Monday, June 30, 2014

Bypassing Washington

Q.  What happens when you put three Republicans in a room to write a report?
A.  BS
Q.  What happens when you put three Democrats in a room to write a report?
A.  BS
Q.  What happens when you put a Republican, a Democrat, & a Independent in a room to write a report?
A.  Sadness

I salute the efforts of Republican Hank Paulsen, former Treasury Secretary under Bush, and Independent Mike Bloomberg, former Mayor of New York City, and Democrat Tom Steyer, hedge fund executive and fundraiser.  They tried to marshall all the evidence on climate change or "global warming" and then drive home the consequences.  As someone who lives on the beach, I encourage you to visit their website at:  

They did not make any policy suggestions to be undertaken by politicians.  They did argue for more aggressive involvement by business, by investors, and by consumers . . . but not by politicians.  Frankly, I agreed with every suggestion they made.  But, it makes me sad that they also believe politicians are worse than useless and are part of the problem.  To deal with climate change (ignoring the cause of it) we need to -- first -- accept the impotency of politicians and -- second -- to overwhelm Washington.

Sadly, Ronald Reagan was right in saying that Washington is not the cure but is instead the problem, at least with respect to climate change.

Sunday, June 29, 2014

Just One More Death

My father was a proud veteran of World War II and participated in the liberation of the Auschwitz concentration camp, where countless Jews were murdered.  He never talked about the horror of it, except to recall how hard the ground was (as only a farmboy would) .  The fact that he wouldn't talk about it and chose instead to focus on the hardness of the ground naturally made me even more curious.

As I learned more about incredible horror of it all, I was stunned to read actual justifications for it.  How could the murder of six million people ever be justified?  Obviously, it cannot -- but it did introduce me to the notion that any horrible thing can be rationalized and made to sound reasonable.

The Carolina HealthCare System operates over 900 facilities including hospitals, nursing homes, and physicians offices.  According to The Daily Ticker, that huge healthcare system is already watching credit card transactions for purchases of cigarettes and unhealthy foodstuffs.  Imagine getting a phone call from the hospital that they see you're still smoking cigarettes and need to stop!  Imagine sitting in your doctor's office when he asks you to explain the purchase of some Hostess Twinkies on June 29th?

Here is the rationalization:  People with unhealthy lifestyles waste the money of healthcare insurers until they go on Medicare and then waste the money of taxpayers.  Why should either my healthcare premiums or my taxes paid be used to subsidize your affection for Twinkies?  To protect my dollars, Big Brother is watching your credit card transactions!  How about if they call you and ask about some local hotel charges, since AIDS is an expensive disease to treat?

Maybe, ranting about the loss of privacy is like ranting about the loss of a loved one thirty years ago, as privacy also died long ago.  Maybe, some things are still worth fighting for -- even fighting like Don Quixote.  Killing innocent people is clearly wrong, but killing the human right to privacy is also wrong!

According to Austrian economics, if you want more of something, you should subsidize it.  If you want less of something, you should tax it.  If we want less smoking, we should tax it to the point that the cost of smoking cessation programs seem modest.  We shouldn't pay for less smoking with less privacy!  

Friday, June 27, 2014

Dallas Buyers Club . . . sorta

In the vein of Freakonomics or finding economic principles in everyday life, please enjoy this review of the Oscar-winning movie: 

A Good Probe

Suppose you own $200 million of XYZ Company stock and want to sell half of it.  If you simply hit the SELL button and flood the market with stock, the price will go down, reducing the value of the stock you sold, plus the stock you kept, plus the value of stock held by other stockholders.  That is because all transactions on the public stock exchanges are public information.  Every buyer will see the market for those shares is being flooded and will therefore offer less.  There is nothing sinister or illegal about this.

