Friday, January 31, 2014

. . . by any other name . . .

In 1996, ValuJet flight 592 crashed into the Everglades, killing all 110 people on board.  The media coverage was intensive and harsh.  The name of ValuJet was ruined.  Therefore, it quickly merged with AirTran to jettison the name of ValuJet.

Economists are not above doing the same thing.

Readers will recall that, when politicians talk about economics, they are talking from only three viewpoints.  First, there was the Austrian school of economics, which dictated that a balanced budget was necessary each and every year.  Then, there was the Keynesian school of economics, which argued that government should run a deficit budget during recessions and a surplus budget during good years.  Lastly, there was the Supply-side school of economics, which concluded that, no matter what the problem, a tax cut will fix it.

I have long argued all perspectives are right and appropriate, depending on the economy.

However, the name of the famous Brit, Maynard Keynes, has been trashed badly ever since President Nixon said "we're all Keynesians now."  Taking a clue from Valujet, meet the American Keynes:  (drumroll please!)  Alvin Hansen.

Like Keynes, he believed anemic recoveries or stagnation were "sick recoveries which die in the infancy and depression which feed on themselves and leave a hard and seemingly immovable core of unemployment," which sounds similar to today, even though he said it in 1938.  His solution was also deficit spending, just like Keynes.  But, "Hansen" sounds so much fresher and more American than "Keynes."  You can expect to hear it as fresh thinking . . . even though he's been dead for 40 years.

When was the last time you heard of "ValuJet?"  Maybe, Keynes also went down on Flight 592.

Thursday, January 30, 2014

Blame It On The Scapegoat !

The hot debate among macro-economists now is whether the recent volatility in emerging market stocks is due to the Fed's tapering program.  In other words, is the Fed responsible for the problems of emerging markets around the world?  This cartoon summarizes the criticism:

I think this is unfair.  Yes, emerging markets are more sensitive to capital flows than developed markets, and capital has in fact been flowing out of emerging markets and back into the developed markets;  because that's where the growth is, not because of some conspiracy by Ben Bernanke.  More importantly, the emerging markets are very dependent on commodities, which have been in a tailspin for almost a year.  In addition, some emerging nations are trying to shift their economies from export-oriented to consumption-oriented, such as China, which can easily stall growth temporarily .

And, by the way, since when is the Fed responsible for the rest of the world anyway?  

Wednesday, January 29, 2014

Some Emerging Market Currencies

A few years ago, I read a book about currency wars, which predicted competitive devaluations in currencies.  In other words, we would force the dollar lower in order to make our exports more reasonable to foreigners and their products more expensive to Americans.  Of course, this is a zero-sum game, in that our gain is somebody else's loss.  Fortunately, this has not happened.

Something else is happening.  Some currencies are falling too rapidly, which can be a disaster.  People try to get rid of that currency, but sellers no longer want to accept that currency.  Sales immediately drop, and unemployment soon drops.

Currently, Wall Street is deeply concerned about "emerging markets."  It is more accurate to say Wall Street is deeply concerned about the falling currencies of Turkey, South Africa, Argentina, Brazil, India, and a few others.  If the currency falls too fast, the price of imports soars.  If the nation is an importer of oil, the price of oil increases, leaving less money for other purchases, like food.  Even worse, if the nation is imports its food, mobs quickly take to the streets, and hyper-inflation breaks out.

Any devaluation must be slow and controlled.  Turkey and South Africa have apparently lost control of the Lira and the Rand.  Last night, Turkey increased interest rates 55%, and South Africa followed this morning.  Anybody with a floating interest rate loan took a big cut in spending money.  Lenders who made fixed rate loans now have big losses to report and will stop making new loans.  Four years ago, I suggested the best way to help friends in Greece was to send them a one-way ticket somewhere else.  If you have friends in Turkey, South Africa, Argentina or the rest, I'd offer the same advice today.

But, there is one big difference between these nations and Greece.  Each of them has their own currency, while Greece was part of the Euro Zone.  The probability of a systemic collapse is much, much smaller.  This  currency crisis will work itself out and is not cause for concern, except for the citizens of those countries.

