Required Viewing

Nobody ever sat at some polished conference table in a gleaming skyscraper in New York City and said "it sure would be fun to collapse the world economy."  Nobody ever said "I want to see eight million Americans lose their jobs."  Nobody ever said "the world would be a better place if six million families lost their homes."

Still, it all happened during the Global Financial Crisis of 2007/9.

The movie version of Michael Lewis' book The Big Short has been released and is required viewing for anybody with any curiosity about how the crisis happened.  Fortunately, there is some comic relief in this mostly dark movie, when various celebrities face the camera to explain technical terms, such as celebrity chef Anthony Bourdain explaining a CDO or collateralized debt offering.  This movie is actually a good learning vehicle.  See it!

Unfortunately, the movie doesn't beg the question of who gets the blame.  Was it the unscrupulous bond salesmen who sold those worthless mortgage-backed securities to pension funds across America and then retired young and rich?  Was it the fault of mortgage-brokers who made mortgage loans to undeserving borrowers with no income verification?  Was it the fault of borrowers who took out loans they could not understand nor handle?  Was it the credit-rating agencies who got paid big fees for giving triple-A ratings to bonds secured only by garbage subprime mortgages?  Was it the fault of CEOs who allowed their companies to sell products they didn't understand themselves?   Was it the fault of Federal regulators, the SEC, the FDIC, the Comptroller of the Currency, the Department of Treasury or even the many state regulators?

In true Libertarian fashion, they were each pursuing their own economic self-interest?  They were simply working their own incentive plan.  What is wrong with that?  Virtually nobody has been convicted of any crime.  After all, how could a CEO see something wrong, when Alan Greenspan and Ben Bernanke could see nothing wrong?

Exodus 20:5 tells us that God will punish children for the sins of their father.  Karl Marx refined this by saying the sins of management are visited upon the worker.  The global financial crisis proved that the sins of capitalism are visited upon the taxpayers.

Measuring Value

Economics is about the allocation of our limited supply of resources among the unlimited demands for those resources.  Idle resources are viewed as unacceptable, if not downright sinful.  Idle resources are no different than wasted resources.

That makes Christmas and other holidays difficult for economists to understand.  Look at all those man-hours of labor that are gone - forever!  The old adage about "idle hands being the devil's tools" rings so true to economists, not from a moral viewpoint but from an economic viewpoint.  Idle hands are wasted labor.

In addition, people should be out there buying stuff or consuming products, which contributes to gross domestic product.  Plus, numerous economic studies have shown us that gift-giving produces a very inefficient allocation of resources.  Recipients of gifts would spend their own money more efficiently, if they were spending their own cash.  It is just hard to justify the holiday concept to economists.

The problem with economists is their reliance only on those things that can be measured.  The joy of watching a kid who believes Santa just left their home . . . cannot be measured and is therefore not part of the gross domestic product.  A baby's smile makes no contribution to GDP either.  Holding the hand of a loved one on their deathbed also has no economic value.  Waking up, snuggled against your gently-sleeping spouse, is just another example of waste.

Some non-economists argue that, if the economic value of something can be measured, then it has no real value.

Maybe, they're right?

A Boring Christmas Wish

My Republican friends in Virginia suspect I am a closet Democrat.  My Democratic friends in Maryland suspect I am a closet Republican.  They're both correct.  The cause of this confusion is my profound belief that gerrymandering is just wrong -- no matter who does it.  It is the bane of democracies everywhere.

Gerrymandering is the practice of drawing political districts to benefit one party or the other.  Currently, Republicans appear to be the worst offenders, but they learned the practice from Democrats long ago, who lumped as many black voters into a district as possible, in order to insure the black population would have some elected representatives.  Republicans quickly realized that the neighboring districts instantly became more conservative, with fewer blacks in them.  The downhill race was on - to see who could gerrymander the worst.