So, large banks operate what are called "dark pools."  In this example, you would give your $100 million of stock to the bank who would then sell $5 million to twenty other clients.  By doing this, you get the best price for the stock you sold as well as the stock you kept. Plus, this is good for other shareholders who are keeping their stock.  All this is possible, because the transactions are secret.  No buyers realized the market was being flooded with shares to sell.  Mutual funds and pension funds are the primary users of these dark pools, and  38% of all equity trades are now done in them.  There is nothing sinister or illegal about this either.

Of course, secrecy breeds conspiracy theories, and there have been many rumors about what else happens in these dark pools.  There sure is a lot of smoke . . .

This week, we learned that the New York Attorney General is probing the second largest dark pool.  Apparently, they are focusing on whether the bank was honest in what was happening inside the dark pool, with the suspicion that they allowed high-frequency trading (described as petty larceny on a grand scale). While I believe it is sinister to allow high-frequency trading in a dark pool, I know it is not illegal.  But, it is illegal to tell clients you are not doing it when you really are.

It is good that this dark pool is being probed and is focusing attention on all dark pools.  These huge secret pools could easily pose a systemic risk to our financial system and need to be better regulated.  My suggestion would be annual audits by the SEC and criminal liability of Chief Investment Officers who abuse the secrecy.

Now, what happens if a rouge dark pool loads up on European derivatives, for example?  Well, that's why God invented the SELL button!

Thursday, June 26, 2014

Gold Reflections

After a ten year bull market, gold has been leaking value for the last three years.  However, technical analysts think it may be getting ready for another bull run, because it is pushing up against the red resistance line in this graph.

Chart of the Day

To a fundamental analyst like myself, I see the recent strength in gold as a normal reflection to increased anxiety in Iraq . . . and in Syria . . . and in Iran . . . and in Jordan . . . and in Lebanon . . . and in . . .

A Tiny Right Saved ?

For most of us, there is no greater pain than the loss of a loved one.  Fortunately, psychologists assure us that the pain decreases over time.  But, what about the loss of a right?  Felons tell us that losing the right to vote, for example, is always an annoyance.  The elderly tell us that losing the right to drive is an annoyance.

However, since losing our right to privacy, my annoyance has morphed and now grown into resentment.    Young people certainly don't agree with me, and most don't even understand the question.  After all, they get to see advertisements more relevant to their interests.  And, does it really matter anyway . . . if Google knows what temperature you prefer on the thermostat?  Does it matter that Google can track your movements during the day?  Would it matter if the Federal government was tracking you instead?  Why, what's the difference?

So, I was both surprised and delighted yesterday when the Supreme Court ruled that police may not search your telephone without a search warrant!  While I am not worried the police will ever find anything remotely interesting in my cell phone, it was a reminder that there is still some tiny privacy somewhere.  Unfortunately, the Supreme Court ruling did not apply to Google.

Wednesday, June 25, 2014

OMG !?!

Let's see . . . the labor market is improving, albeit slowly but steadily improving . . . corporations are highly profitable and sitting on a trillion dollars in cash . . . May home sales were the highest in seven years . . . consumer confidence is at the highest point since the global financial crisis . . . what, the Dow lost 119 points yesterday!?!  The sky must be falling!

I don't know if this is the beginning of the perfectly normal "June swoon," but we are due for a 5-10% correction and shouldn't be scared of it.  It is good for the stock market in the long run.  And, don't forget the stock market always over-reacts to geopolitical events, and we have a potential "humdinger" of a geopolitical event coming up.  It too shall pass . . .

Now, take the summer off and go to the beach!

Monday, June 23, 2014

A Grand Framework for Mundane Issues

Some twelve years ago, I read The Clash of Civilizations and the Remaking of World Order by Samuel Huntington.  It was a brilliant book and became a framework for much of my thinking, even for more mundane things.  He argued that civilizations have become more important than nations or states.  An example would be our Western Civilization speaking romance languages, compared to the Eastern Civilization or to the Islamic Civilization as examples.

