Monday, September 29, 2014

Staying Focused

The most interesting travel experience I've ever had was in 1987, when I happened to be in Hong Kong on the day the British government announced the handover of Hong Kong to Red China.  Immediately, the vibrant exciting city become moribund.  There was no traffic on the formerly crowded streets.  The stores didn't open.  The parks were deserted.  The people of Hong Kong had been betrayed and sold out.  Of course, China had a good PR spin, promising "one government, two systems," which meant capitalism would be permitted in Hong Kong but not democracy.

You don't understand China if you don't appreciate their greatest fear is a public uprising.  For the last two nights, demonstrators have taken to the streets in Hong Kong, rattling stock markets around the world.  Today, the Dow lost 160 points at the open, and it is going to get worse.

There is zero possibility that this demonstration will accomplish anything more than getting some demonstrators killed.  (Remember Tiananmen Square in 1989?)  When the shooting starts, world stock markets will nosedive again.  Then, they will stabilize and resume their upward climb.

If you really want to lose sleep about something, then worry about Russia's ambitions.  The media is carpet-bombing us with stories about IS or ISIS or ISIL or whatever.  With only 35-40,000 soldiers, they are insignificant compared to Russia, where their economy is sinking quickly into recession.  Their stock market has crashed, and the Ruble is at a multi-year low.  The best way to divert the Russian people from their own economic woes is to whip-up some saber-rattling war-talk.

If Putin cuts off natural gas to Europe, then Europe is immediately in recession.  This would greatly hurt U.S. growth, reducing our stock appreciation for awhile, affecting your retirement.  And, why wouldn't he cut off the gas?

Forget Hong Kong, even forget ISIS, but stay focused on Russia!

Friday, September 26, 2014

Lawful Discrimation

Everybody knows that a rowboat operates better with two oars than one.  The same is true for economic policy – it works better with BOTH monetary policy and fiscal policy.  Monetary policy is controlled by the Fed, which has done the heavy lifting to get the economy out of recession.  Fiscal policy is controlled by Congress, which has done nothing.  If the opening page to your internet connection is not set to – why isn’t it?

Dr. Hyman Minsky was a Keynesian (think: Democratic) economist from Washington University who popularized the very Classical (think: Republican) economic belief in the “Minsky Moment.”  He argued that debt will keep expanding until such time it cannot, when the debt markets will then collapse suddenly.  The problem is that nobody knows when that moment will be.  I do know that moment will be ever-closer -- as long as Congress remains useless.  (It should be illegal for any elected official to say “if only the other side would work with us!”)

The borders of political districts are redrawn ever ten years, based on the latest census data.  The current practice is to allow elected politicians draw the borders to include their likely voters and exclude others.  Thus, elected Republicans run in purified districts that are safe for Republicans.  The same is true for Democrats.  The problem is that pure districts discriminate against moderates of both parties who can accomplish things and favor purists (think: extremists) who can obstruct things.  This means Congress will remain useless until the next census in 2020 at least.  The question is whether the Minsky Moment will occur before then?

Discrimination against moderates is not prohibited by the Constitution.  

Neither is the Minsky Moment!

Thursday, September 25, 2014

Worrisome Sign

The conventional wisdom on the stock of smaller companies or small-cap stocks is that they produce higher returns over the long run because they are more risky than large-cap companies.  After all, the risk-return ratio seems to justify that, doesn't it?

If that relationship starts to break down, it suggests problems for the overall stock market.  Take a look at this graph, which tracks the Russell 2000 Index of smaller companies:

Chart of the Day

Since the crash of 2008/9, small-caps have trended upwards within an increasingly narrow band.  Breaking out of that band is a worrisome sign, and it has now broken out!

It seems counter-intuitive that small-caps, which have minimal international trade, would be breaking out of its long-term trend while large-caps, which have 50% sales exposure to international trade, are not breaking out, especially during this period when the U.S. economy is largely out-performing the rest of the world.  That is even more worrisome.

This is probably just a technical breakout and not a panic button, but it is worth watching . . .

Wednesday, September 24, 2014


On January 6th, Inside Business published my 2014 stock market forecast that the Standard & Poor's 500 Index would reach 2,014 in this year.  It was 1,800 at the time.

On September 19th, it happened.  That's the good news!

The bad news is that it was an intra-day high on the same day of the Alibaba IPO.  When the market closed, it was back below 2,014 and has not risen above it since then.