Unfortunately, investors will react to the headlines, turn bearish, and leave the stock market for awhile.  Jim Cramer predicts a 6% drop in the stock market, before rallying to a new high, and that is quite reasonable.

3.1% of Europe's GDP is trade with these "stressed" economies, compared to 2.4% of Japan's GDP and only 1.3% of the U.S. economy.  We are relatively insulated, thankfully.

This currency crisis is a headwind to the U.S. stock market, probably producing the 5-10% correction I've been hoping for.    

The Silly Season

No disrespect to the current President or any past President, but the State of the Union (SOTU) message is even more over-rated and more over-hyped than the SuperBowl --assuming that is possible.

As we know, existentialists have a "thing" about absurdity.  It simply drives them crazy, but they still cannot stop watching it -- like watching a slow-motion train wreck.  So, I'm rather proud of the fact that I fell asleep during last night's version of the SOTU message after only 30 minutes.

What is so absurd you ask?  Well, you get about 600 people crammed into one room on a cold January night.  Then, they all cheer when someone walks in, even though half of the people can't stand him.  They even give him a standing ovation, before they divide themselves into one group that applauds everything and another group that applauds nothing.  Lastly, that person brags about how good everything is and then speaks about things that will never happen.

Economists pretty much agree that presidents get more credit than they deserve when the economy is good and more blame than they deserve when the economy is bad.  That doesn't seem to matter during the SOTU message!

I'm just thankful that both the SOTU message and the SuperBowl are in the same week.  That's what the dead-of-winter is good for . . .

Monday, January 27, 2014

What It Is . . . And Isn't

Last week was the worse week for the Dow since November of 2011.  Is it time to panic?  No, of course not!

However, it might be a good time to review the differences between an economic recession and a financial crisis.  For example, an economic recession normally comes on relatively slowly, while a financial crisis can appear quite quickly.

An economic recession is normally relatively mild, compared to a financial crisis which is normally severe.

There have been many economic recessions but relatively few financial crises.

Recovery from economic recessions is quicker and more predictable than recovery from financial crises.

Economic recessions are healthy for long-term economic growth, as it purges inefficiencies and re-allocates resources.  Financial crises are not!  Therefore, I embrace economic recessions but fear another financial crisis.

"Buy and Hold" portfolio management is appropriate for an economic recession, but increasing cash relatively quickly is appropriate for a financial crisis.

Currently, economic data indicates the U.S. economy is relatively strong and getting stronger.  However, there is a great deal of concern about the emerging markets, which were only 37% of world GDP in 2000 but are now about 50%.  Could the emerging markets pull us into a recession?  Of course, anything is possible, but this is not likely.

The important question is this:  could a currency crisis in the emerging markets cause a financial crisis here, like the Thai baht crisis in 1997 did when Long-Term Capital Management nearly took us down?  While possible, it is not as likely, because almost all currencies now float, permitting slower adjustments to value instead of sudden, dramatic devaluations.

The world is not ending . . .  but we are indeed extremely fortunate to be living in this country!

Slipping Into Dishonor

The indictment of Virginia's past governor and his wife is certainly a personal tragedy for them, and it is also an object lesson in the slippery slope of corruption.

After several years of experience as a trust officer, I became a division president for a large public company responsible for public syndication of real estate.  During a review of property-level and fund-level expenses, I realized my investors were being over-charged and immediately reversed those charges.  Of course, that increased expenses of the large public company and made me quite unpopular.  I was nicknamed "booker" as in "by the book."  (One particular executive sometimes referred to me as "Booker T. Flinchum.")

Now, suppose my daughter wanted a fancy wedding that I could not afford or that my wife had huge credit card bills and was already borrowing heavily from a "friend."  Would I still have been able to withstand corporate pressure to over-charge my investors?  I suspect so but will never know.  Family money pressures are crushing.  Many marriages fall victim to such pressures.  While that does not excuse corrupt behavior, it may make it somewhat understandable.