My takeaway was comparing civilizations to tectonic plates on the Earth's surface.  Remembering your college class on continental drift, these tectonic plates drift around on the Earth's surface very slowly.  However, when they do collide in very-slow-motion, several things can happen.  One tectonic plate may rise on top of the other, explaining the Himalaya.  Or, they may begin touching each other, despite their continuing movement.  Because they are still "drifting," pressure builds up wherever they touch.  If that pressure is released slowly, it is barely noticed.  If that pressure continues to build, it will eventually be released -- as an earthquake, explaining California.  Civilizations are the same.

Carrying the concept of clashing non-tangibles is also useful for more mundane thoughts.  Most everyone can readily see the clashing of religions, but how about the clashing of cultures or mundane social patterns?

I keep thinking about a young lady we met on our last trip, who is bright, cheerful and should have a good future -- except she is heavier every time we see her and dresses more like a farmhand than a bright, cheerful young lady who could have a good future.  It is not her fault.  She knows nothing about nutrition and healthcare.  Her parents also know nothing about nutrition and healthcare, except you shouldn't eat foods that don't taste "good."  Her school may have an elective course in nutrition, but it should be required.  I know the Republican position is that parents should be the "mommy-state" and not the school, and I agree, but the parents were never taught anything about nutrition either.  When does the chain of ignorance get broken?

With respect to dress, public schools are not charm schools, I understand that.  Yet, I remember the last three weeks of Officer Candidate School in the Army had several classes on table manners and appropriate off-duty behavior, including clothes.  Even the Army thinks it is important enough to spend tax dollars teaching what is not obvious to most.

When pressure between the tectonic plates of health and healthcare builds, a premature and slow death is more likely to occur.  When pressure between the tectonic plates of social expectations and social awareness builds, missed opportunities result and at what cost to GDP?

There is a cost to doing something, and there is a cost to doing nothing.  Which is greater?

Saturday, June 21, 2014

Ignoring Air-Pockets

The Conference Board has been around since 1916 and is a private, non-governmental research body funded mostly by corporate contributions to do economic research.  It is well-respected and well-known for two reports in particular.  One is the Index of Consumer Confidence.

The other is the Index of Leading Economic Indicators or LEI, which predicts economic conditions during the next few months, generally assumed to be six months or so.  It has been positive for four straight months now, which is very bullish.  But, most investors don't know that it is composed of ten "sub-indicators."  They are:

1. the average weekly hours worked by manufacturing workers
2. the average number of initial applications for unemployment insurance
3. the amount of manufacturers' new orders for consumer goods and materials
4. the speed of delivery of new merchandise to vendors from suppliers
5. the amount of new orders for capital goods unrelated to defense
6. the amount of new building permits for residential buildings
7. the S&P 500 stock index
8. the inflation-adjusted monetary supply (M2)
9. the spread between long and short interest rates
10. consumer sentiment

This month's LEI would have been ever more bullish, if building permits had not been such a drag, but that was easily offset by the strengthening labor market.  However, the increasing spread between long term and short term interest rates (#9) is driving the LEI, and that is very bullish.  A flat yield-curve is one where interest rates for debt maturing in ten years is about the same as debt maturing in three months.  That is not good.  A negative yield curve is one where ten year debt pays a lower rate of interest than three month debt.  That is very bad and is a strong bearish signal.  A positive yield curve is one where borrowers pay a higher rate of interest for longer-term debt, which is normal.  It is a signal that the economy is improving so much that borrowers are willing to pay a higher rate and is very bullish.

The generated optimism from the economic data continues to push the stock market to new highs, surprisingly immune to the geopolitical risk of an Iraqi collapse.  In the list of ten sub-indicators above, geopolitical risk is not mentioned.  The LEI is certainly a good indicator of the U.S. economy and probably an indicator of the U.S. stock market, but it ignores what happens when we hit a geopolitical "air-pocket."  Like the pilot says . . . always keep your seat belt fastened!