Be patient -- I still think the S&P 500 will end the year at 2,014 or above.  Bumpy market conditions like one normally finds during wartime are unsettling and annoying but nothing more.  Think long term if you can -- increase cash if you cannot.

Saturday, September 20, 2014

Is Brazil is"getting an American" ??

Typical of their sophomoric humor, the current joke circulating among economic students is that President Obama "needs a Brazilian."

Normally, an improving job market reflects an improving economy.  If you can make GDP increase, then you can make unemployment decrease.  Right now, the Brazilian economy is slowing down, from 2.1% to 1.0%.  Job creation has decreased from 2.1 million per year to only 536 thousand.  Yet, unemployment just hit a record low of 5.2%  The president, Dilma Rousseff, is enjoying rising popularity, despite a falling GDP.  Jobs matter more!

In the U.S., the economy has certainly been improving, growing over 4% last quarter. Regular unemployment has decreased but is nowhere near a record low, while the long-term employed has remained stubbornly high.  Economic students say President Obama should increase student aid as well.  That would be "getting a Brazilian."

How does this apparent inconsistency exist?  President Rousseff took a page from President Clinton's playbook in the 1990s, i.e., making massive student loans possible, which takes young people out of the unemployed.  It is estimated that 9.6% of the workforce between the ages of 15-24 have gone back for higher education.  That worked well for holding down U.S. unemployment during the 1990s.

Unfortunately, the best of intentions can lead to hell, and that is the case for the U.S.  Easy financing
fueled the rise of for-profit "failure factories," producing graduates with questionable degrees who cannot find work.  To make it even worse, they have to repay loans taken to earn these questionable degrees.  There is now more total student debt than credit card debt in this country!  This is also making young people ineligible for mortgages to buy their first home, especially hurting the housing industry.

At some point, Congress will have to deal with this debt that is crushing the economy, such as 50% discounts for students becoming firemen or nurses or relocate somewhere.  However, with ISIS, the Ukraine, Ebola, China, climate change, and the $17.7 trillion national debt, the plight of those, who believed a college degree leads to good things, will suffer from a lack of attention.  I hope Brazilian students are spared the plight of American students.

Friday, September 19, 2014

Enjoy The Show

Most people find it boring and tedious to watch the stock market all day, and I understand that, but consider today, Friday, September 19th.

First, it is a Friday, always the most unpredictable day of the week.

Second, Scotland wisely voted to remain in the United Kingdom, saving the pound from dropping and saving the dollar from spiking up too much, hurting our exporters.  That should produce a relief rally!

Third, it is a triple-witching day, when futures, forwards, and options all reset.  This can sometimes produce unpredictable volatility.

Fourth, it is the day that Chinese giant Alibaba goes public.  As an extremely hot IPO, the animal spirits or dollar-lust will be hot and heavy on the NYSE floor today.  Remember Facebook's IPO?  This usually creates a rally -- another plus!

It is not a good day to enter trades.  It is a good day to lean back and enjoy the show.

Wednesday, September 17, 2014

"Considerable" Angst

Outgoing Fed Head Ben Bernanke did not want to be remembered solely as the Fed Head who greatly expanded the economic power of the Fed.  Last year, he.announced that his program to stimulate the economy known as Quantitative Easing (QE) would begin tapering, i.e., slowly decreasing monthly purchases of Treasury bonds and mortgage-backed bonds from $85 billion per month.  It is expected to end completely next month.

Wall Street immediately jumped to the next question -- not when will QE end, but when will interest rates begin to increase?  At her first press conference in January, incoming Fed Head Janet Yellen was asked that question and replied "Oh, six months or so," which she quickly came to regret.  The bond market convulsed as bondholders sold bonds maturing in more than six months, as those bonds would decrease in value once the announcement to increase interest rates were made.

She eventually recovered by changing her statement to -- it would be "a considerable period" between the end of QE and the first interest rate increase.  The bond market calmed down.

Two things have happened since then.  First, the end of QE is now upon us, and, two, the economic data has been strong enough to suggest that the economy no longer needs the "training wheels" of low interest rates.  Speculation has been increasing that the next meeting of the Federal Reserve Board, which ends today, would change the language, removing the word "considerable."

Yesterday, the market rallied strongly on rumors the Fed would stand pat, without dropping "considerable."  Today at 2:00 PM, the minutes will be released, and we will know.  If the word stays, I expect a modest rally.  If it is dropped, I expect a modest sell-off.