Today, Republican districts are more conservative than ever before, while Democratic districts are more liberal.  As a result, we are discriminating against moderates of both parties.  The result is gridlock.

In Virginia, there are 40 members of the Senate and 100 members of the House.  In the last election, 50% of the incumbent Senators and 71% of the incumbent Delegates campaigned without an opponent.  In other words, their district was so overwhelmingly Republican or Democratic that running against the incumbent was hopeless.  Who won -- the incumbents, of course!

The law requires districts be re-drawn after each census or every ten years.  In those states where districts are drawn by elected politicians, who draw lines to protect their seat, lawsuits quickly follow.  After the 2010 elections, 42 states had to deal with these lawsuits.  Courts traditionally expedite these cases, because it is hard to correct the damage.  Besides Virginia and Maryland, lawsuits continue in Arizona, North Carolina, Texas, and Florida -- five years later.  There is no assurance these suits will be settled before the next redistricting in 2020.  The system is broken!

My Christmas wish is that the extremely important function of redistricting be removed from incumbents and instead be put in the hands of a independent non-partisan commissions, such as Ohio and California.  Some things are simply too important to be left to politicians, who have a proven inability to be non-partisan!

That would not produce "peace on Earth and goodwill toward Man" but would be a positive step in the right direction.  There can never be peace as long as extremists continue to win elections.

Thank You, Art!

I have never heard an unkind word about Art Cashin, who has worked on the floor of the New York Stock Exchange for well over 50 years -- yes, well over fifty years!  Now the director of floor operations for UBS, he knows the old traditions and the new technologies better than anybody I follow.  He also has a wry sense of humor that I love.  As published by CNBC, here is his annual Christmas poem . . . enjoy!

'Tis two days before Christmas
and at each brokerage house
The only thing stirring
was the click of a mouse

Down on the Exchange
the tape inches along
Brokers bargained and traded
as they hummed an old song

The Fed turned data dependent
or so they would claim
Yet they hiked in December
though the data looked tame

KC took the series
and the Pats grabbed the Bowl
While American Pharoah
had the Crown as his goal

Our girls took the World Cup
they were just over-joyed
And we found us a new star
who was named Carli Lloyd

Letterman, he retired
and he quick grew a beard
And so did Paul Ryan
I'm thinking that's weird

The Pope came to visit
and he drew quite a crowd
And hundreds of selfies
he even allowed

The Broadway play — "Hamilton"
as a show caused a flap
They've a sold out box office
with Founding Fathers who rap

Yet there's still Cosby and Kim K
they still don't bring us cheer
But it's Christmastime, Alice
And Santa is near

So stop looking backwards
have a cup of good cheer
And kiss you a loved one
raise your hopes for next year

And amidst all the trading
Christmas themes we will heed
And share our good fortune
with families in need

And tomorrow they'll pause
as we wait on the bell
To sing a tradition
a song for old "Nell"

Don't let this year's problems
impede Christmas Cheer
Resolve to be happy
throughout the New Year

And resist ye Grinch feelings
let joy never stop
Put the bad at the bottom
keep the good on the top

So count up your blessings
along with your worth
You're still living here
in the best place on earth

And think ye of wonders
that light children's eyes
And hope Santa will bring you
that Christmas surprise

So play ye a carol
by Mario Lanza
Unless you are waiting
to celebrate Kwanzaa

Hanukkah's over
And Ramadan's long gone
Different folks, different holidays
yet each spirit lives on

Whatever your feast is
we hope you all still
Find yourself just surrounded
by folks of goodwill

Thursday, as the bell rings
hark to your heart's call
And as Santa would shout
Merry Christmas to All!

— By Art Cashin Prepared by UBS Financial Services.

2016 Peek

The real, honest-to-God, know-it-all's at Goldman Sachs work in their research department, and I value their thoughts.  Here are some of their latest:

1.  GDP growth in the U.S. will slow slightly from 2.4% this year to 2.3% in 2016.  Japan will increase from 0.6% to 1.0%, while Europe will increase from 1.5% to 1.7%, which is disappointing.  The closely watched GDP growth rate for China will continue to decrease, from 6.9% to still robust 6.5%. but far below their double-digit growth a decade ago.