Friday, June 20, 2014

On Being The Fed Head

Just imagine that your congressman stood on the House floor and proposed spending another $175 BILLION that is not providing any new service to Americans nor enhancing any existing service nor building any infrastructure nor financing any new wars.  Would you ever vote for him/her again?

A one percent increase in interest rates on our national debt will cost us an additional $175 BILLION every year, and many analysts estimate the "natural" rate of interest is at least 3 points higher.  Will the Chinese continue loaning us money to pay interest back to them?

Now, just imagine you are Janet Yellen and need to raise interest rates to control inflation.  Then, imagine your congressman back on the House floor again, but this time he is condemning her for this arbitrary and harmful decision to impose a huge new unfair tax on the American people, suggesting the Fed should be terminated.  Frankly, I feel sorry for her.  She is damned if she does and damned if she doesn't.

I expect she will start raising interest rates later instead of sooner.  

Wednesday, June 18, 2014

Asset Protection & Crooks

Asset Protection Trusts (APT) are designed to protect assets from lawsuits and ex-spouses and have existed for many years.  During my trips to Switzerland in the 1990s, I studied them closely and also became convinced that there are more crooked financial advisors pushing these trusts than any other field in financial planning.  Normally, I urge clients to avoid APT for a host of reasons -- but particularly because you must give up title to your own assets permanently, in order to create the trust.

However, there has been a recent court case, which allowed an individual to create such a trust in the Cook Islands after litigation had begun but before damages were assessed against that individual.  He got to keep the money in that trust, and the creditors got nothing.

Personally, I think this is unconscionable and hope it will reversed on appeal.  In the meantime, I expect these same old crooked financial advisors to crawl out from under their rocks and start pushing APTs like cotton candy.


Fed Day Forecast

Wednesday is a Fed Day, which means the stock market will continue to simply churn, as it waits for some statement from the Federal Reserve Bank, usually at 2:15 PM.  As is normal, they have to make an important decision based on incomplete and contradictory economic data.  And, by the way, they are also human.

You'll recall the Fed is the only central bank that has a DUAL mandate to curb both inflation and unemployment.  All other central banks worry about inflation only.

The "unemployment rate" has dropped nicely, which suggests the Fed does NOT need to be stimulative.  However, the mandate doesn't distinguish between the normal "unemployment rate" and the "long-term unemployed."  This latter is still terribly high.  Wasting five years of your life NOT working is a waste of a NATIONAL resource.  Not working reduces GDP.  Thus, the Fed does need to remain stimulative.

The inflation rate has been worrisome because it is too LOW.  Deflation is much more pernicious and dangerous than inflation.  We have been fearful of falling into deflation, which is one of the primary reasons the Fed has been so stimulative, i.e., trying to CREATE inflation.  Tuesday's CPI release was up 2.1% over last year, which is close enough to the Fed's goal of 2.0%.  Does that mean the Fed can become LESS stimulative -- Nope!  The Fed doesn't care about CPI.  They care about the PCE deflator or Personal Consumption Expenditures Index, which is only up about 1.5% - well below the Fed's target of 2.0%.  Does that mean the Fed should continue being stimulative -- Yep!

At 2:15 PM Wednesday, I expect the Fed will continue to hold interest rates stable and will again decrease the monthly quantitative easing by another $10 billion.  This would still be stimulative but slightly less so.  More importantly, the market also expects this.  Anything different will create a market reaction.

Monday, June 16, 2014

The Ultimate Resource

I avoid listening to either Republicans or Democrats talk about ObamaCare.  Both have their spinning points and sound bites.  Thank God for Carolyn McClanahan, who is both a medical doctor and a financial planner.  I promise you that she understands ObamaCare better than Obama does.  You can read her latest blog at:

Friday, June 13, 2014

My Hero

As a strapping young soldier, I was a paratrooper and "jumped out of perfectly good airplanes."  Most jumps were from 800 feet, although a few were from 4,000 feet.  Yesterday, 90-year-old former President George H. W. Bush  jumped from 6,000 feet.  (Sure, it was a tandem jump, meaning he was harnessed to somebody else, but his legs are now useless.  It is all good!)

