy will eventually follow.  But, we have learned that the value of capitalism is more apparent to thugs and dictators than the value of democracy.

Thursday, December 18, 2014

Santa Cheats

Gifted and/or cursed with the "early to bed, early to rise makes a man healthy, wealthy, and wise" and/or sleepy metabolism, I get to watch the European stock markets open most every morning.  It is like watching the sun come up, where one witnesses renewal of the physical universe, only that I witness renewal of the commercial universe.  It is a living, breathing phenomenon.  (On weekends, I use the quiet of early morning to simply write.)

However, during the last two weeks of December, I usually enjoy the "Santa Claus rally" by sneakily watching The Golf Channel, instead of CNBC or Bloomberg.  So far this month, there has been serious question whether Santa was coming or not, and I have been cheated out of my annual golf fantasy.  Now that it looks like Santa has just arrived tardily, I'm going to watch The Golf Channel and start working on my annual New Year's Resolution to play more golf next year . . . which I secretly know I will never do!

Replace or Repair

Conservative pundit Michael Gerson has written an excellent column about the need for compromise in Congress.  Please read: 

Crashes Are Transitory?

Back in 1980, I was doing graduate study in international finance at the University of Dallas when I took a course in the economics of energy (which is not surprising in Texas, I guess).  I learned that oil is the most competitive commodity in the world, as well as the most regulated.  Most of all, I learned that oil is the most important commodity in the world, even more important than gold.

So, it was surprising to me when I heard Fed Head Janet Yellen describe the impact of oil's recent crash as "transitory."  As we know, this commodity has caused a massive shift of wealth to the Middle East from the rest of the world.  The lack of that commodity nearly brought our economy to its knees in the early 1970s.  It accounts for 10% of all construction in this country, larger than government or office buildings or shopping centers.  It is largely responsible for the robust job growth we've seen this year, due to fracking.

How many national economies have we seen rise or fall with the price of oil?  How many national leaders have we seen replaced, when their oil-based economy suffered?  There is even a remote possibility of Russian president Putin being deposed in the near future.  How many wars have we seen fought over oil?  How many people have died?


I guess the way to look at this unfortunate choice of words is that she was not under-estimating the importance of oil.  She was just suggesting that the price of oil will rebound within three months, agreeing with Goldman Sachs, and that the geopolitical changes will also be short-term.  Now, is that good or bad?

Wednesday, December 17, 2014

The Squid's 2015 Outlook

Self-esteemed investment bank Goldman Sachs has released their outlook for next year.  In no particular order, they expect:

1.  The S&P will rise to 2,100 over the next three months and stay there for the rest of the year.
2.  The European stock markets will rise 12.3% by 2015 year-end.
3.  Interest rates will start moving up quite soon, with ten-year Treasuries going from 2.1% to 2.5% within three months and ending the year at 2.85%.
4.  The dollar will rise 7.8% against the euro.  (Think European vacation!)
5.  The dollar will rises 9.5% against the yen.  (Think Japanese vacation????)
6.  Oil will recover within three months, with Brent Crude hitting $85/bbl before stabilizing.
7.  Gold will continue falling, reaching $1,050 by year-end.
8.  GDP in the U.S. will rise from 2.2% this year to 3.1% next year, which is impressive.
9.  China's GDP will continue to decelerate slowly, dropping from 7.3% this year and 7.0% next year.
10.  "The geopolitical condition is often quite difficult to quantify and unpleasant to summarize.  Although turmoil in Russia and Ukraine and in the Middle East bears watching in 2015, the majority of geopolitical hotspots are, in our view, regionally tethered and of limited broader economic consequence."

Reflecting the respect I have for their research department, I can see the logic of all these predictions except #3 above.  With the high level of uncertainty and nagging level of U-6 unemployment and Yellen's dovish nature, I cannot see interest rates rising so soon.  It is also surprising to me that they expect strong GDP growth of 3.1% but without a more significant increase in the stock market.

Tuesday, December 16, 2014

"Considerable Period"

The friendly wagering on Wall Street last week was whether the phrase "considerable period" would be removed from the language describing the remaining time the Fed will keep interest rates at historic lows.  It is an important distinction.

The Street is expecting it to be removed, at the Federal Open Market Committee (FOMC) this week.  This reflects the market's expectation that the Fed will initially raise interest rates modestly in the second quarter (Q2) of next year.  If it is removed, it will put modest downward pressure on the market.

My bet is that the Fed will retain that magical phrase, because uncertainty has increased so much within the past week.  Few, if any, analysts predicted this collapse in oil prices.  Fewer, if any, analysts predicted the huge subsequent impact on Russia, where their currency is collapsing dramatically, along with their stock market (which is down a whopping 14% so far today).  Retaining the language will put upward pressure on the stock market.  However, with so much downward pressure, it may not even be noticed.

When most people think about market crashes, they think of the horrific, iconic 1929 crash.  Most can actually remember 1987, when the market dropped 24% in one day.  My expectation is that, if this continues, the crash will look more like 1997-98.  Remember Long-Term Capital Management, the collapse of the Thai baht, and chaos in Russia?  If so, then you must also remember that the stock market got over it and moved upward to new record highs within two years?

Some thought-leaders say that the Days of Globalization are over.  The United States is an economic fortress, comparatively speaking, to the rest of the world.  Yet, the troubles of the rest of the world continue to wash up on our shores, and that sure looks like globalization to me.

It is still unthinkable that the egocentric, egomaniac, ex-KGB, intensely nationalistic Russian president will take his country to war . . . but only barely unthinkable!  It might be the only way Putin can survive.  Otherwise, unlike the Fed, he does not have a "considerable period" before he disappears into history.

Sunday, December 14, 2014

An Individual Duty

Senator John McCain is right.  We should renounce all forms of torture and should abide by the Geneva Convention . . . as a nation.  If we are to ever become the "shiny city on the hill" that President Reagan wanted us to be, we must renounce torture and once again embrace.the Geneva Convention . . as a nation.

However, in the wildly unrealistic situation that I am holding the hostage who has the code to prevent an explosion killing Americans in one hour, I would immediately begin severing fingers, toes, and all other appendages until I get that code.  Afterwards, I would throw myself on the mercy of the court, because serving time in prison is a cheap price for serving my country . . . as an individual.

Sometimes, what is wrong for a country is justifiable for an individual.  The Chinese argue that Americans suffer from the "cult of the individual," placing the good of the individual above the good of many.  I would argue with them . . . not always. 

Thursday, December 11, 2014

Short-Term Pain

You are really, really old if you can remember the TV show entitled The Millionaire.  It ran from 1955 to 1960 and illustrated possible effects on normal, unsuspecting people when they were suddenly given a million dollars, which was an unimaginably huge amount of money at the time.  Some people quit their jobs and therefore lost their identity.  Some people watched their family spin apart as they all had strong ideas what should happen to the money.  Some people became jerks, alienating those who loved them.  Some found ingenious ways to just give away their money.

Right now, the stock market is convulsing over the sudden, dramatic 40% drop in oil.  It reminds me of the old TV show -- adjusting to a good thing can be quite painful.  Make no mistake:  a drop in the price of oil is good for the economy in the long run.  However, we must adjust to it in the short run.  The market angst is whether the drop is due to oversupply or to falling demand, which would indicate weakening economic growth worldwide.  Oversupply is a good problem.  Weakening economic growth would be a bad problem.

Another short run adjustment is the damage to fracking industry in the United States.  This has been such a growth industry and has really helped lift the economy out of recession.  It has also brought us closer to energy independence than we have been in my lifetime.  I hope we will protect that industry, as well as minimize any environmental damage.  Related to this, the growth in this industry allowed many of the smaller companies to issue high-yield or "junk" bonds, which powers the portfolio income for many income-needy investors.  The value of these bonds have dropped rather dramatically.  (The value of MLPs have dropped but not as much.)  Banks with heavy lending exposure to the energy sector have also dropped in value.