I salute Governor McDonnell for passage of his transportation bill but, assuming media reports are accurate,  regret he apparently followed his wife down that slippery slope into corruption and dishonor.    I have met the former Governor and know many of his friends, all of whom uniformly vouch for his good character.

My internal financial planner wonders if this tragedy could have been avoided with better financial planning?  All he had to do . . . was to ask for help . . . before stepping onto that slope!

Friday, January 24, 2014

Losing the Golden Touch ?

During the dark ages of last month, THE vampire squid, otherwise known as Goldman Sachs, predicted that gold would end this year at $1,050 per ounce.  Today, it is selling for about $1,264 -- but that is up considerably so far this year.

Gold Double-Bottom: Breaking Above 50-Day Moving Average

At times, gold has moved in opposite directions from stocks.  At other times, gold reacted more to inflation.  Some times, it reacts to political uncertainty, and that appears to be the case this time.  Turkish and Russian investors are abandoning their currencies to hold gold, driving up the price.  Also, there is talk in India about reducing the tariff on imported gold.  Since India is the world's largest consumer of gold, that also might be impacting the price of gold.

Goldman Sachs may still be correct about the year-end price of gold, but it does show how difficult it is to make predictions . . . even for "the best and the brightest"  . . . snicker, snicker!

It's Here . . . I Hope

Bull markets NEVER go straight up.  After a great 2013, I predicted the stock market needed a good 5-10% correction.  It is a normal, healthy part of a long-term bull market.  While I didn't expect it quite so soon, it looks like it is here anyway, and that's fine!

The immediate catalyst for yesterday's fall was primarily due to a slightly negative report from China.  Oddly, there was even a translation problem, as another report out of China apparently noted the "credit transmission mechanism was broken," whatever that means.  Also, Latin America rattled the markets, as Argentina continues to "circle the drain," and Brazil lurches leftward.  Both the Turkish Lira and Russian Ruble hit new lows, reflecting their internal troubles.  And, I know fear was up, because investors bid up the price of risk-free Treasury bonds, which forced interest rates down.  Nobody seemed to even notice that the economic reports out of Europe were better than expected.

But, keeping our attention on what really matters . . . is what really matters.  We're in "earnings season," when companies report their operating results.  Beating the expectations of analysts is always important, and 63% of the companies reporting so far have beat those expectations.  American businesses are looking fine.  The bad news is that many companies have also downgraded their earnings estimates for the full year, which spooked some investors out of the stock market but is a normal part of the corporate game to lower expectations for the next earning season.

The S&P 500 is about 1,828 and could easily drop another 10 points today.  There is a lot of support around 1,800, but a full 10% correction would take it down to 1,663.  So . . . don't start losing sleep until then, please!

 Besides, you'll recall most of the annual appreciation during the second year of a Presidential term happens in the fourth quarter.  We have plenty of time!  My mother told me that good things do come to those who wait.  Now . . . wait!

Wednesday, January 22, 2014

Surf's Up !!

Deutsche Bank is a giant European bank, who also has a huge wealth management business in the United States.  Because of this European background, I try to follow their perspective on the U.S. economy.  Here is the latest:

1.  The U.S. economy is definitely gaining positive, sustainable momentum, albeit weak.
2.  The things that have been holding back economic growth are weak consumers, lack of credit, a housing overhang, state and local government retrenchment, and fiscal drag from the federal government.  All are improving and losing significance.
3.  Housing is unlikely to continue such rapid appreciation.  It is ahead of fundamentals at this point.
4.  While the rate of growth is decidedly positive, it will not be as rapid as past recoveries because "the economy's potential output -- determined by factors such as labor supply and productivity -- may have been damaged by the trauma of recent years."  In other words, it was a really severe recession -- duh!
5.  The labor market is not as good as economic reports indicate.  There is no upward wage pressure.
6.  Inflation is not an issue - agreed . . . for now!
7.  Interest rates will not rise anytime soon, courtesy of Janet Yellen.

I don't disagree with any of this, but I would only add the thought from the 1970 classic book on Future Shock that the rate of change continually increases.  This slightly rosy portrait of the U.S. economy can change quickly, especially if there is a derivatives blow-up or the velocity of money increases suddenly.