Mr. President, I proudly salute you!

A Sad Silk Purse

It is just sad!  Nobel Prize-winning economist Joseph Stiglitz has estimated the cost of the Iraqi War at more that ONE TRILLION DOLLARS.  In addition, almost five thousand Americans died in that rat-hole.  And, what about the tens of thousands of young Americans still dealing daily with the physical and emotional wounds from that war?

My father was just a young farm boy, when World War II started.  After being drafted and after only 90 days of training, he found himself on a boat headed to Normandy.  Americans were ready to fight in three months.  How is it possible the Iraqis are still not ready to fight -- after a decade of training?  We have done everything we can to help!  In fact, it may have been naive to expect Iraq would not eventually collapse regardless of what we did, unless we had divided the country into thirds when we could?

As grossly insensitive as it seems, it is OK to make money from this tragedy.  The sudden surge in uncertainty will weaken the stock market, but it will not collapse.  Maybe, it will produce the 10% drop I've been hoping for?   Whatever, this too will pass, but it will offer some stock buying opportunities in the meantime!  So, go out and buy a silk purse from that poor, scared sow selling her stocks!

Thursday, June 12, 2014

The World's Worst Job ?

Society gives a great deal of respect to doctors, and they deserve it!  They spend many years studying our bodies, our ailments, and our medical needs.  However, I just attended a class on medical insurance and now wonder whether the practice of medicine is really more difficult than medical insurance.

For example, a doctor must learn that the gall bladder produces bile that empties into the small intestine which helps breakdown fat consumed by the patient.  A medical insurance analyst must ask (1) if the patient was physically located in a covered state, (2) if the patient had the right policy for that particular coverage, (3) how much did the patient earn, (4) how much income did the patient's household earn, (5) if the patient is behind on any health care insurance penalty payments, and (6) it goes on . . . to some point where it becomes absurd.

Actually, a doctor needs to learn the basic role of gall bladder only once.  The medical insurance analyst must update their myriad rules every year.

More nuanced, a doctor learns the way the body is organized, which is mostly logical and magical.  The medical insurance analyst learns to be abide by rules, which are mostly arbitrary and maddening.  Existentialists abhor both absurd and arbitrary!

I would rather be either a doctor or a garbage collector but certainly not a medical insurance analyst!  They have my sympathy . . .

Wednesday, June 11, 2014

Too Many Arms ?

President Harry Truman famously wished for a "one-armed economist."   He was tired of economists who say "on one hand . . . and on the other hand."  Unfortunately, that is the nature of discussing the myriad aspects of economics.  There are 130 economic data points released most every month.  Economic data always contains reasons to worry about something.

Currently, most economic data is looking good.  Consumer confidence is up, which leads to the growth in consumer credit, which enjoyed the biggest increase in over three years.  Business confidence is also up, with Small Business Optimism reaching a new high last month for this cycle.  Small business is even more optimistic than big business, which is bullish.

On the one hand, this is proof that economic growth is increasing.

On the other hand, you'll recall the formula GDP = PT = MV, which is that the Gross Domestic Product is equal to the total number of transactions in the economy multiplied by the average price per transaction, which is also equal to the money supply multiplied by the velocity of money.  As a young economics student, I was taught that the velocity seldom changes.  It measures the number of times a dollar is spent each year or the willingness of consumers to spend.  During the last recession, it dropped from about six to two, which is HUGE.  The result is that the big increase in the money supply did not increase inflation, if you remember Algebra 101.

But, what would cause velocity to increase?  Answer - increases in consumer confidence, consumer credit, and business optimism.  The problem is that money supply has to decrease at the same rate as velocity increases.  If not, inflationary pressures build.  It is difficult and indeed painful to decrease the money supply, suggesting the Fed will be slow to do so.  Watch out for an increase in velocity!  I might buy some gold when that happens.