2.  Interest rates (10-year Treasuries) will increase 73 bps in the U.S. to 3% -- far above 0.8% in Europe and 0.6% in Japan.  This should cause the dollar to rise 5.6% against the Yen and 7.8% against the Euro, which will reach parity ($1 = 1 Euro).

3.  Oil will rise 25.6% to $54/bbl, and natural gas will increase 37.2% over the next year.

4.  Gold will lose another 25.6%, while cooper will lose another 2.4%.

5.  Unemployment rates in the G-7 countries are now the lowest since 1970 -- 45 years ago.  

The End Is . . . NOT . . . Near

It was certainly an interesting week on Wall Street.  It began with a stampede of bulls running up stock prices and ended with bears clawing those prices back down . . . violently.

To add to Friday's dramatic sell-off, don't forget it was an expiration Friday, when most options and futures expire or rollover.  That is is called "triple witching day" and is almost always one of the most volatile days each quarter.  Since Friday was the last time in this year, there was even more "window-dressing" than normal, to make year-end statements look healthier.

The only weak spots in the economy that cause me to lose sleep right now are energy and junk bonds, which are inter-related.  Solve the energy problem and you will also solve the junk bond problem.  As we've discussed, the energy problem is too much supply, both oil and natural gas.  Maybe, that is just too much of a good thing?  Remember 1972?

Many analysts are concerned that corporate earnings have stalled.  That is a legitimate concern, but I suspect it will be transitory.  Recent outbreaks of cooperation in Washington have fueled my optimism.  2015 was an exciting year on Wall Street, but very little value was created, if any.  I suspect that "wheel-spinning" will continue until next summer, especially if uncertainty about the presidential election begins to fall.

Most portfolios should just sit tight during this spasm.  If you are nervous, you could increase your cash level by selling energy-exposed assets.  If you still do the traditional Christmas gift-giving, please don't stop or decrease it, just because of the stock market spasm.

Don't grab your chest, screaming "this is the big one!"  It is NOT.

This too shall pass . . . now, go enjoy the holidays!

Drowning Santa

Finally, the Fed raised interest rates a small amount.  The stock market rallied a few days, as it always does when some uncertainty is reduced.  Now, it has suddenly remembered "oh, yeah, we have that major uncertainty about the energy business."

That uncertainty is not going away anytime soon!  And, without a recovery in energy prices, the high-yield market cannot recover, as so many junk bonds were issued to pay for fracking expenses.

The world produces somewhere between 1-2 millions barrels of oil too much every day.  This means inventory levels or "overhang" is increasing every day, putting downward pressure on prices.

Fracking accounts for only 3-4% of daily oil production worldwide.  Shutting down these high-cost producers will not solve the energy problems.

Average annual increase in temps worldwide are 20% higher this year than last, reducing the demand for heating oil.  How do we lower temperatures worldwide?

Speculators have long been the traditional savior of the energy business, by bidding up the price of oil when they think bottom prices have been established.  But, they are scared to participate, because nobody knows what happens when the Iranian oil enters the market.  That is another 400 thousand gallons a day that the market doesn't need.  (Goldman Sachs predicts oil could fall to $20/bbl.)

Now, it looks like the U.S. will start exporting oil, further flooding the oil market worldwide and further weakening prices.

Normally, we look forward to a "Santa Claus" rally this time of year.  Unfortunately, it looks like Santa and Rudolph are drowning in oil, instead of delivering stock market gains.

The Official Version

Recently, I wrote about a moving memorial service for a unsung fallen hero buried in Quantico and have received numerous kind comments from readers.  Since then, the CIA has posted their own description, and you can find it here:

https://www.cia.gov/news-information/featured-story-archive/2015-featured-story-archive/remembering-cias-heroes-greg-wright.html 

Go, Fed, Go . . . please!