Another complicated adjustment is with international relations.  When Russia confiscated Crimea and invaded Ukraine, it did not know that the price of its primary source of hard currency was about to drop 40%.  China did not know that its most expensive import would be blessed with the gift of a 40% decreased cost.  The already-shaky oil-exporter Venezuela is now circling-the-drain.  The list of affected international relations is long and complex.  (Maybe, the leaders of all these countries could star in a new reality show called The Trillionaire?)

But, all this assumes the price of oil will stay low.  Over the last seventeen years, oil has traded within a channel.  Take a look at this graph:

Chart of the Day

Now, it appears that oil is close to rebounding, which will also upset the stock market.  Some argue that this drop in oil price is a "black-swan" which unexpectedly resets all relationships, making this graph of past relationships meaningless.  

A little stability would be a big blessing, don't you think?

Wednesday, December 10, 2014

What's Wrong With This?

Quoting from the front page of the December 5th issue of The Kiplinger Tax Letter:

The final bill (new tax law) will contain a significant new break for disabled individuals.  Tax-free ABLE saving accounts, similar to 529 college savings plans.  Starting in 2015, states can set up ABLE programs so families can set aside funds to help the long-term disabled maintain their health, independence, and quality of life.

Nondeductible contributions to ABLEs of up to $14,000 a year will be allowed for those who became blind or disabled before age 26.  Lifetime payins would be capped at the same level as the state's 529 plan.  Account owners would remain eligible for Medicaid.  And account balances of $100,000 or less wouldn't affect SSI benefits.

Withdrawals would be tax-free if the funds are used for housing, education, transportation, job training and the like.  This includes payout of account earnings. 

Tuesday, December 9, 2014

Austrian Pantsuit

My late mother always told me that name-calling is bad.  She was right, of course, but she was looking at it from an etiquette standpoint.  I think she was also right from an economics standpoint.  If you are going to invest precious resources, like time and effort, into another person, relationship, or situation, then name-calling is a risk to your investment.  I avoid calling anybody by any name worse than "dork" or "geek," which are both terms of endearment used to describe myself.

Still, I nearly collapsed with laughter when CNBC Jim Cramer referred to Chancellor Angela Merkel as "Herbert Hoover in a pantsuit."

During the stock market crash in 1929 and the subsequent economic collapse, all we understood about economics was that surplus budgets were good and deficit budgets were shameful, with even moral implications.  Therefore, President Herbert Hoover raised taxes and slashed spending, which seemed logical at the time, but the economy promptly went from recession into depression.  He took precisely the wrong action at the wrong time, and history has been unkind to him because of that.  (No, I'm not endorsing either the Keynesian or Supply Side approaches, but either would have worked better in that particular situation than the simplistic Austrian approach of Hoover.)

Not surprisingly, the Austrian approach is still taken as gospel in its home of Germany, where the hyperinflation following World War I is still a vivid, relevant memory.  As the European economy remains stalled, in desperate need of lift-off by its economic engine (Germany), Merkel wants higher taxes and less spending, like Hoover.  Compounding the problem is that she is pushing hard to impose the same solution on "basket-cases" like Greece, which makes recovery from their depression even more difficult.  European history will be unkind to Merkel, I'm afraid, but Greek historians will be even more unkind.

There is a time for this Austrian approach, but not when the economy needs a kick-in-the-pantsuit.

Sunday, December 7, 2014

Sunday Thoughts

Construction is a pro-cyclical industry.  That means it makes the business cycle more pronounced.  It makes good times better and bad times worse.  Right now, commercial construction is doing well.  Residential construction is limping along.  But, one area of construction is a drag on the economy.

Construction of churches has fallen to the lowest level since 1957.  It is down 80% from its peak construction level in 2002.  It totaled a mere $3.5 billion in 2012.

Some explain that churches are now more concerned with their ministry than their buildings.  Certainly, that might explain part of it.  Of course, there are other things going on as well.  The percentage of the population that never attend church was 25.3% in 2012, up dramatically from a mere 5.1% in 1972.  Financial giving has also changed dramatically.  Religious groups received half of all giving in 1990, which has now fallen to only one-third.  They simply don't have as much money to build new facilities.  They are a smaller portion of the GDP.

Rather than looking at this change from a religious standpoint, it may be more helpful to look at it from an economics standpoint, which is unrelentingly honest.  Benjamin Graham was the father of value investing and the mentor of Warren Buffet.  He famously argued that, in the long run, the marketplace is a weighing machine, i.e., determining the substance of an idea or product.  I think he would argue that marketplace for traditional religious thought and practices finds that it weighs less today than it used to weigh.  The marketplace is sending a disturbing message to religious leaders but what is it?

In the economy, if a product is not selling well, the seller has to make a decision:  (1) stop selling the product, (2) lower the price, (3) change the merchandising, including advertising campaign, or (4) change the product to meet changing consumer needs or preferences.

Ask your rabbi, priest, or preacher what he or she thinks.  Then, tell them to really help the economy by building a giant new building . . .

Saturday, December 6, 2014

Too Good ?

The December "Jobs Report" was better than expected, with 321 thousand jobs being created.  That brings the three-month average up to 278 thousand, which is certainly respectable.  This will likely be the most jobs produced in any one year since 1999.  (Average weekly earnings, reflecting slight higher earnings per hour and a few more hours, are also up a relatively modest 2.1% over last year.)

Republicans immediately pounced on this release as politically motivated to spur Christmas shopping, which is ridiculous.    I have met many economists at the Bureau of Labor Statistics (BLS), which publishes this report, and cannot imagine a career technocrat or bureaucrat throwing away his fringe benefits and lavish retirement package for any slimy, non-intellectual political hack.  (Of course, Democrats made the same unfair, biased allegations against the BLS during the Bush Administration.)

Normally, I would feel confident that this number of 321 thousand is an anomaly and would be revised downward next month, as it is a relatively volatile number, produced from a survey of corporate payrolls.  However, the survey of households also indicates a three-month average of 289 thousand, confirming the payroll survey.  It may be the economy has shifted gears into faster job growth.

So, how did the market react?  It was up -- but not as much as one would expect from such good employment news.  Because the job numbers were so good, that would mean the Fed will start raising interest rates sooner than expected.  Therefore, interest-sensitive stocks, such as utilities and REITs, lost value with this news, holding down the overall market.  If you are an income-investor, this was a preview of what will happen as we approach that day when the Fed actually does it.  The Street still believes it will be mid-2015, while I think it will probably be late-2015.

In the meantime, let the good news be just that . . . good news!

Thursday, December 4, 2014

Bulls And Bears Are Different

Every time we have a bull market, there is another study that confirms what a similar study during the last bull market showed, i.e., index-investing out-performs active-investing.  A new study by Lipper shows that 85% of large-cap mutual funds failed to beat the S&P.  A confirming fact is that 2014 saw a record number of hedge funds, who are always active investors, closing and sending funds back to the clients, because their investment performance was so poor.

Index-investing means buying exchange-traded-funds (ETFs) or mutual funds that simply mirror indexes, such as the S&P.  Their fees are usually lower, because they don't try to "beat the market."  Active-investing means trying to outperform the indexes or beating the market.  If index-investing outperforms active-investing and costs less money, why not be an index-investor?

One huge problem with this study is that this out-performance by index investors only works during bull markets but not during bear markets, which are far more scary.  Active investing usually outperforms index investing during bear markets.  Active investors allocate a larger proportion of their funds to cash during a bear market.  Index investors do not.  Active investors can also shift allocation toward consumer defensive stocks, which usually retain more value during bear markets..