Thank God we don't have three arms . . . or do we?

Monday, June 9, 2014

A Lesson From Portugal

Long-time readers know I value most lawyers as being one step below mafia hit men.  (Unfortunately, lawyers are blinded to their own banality by the respect given to their education.)  And, I respect courts only because they command little men with big guns.  But, sometimes I do appreciate our courts, at least a little.

As part of the economic restructuring in the wake of the 2008/9 global financial crisis, Portugal was required by the EU, IMF, and various refinancing covenants to shrink government spending.  To their credit, the elected leaders of Portugal made many painful decisions and really tried, but the public unions took them to court.  Their high court ruled that the government could not cut spending, suggesting they raise taxes instead.  Now, can you imagine the U.S. Supreme Court making such a decision?

So, the next time you agree with me about our legal system, just remember . . . it could be worse!

Sunday, June 8, 2014

Triple Crown Winner ??

The stock market is hitting record highs -- YEA!  Is it time to break out the champagne?  No, but you can always celebrate NOT hitting record lows.  But, are these record highs really record highs?  No, not on a real inflation-adjusted basis!  Take a look at this graph:

Chart of the Day

Readers know I am not a fan of "technical analysis" which relies on graphical relationships to study the market.  To me, it is Presbyterian predestination applied to investing.  It should be required that such graphs be labeled "past relationships are no guaranty of future relationships."

Still, there is something interesting in this graph.  You'll note on the right side that the Dow has broken thru the resistance level rather decisively on the third attempt.  This strongly suggests to me that the bull market still has room to run.  I hope so, don't you?

Saturday, June 7, 2014

Prioritizing Truths

Which of these truths is untrue:  (1)  we leave no troops behind, (2) we don't negotiate with terrorists, (3) innocent until proven guilty, or (4) spin is more important than truth.  Answer:  None!

As a soldier, it means so much to have confidence you will not be left to rot in some God-forsaken rat-hole forever.  But, we have left troops behind before.

If I was one of the remaining soldiers in Afghanistan, I would be even more worried about a kidnapping attempt than I was before the Bergdahl controversy.  But, this is not the first nor last time we have negotiated with terrorists.  They have  been incentivised to take more hostages.

I don't know if Bergdahl was a traitor or not.  I do know others in his unit have said he was a traitor.  If we left him there, we would never have the benefit of putting him on trial.  I feel he should be tried by a military court.  If he is found to be a traitor, I think he should be promptly executed by firing squad on live television.
Of course, one can argue we paid too great a price, i.e., five terrorists for one P.O.W. of questionable patriotism. Normally, I try to avoid criticizing any negotiated outcomes without knowing the dynamics involved.  Still, I have to assume we have implanted some type of RFID device to track them.  Since we couldn't execute them under the watchful eyes in Guantanamo, they lost those "Constitutional" protections when they left.  Now, they are eligible targets!

Yes, the truth is that spin is more important than truth, at least in the short-term.  Whatever a Democratic President is wrong, according to Republicans.  Whatever a Republican President does is wrong, according to Democrats.  Neither party is rushing to a considered judgement.  Instead, they are just rushing to the microphones and TV cameras.  Situation normal!

The paramount truth is that every person is innocent until proven guilty.  I just hope the punishment is swift and fits the crime . . .

Friday, June 6, 2014

Don't Fight The ECB

The U.S. entered the global financial crisis of 2008 first.  Remember Lehman Brothers?  Tim Geithner, who was Treasury Secretary for much of the recovery, has been strongly criticized for saving the banks instead of saving the taxpayers.  He bailed-out bank after bank with one hand.  However, with the other hand, he and Ben Bernanke raised the capital requirements for U.S. banks, making them stronger.