Wall Street is just atwitter over the Fed raising interest rates tomorrow -- for the first time in nine years.  (Back then, millions of current investors could not even find Wall Street on a New York City map.)  Five years ago, three years, and even last year, Wall Street was terrified of a rate increase, but no longer.  It wants a rate increase, and it wants it now!  In September, Wall Street thought the Fed would act then.  When it didn't, the stock market threw a tantrum and tanked.  The latest CNBC survey shows a whopping 95% of investors believe the Fed will act tomorrow and raise interest rates modestly.  They finally see an increase as a vote of confidence in the economy from the Fed.  (If they don't raise interest rates tomorrow, expect another tantrum, also known as a buying opportunity.)

Given the dual mandate of the Fed to hold down both unemployment and inflation (which Keynesian economists argue is next to impossible), I have long believed there is no reason to raise the rates, as both unemployment and inflation are well contained.  In September, however, we learned the Fed is also paying attention to  international considerations, especially currency exchange rates.  Raising interest rates in the U.S. makes the dollar stronger and other currencies weaker.  This is bad for large companies who sell abroad, as it makes their products more expensive for foreigners to buy.  This is especially true when the central banks of Europe and Japan are more stimulative, while our central bank is becoming less stimulative.  This also argues NOT to raise rates, but who cares?

Libertarians have long feared the Fed and give it no credit for avoiding a depression in 2008.  They claim, with some justification, that keeping interest rates this low for so long causes other bubbles to form, like we now see in art, antique autos, and even wine.  Knowing the public doesn't like the notion of raising interest expenses, they have fashioned a term-of-art for it -- normalizing interest rates.  But, after nine years, I'm not sure the definition of normal is unchanged.  I am sure that I'm tired of hearing the Libertarians whine.

Now, I just want it over with.  It is not unlike losing your virginity.  Long afterwards, you laugh that it was ever such a big deal.  This interest rate increase is just a huge distraction for Wall Street.  Once this is past us, we can then obsess about something else, such as the much-too-low price of oil.

And, The Non-Oscar Goes To . . .

 . . . Robert Redford for his searing portrayal of a lone man adrift-at-sea in All Is Lost, which is arguably the best existential movie of the decade.  Unlike Hemingway's The Old Man And The Sea, Redford's movie is not a contest between a man and a fish or even against another man.  It is a contest between one man and one death.

The classic image of existentialism is the image of Jean-Paul Satre drifting down a river, alone of an ice floe, appearing helpless against the environment but still in possession of his intellect and ingenuity.  The image applies equally to Redford, who is the victim of bad luck but bounces back thru sheer ingenuity.  First, his sailboat is disabled, then further damaged in a storm, before sinking, just as Redford steps into a floating raft, where he stays until the movie's surprise ending.

Unknowingly, we watch Redford progress thru the five stages of dying made famous in Dr. Elisabeth Kubler-Ross's 1969 classic On Death and Dying.  First, Redford went into denial - how could a cargo container puncture a hole in his sailboat in the middle of the Indian Ocean?  What are the odds?  Then, he become angry - why me?  The third step is bargaining, where Redford merely becomes pensive in the movie, suggesting a lack of spirituality in his life.  But, if the third step was short for Redford, the fourth step of depression consumes most of his time in the raft, as ships pass closely but without seeing him.  The final and most important step is acceptance, when hope is lost and the release of death becomes a better option than the continued burden of life.  After accidentally setting his raft on fire, while signalling a distant light on the horizon, he finds himself alone in the dark waters, accepts his fate, and slips below the surface.

Only the Hollywood-dictated "happy ending" keeps this movie from existential greatness.

This movie is so different.  The singular focus is on one speechless person.  That speechless person allows us to insert our own thoughts and emotions.  It doesn't tell a story.  It shows the story.  It shows the emotional progression of dying  . . . maybe not alone on an ice floe, but certainly against a hostile environment that overwhelms both intellect and ingenuity.