But, more importantly, don't watch the stock market reaction -- watch the bond market! 

Tuesday, September 16, 2014

Drinking From A Fire Hose

I just watched the monthly video of economic conditions from Wells Fargo.  They foresee continued GDP growth of roughly 3% thru the end of 2016.  If so, this would be the best two-year GDP expansion in a decade.  They also consider the disappointing Jobs Report earlier this month of only 142 thousand jobs to be an anomaly and expect it to return to a more normal 200 thousand level.  Importantly, they see the greatest risk to their forecast as being the Russia-Ukraine crisis.  An embargo of natural gas from Russia to Europe would have painful economic consequences to the West.  It was an excellent and timely video update, as usual.

However, while watching it, I kept thinking about the house guests from California that we enjoyed last weekend.  They're dear friends that we've known for many years, and I thought they understood my profession better.  But, then they asked how I could compete against the stockbrokers who have whole research departments.

I was flabbergasted!

A stockbroker only has access to the research of his employer and, whether he believes it or not, is required to follow that research.  An independent NAPFA-Registered financial advisor has access to more research than can be consumed.  It is truly like "drinking from a fire hose."  Plus, we can follow the research that makes sense to us, not solely whatever makes sense to the head of the research department.

I study the research from Wells Fargo, Goldman Sachs, several mutual fund companies, as well as Bloomberg, and the National Association of Business Economists.

I'm drowning in research!

Monday, September 15, 2014

The First Nihilistic Nation

The seemingly sudden arrival of the Islamic State upon the world's stage is disturbing in a number of ways.  After all, it even televises and broadcasts its atrocities and war crimes.  It truly celebrates a culture of death.  I suspect it is the first truly nihilistic nation - one that sees life as a mere waiting room for "nothingness."

Nihilism has been defined as moral and spiritual bankruptcy.  ISIL labels itself as guardians of Islam, but is it?  I know Islam as a religion of peace.  (Of course, like all religions, it has its radicals, but Islam has more trouble marginalizing its radicals, and I don't know why?)  ISIL is proud to be the deliverer of death, not peace.  That sounds like moral and spiritual bankruptcy to me.

The original nihilist was the Greek Gorgias (483-378 BCE) who said "Nothing exists. If anything did exist it could not be known. If it was known, the knowledge of it would be incommunicable."  The word is derived from the Latin word for nothing, and it was popularized by the Russian novelist Ivan Turgenev in the mid-nineteenth century.  The video for the hugely popular 1986 song by the Swedish band Europe entitled The Final Countdown showed crowds of young people joyfully awaiting the nuclear holocaust, which is the final step toward nothingness.  Many religious ministers have warned against the impact of nihilism on our culture.

But, ISIL is more than a nihilistic culture, it is the first nihilistic state.  It cannot exist without death.  When it runs out of people to kill, it will have to self-immolate.  Our job should be to facilitate them.  Contain them in a perimeter of carpet bombing, cut off their income, . . . and wait for them to achieve nothingness.

Wednesday, September 10, 2014

A Bad Sequel

It is a bad sequel to a great movie.  One can argue that the only good thing Mel Gibson ever did was the 1995 movie Braveheart, which won several Oscars, including Best Picture.  It shows the subjugation of Scotland by the English beginning in 1280.  That was a long time ago, but tribal memories are even longer.  The Scots still want to be independent, unfortunately.

With the markets focused on the Ukraine, Syria, ISIS, ebola, and so forth, nobody noticed that the Scots are finally getting to vote next week on whether they want to be part of Great Britain, ending 307 years of economic and political integration.  Nobody thought Scotland would really vote to succeed, but the first poll indicating the Scots would vote Yes to succeed was Saturday.  The second poll was Monday.  Suddenly, Great Britain is terrified, and the English Pound has started falling.

There are so many imponderables about this.  Will it be good or bad for the pound in the long run?  Will there be a fight over the oil revenue from the North Sea off Scotland?  Since Scotland is normally Labor (think Democrats) in the English Parliament, does this hand permanent control to the Tories (think Republicans)?  Will Scotland join the European Union?  Will it even be accepted into the EU?  Will it join NATO?  Will this election encourage other tribes to succeed, like Catalonia from Spain?

And, what does increased uncertainty do to stock markets?  It's not good, especially for the English stock market!!

It is an unfortunate coincidence that the current Scottish independence movement was born before England's austerity measures started to pay off.    Sometimes, economics drives politics.