Another problem is there are plenty of examples of mutual funds outperforming ETFs, which demonstrates the importance of picking the right mutual funds, especially during bull markets.

Lastly, it assumes there is no value to financial planners besides making investments.  Serving as a chief financial officer to a client obviously has great value, such as advising on estate planning, college planning, gifting programs, divorce planning, etc.  Little things like taking care of annual minimum required distributions (MRDs) from IRAs is one example.  And, just "being there"  when there is a death in the family brings tremendous value to a client or their family.

While there are no guarantees in investing, I do guarantee that there will be yet another study during the next bull market, confirming the Lipper study in this bull market, which confirmed a similar study during the last bull market.

Wednesday, December 3, 2014


One normally thinks of Europe as a hotbed of left-leaning governments, more concerned with over-work than their budgets.  So, it seems odd to thank them for protecting an old-fashioned American value.

For generations, privacy was expected in the U.S.  We had the right to control most information about ourselves and our families.  Then, Google came along, and privacy was no longer important to anyone.  Or, at least, it was no longer available to anyone.  People were so happy to see advertisements targeted to them individually that they surrendered their privacy.  Some trade-off!

The Calvary may be the European Union, who is locked into an anti-trust battle with Google, threatening a break-up.  Part of the battle is the "right to be forgotten" or the right to withdraw from Google's "data-mining" on every individual.  Go E.U. -- beat GOOG !

George Orwell's 1949 classic entitled 1984 described a world where the government watched everything that everybody did.  Who knew that it would be a giant tech company instead?  Raise your hand if you think the government doesn't have access to the private details of your life that Google collects.

My grandson will never know the concept of privacy or why it was even important.  Sad!

For now, I'll just paraphrase John Kennedy's famous 1963 speech in Berlin . . . ich bin ein European!

Sunday, November 30, 2014

Golden Memories Are The Constants

As individuals in the constantly changing world of relationships, we look for a constant - a relationship with someone which does not change over time.  That person usually becomes a spouse but often becomes our ex-spouse.  There really aren't constants in relationships, because people change as they age, and either the relationship adjusts or it doesn't.  Either way, people are not constants.  Neither are relationships.

As investors in the constantly changing world of investments, we look for a constant - an investment that is predictable, something we can save, rather invest in.  For centuries, we thought that investment was gold, and it was . . . until it wasn't.  Switzerland was the last developed nation to sever the link between gold and it's currency - the Swiss franc or the "Swissie."  That happened in 1999.  Since then, the Swiss central bank has tried to peg its currency directly to the euro.  Of course, whenever the euro has troubles, Europeans flock to put their money into the Swiss franc, which drives up the value of the franc, making imports expensive for the Swiss.  To maintain that artificial price, the Swiss central bank has to spend huge sums of francs to buy euros.  They are reaching a point where they can no longer afford the franc being tied to the euro.  It is just too expensive.

Today, Switzerland is voting on whether to require their central bank to hold 20% of their capital in gold, compared to 7% now.  If passed, the price of gold is expected to jump 5% tomorrow and another 20% over the next few weeks.  Of course, passage would be ruinous for the bank if gold went back to $300/oz.  The point is -- gold is also not a constant.  It is a heavy, dumb metal that pays no interest and costs money to protect.  Plus, you cannot sell it for more than people are willing to pay for a heavy, dumb piece of metal that pays no interest and is expensive to own.  It is worth whatever the market says it is worth, via supply and demand -- no more and no less!

If all nations could agree on a price to sell and buy gold, a constant could be imposed on the market but "gold-bugs" are almost always Libertarians, whose philosophy doesn't approve of any market manipulation, such as price-ceilings or price-floors.

Like fond memories of your high school sweetheart, remembering the glory days of gold just makes the heart ache . . . for no good reason.  The genie has escaped the bottle!

Friday, November 28, 2014

Opaque OPEC

Although OPEC is currently meeting in Vienna, little is expected, despite a flurry of activity behind the scenes.  Before the conference, the smaller producers were asking the "swing" producers like Saudi Arabia to reduce their own production levels to decrease the supply of available, which would drive up the price of oil and prop up the revenue of the smaller producers, at the expense of the larger producers.  Saudi Arabia has agreed to do this in the past but only rarely.

Also before the conference began, two non-members of OPEC showed up, i.e., Russia and Mexico.  Initial reports were that they were there to plead with OPEC members to reduce production.  Subsequent reports suggest Russia and Mexico were actually summoned to appear, so that OPEC could appeal to them to go along with any production cuts made by OPEC members -- an obvious attempt to spread the pain.

Then, Saudi Arabia said they would not cut production, causing oil prices to drop even more rapidly, and the shares of oil companies are dropping as rapidly as shares of airlines are taking off.  One Russian oligarch predicts oil will now fall another $10, to below $60/bl.

Today, it is reported that erstwhile ally, Saudi Arabia, does not see this short-term problem of a revenue drop as significant as the long-term threat of American energy independence, resulting from our shale oil production.  The rule-of-thumb is that shale oil production in the U.S. costs about $65/bl to produce.  If prices fall below that, the U.S. will shut-in those oil wells and begin losing its energy independence.

Obviously, the long-term implications of this loss of independence are profound.  I think that becomes a matter of national security, and I pray that our do-nothing government can actually protect that independence.

Of more immediate importance, about 15% of high-yield bonds (AKA junk bonds) over the last two years have been related to shale oil production.  If those companies start going bankrupt, when oil prices fall below $65, that fixed-income market will be hurt badly.  Income investors will be hurt the most.

It is possible to have too much of a good thing.  A small drop in the prices at the pump is good for America.  A big drop is definitely not!

Thursday, November 27, 2014

Thanksgiving Day, 2014

I am thankful that unemployment has dropped from 10% to 5.8%.

I am thankful that the more problematic U-6 level of unemployment, which includes people who want to work full-time but can only find part-time work, has dropped from 18% to "only" 10%.

I am thankful for the average 4% GDP growth in the second and third quarters.

I am thankful we have minimal inflation and, more importantly, no deflation.

I am thankful that the stock markets are once again setting new highs.

I am thankful that the U.S. economy is once again the economic engine of the world.  (Sorry, China!)

I am thankful for my clients, who give me purpose in life.

I am thankful for my small extended-family, who provide a constant in a constantly-changing world.

I am thankful for our freedom of speech, so we can complain about every little thing, and for my right to pretend to listen politely.

I am thankful for our freedom of religion, so we can attend the church of our choice or stay home without fear of being arrested for not attending church.

I am thankful for Thanksgiving Day, so we can focus on how really lucky and fortunate we are!!

Tuesday, November 25, 2014

Things That Matter

Despite his impressive memory and command of details, Jim Cramer of TheStreet and star of CNBC is not my favorite analyst.  I find his style annoying and egocentric.  Nonetheless, my gut tells me he is still a good guy.

For anybody who has ever lost a parent, I recommend Cramer's fond eulogy to his father, which you can find here: 

No Comment

Long ago in Panama, along with a young black captain who had just returned from Vietnam, we caused a private club located on Canal Zone property to integrate and allow black members.  In the course of that, we had to face down seven men holding shotguns.  Later, we received many compliments, including those of the commanding general.  With a "street cred" like that, I felt entitled to have thoughts on the touchy subject of race.  I was wrong.