Springtime At Christmas ?

It is probably too early to find long-lost hope, but there is something good going on in Washington.  With all the drama of the stock market and the pressure of the holiday season, you may not have noticed that two significant pieces of legislation have passed and been signed by the President, plus the predicted government shutdown next week has been avoided.

First, a five-year transportation bill was approved.  Not only was more money committed to infrastructure, but it was committed over a five-year period.  Imagine you're a road-builder with only a one-year contract, knowing your contract will almost certainly lapse every year for lack of funding.  Better yet for taxpayers, just imagine more and better infrastructure!

Second, an updated "no-child-left-behind" education bill was approved.  It still required annual testing, which teachers hate, but delegated remedial solutions to the state level, which Republicans love.  Nonetheless, the President signed it.

I'm sure there are enough details that everybody can find something to disagree with.  The point is that both pieces of legislation passed anyway and were signed.  For years, I've referred to Congress as "elected-children."  What caused this change of season, from bitter Wintertime to pleasant Springtime.  Could it be Republicans want to prove they can govern?  Could it be that Democrats are embarrassed and tired of low approval numbers?

I suspect much of the credit for this improved legislative climate goes to the new Speaker, Paul Ryan.  Certainly, there are no fewer Tea Party members in the House, but Ryan has found a way to corral them and harness their anger.

Attaboy, Paul !!

Nothing could help the stock market more than a functional fiscal policy, reducing the lop-sided need for stimulative monetary policy.

Go, Paul, Go !!!

No More Good News, Please

Who doesn't like low gas prices at the pump?  Economists get positively giddy at the increased discretionary income for consumers, when they pay less at the pump.  But, enough already!  At some point, the long term damage exceeds the short term pleasure.  Take a look at this chart:

There has been a decisive breakout to the downside.  In other words, the past offers little or no guidance for the future.  We all know the reasons for this "brave new world."  First, demand increases has slowed due to improved car efficiency.  Second, there have been several major new oil fields, increasing supply.  Third and a big one, fracking in the U.S. has made us the world's greatest oil producer again, stripping OPEC of its power.  There was a time when the mere threat of a war in the Middle East would have driven up the price of oil.  Now, not even a good old-fashioned shooting war will help.  

Last week, OPEC had the opportunity to reduce supply but chose not to do so, because it would reduce their income.  OPEC is now impotent.  Saudi Arabia is no longer the "swing-producer."  The United States is!

But, the point is -- oil prices have become TOO low.  Houston and other cities are getting crushed.  Houston is the only major city in the country with an increasing foreclosure rate.  I know that pompous, blowhard Texans don't get much sympathy, but we will soon see huge write-offs in banks, which decreases their ability to lend to healthy industries.  Master Limited Partnerships (MLPs), which make their income from rent charged to move oil or gas thru their pipelines, have gotten crushed in the stock market, even though their income is unchanged.  Income investors have become overly frightened.  Major oil companies have been safe dividend producers for decades, but there is now legitimate worry that those dividends will be reduced.  The instability of oil prices is spilling over into the banking industry and the stock market.  As the damage spills into increased default rates for the many bonds issued by fracking companies, the "high-yield" bond market will get hurt even worse!

Non-serious oil watchers interpret the fall in oil prices as evidence that worldwide demand is falling, because worldwide economic growth is falling.  I believe the increased supply is far more relevant than any decreasing demand.

This is a time for the federal government to add to the National Petroleum Reserve, while prices are low, with the side benefit of stabilizing the dangerously low price of this important commodity.  Beyond that small, temporary effort, there is little any government can do.

The brokerage firm of Raymond James has a good track record predicting such things, and they just predicted oil prices have hit bottom.  I hope they are right!

There is too little pain at the pump . . . we need more pain!  It will be good for us!!