But, for now, the sun is shining, and I'm looking for my bathing suit . . .

Dying Unhappy Is Optional

I laid awake last night thinking about a dead guy . . . actually, a dead rich guy.  He was only 73 years old.  He married well and worked hard enough to be wealthy and retired by age 50.  To fight the boredom of retirement, he ran a retail store for several years, until that became boring as well.  Over the twenty-some years that I knew him, he sank deeper and deeper into depression.  Death must have been a relief for him.

Sitting in the church for his memorial, I remembered Abraham Lincoln's famous comment that "Most of us are about as happy as we make up our minds to be" and then I wondered why the dead rich guy didn't make up his mind to be happy.  Being in church, I wondered if the Bible could shed any light and found that the Apostle Paul in his letter to the Philippians said "I have learned to be content whatever the circumstances . . . I know what it is to be in need, and I know what it is to have plenty.  I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want."  (emphasis added)

Certainly, it is not a question of rich or poor.  Money has minimal relationship to happiness.  I've known other rich people who died quite happy, and I've known poor people who died happy while some died unhappy.  So have you!

Then, I ran across the story of a sailor in World War II, named Clark Poling, who had just written a letter to his parents when the ship came under attack, and the sailors were forced to abandon ship.  The over-loaded troop transport ship didn't have enough life jackets, and Poling willingly gave his to a younger sailor, asking him only to deliver that letter to his parents.  In that last letter, he wrote, "I know I shall have your prayers, but please don't pray simply that God will keep me safe.  War is dangerous business.  Pray that God will make me adequate."

Maybe, it is not a question of dying happy.  Maybe, it is a question of dying content.  Have I been adequate to the challenges in my life?  Have I been adequately compensated in some combination of money, love, experiences, perspectives, and thoughts in this life?

The existential view is that a dead rich guy is just another dead guy.  We are kings of our own individual islands and can control whether we are happy or not, content or not, adequate or not.  If my compensation package of money, love, experiences, perspectives, and thoughts is inadequate, then it is my responsibility to determine what is missing.  If there is not enough money, maybe I can add some love or some experiences to the package?  But, whatever it is, it will be adequate.  I will be content.  I can control this.  I am king of my island - myself.  So are you!

Monday, January 20, 2014

Happy MLK Day

As a boy, I was raised to be very respectful of authority.  So, it was not surprising that Martin Luther King was held in low esteem in our household.  After all, he was encouraging people to dis-respect authority.   But, it was not racism.  In fact, my father, who had spent a great deal of time with "coloreds" in World War II, was always very sympathetic to their cause.  It was about being dis-respectable to authority.

Respecting authority seemed to make sense as a boy.  However, when I was in the Army, I found myself over-dosing with rigid authority figures.  Fortunately Special Forces had a looser structure, and I was strongly attracted to the mission-first mind-set and the "authority-be-damned" mentality.

My attitude toward King slowly changed from a trouble-maker, dis-respecting authority, into a fellow soldier, fighting for what he believed.  He died for what he believed, and I will always respect that!

Yes, he had money-troubles, but who hasn't.  Yes, he had women-troubles, but who hasn't?  But, he changed America, even though he never held a military commission nor a public office.  He had authority, real authority -- moral authority -- and I do respect that authority . . . just like I was taught.

Saturday, January 18, 2014

Another JOLTing Column

My latest quarterly column for Inside Business can be found at: 

In that column, I mention the JOLTS report or Job Openings Labor Turnover Survey.  Since the column was submitted to the editor, the latest report (November) has been released, and it shows continued increases in the number of "quits," which is a very healthy sign of improvement in the labor market.  Workers are reluctant to quit a job, when they are not confident of finding another job.  

One interesting detail in the latest report is that the increased confidence is strongest among the low-skilled workers.  Why is their confidence level increasing faster that non-skilled and highly-skilled labor?  We're not sure of the reason, but I am sure it will be studied closely and quickly.