Over the intervening years, I worked for three different banks.  Each required employees to attend "diversity sensitivity training."  It was there I realized I was not permitted to do anything other than to nod my head in agreement.  After all, since I've never been black, I could not possibly have any legitimate thoughts on the subject of race.  (Of course, I've never been a Catholic or a communist or sang in a choir either, but I am allowed to comment on those subjects?  Go figure!)  Of course, no matter what else, a person must always avoid being called a racist.

The inability to discuss race creates more problems.  The prosecutor in Ferguson was so concerned with being called a racist that he made a circus of the grand jury process.  Instead of leading the jurors thorough the evidence, as prosecutors normally do, he simply dumped a massive amount of evidence on them, with no direction.

Solomon Wachtler, former Chief Judge of the New York Court of Appeals, is usually given credit for saying that a grand jury would "indict a ham sandwich," meaning the prosecutor had so much influence over the grand jury that anybody could be indicted for anything.  That does not seem to be the case in Ferguson.

To avoid being called a racist, the Ferguson prosecutor conducted an exhaustive grand jury proceeding, which are always secret and out-of-view.  This creates mistrust and has created a new class of grand juries -- for defendants in racial crimes.  Shouldn't the next defendant in a racial crime receive the same sort of grand jury proceeding?  Why not?  Doesn't this perpetuate the assumption that the courts have one system of justice for whites and another for blacks?

Note:  Those are just questions, not comments or opinions.
I have no comments or opinions on the subject of race.

Monday, November 24, 2014

Incoming Tide

The bulls are running on Wall Street and running hard.  The stock market is up sharply.  But, doesn't the stock market reflect the economy?  The economy is growing but not rapidly.  Shouldn't the stock market be going up as slowly as the economy improves?

Yes, there is a loose relationship between the economy and the stock market, but the stock market reacts primarily to the "flow of funds."  If more money is flowing into the market, it will go up.  If money flows out, the stock market goes down.  That is why mutual funds are watched so closely, as a proxy for the overall market.

Right now, foreigners are pouring money into the U.S.  The latest available data is from September, when foreigners bought $94.2 billion in long-term securities, half of which went into U.S.  Treasuries.  That is the highest inflow since January of 2012.  In addition, Americans sold $70.1 billion of their assets owned outside the U.S. and brought that money home as well.  The combined $164.3 billion of inflows to the U.S. is the highest on record.  Obviously, this increased inflow reflects the rising fear outside the United States.

This is also what has been driving up the dollar.  Foreigners need dollars to buy U.S. assets.  Therefore, they have to sell Euros or Yen or whatever, which drives down that currency, and buy dollars, which bids up that currency.  It is a good time to use your dollars to travel abroad but not to be an exporter.

Enjoy the ride, but remember that those inflows will become outflows -- when worldwide fears subside even a little.

Sunday, November 23, 2014

"Red, White & Blue" From "Ol Blue Eyes"

As an introduction to his song, The House I Live In, Frank Sinatra said he loved this country, even more so because it is NOT a perfect country.  His reasoning was that it so much "fun" trying to make it perfect.  I don't know if he would still say that today, but I still love every word of the song:

What is America to me?
A name, a map, or a flag I see;
A certain word, democracy.
What is America to me?

The house I live in,
A plot of earth, a street,
The grocer and the butcher,
Or the people that I meet;
The children in the playground,
The faces that I see,
All races and religions,
That's America to me.

The place I work in,
The worker by my side,
The little town or city
Where my people lived and died.
The howdy and the handshake,
The air and feeling free,
And the right to speak my mind out,
That's America to me.

The things I see about me,
The big things and the small,
The little corner newsstand,
And the house a mile tall;
The wedding and the churchyard,
The laughter and the tears,
And the dream that's been a growing
For a hundred-fifty years.

The town I live in,
The street, the house, the room,
The pavement of the city,
And the garden all in bloom;
The church, the school, the clubhouse,
The million lights I see,
But especially the people;
That's America to me.

The house I live in,
My neighbors white and black,
The people who just came here,
Or from generations back;
The town hall and the soapbox,
The torch of liberty,
A home for all God's children;
That's America to me.

The words of old Abe Lincoln,
Of Jefferson and Paine,
Of Washington and Jackson
And the tasks that still remain;
The little bridge at Concord,
Where Freedom's fight began,
Our Gettysburg and Midway
And the story of Bataan.

The house I live in,
The goodness everywhere,
A land of wealth and beauty,
With enough for all to share;
A house that we call Freedom,
A home of Liberty,
And it belongs to fighting people
That's America to me.

All I can add is . . . Amen!

Saturday, November 22, 2014

Trouble Next Door?

Just two years ago, optimism about Mexico was high and rising.  The new President, Pena Nieto, seemed truly committed to reforming the hidebound and corrupt country.  He opened the oil business to foreign investment, which has long been a sacred cow to the Mexican people, who vividly remember exploitation by foreign corporations.  With an improving economy and a falling birthrate, even illegal immigration to the U.S. decreased markedly.

Now, something is starting to smell.  Yesterday's release that GDP growth in Q3 was only 2.2%, far below expectations.  While still respectable, the leading component was construction, which is often fleeting and not dependable.  Mining was way down, for the fifth straight year.  The transportation sector only grew 1.1%.  (Remember Dow Theory?)  Even government spending was substantially less than expected.

In addition, protests over the 43 student-teachers who were mutilated and massacred has spilled over from the province into the nation's capital.  The outrage over the powerful drug cartels seems to have found a lighting rod.

If that wasn't enough, there is now some existential absurdity to the revelation that President Pena Nieto and his TV-star wife have a "sweetheart" arrangement with a government contractor for their private mansion.  So much for his reputation as an upright reformer of corruption.

This is worth watching, but I wouldn't travel to Mexico to watch it . . . 

Friday, November 21, 2014

For History Students Only

When we look at stock market cycles, we know the current bull market is getting old -- over five years old.  However, if you look only at bull markets that follow at 30% decline, it is a very different perspective.  The deeper the bear drop in the stock market, the longer and strong the bull recovery.  Our stock market drop of 52% in 2008/9 was terrifying, but it did set the stage for an impressive bull run since then.  Now, take a look at this chart:

Chart of the Day
Over the last 114 years, there have been 13 recoveries, averaging 8.8 years each.  Of those 13 bull runs, 6 had a shorter duration than the current one, and six had a longer run.  We're in the middle.  However, because our 52% drop was substantially greater than the 30% minimum, one can easily argue that this recovery will be much longer and stronger than average.

I hope so!

But, please note one big difference:  Never before have we sustained a major economic recovery on such a sea of debt -- except for the longest and strongest recovery of all, labelled 1942 above.

Thursday, November 20, 2014

NOT Our Finest Hour

In Infantry Officer Candidate School, we were taught that, whenever your men come under fire, it is critically important to give a command.  It doesn't matter if you holler - hit the dirt or climb a tree or drop your pants - just give a command, even if it is wrong!  Just make a decision . . .

It doesn't matter if you think the President is a corrupt usurper of Congressional power, determined to be the Emperor, OR if you think the impotent Congress has had enough time, since they haven't made any decisions on immigration since the Executive Orders of Reagan in 1984 or Bush in 1991 - a few numbers always helps.

Since 2007, the number of undocumented persons in this country has dropped from 12.2 million then to 11.5 million now.  As the Mexican economy has improved and as their birth rates have decreased, their in-migration has dropped from 700 thousand annually in 2001 to only 160 thousand in 2012.  In fact, the number of undocumented Mexicans in this country dropped from 7 million in 2009 to 5.6 million in 2012.  (Of course, more immigrants are coming from Central American countries now, instead of Mexico.  Almost all undocumented workers in Virginia are from Central America.)

In 2012, there were 8.1 million undocumented workers who were either working or looking for work in our country.  That was 5.1% of our total labor force.  We're hardily being overrun.  This is not a metastasizing economic cancer that is growing.  It is a moral issue.