In A Time of Dudes

Yesterday, about thirty people gathered around a grave site in a remote section of Quantico National Cemetery, south of Washington, D.C.  Each drank one can of Bud Light beer and then scattered back to their individual lives.  It was a wry, fond tribute to an unknown American hero, Gregory Wright.  I suspect he would have liked it that way.

A Marine, a Seal, and a CIA operative - he was cut from the same clothe as Chris Kyle, the not-unknown American hero in the movie Sniper.  Unfortunately, Gregory died alone, lying on the ground in Iraq, protecting his men.  He lived in obscurity and died in obscurity and undoubtedly preferred it that way.

As I looked around the acres of tombstones, perched silently on the gently rolling grounds, I noticed most of the graves held veterans of WWII, of Korea, and of Vietnam.  There were surprisingly few since 9-11.  As wars have become more technological, fewer and fewer Americans actually fight for their country.  While I can see that is a good thing, because fewer American mothers will get that dreaded knock on the door.  I also see it with some sadness.  Americans are increasingly insulated from the horrors of war -- horrors that the rest of the world still feels.  Few families actually know the name of somebody who died in combat since 9-11, and even fewer are related to any of those fallen heroes.  Will that increasing insulation make us more warlike?  Listening to the current clamor for war makes me suspect it might be so.  Why not go to war . . . if you don't have a kid-at-risk?

It is good for the soul to respect and appreciate men like Gregory Wright.  Real men like he and Chris Kyle make America safer for all those "dudes," who have been taught to politely mouth "thank you for your service," albeit with no idea what that really means.

I cannot look at a Bud Light again without smiling and thinking of Gregory.  I know he would smile as well!

Whistling Past The Crime Scene

If it is hard to walk and chew gum at the same time, how difficult must it be to walk, chew gum, and whistle at the same time?

After the latest mass killing, the predictable Democratic response has been to put some control over gun availability.  That, of course, is correct.  The predictable Republican response has been that the hallowed Second Amendment guarantees the right of every American to own as many bazookas as they want, and that we should instead focus the discussion on improving mental health care.  That, of course, is also correct.  Now, mass killings have taken on a stronger third and even-more-complicated dimension - terrorism, either foreign and domestic.

Mass killings have become a Gordian knot, i.e., something so complicated that it cannot be solved by reason and patience.  In mythology, nobody could figure out how to untie the famous knot, until Alexander the Great pulled out his sword and severed it.  Problem solved.

Where is Alexander when we need him?  While he had no use for the niceties of democracy, maybe he could walk, chew gum, and whistle at the same time.

Welcome Back, Mr. Spock

The popular Executive Officer aboard the U.S.S. Enterprise in the classic Star Trek was Mr. Spock.  He was known for his faithful worship of logic - the more pure, the better.  I expect he sold all his stock holdings long ago and got out of the market.  It became too illogical for him in 2008.

There was a time when the stock market behaved logically.  Good economic news made the stock market more bullish, and bad economic news made the stock market more bearish.  Then, there was the Global Financial Crisis of 2008/9, when central banks began directing the economy.  Everything changed.

The market reasoned that the central bank, (the Fed) would decrease its financial support, when good economic news was received.  This increases uncertainty, which the stock market loathes.  So, we got into a pattern of reverse-logic, i.e., good news = less Fed support = more uncertainty = lower stock prices.

Yesterday, something remarkable happened.  The Department of Labor issued its monthly "jobs report," and it was considerably better than anyone expected.  In other words, it was good economic news.  However, instead of going down, futures rose immediately, and the stock market roared all day.

The Reason:  The Fed has been hinting very loudly that it will almost certainly raise interest rates this month, which reduced uncertainty.  The Fed was removed from the equation.  Once again:  good news = higher stock prices.

It is akin to watching a distant nephew who finally "got his act together" and behaved logically, for a change - a refreshing change.  Mr. Spock would be proud!  