Tuesday, September 9, 2014

A Chilly Similarity ?

My father likes to watch educational, non-fiction DVDs about World War II, which I order and often preview for him.  Last weekend, I watched the two-disc set of Apocalypse Hitler.  The first disc detailed the childhood and early adult years of Hitler.  It was interesting to me that he was such a "Mommie's Boy" and that his much younger niece killed herself to escape living with him.

The second disc, however, was more educational.  It detailed his rise to power.  He was obviously a great political strategist, as well as a great orator.  There was one speech in particular that gave me chills.  He gave it during the election campaign and warned of the evils of compromise -- pronouncing it a sell-out of the people and their values.  Compromise corrupts!  He promised there would be no compromise once he was elected.

Does that remind you of any current political party or partisan?

Monday, September 8, 2014

We're Number Three !!

Is the Wall Street bull getting tired?  After all, it has been running for over 2,000 days now.  It has been more than 2,000 days since March 9, 2009 when the Dow touched its low of 666 points.  It is now around 2,000 points after 2,000 days.  (Technically, the 2,000th day was August 30th.)

No, that is not the longest running bull, not even close.  The longest was 4,494 days from December 1987 to March of 2000, when the S&P 500 rose 582%.  The second longest 2,607 days from 1949 to 1956, when the S&P rose 267%.  We're number three and thankful there is still room to run.  This is NOT unexplored territory.

A few months ago, legendary Goldman Sachs advised its clients to cut back on their allocation to stocks.  They just reversed themselves, suggesting clients should increase or over-weight their allocation to stocks, predicting global stocks (ex-Japan) will rise 3.5% over the next three months and 12% over the next twelve months.  I guess they also expect the bull to keep running.

Just think . . . in another two years, we'll be NUMBER TWO !!

Sunday, September 7, 2014

Lessons From A Tragedy

I would gladly buy tickets to watch Bernie Madoff get executed.  After all, he betrayed thousands of people.  But, I would not buy tickets to watch Bob McDonnell get punished, even though he betrayed millions of people.  ("Bob For Jobs" McDonnell was the immediate past governor of Virginia, who was just convicted of eleven crimes involving bribery and corruption.)

Arguably, McDonnell's crime was much worse than Madoff's crime.  Bernie was just another thief, albeit on a grand scale.  However, Bob cheapened the highest office in the state and confirmed our worst suspicions about politicians.  This gives me no joy.

Every tragedy produces lessons to be learned, even this one.  For young people, your choice of marriage partners is far more important than you suspect.  For older people, you always remain responsible for your own actions and cannot blame somebody else . . . not even your spouse.

Saturday, September 6, 2014

Concrete Good News . . . but vague worries

The continued flow of economic news in this country is relentlessly good.  Last week, the ISM Manufacturing Index showed that the factory sector has accelerated.  Indeed, the ISM Non-Manufacturing Index of the service sector has reached a nine-year-high.  In addition, reflecting our emergence as an energy-exporter, our trade deficit actually decreased.

Of course, the first estimate of the August "Jobs Report" was lousy at only 142 thousand, and the trade deficit is expected to rise,  Yes, that Jobs Report was disappointing, but I know of no economist who does not think it is understated, almost universally expecting it to be revised higher next month.  Even if not, we are still averaging better than 200 thousand new jobs being created every month of this year.  And, by the way, unemployment is still dropping, now at 6.1% and expected to drop to 5.9% by year-end.

The reason our trade deficit is expected to increase is due to the slowdown in Europe.  We expect they will be less able to afford American made goods, largely because the Euro is weakening against the dollar, thus making American good more expensive to Europeans.  Fortunately, as the Fed's monetary policy has pulled the U.S. economy out of recession, Europe's ECB is preparing to do the same with their monetary policy

As I said, the continued flow of economic news in this country is relentlessly good, which makes some people worry even more.  An old Wall Street adage is that Wall Street is always climbing a wall of worry.  A corollary to that adage is the wall of worry gets higher as the good news continues.

Yes, the national debt is $17.7 trillion and still climbing.  Yes, the Fed's balance sheet at $3.5 trillion is way-too-big.  Yes, fiscal policy (AKA Congress) is still a useless drag on the economy.  Yes, our employment health is not as good as the numbers indicate.  Yes, there are many things to worry about, to fret about, and reasons to lay awake at night.

But, another old adage is that the trend is your friend.

Enjoy the ride, knowing a correction is coming . . . which you will survive.