Making a decision on immigration is not rocket science.  It doesn't take twenty years to study.  It just takes courage.

Certainly, it would be much better if the Republican leadership of Congress would personally agree to a deadline of March 31st, when they will control both houses of Congress, but if not . . . well, it just takes courage.

I assume we will have a Republican president in 2016, but we will still have a useless, gerrymandered Congress, because that cannot be fixed until after the next census in 2020.  I hope he will use his executive authority to make decisions that Congress cannot make . . . if he has the courage.

Wednesday, November 19, 2014

Keynesian Malpractice

A few years ago, the flaccid Japanese government decided to take a Keynesian approach to end their "lost decade(s)" and applied a huge stimulus, using deficit spending.  Predictably, the economy strengthened and their stock market boomed.

Now, a "true" Keynesian knows that deficit spending has to be temporary, followed by budget surplus, to keep the debt level low.  Given that their debt-to-GDP is almost twice as problematic as the U.S., they really did need to start reducing the debt.

So, earlier this year, they raised the sales tax by 60% from 5% to 8%.  Of course, it was expected consumers would respond with less spending, but economists were stunned by the large 7.2% drop in Q2 GDP.  They argued it was a one-time response and predicted Q3 GDP growth of 2.1%.  Instead, GDP dropped 1.6% last quarter, and the economists were stunned again.

My first thought was -- how can Japanese economists be so bad?  My second thought was that -- what, governments can do something, anything?!?!  But, the more important thought is - sure, the economy strengthened after the stimulus package but they didn't give it enough time to normalize before applying a LARGE tax increase.  While I applaud their courage in applying the unpopular part of Keynesian economics, i.e., raising taxes, a responsible Keynesian would have given the economy more time to strengthen before applying a much smaller tax increase.

Tuesday, November 18, 2014

Involuntary Mercenaries

Vladimir Putin is the greatest danger to the United State, far more dangerous than ISIS or Ebola.  He is also a danger to the Russian people.  Yet, they still love him.  Vitaliy Katsnelson has written an excellent article on the Private Portfolio website, proving that -- perspective is everything.  Yes, their access to information is highly restricted but is very effective in presenting Putin as working hard for the Russian people.  Nothing could be further from the truth.  Putin is working for himself.

He has essentially run that nation for twenty years and is now rumored to be one of the world's wealthiest men, at about $40 BILLION.  During that time, Russia's petro-economy has gone from largely dependent on oil to one that is almost entirely dependent on oil.  He had the opportunity to make it better but has made it worse!  During the years of high energy prices, this increasing dependence was not obvious to the Russian people.

So far this year, the Russian ruble is down 27%.  Imagine what would happen in this country if the dollar dropped 27% so rapidly!  Yet, the Russians inexplicably still love their unsavory leader.

Don't forget that Hitler knew it was time to start the war when the bond markets cut him off.  Putin is getting closer to that point, where Russia can no longer borrow enough to stay afloat.  However, instead of starting a war, he could throw Russia into the arms of China.  Already this year, he has announced two huge deals with China, which analysts agree are very favorable to China.  Russia could become the spear held by China.  The patriotism of Russians would serve their Chinese masters well.

Monday, November 17, 2014

On Glory-Hounds

Much has been written recently about an unwritten code that exists among members of Special Forces, whether Army or Navy.  That code is based on a deep respect for and obligation to your fellow soldiers.

Robert O'Neill is a former member of Seal Team Six, who has gone public and taken the glory for killing Osama bin Laden.  If this is a technically criminal act, I hope he will be tried and buried under the jail.  In my opinion, he does not deserve to be buried with the good men in a veteran's cemetery.

If it is not a technically criminal act, he is still "dead" to other Special Forces troopers.  Although Mr. O'Neill has thrown out a few platitudes about his fellow Seal Team members, it only takes one blowhard glory-hound to denigrate, cheapen, and disrespect the other soldiers who took just as much risk as he did.  Personally, as an old Special Forces officer myself, I would not throw him a life-preserver if I saw him drowning.

Besides, what kind of man puts his family at risk, just for his own glory?

Saturday, November 15, 2014

Quittin' Time

With the executive and legislative branches of our government being utterly useless, if not worse, the role of chief economic caretaker has defaulted to the head of the Federal Reserve System, who is Janet Yellin.  She has two prime directives:  (1) control inflation, and (2) control unemployment.

The "trick" is that those two directives can often conflict.  The Fed's cure for high inflation is higher interest rates, which can reduce inflation but can easily slow down the economy as well, raising unemployment.  Conversely, low interest rates to reduce unemployment may ignite inflation.

Since the 2009 collapse, unemployment has been a far larger problem than inflation.  Janet Yellin is described as a "dove," meaning she is more concerned about unemployment than inflation.  A "hawk" is more concerned with inflation than unemployment.

The unemployment indicator most favored by Chair Yellin is the JOLTS report.  In that report, we find the number of "quits" each month.  Because workers don't normally give up their jobs unless they think the market for their skills is strong enough that they can routinely get another job.  An increasing number of quits is a good indicator.  Last month, 2.74 million workers were confident enough to quit their jobs.  This is the highest since 2008 and is a very good sign.

In addition, the number of job openings is now the highest since 2001 -- that is not a typo -- the highest since 2001.  It is small wonder that workers feel confident enough to quit their jobs.

With the labor market looking so strong, Wall Street believes Yellin will begin increasing interest rates in the second quarter of next year.  While I think it may be somewhat later than that, I don't expect the stock market to necessarily turn down as a result of the increased interest rates for two reasons:  (1) it is not a surprise, and (2) the increase will be a modest quarter point.

We'll see . . .

Friday, November 14, 2014

"Supply & Demand" Spoken Here

The Law of Supply is that sellers are more anxious to sell at higher prices and will bring more supply to the marketplace.  The Law of Demand is that buyers are less anxious to buy at higher prices and will buy less of the product.  If too much supply comes into the market at high prices, the price will  collapse.  If there is too much demand, the price will rise, as buyers outbid each other.  Eventually, a point of equilibrium will be reached where buyers will demand all products supplied at that price.  This can often last for years.

Beef consumption in the US has gone from 90 pounds per year in 1970 to only 54 pounds in 2013.  This means per-person demand growth has dropped significantly.  It is expected to decrease another 2.3% this year, further reducing demand.  This suggests that the price of beef should fall.  Instead, it has increased considerably over the last two years, better than 6% yearly (compared to 2% for chicken).

During that time, the supply growth of beef has fallen faster than the demand growth for beef has fallen.  The droughts of 2012 and 2013 reduced the size of cattle herd more than expected.  Compounding this supply shortage, the kill-level has been reduced to allow the size of the herd to grow again.  The currently cheap price for corn makes it less expensive to keep cattle alive.

The point of equilibrium will be reached when the herd size and the kill-level are restored and the market price is affordable by enough buyers to buy all the beef being brought to the market.

What does this mean?  Beef prices are going up for awhile, probably two years, assuming the price of corn doesn't spike.

Of course, this is good news for producers of chicken and pork, which are now the "proteins of choice."  But, that's an entirely different story of supply & demand . . .

Thursday, November 13, 2014

Another Veil To Pierce

Some of the best advice my father ever gave me was to NEVER talk about religion or politics.  I have rarely strayed into discussing subjects that had political tones and then only when I could do so from a bipartisan, economic perspective.  I have taken his advice on religion and avoid any discussion of it.

This week however, I attended a lecture on Islamic Finance, curious how their perspective is different than our Christian/Capitalistic perspective.