In Europe, they just bailed out the banks without raising their capital requirements.  That was a mistake!  The European economy is still sputtering, even more so than the U.S. economy.  Two years ago, the head of the European Central Bank (ECB), Mario Draghi, promised "whatever it takes," to save the euro, and stock markets around the world rallied.

Maybe, he did too good a job, because the euro has now become too strong.  Yesterday, he attempted to drive down the value of the euro.  He announced an end to sterilization, which is an obtuse way of saying, he was going to expand the money supply, which both theoretically and traditionally will cause the currency to fall.  While he was speaking, the euro did indeed fall.  However, when he stopped talking, the euro started rising again.  Give it time . . .

He also announced other measures designed to force banks to start lending more aggressively, such as punitive negative interest rates for money held at the ECB.  Unfortunately, their ability to lend is constrained by their relative shortage of capital.  The ECB has missed their opportunity to force the banks to increase their capital.  Now, they are in a box.  Draghi may well be "pushing on a string."

A different take is to remember that Draghi's use of a famous phrase two years caused stock markets to rally worldwide.  Yesterday, he used Malcolm X's famous phrase "by any means necessary," describing his commitment to drive down the euro.

Because central banks have so many tools to work with, investors are often warned to "don't fight the Fed."  There is no doubt that Draghi has both the tools and the commitment to drive down the euro.  (Among other things, that means it will become less expensive to take a European vacation . . . in another year or so.)

Wednesday, June 4, 2014

Upstaged By Europe

It is a rare month indeed that the U.S. "jobs report" is NOT the most important report of the month.  It is always released on the first Friday of the month, which would be this Friday.  However, the European Central Bank (ECB) will make an announcement on Thursday that over-shadows our "jobs report."

Europe's GDP growth has stalled.  One reason is that the euro has become too expensive, which makes their exports more expensive to buyers in the U.S. or Asia or anywhere else.  Decreased exports means decreased jobs.  Therefore, to weaken the euro, it is expected that the ECB will increase the money supply, possibly by reviving its long-term-refinancing-operation which allowed the ECB to lend against different types of collateral, or decrease the already painfully low interest rates even more, maybe even negative interest rates.  Instead of being paid interest by the bank, just imagine paying the bank to hold your money for you!  That is very rare but may happen in Europe on Thursday.

All that sounds good if you own European stock, but how does that impact the U.S.?  If the euro depreciates, then the dollar will appreciate.  This means our exports will become more expensive to buyers in Europe.  This ain't good!

Now, just imagine you are Fed head Janet Yellen.  Her efforts to eliminate quantitative easing (QE) and start shrinking the Fed's balance sheet are expected to strengthen the dollar -- hurting our exports.  She will be under pressure to delay, which means she will raise our interest rates later, instead of sooner.  And, that is a good thing!

The 90% Minority

One afternoon, as a 13-year-old paperboy, I was riding home on my bicycle, with the big metal basket over the front wheel for the newspapers, when a pick-up trust drove by.  In the back, there were four black boys about my age, who had obviously been picking walnuts as the pick-up truck was loaded with them.  They slowed down and began pelting me with the walnuts.  While the walnuts didn't really hurt me,  I was confused.  It was my first exposure to racism.

When I got home, I asked my father about this.  He explained that 10% of all blacks are bad people, and that I shouldn't judge the 90% by the actions of the 10%.  That made sense . . . for a few minutes anyway, but it begged the next question, which was what percent of white people are bad?  His simple reply was 10%.  Suddenly, it was obvious that he thought 10% of all types of people were bad, but we should still enjoy the other 90%.  I think there was wisdom in his comments.

Some of my readers are annoyed with me, because I don't criticize President Obama and the Democrats, nor the Republicans.  I'm sorry for being non-partisan but think my father was more correct than even he realized.  I think 10% of the Democrats are sleaze-balls and 10% of the Republicans are neanderthals.  But, 90% of both parties are good, decent Americans.  Too bad that 10% of Americans can make life so difficult for the rest of us.