Friday, January 17, 2014

Top 10 From The Top 700

About 700 invitations go out each year to attend the prestigious World Economic Forum held in Davos, Switzerland.  Ahead of the conference this year, the attendees were asked to list their primary concerns.  Here are the top ten:

1.  Fiscal crises in key economies -- think China, Europe, and the U.S.
2.  Structurally high unemployment/underemployment -- predicts social instability
3.  Water crisis -- ask anybody in the western U.S.
4.  Severe income inequality -- also predicts social instability
5.  Failure of climate change mitigation and adaption -- no longer debating the earth's flatness
6.  Greater incidence of extreme weather events -- see #5
7.  Global governance issues -- the need to overcome some national sovereignty issues.
8.  Food crisis -- hard to imagine sitting here in America
9.  Failure of a major financial institution -- my primary concern, leads straight to Wall Street
10. Profound political and social instability -- symptom or cause?

This is the Top Ten from the "best & brightest."   Now, what would YOU add to this list?

Thursday, January 16, 2014

A Little Good In Everybody?

As much as it pains me to say something nice about Google, I am truly impressed by the cutting edge research they are doing.  Take a look at this:

Google smart contact lens

It is a regular contact lenses that measures the glucose level of a person's tears, every minute.  Just imagine how this would impact the life of a diabetic.  If it can measure sugar, what else can it measure?

This is wholly independent of their Google Glass project, which is already in beta testing.  Such cutting edge research is only possible by a highly profitable company, and it is good to see actual research instead of stock buybacks.

While I painfully applaud Google on this, I'll also bet Google will find a way to capture more details about the wearer and then sell those details to advertisers.  Hey . . . it's capitalism!

My Lost Red Shoe

On the morning of September 11, 2001, I watched from my office window in Alexandria, as the Pentagon billowed smoke, and I could feel over-whelming anger welling up inside me.  My wife worked directly downwind from the Pentagon, and, as her office filled up with smoke, she worried that she might be breathing dead bodies.  I think those were probably normal emotions.

Our next door neighbor worked in the Pentagon.  She was forced to flee the Pentagon at a dead run and was sprinting across the grounds when she lost one of her shoes, a red heel.  For whatever emotional reason, she obsessed over that red shoe.  She could not speak of the friends she lost.   She could not discuss the damage to her office.  She could only discuss her lost red shoe.  Maybe, that helped her emotionally to deal with her memory of the tragedy.  However, when we last saw her, 18 months after 9/11, she was still obsessively focused on her lost red shoe.

Maybe, I am becoming the same about privacy, i.e., obsessively focused on losing something that doesn't really matter.

The latest assault is something called "location sensors," which are mounted in stores or nightclubs or hospitals or anywhere.  Whenever a Wi-Fi-enabled phone passes by, the sensor records that information and collates with other places that have tracked that phone.  If you subscribe, you can find out how many people within one mile of your home that went to nightclubs last night and which ones.  If you want those people to come to your nightclub or store, you now have a way to advertise directly to them.  Or, you can know how many people in a five-mile radius walked by the office of a oncologist or urologist in the past two weeks. If you want those people to buy your new "cure" for cancer or social diseases, you now have a way to advertise directly to them.

I know, I know . . . cell phones already track our every move, but access to that info is at least somewhat restricted.  A distrustful wife cannot simply call the phone company and ask for the location of her husband's phone last night.  There are already some weak safeguards against that.

But, there are no safeguards with these location sensors.  Commercial companies collect this information and sell it to local merchants, as well as to the big advertising companies, like Google.  Private investigators will undoubtedly use these services to help distrustful wives and husbands.  It is just another way around the existing weak safeguards.

But, privacy is not about cheating spouses.  It is not about knowing which neighbor is hiding something.  It is not about money.  It is part of who we are, our very identity.  Are we autonomous individuals, as existentialists believe . . . or not?  One of the most important horror stories not written by Steven King was 1984 by George Orwell.  It almost seems innocent to fret about the prying eyes of an all-controlling government, as envisioned by Ayd Rand, when the prying eyes of advertisers are far more pervasive.  Do you really believe the NSA will not subscribe to this data?