It is apparently a growing market with nearly $2 trillion of assets being managed in accordance with Islamic principles, mostly in Dubai and increasingly in London.

 Islamic Finance begins with Five Pillars, which are the basic platitudes that all people are to be treated fairly, yada, yada.  Then, they list the prohibitions.  Anything not prohibited is permitted.

I already knew that one prohibition is that they are forbidden to pay or receive interest and wondered how they could possibly ever make a loan or issue a bond without somebody paying for it.  You can "borrow" money and you don't pay interest but you do pay a percentage of profits, because the loan is called an investment.  A duck by any other name is apparently NOT a duck.

An example is getting a car loan.  You go to the dealer and negotiate a sales price.  Then, you go to the bank and ask them to buy the car from the dealer at this price.  After the bank buys the car, they sell it to you at a higher, marked-up price (on a monthly installment plan).  Therefore, it is not interest.  The bank is merely booking profit from a sale to you, not interest from a loan to you.

Another prohibition is that you cannot sell anything you do not own. Therefore, you cannot invest in options, futures, or certain other derivatives.  Getting around this prohibition is overly-complicated, meaning it is seldom done.  This is the single biggest disadvantage to being an Islamic investor, but, given my anxiety about the power of unregulated derivatives to destroy capitalism, this is the only advantage that Islamic finance offers the world.

I came away with the impression that the Koran is just another nuisance that Capitalists routinely side-step or work-around, not unlike national regulatory authorities, such as the SEC.  Is this the purpose of religion . . . of any religion . . . to get in the way of Capitalism?  Is religion . . . any religion . . . trying to empty the Atlantic Ocean with a spoon -- by trying to getting in the way of Capitalism?

Is Capitalism "the one-true religion?"  God forbid!  Or, is it just more powerful than any religion?

Wednesday, November 12, 2014

Room To Run

Five or ten years ago, there were frequent commercials on business TV networks to use "trend-channel investing."  I always chuckled, as it was just a minor variation of traditional technical investing, which relies solely on chart patterns to determine a stock's value.  Nonetheless, while I think technical investing is more akin to voodoo investing, I still find it interesting.

From a technical standpoint, the Dow has plenty of upside.  Take a look at this chart:

Chart of the Day

You can easily see the dramatic drop in October and sudden reversal to record-highs now.  It bounced off the green support line but still has plenty of room to run before it hits the red line.  If it does hit the red line, technicians will likely argue it is time to sell.

A similar chart for small-cap stocks would be more interesting.  Historically, they out-perform large-cap stocks over the long-run but are more volatile.  This year, small-caps are greatly under-performing large-cap stocks and are due for a reversal.  

Yesterday, the National Federation of Independent Businesses (NFIB), which represents really small businesses, released their survey of small business optimism and it show improvement, especially in (1) higher expected rel sales, (2) current job openings, and in (3) the number of "hard-to-fill" jobs.  What else really matters?

As long we remain in the upward-sloping channel between the green and red lines, the forecast looks good.  So, enjoy the ride up . . . but remember to remain calm when the ride down begins! 

Tuesday, November 11, 2014

Changing Face of Veterans

Decades ago, my father observed that some families have veterans and some do not.  Because I could quickly think of a couple of exceptions to this, I dismissed it.  But, over the years, I have found that it is indeed more often correct than incorrect, and I don't know why.

I suppose that parents in non-veteran families put more pressure on their kids to stay out of military service than do veteran families.  In addition, because there is no family tradition of military service, it is probably never even considered as an alternative. That does not mean that non-veteran families are less patriotic.   It does mean the kids of those families have less opportunity for growth.

As my years of military service surely galvanized me, it is sad to see young people today missing that opportunity, but the needs of the military must come first, and the military just doesn't need to raise young kids for a few years.

In my family, it was always assumed that I would eventually serve.  My grandfather served in World War I.  My father served in World War II.  It never crossed my mind that I would not serve at some point.  That point came after a minor football injury required me to stay off my feet for a week, during which time I listened to Day for Decision and Ballard of the Green Berets - over and over - on the radio.  When that week was over, I enlisted.

Since then, I do think the percentage of American families with veterans has decreased, as so many more of our servicemen & women are now full-time adult professionals, and there is no more draft.

As much as I applaud Secretary McDonald's efforts to reorganize the Veterans Administration, he is doing so at a time of peak usage.  The number of veterans is expected to decrease from about 22 million to only 14 million over the next thirty years, as the World War II and older Vietnam-era members die off.  And, as a percentage of the population, the number of veterans will continue to decrease even more.  Unless, of course, we have a few more large-scale wars . . . 

Sunday, November 9, 2014

The Cornered Rat

Most psychologists believe that a healthy male ego is good for a man.  It makes them more confident, competitive, and committed to doing a good job.  Most women believe a little may be good but too much is awful.  At some point, a healthy male ego can morph into egotism, which is characterized by an exaggerated self-worth.  Sometimes, egomaniacs can also be egocentric egomaniacs, which is characterized by an exaggerated self-worth combined with insensitivity to others.  The world revolves around them, or so they think.

Vladimir Putin is an egocentric egomaniac, which makes him very dangerous.  If you think a cornered rat can become vicious, just imagine how a cornered egocentric egomaniac would react, especially one with nuclear weapons.

Russia is in terrible shape and getting worse.  Just last week, I gave a lecture and talked about the 20-20-20 problem of Russia.  The Russian ruble was down 20%, their stock market was down 20%, and their unofficial unemployment rate was 20%.  I lectured that no leader can survive in the long term in such a bad economy.

Since then, it has gotten worse.  The ruble is now down 30% and still dropping.  This is inflationary for the Russian people, as the price of imports has risen 30%.  It is called "importing inflation."  To control this descent, the Russian central bank has started spending their precious national reserves to buy rubles.  It is estimated they spent $10.5 billion last month alone and only have $428 billion left.  That $428 billion amount is meager, as it is used to pay for all their imports.  They simply cannot afford to support the ruble very long.

Another means of supporting your currency is to increase interest rates in your country, which keeps more money from leaving the country and hopefully attracts money from outside the country.  Russia has already done this, increasing 1.5% last month without slowing the descent of the ruble.  Russian borrowers cannot be happy about paying higher interest.

Although it cannot be documented, it is widely believed much of those selling rubles and buying dollars, driving down the price of the ruble in the process, are Putin's "friends" who are deserting him due to his inevitable downfall.  Sometimes, economic sanctions work, and sometimes they don't.  They have worked very well in this case.

To keep the Russian people from focusing on their economic misery, Putin has undertaken military adventurism to dominate the headlines and cause the Russian people to "rally behind the flag."  He sent tanks into the Ukraine last week.  He sent Russian fighter jets on unauthorized over-flights of western allies.  Norway has been searching for what they believe is a Russian submarine in their waters.  The margin for error increases with military adventurism.

From an investment approach, one could increase the share of their portfolio allocated to defense companies.  It is not prudent to sell the S&P short without "insider information" from Putin himself.  The only other defense is to sell and sell quickly to hide in cash.

But, don't forget the old admonition from the Napoleonic wars -- to sell on the rumors of war and buy on the sound of cannon-fire.

Just be glad you don't have the problems of Putin!  Of course, egocentric egomaniacs believe they can handle any problems.  Too bad that's not true . . . 

Saturday, November 8, 2014

Denim Dependency

Among my many blessings is that I don't suffer from Denim Dependency.  This dreadful disease is very painful to victims, who experience great pain when their legs are not wrapped in denim.  Apparently, it is quite painful to pull up any pants that are not made of denim.