Thursday, September 4, 2014

Today's Bible Lesson

The Lord works in mysterious ways.

We've all heard that or some iteration of it.  It came to mind reading that Andrew Madoff had died from cancer.  While I'm sorry for him and his immediate family, I do remember that his father was Bernie Madoff, who infamously stole billions of dollars from his clients.

The appropriate punishment for Bernie would have been to be locked in a room with his victims, each holding a rubber hose.  Of course, in our polite society, the victim is the government, not the people who actually lost their life savings.  And, the government's need for justice was satisfied by providing Bernie with a lifetime of free food, housing, support, and even health care, all at taxpayer expense.  That is certainly a mysterious way for the Lord to work.

Then, his wife divorced him.  Then, his eldest son committed suicide, in shame of his father's illegal actions.  Lastly, his youngest son died of cancer.  Although Bernie was spared any physical discomfort, I cannot image the emotional agony of losing all your children.  While I would not wish that on anybody, it wouldn't bother me if Bernie Madoff suffered intense emotional agony for many years, before dying a miserable death.

Maybe, when the legal system fails us, it is true that:

Vengeance is mine, saith the Lord.

Wednesday, September 3, 2014

Wishing For Bad News

This stock market rally does not get the respect it deserves, probably because it is significantly weaker than the average rally.  But, as this graph shows, it is now the 7th longest rally since 1932.

Chart of the Day
While I do respect the rally, I sure wish we could get a meaningful correction.  A correction cleans out the froth and the weak, leveraged holders of stock.  It builds a stronger base for continuing the market rally.  We normally get a 10% correction every 19 months on average, but we haven't had one since the 19.4% correction in 2011.  We're overdue!  We deserve it!  Bring it on, please!

Tuesday, September 2, 2014

Must-See Conversation

Existentialists are often accused of being dour pessimists who are obsessed with death.  Of course, they then laugh heartily, saying that it is not them but society that is obsessed with death, attaching far more significance that it deserves.  Existentialists see death as merely the over-hyped end of a relatively meaningless life.

A recent movie called The Broken Circle Breakdown has been described an existential triumph.  It is not!  It is instead a heartbreaking story of how the relationship between a husband and wife is traumatized by the death of a beautiful five-year-old daughter.  Except for the overuse of flashbacks, it is an excellent well-made, well-acted, memorable movie, but not an enjoyable movie.  Don't watch it to learn about existentialism.  Watch it only if you're in need of a good cry!

A more existential film is a documentary entitled Consider the Conversation, which costs about $30 on Amazon, but is nonetheless required viewing.  It is a dispassionate but very sensitive discussion on a subject that is difficult to discuss.  I am convinced that it is easier and less emotionally traumatic to die, if there has been some honest discussion about it.  But, it is difficult to get such a discussion started.  This film can really help.  I am giving my copy to a client who just entered into hospice care.  

Monday, September 1, 2014

Dorky Economists

Trust me, if you have any sense of humor . . . watch this: 

Workers-of--the-World . . . thank you!

I have a relative whose only ambition in life was to NOT work.  It didn't matter what else he did in life, as long as it was NOT work.  It was a negative ambition.  I've struggled for a long time to understand but have failed.

A few years ago at a dinner in Florida, I sat next to a young entrepreneur, who had sold his internet company in 2000, right before the internet crash.  At age 36, he had already netted $24 million. as he informed me in a too-loud voice.  I asked him what kind of work he did now.  He seemed terribly offended by that question, as it implied he might be a member of the working class and not a member of the aristocracy, I assume.  Anyway, we skipped dessert, just to get away from this person.

Both as a society and as individuals, we have a complicated relationship with the notion of work or labor.  Maybe, it is no more complicated than "idle hands are the devil's tools?"  Maybe, we teach our kids that their only identity is their job?  Maybe, we are afraid we'll spin-out-of-control if we don't work?  Maybe, we prefer work to spending more time with our spouse?  Maybe, we hope we won't die, if we don't retire?  Maybe, retirement results in too much self-involvement?  Whatever it is, I do believe that old maxim that "work never hurt anybody."

So, to those who work, whether they need to or not . . .
To those who want to work but cannot find a job . . .
To those who want to work but have physical or mental limitations . . .
To those who retire but volunteer for charity work . . .
To those who carry the burden of family while others benefit . . .
This day is for you . . . enjoy it!

But, tomorrow . . . get back to work!