I've always enjoyed the process of getting to know people.  Like an onion, you peel away layers of family, education, experiences, values, and philosophy to find a real person.  Soon, I'll be able to quickly download enough information to reach some conclusions -- all for a modest subscription fee.  No need to waste time talking with real people!

Young people don't seem to mind, preferring to receive more interesting advertising specifically targeted to them as individuals.  They will not miss some fuzzy, old-fashioned and over-rated value called privacy.

I wonder if my former neighbor finally got over her obsession about a red heel . . . .and how long it will take me to stop missing old-fashioned and under-rated privacy?

Wednesday, January 15, 2014

Her Honeymoon Is Already Over

Sometimes, a cartoon can capsulize a complex thought and sometimes a cartoon can mislead.  Take a look at this misleading one:

You see the next Fed Head Janet Yellen explaining that there will be no inflation, because 0% interest rates on overnight deposits forever will cause zero inflation.  I don't think there is an economist on this planet who believes that is remotely possible.

It would obviously cause inflation at some point, but the cartoonist was trying to encourage investment in gold by insulting Yellen's intelligence.  Yellen never said this!  With a Ph.D. in economics from Yale and a lifetime of experience, she would never say such a stupid thing.  (She is also married to a Nobel-prize winning economist, and her son is a professor of economics.)

Bernanke and Yellen have both assured the investment community that a decrease in the amount of monthly quantitative easing does not mean they will allow interest rates to move up, until the economy is on sounder footing.

There are lots of reasons to buy gold, but this is not one of them.

Yellen has not even taken over as Chair of the Federal Reserve System yet, but the usual honeymoon with critics is already over.  

Tuesday, January 14, 2014

Squid-ish Thoughts

Because they fancy themselves the smartest guys in the room, it is always good to follow the thoughts of Goldman Sachs.  Here are their latest:

1.  "Stay fully invested -- we don't have bubble troubles yet."
2.  They like technology stocks and junk bonds.
3.  There is a 67% probability that stocks will have a 10% correction this year.  (I agree!)
4.  But, the S&P will still end the year up 3% this year and 4% next year.
5.  European stocks should gain 10% this year and average 11% per year the next five years.
6.  There is only a 20% probability of recession in the U.S.

            . . . and drum roll, please . . .

7.  "The economic risk of U.S. political gridlock around the debt ceiling and government shutdowns is negligible."  Let us pray they are right!

Saturday, January 11, 2014

Believing in Santa

Who is least believable?  Santa Claus, the Easter Bunny, or the latest Jobs Report?

Santa Claus and the Easter Bunny are pleasant frauds, designed to sell toys and candy.  The latest Jobs Report is an accidental fraud, designed by the Bureau of Labor Statistics (BLS) to describe U.S.  labor market.

The just-released December report indicates only 74 thousand jobs were created that month, down 69% from November.  Just prior to its release, the futures market was indicating the Dow would gain 60 points when the market opened, because the consensus forecast by economists was that 200 thousand jobs had been created in December.  Naturally, the Dow dropped like a rock when this report was released!

In fairness to the BLS, December is one of the most difficult months to estimate, because the holiday season causes wide swings in retail employment.  Plus, the survey is easily skewed by bad weather.  One analyst estimated that 80 thousand of drop in jobs created from November was due to weather.

More significantly, this report is very inconsistent with other economic data.  The latest consumer confidence survey, the ISM non-manufacturing survey, the NFIB report and the ADP report, among others all indicate a strongly improving economy.  My prediction is that next month's Jobs Report will show substantial upward revisions to the December number.

In addition, the unemployment rate dropped from 7.0 percent to 6.7 percent, which is a very large decrease and therefore good news . . . right?  Unfortunately, the decrease was due to the wrong reason, i.e., 347 thousand people gave up and quit looking for a job.  This is called the Labor Force Participation Rate, and it dropped to 62.8%, which is the lowest in 36 years.  That means 37.2% of working-age Americans are being supported by the 62.8% who do work or are looking for work.  Republicans spin that is proof people are too lazy to work.  Democrats spin that just shows the baby-boomers are retiring and unemployed are going back to school.  Neither party spins this as good news.