Tuesday, June 3, 2014

Three Strikes and You're Correct ?

Over the years, I've met several economists at the Institute of Supply Management and found them to be as  nerdy and humor-challenged as most academic economists.  Each month, they publish the closely watched ISM Index of Manufacturing.  Anything above 50 means the economy is expanding.  Anything below 50 means the economy is contracting.

Yesterday, the market was expecting 55.5 for May.  Promptly at 10 AM, the ISM released the report showing 53.2 and the stock promptly dropped about 20 points.  Then, just before 11:30 AM, they announced they had made a "software error" and the correct number was really 56, which caused the stock market to reverse its losses and turn positive.  An hour later, they corrected their earlier correction and said the correct number was really 55.4, which was essentially what the stock market was expecting in the first place.  The stock market promptly ignored the last ISM release and may even do so again next month.

While it was certainly a bad day for nerdy, humor-challenged academic economists at the ISM, it was a good day for the rest of us, as it demonstrated that the stock market really does pay attention to our nerdy numbers.

Takeaway:  the economy is still expanding just fine.

God Must Be European ?

I have always believed there is a God, but I just realized he is European.  Last week, somebody actually had the courage to stand up to Google.  Since only a God could stand up to the power of Google, the European high court must therefore be God?

Google, whose official motto is "Do No Evil," has arguably done more to shred the privacy of individual Americans than . . . even the NSA.  Google has made billions of dollars selling billions of private facts about millions of people.  They report or sell almost any information it can glean from a person's online life.  Sometimes, they accidentally report or sell false information but refuse to correct it.  Now, Google has to provide a method enabling people in Europe to challenge false information and have it removed.  Just try doing that in the United States!  Please, just try!  Europeans now have greater privacy rights than Americans.

Unfortunately, I don't think there is a God in the United States that is strong enough to stand up in front of Google  - you know, Free Enterprise and all that . . .

Sunday, June 1, 2014

DON'T Sell in May and DON'T Go Away

There has long bee considerable argument within the investment community as to whether active management outperforms passive management.  In other words, is it worth it to pay higher expenses for an active mutual fund with a manager who buys and sells stocks frequently, when you could reduce your expenses by investing in a static or passive exchange-traded-fund that mimics, say, the S&P 500 or the Dow?  Like most answers, it depends.

Last year, passive investors beat active investors.  So far this year, it has reversed.  In particular, hedge funds were beaten by passive investors last year, but that has reversed itself this year.  Of course, I don't pretend to understand the myriad reasons for that change, but there is one curious coincidence that nags at me.

Ben Bernanke is a personal hero of mine!  I think he did many courageous and innovative things to control The Great Recession.  However, as a pharmacist's son from a small town in South Carolina, he was not born wealthy.  As a college professor, he never became wealthy.  As Fed Chairman, he only made $200 thousand a year, which was chump-change for the work he did.

Now, as the former Fed Chairman who left office in January, he charges as much as $250 thousand to have dinner with him, where he is free to give his opinion about monetary policy, just like any other American.  There are numerous unconfirmed reports that most of these dinners are with hedge fund managers.

Other reports suggest that he is not saying anything new, but he is saying it more directly and clearly without "Fed-speak."  It is well-known that he is close to the current Fed Chairman, Janet Yellen.  I suspect if Mr. Bernanke leaned over his foie gras, reaching for his crystal glass of Chardonnay, looked me in the eye and said "Don't fight the Fed," I suspect I would also get very bullish very quickly.  I might even conclude that "sell in May and go away" would be very bad advice this year.  (The S&P was up over 2% in May.)

Mr. Bernanke is not the first Fed Chairman to do this.  Alan Greenspan also became wealthy after leaving office.  But, that doesn't change the optics -- something is not right about this.  Even though he reportedly gives away a large portion of his fees to charity, it still leaves a bad taste in my mouth . . . even worse than the taste of foie gras.