Worse, the disease is spreading wildly.  Victims of Denim Dependency can be found anywhere.  In pursuit of more customers, most fancy restaurants now permit victims to wear jeans while dining.   Recently, I saw two couples wearing jeans to the memorial service for one of their relatives.  Last Sunday in church, I saw three couples wearing jeans and said a little prayer of thanksgiving that they were wearing jeans and therefore not suffering.

Fortunately, victims of Denim Dependency already have the right to marry, but I have noticed their children also frequently suffer from this disease as well.  Maybe, they should not be allowed to marry and pass this disease to their children?

Apparently, the only known cure is golf.  I say that because the club where I play does allow jeans into their fancy dining room but not on the golf course.  Therefore, I assume the desire to play golf helps to overcome this dreadful dependency, but that is only speculation.

Predictably, as the number of sufferers increases, they have now begun asserting their civil rights.  These victims become quite indignant if told they cannot wear jeans EVERYWHERE.  Any place that prohibits wearing jeans is guilty of discrimination against victims who NEED denim.  It is inevitable that we will soon see the National Jeans Party, whose objective will be to defend their right to wear jeans in all places and at all times, even to the presidential inauguration.  Wouldn't that be nice?

Friday, November 7, 2014


That is the headline -- 5.8% unemployment rate last month!  While that's certainly good, it is not enough of the story.  It is a good story!

Total jobs produced last month were 214 thousand, of which 209 thousand were in the private sector, leaving only 5 thousand government jobs being produced.  Certainly, no "make-work" job creation!

The labor force participation rate increased slightly from 62.7% to 62.8%.  This is the percentage of the labor force that is either employed or looking for a job.  As the job market improves, those who have given-up slowly return to the workforce.  Think about this:  only 2 out of 3 people between ages 18 and 65 are employed or looking for a job.  One out of 3 either work in the home, are students, or are just too lazy to work in a candy store?  Some are simply psychologically dysfunctional.

Happily, the U-6 level of unemployment dropped from 11.8% last month to 11.5% now.  It was 13.8% this time last year.  This measure includes the 5.8% who are unemployed plus those people who are working part-time but want to work full-time.  It has been the most stubborn measure of employment to recover from the Great Recession.

There is no hiding from the fact that the job market continues to improve at a good, sustainable rate.  Nonetheless, a survey last month showed that 62% of those surveyed thought the economy was either somewhat poor or very poor!

I just don't understand that 62%.  Do you?

Thursday, November 6, 2014

Improving Cure-All

All schools of economics believe the magic cure-all for almost everything is productivity growth.  If the rate of inflation is too high, increasing productivity will tame it.  If the national debt-to-GDP ratio is too high, productivity growth will tame it.  It could probably cure the common cold as well?

It is one of the most important of the 130 pieces of economic data released each month, and I watch it closely.  It has averaged 1.6% since the current recovery began in 2009.  The latest data is a stronger-than-expected 2.0%.  That is much more than a "green sprout."  It is a small green tree!

Increasing productivity means business is getting more results with the same amount of resources.  It means workers are producing more products at a faster rate than their wages are increasing.  It means an improved profit margin.  It means greater corporate profits, which is the "mother's milk" of stock prices.  It means a rising stock market.

Because there is so much agreement on the importance of productivity growth, it is not surprising that government has tried to boost it.  Unfortunately, there is little they can do.  Every few years, they look at an investment tax credit for machinery purchased to increase productivity, but beyond that, there is little else the government can do.

Frankly, it doesn't look like it needs any help from the government.  Productivity is growing nicely.

Lowering The Bar

One of the more perplexing things about our wonderful country is that any fat, undisciplined, under-educated, morally-immune thug has the right to vote, to buy a gun, to own a dog, to become a parent, and to make a living.  If they have the gift of gab, that thug can be promoted to media thug.  If they can use simplistic sound-bites, instead of a nuanced discussion, to demonize anybody who disagrees with them, then they can become a fabulously wealthy media thug.

I was appalled to hear a fabulously wealthy media thug say the new Republican mandate was not to govern but simply to destroy the President!

Whatever happened to the Republican Party of Ronald Reagan?  He was so strongly opposed to greater government involvement in our lives.  He described America as a "shining city on the hill."  But, I don't recall him ever demonizing anybody.  He raised the bar, the standard by which politics would be conducted.  Today, Reaganites are derisively dismissed as mere "country club Republicans."

If WWJD means What Would Jesus Do, then WWRS means What Would Ronnie Say . . . especially about his standards being lowered so shamefully?

Wednesday, November 5, 2014

Getting What We Wish For

Students of the Weimar Republic invariably remind us that the seeds of the next war are planted in the ashes of the last war.  A fair paraphrasing of that would be:  The seeds of the next defeat are planted in the ashes of the last victory.

Now that the Republican Party has full control of Congress, there is an understandable urge to over-reach.  But, how will we know when they are over-reaching?

No, stop for a minute!  How will we know when they are over-reaching?  What has to happen before we know they have over-reached?  Because . . . that is the point when they start planting the seeds of defeat in 2016.

Have you answered the question yet?

Timing Is Everything

The more I think about it, the more impressed I become with the Fed's timing to end quantitative easing (QE).  When they ended QE1, the stock market dropped scarily, and the Fed quickly resumed quantitative easing with QE2.  The stock market soared.  When they ended QE2, the stock market took another ugly spill, and the Fed felt forced to resume quantitative easing once again with QE3.  Again, the stock market soared, suggesting to some that the stock market had become dependent on the liquidity afforded by quantitative easing.

However, I am convinced the Fed wants out of quantitative easing permanently and does not want to conduct QE4.  So, when should the Fed get out of QE3 without upsetting the stock market?

The months of November, December, and January are historically the best months for the stock market.  So, ending quantitative easing just as the best three months for the stock market begin makes a lot of sense.  But, what else?

As mentioned in an earlier blog, the new liquidity rules for money-center banks require enough immediately-liquid securities be held to cover 90-days of operation, which increases the demand for Treasury bonds by money-center banks at the same time that the Fed is buying less.  (A special exception also included mortgage-backed securities within the definition of immediately-liquid.)  The result is that liquidity in the marketplace should not be reduced with Fed's reduced purchase of Treasury bonds.

Last week, the European Central Bank quietly announced that the large banks of Europe would have to hold a full-year of operating cash in the form of immediately-liquid securities, which further increases the demand for U.S. Treasury bonds.  This virtually assures stock markets worldwide will continue to have plenty of liquidity.

Yes, it is possible all these events are mere coincidence, but I don't believe that for a second.  Maybe, not everything that happens in backrooms is bad?

Monday, November 3, 2014

Jumping the Shark

In 1977, there was a scene in the popular television show Happy Days where the always-cool "Fonzie" was water-sking in his trademark leather jacket and literally jumped over a shark.  Afterwards, the television show went into decline and soon disappeared into TV history.  But, the phrase has come to mean a "tipping point" in cultural acceptance.

Sunday, we attended the "Book of Mormon" play and wondered if we had witnessed a "jumping the shark" moment or not.  That play is brutally funny about all things religious, maybe more brutal than funny.  If it was a "jumping the shark" moment, would that mean that stereotypes of all things, people  and symbols religious have peaked in popularity and will decline, or does it mean that caricatures of those stereotypes of those things have peaked in popularity and will now decline?

Written by the creators of the TV program South Park, which is either brilliant or stupid but always politically-incorrect, I do suspect that the "Book of Mormon" represents either the zenith of disrespect for organized religion or the nadir of respect for it.  Either way, it is a cultural tipping point, indeed.

Thursday, October 30, 2014


You'll remember the basic logic from Economics 101 that decreasing demand for a product will cause the price to fall, assuming the supply of that product is relatively fixed.  Likewise, increasing demand will cause the price to rise.  On the other hand, increasing supply will cause the price to fall, assuming the demand for that product is relatively fixed.  Likewise, decreasing supply will cause the price to rise.