Just prior to the 2012 election, the BLS released a very strong Jobs Report and was criticized for "cooking the stats" to help President Obama's re-election.  I defended the BLS then and continue to do so.  Having attended numerous economic conferences and meeting many BLS economists, I find them too "geeky" and too lost in their numbers to really care.  In addition, it would be so apparent if the stats were cooked that no economist in their right mind would do it.  The BLS may be wrong, but they are not stupid.

I may not believe the latest Jobs Report, but I do believe the BLS . . . and Santa and the Easter Bunny too!

Wednesday, January 8, 2014

The Unthinkable

It was during the late 1970's when I realized that international trade was growing much faster than the economy.  Indeed, that actually triggered my graduate work at the University of Dallas in international finance.  Since then, I have studied and lectured many times on the benefits of globalization.  It seemed almost sacred to me that globalization would increase forever, making nations too economically interdependent to ever conduct war with each other.

But, something is happening.  Cross-border investment dropped 18% in 2012 and is expected to have fallen even more last year.  International trade has failed to grow as rapidly as the world economy for two straight years.

Two things have clearly contributed to this.  First, technological innovation has made it easier to source and inventory parts domestically than expected, by such cutting-edge techniques as 3-D printing.  Technology has made it easier to manufacture within one's country without the hassles of out-sourcing.  This is made even more problematic by those nationalist governments like China, who strongly discourage any out-sourcing of labor or importing of parts.

Secondly, there has always been one or more worldwide leaders to champion the cause of economic interdependence but not now.  For whatever reasons, most national leaders, from England to China, are weak by historical standards.  Despite the Tea Party paranoia that President Obama is a socialist, Islamist dictator, he is actually a very weak president, relatively speaking.  He has had zero success getting passage of the important Trans-Pacific Partnership (TPP) or the new U.S.-European trade pack or most anything else.  Globalization has stalled.

Indeed, we are going backwards.  The Center for Economic Policy Research in England has recently published that the G-20 countries have implemented 23% more protectionist measures in the last five years.  This is a tragedy, indeed!

Lacking a better measure, the Baltic Dry Index has historically been the traditional benchmark on globalization.  While it merely reflects shipping rates of dry goods (think: clothes, etc.) across the Atlantic Ocean, we assume increased shipping rates reflect increased shipping, which reflects increased trade.  Here it is:

It shows the dramatic collapse during the Great Recession, followed by recovery that also soon collapsed.  During the last half of 2013, there was some recovery, but that reflects improving economic conditions, not necessarily increased globalization.

The opposite extreme of globalization is isolationism.  I don't worry about that extreme, but I do regret the tangible benefits of globalization are being delayed . . . including economic interdependence.

Just five years ago, this would have been unthinkable . . . 

Tuesday, January 7, 2014

Take A Bow , Dr. Siegel

Undoubtedly, my all-time favorite professor at Wharton was Dr. Jeremy Siegel.  Last week on CNBC, he was honored for his stock market prediction last year that the S&P 500 would end the year at 1,850.  He was wrong!  It was only 1,848.  Of course, that was closer than anybody else, and he deserved the honor.

I just read his latest prediction.  Looking at the Dow instead of the S&P this year, he thinks the fair value of the stock market is 18,000 compared to about 16,425 now.  That means he expects another 9.6% market appreciation before becoming fully valued.  He also points out that markets "rarely stop at fair value" and will normally go higher before falling back to fair value.

In other words, this brilliant, self-effacing professor thinks it is still a good time to invest more into the market.  However, as fond as I am of Dr. Siegel, he is known as a "perma-bull" who always sees a glass as half-full and normally expects a bull market.  Nonetheless, with the positive economic reports over the last few months, I expect he will probably be correct this year . . . again!

Saturday, January 4, 2014

Hyperlink To The Future ?

As promised, here is the link to my annual forecast for Inside Business:  The Hampton Roads Business Journal.

