Sunday, November 30, 2014

Golden Memories Are The Constants

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

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

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

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

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

Friday, November 28, 2014

Opaque OPEC

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

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

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

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

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

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

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

Thursday, November 27, 2014

Thanksgiving Day, 2014

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

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

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

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

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

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

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

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

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

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

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

Tuesday, November 25, 2014

Things That Matter

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

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

No Comment

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

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

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

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

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

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

Monday, November 24, 2014

Incoming Tide

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

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

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

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

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

Sunday, November 23, 2014

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

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

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

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

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

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

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

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

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

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

All I can add is . . . Amen!

Saturday, November 22, 2014

Trouble Next Door?

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

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

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

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

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

Friday, November 21, 2014

For History Students Only

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

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

I hope so!

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

Thursday, November 20, 2014

NOT Our Finest Hour

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

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

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

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

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

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

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

Wednesday, November 19, 2014

Keynesian Malpractice

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

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

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

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

Tuesday, November 18, 2014

Involuntary Mercenaries

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

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

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

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

Monday, November 17, 2014

On Glory-Hounds

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

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

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

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

Saturday, November 15, 2014

Quittin' Time

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

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

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

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

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

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

We'll see . . .

Friday, November 14, 2014

"Supply & Demand" Spoken Here

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

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

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

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

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

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

Thursday, November 13, 2014

Another Veil To Pierce

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

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

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

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

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

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

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

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

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

Wednesday, November 12, 2014

Room To Run

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

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

Chart of the Day

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

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

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

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

Tuesday, November 11, 2014

Changing Face of Veterans

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

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

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

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

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

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

Sunday, November 9, 2014

The Cornered Rat

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

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

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

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

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

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

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

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

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

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

Saturday, November 8, 2014

Denim Dependency

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

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

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

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

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

Friday, November 7, 2014


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

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

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

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

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

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

Thursday, November 6, 2014

Improving Cure-All

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

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

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

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

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

Lowering The Bar

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

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

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

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

Wednesday, November 5, 2014

Getting What We Wish For

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

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

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

Have you answered the question yet?

Timing Is Everything

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

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

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

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

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

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

Monday, November 3, 2014

Jumping the Shark

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

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

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