The same basic logic applies to U.S. Treasury bonds.  The announcement by the Fed that Quantitative Easing (QE) will end this month means the demand for bonds will decrease by $15 BILLION next month, which suggests that interest rates (the price of the product) will fall.

Then, the basic logic breaks down.  It has never happened that the Federal government was unable to sell all the bonds it wanted, because they simply raise the interest rate enough to entice more buyers.   The bad news is that paying increased interest expense is taking money out of taxpayers pockets.

So, who will take the place of the Fed to maintain demand for Treasury bonds and mortgage-backed-securities (MBS), to keep interest rates from rising too much?  Conveniently, one of the new banking requirements is increased holding of liquid securities, such as Treasury bonds and MBS.  This liquidity requirement is at least 30 days of operation held in highly liquid assets, and banks must be "mostly compliant" by year-end.

(At the same time, don't forget the supply of new Treasury bonds has fallen by two-thirds since the global financial crisis.  In other words, the Treasury doesn't have as many bonds to sell each month as they did when QE started.)

In mid-November, there is a meeting of the G-20 in Australia, which is likely to also require some increased liquidity requirement on banks worldwide, further fueling demand for U.S. Treasury bonds and MBS.  Isn't that convenient?

While the end of QE does frighten the stock market, it will pass.  Interest rates will not soar.  The world will not end. 

Wednesday, October 29, 2014

He Said -- She Said

There are at least 130 economic indicators each month, but there has never been a time when all 130 indicated the same condition of the economy.  Considering all the different organizations producing all these indicators using different methodologies, it should not be surprising, but it can be confusing.

For example, the latest report on durable goods disappointed with a 1.3% decrease, despite the fact it was expected to increase 0.5%.  This is a significant difference and could suggest a turning point in economic growth.  The same day, we learned that consumer confidence rose unexpectedly to 94.5, which is the highest level since 2007.  This could suggest a strengthening economy, since consumer spending is 67% of GDP.  So, what is a person to believe, with two economic indicators indicating different things?

One approach is to do a "deep dive" into the data, where you would find the durable goods number was skewed by the wildly volatile category of non-defense aircraft, which fell 16.1%.  The other categories were relatively as expected.  So, the drop in durable goods is not as alarming as it first appears.

Diving deeper into the consumer confidence, it is clearly dependent on two factors, i.e., the improving job market and falling gas prices.  Reverse either and the level of confidence will decrease.  One worrisome piece of data is that the percentage of people planning to buy a house dropped from 5.5% last year to 5.1% now.  So, the increase in consumer confidence is not a reassuring as it first appears.

Another approach to understanding conflict among the 130 economic indicators is to simply talk with your friendly neighborhood economist and ask for his/her "gut-feel" only.  If you ask for more than his/her gut-feel, grab a cup of coffee and sit down -- you'll be there awhile.

Saturday, October 25, 2014

The Joy of Spanking?

My father used to joke with other parents that the reason I was such a good student was because he would spank me every week, whether I needed it or no.  His logic was that it was good for a kid to be humbled ever so often.  Of course, he was joking!

But, I still think about that with respect to both the economy and the stock market.  Both need to be humbled ever so often.  Over the long run, a recession is good for the economy, and a correction is good for the stock market.  We're overdue for both!

The Index of Leading Economic Indicators (LEI) was released this week, and it was surprisingly strong.  There is still no recession in sight.  There are ten components to the LEI, and nine were up, especially bank lending.  (Some think the huge reserves generated by Quantitative Easing has finally overloaded bank balance sheets so much they HAVE to make loans.)  The only component that was down slightly was consumer expectations, which is not surprising, given the steady force-feeding of PIE (Putin, ISIS, and Ebola).

The stock market enjoyed a scary, brief 6% correction (which is technically not a correction at all), but the bulls seem to be in-charge once again.  As a kid enjoys the reprieve between spankings, I guess we shouldn't complain.

Wednesday, October 22, 2014

View From THE Vampire

The excellent Research Department of the once-excellent Goldman Sachs has released their latest projections.  Here is a sampling:

1.  The U.S. economy is the economic engine of the world again.   (Agreed!)
2.  Our economic recovery still has room to run.  (Agreed!)
3.  GDP growth next year was reduced to 3.1%, which is still good.
4.  Unemployment will end 2015 at only 5.4%, which would be great.
5.  Inflation this year & next year will remain less than 2%.  (Agreed!)
6.  Ten-year-Treasury yields will end this year at 3.0% and next at 3.5%.  (Disagree!)
7.  The S&P 500 will end this year at 2,050 and next year at 2,100.
8.  Gold will end this year at $1,050 but rise to $1,200 next year.  (It's about $1,240 now.)
9.  The dollar will continue to appreciate through next year.

I do wish they would discuss how long monetary policy can propel this country alone, with no help from fiscal policy.  However long that period is, it is getting shorter every day.

Monday, October 20, 2014

Don't Ask Me Why

Despite being born and raised in the South and despite being named to play "Uncle Remus" in an elementary play due to my strong southern accent, I have never considered myself to be a "southern boy" or "good ole boy" of any type.  But, it troubles me that employment data from the South is less clear than employment data from the rest of the country.

Generally speaking, the rate of unemployment has been dropping all across the country since 2009.  But, in the last six months or so, it has risen in three southern states, i.e., Georgia, Tennessee, and Louisiana.  The predictable political response from the three Republican governors was that the Democratic administration was "fudging the numbers" for political purposes.  Of course, that not only assumes set-for-life-bureaucrats will choose to become criminals but also begs the question of why fudge the numbers for those three states and not other states with Republican governors, such as Texas.

Digging deeper, the other employment indicators, such as new unemployment filings, home purchases corporate hiring, etc., don't support the higher unemployment rates in those three states.  The economy in each of those three states is definitely growing.  The most common belief is that the labor force participation rate is increasing.  In other words, people in those three states are now more optimistic about getting a job and returning to the labor force but at a faster rate than they are being hired or absorbed into the labor force.

Digging still deeper, the unemployment rate is a blend of two survey techniques, i.e., the payroll survey and the household survey.  Now, the payroll survey is based on payroll taxes paid, supplemented by phone calls.  That survey shows continued job growth and falling unemployment in those three states.  On the other hand, the household survey is conducted by calling random phone numbers and asking how many people in that household are looking for work or have jobs.  It is the household survey that is driving up the unemployment rate in those three states.

Does that mean the phone canvassers have called disreputable random numbers for six straight months?  That is a remote mathematical possibility -- very remote.  Or, does it mean that random households in those three states hate the government so much that they lie as a matter o f principle?  But, why only those three states?  I don't know . . . 

Friday, October 17, 2014

Bull and Bull Markets

One of the rumors on the Street is that the reason stocks have been falling so much in October is that hedge funds have generally done poorly this year, under-performing mutual funds.  Feeling some financial pressure as individuals, they took a look at the 20% of profits that they keep and decided to take all the profits they could right now and sit out the rest of the year in cash.  This is Bull!  Most of them don't have any investment profits to take 20% from.  Plus, any firm that lets investor's money sit in cash, while they charge annual fees of 2%, will see investors run away from them.

Another rumor is probably true.  The strong rise in the dollar over the summer was due to foreign demand for dollars.  In August alone, foreigners bought $25.7 billion in U.S. Treasuries and $52.1 billion in corporate bonds.  Since you cannot buy U.S. bonds of any type with Euros or Yen or anything else, they had to sell those currencies to buy dollars, creating a bull market for the dollar.

Rumors come with all degrees of truth but some smell worse than others.