You might also enjoy the perspectives of other business leaders.  There are some very interesting forecasts from the different business sectors.  Seeing their world through their eyes is a valuable insight!.

Income Taxes vs. All Taxes

I just reviewed the latest information from the IRS about who pays what taxes.  It reports that the top 1% of income earners (over $388,905) paid 35.1% of all Federal income taxes.  They paid 37.4% the year before.   The top 1% also paid about 1% of all Social Security taxes and Medicare taxes.  Does that sound fair?

The bottom 50% only paid 2.9% of income taxes but almost 50% of payroll taxes, like Social Security and Medicare.  Should they pay higher income taxes like the top 1%?  Should they pay a smaller share of payroll taxes, like the top 1%.  What is fair?

Since poor people spend all or most of their income to live , almost 100% of their income is subject to sales tax.  The "rich" (I hate that word!) save some of their income, which is a tax shelter from the sales tax.  Is this fair?

And, when did the word "fair" become a dog-whistle for Democrats anyway?

 Fairness is best left to ministers, moralists or ethics professors.  From an economic perspective, this argument is comparable to "re-arranging the deck chairs on the Titanic."  Economists are more interested with the allocation of resources.  Who gets what resources for what prices?

The economic system of capitalism does a great job of allocating those resources by market prices.  If the price of a product or service is too high, then suppliers and providers will be motivated to allocate more resources to produce the product or service, thereby increasing supply, which will eventually drive the price back down.  If the price of a product or service is too low, then suppliers and providers will be motivated to allocate fewer resources, thereby reducing supply, which will eventually drive the price back up.  The "market" will find the right price for the product.

But, notice that economists assume everybody pays the same price for the same product or service.  Does the top 1% and the bottom 50% pay the same amount in taxes for the same services of government?  Taxpayers with expensive homes pay the same for fire protection as the cheapest house in the neighborhood.  But, the bottom 50% absorb more public healthcare than the top 1%.  A recent study indicated that the affluent benefit more from police protection, because they have more assets to protect.

So, how do we allocate government services by using price (taxes paid) as the mechanism to allocate resources?  Economists have tried repeatedly, but the study is always flawed by assumptions.  I don't think we can answer that question.  Econometrics fails us.  Therefore, we fall back to the unhelpful concept of "fairness."

Darn it!

Friday, January 3, 2014

Our "Bull In A China Shop"

Long-time readers know how concerned I have been about the dangers of a derivatives failure, which could cause sudden and dramatic damage to world stock markets.  Investing around derivatives to minimize the danger is nearly impossible because so little is known about the derivatives.  Nobody knows for sure how big the problem is, but it is estimated there are $400 trillion in unregulated derivatives.  There is no "stock market" to capture the needed data.  There is no way to know who is betting how much and on what!  For example, Goldman Sachs might be betting $100 billion on the price of wheat in August, pushing that price up or down depending on what price they want.  Or, how about if they shorted Greek bonds and then their analysts downgraded those bonds?  Do you remember the problems of credit default swaps a few years ago, when investment houses sold mortgage-backed securities to the clients and then shorted them?

The point is that derivatives provide the "big boys" with huge investment opportunities to create "bubbles and busts."  They are a threat to the long term viability to the world stock markets.  Most of the investment industry has been clamoring for some protection, but not the "big boys."

When the enormously complex Dodd-Frank financial reform law was passed in 2010, Gary Gensler was Chairman of the Commodity Futures Trading Corporation, where several types of derivatives could be regulated.  In a political environment where any regulation of any thing at any time is bad, Gensler became frustrated and used his administrative powers to implement 68 new rules to govern derivatives.  While some of the 68 rules will probably be just counter-productive window-dressing, it is still a step in the right protection.

Gary Gensler just left office at year-end, and I wish him well.  While many regulations are often unproductive or even silly, blind antipathy toward all regulation is also unproductive but not silly.  Gensler attacked a huge problem that was known only to a few.  As the "big boys" will undoubtedly take all 68 of the new regulations to court, it is unclear that derivatives will be any better regulated than previously, but I am much more optimistic.

Good job, Gary!