Burying Seeds

For most people, the 2008/9 Global Financial Crisis was a bad dream.  For those in the investment business, it was a nightmare.  So many things went wrong.  Modern Portfolio Theory failed.  It was useless, and we were dangerously close to a systemic failure of the financial system, like 1929.

The Fed rose to the occasion by taking both unprecedented and repugnant measures, such as the bailout of Bear Stearns or of AIG.  It put the Fed in the business of deciding winners and losers, which nobody wanted -- least of all, the Fed.  To prevent this from ever happening again, language in the 2010 Dodd-Frank law will only permit loans to a minimum of five firms.  If only four firms are in trouble, they can all go out of business.  It takes five firms to survive.  There are other provisions to limit the powers of the Fed, such as limited collateral types and quality, such a loan term and other constraints.

It is often said that the seeds of the next crisis are buried in the ashes of the last one.

Do we really want to reduce the flexibility of the Fed, our last line of defense against depression and systemic collapse?  Sure, nobody wants the Fed or anybody else picking which companies survive and which that fail.  I applaud the objective . . . but it is not our first objective.

Our first objective during a crisis is to stop it, to prevent it from getting worse, which requires both imagination and flexibility.  Anything that threatens the first objective is nonsensical.  These restrictions on the Fed are nonsensical.  It is like saying the President of the United States cannot commit less than 100,000 troops into any given combat zone.

If we want to get vindictive (and we should), then we should change the law, so we can punish the decision-makers who put us into such a crisis as 2008/9.  We shouldn't execute an entire firm for the misdeeds of a few executives.

Yawning At The Yuan

The International Monetary Fund (IMF) has decided to include the Chinese currency (known as the Yuan) as the world's newest reserve currency.  In the short run, this should have a mild bullish effect on their currency and mild bearish effect on the euro.  In the long run, it has little economic significance.  However, it does have considerable political significance, especially inside China.  The Chinese people feel justifiably proud of their nation's arrival on the world's stage.

So, who cares?  Or, who cares if the Yuan is a reserve currency or not?  I don't!  I'm yawning.

Elevating the Chinese currency is more a reflection of change than a real change.  I'm far more concerned about their financial power and, increasingly, their military power.

It is far more significant that the amount of Chinese reserves of currencies of other nations -- foreign reserves -- is incredibly high.  China holds 31.25% of all foreign reserves held by ALL nations.  China's foreign reserves exceed those of the next five highest countries - combined.  For example, Japan is second at 10.53%.  Saudi Arabia is third at 5.8%.  The Eurozone is fourth at 2.15%, followed by England at 0.9%.  The United States of America, the world's most powerful nation, holds a mere 0.34% - one third of one percent - of the world's total foreign reserves.  The Eurozone, England, Japan, and the U.S. long enjoyed reserve currencies and were simply overwhelmed by the financial liquidity of China.

Another perspective is that, while no nation spends as much money on national defense as the U.S., our spending has increased a mere 0.4% over the last ten years.  China has increased their military spending a whopping 167% over that same time frame.  And, they are still sitting on 31.25% of the world's financial reserves!

It is far more important that China is still ramping up their military spending and have the financial muscle to ramp up their military spending even more . . . much more.  That doesn't change whether the Yuan is a reserve currency or not.

Advising New Advisors

Purportedly, it is an old mafia axiom that you should - keep your friends close and your enemies closer.  If true, doesn't that also mean that - your enemies are closer to you than your friends?

Over the decades, I've had clients who were older and younger than myself, although most have been older.  I've had both male and female clients, although most have been male.  I've had clients who were Republicans, Democrats, Libertarians, Anarchists, and even genuine Independents.  I've had clients who earned their money, that inherited their money, and that married their money.  I've had clients who were atheists, Protestants, Catholics, Jews, Muslims, Hindu, and even one Sikh in McLean.  But, the most difficult clients-of-all are . . . family.

Don't ask me why?  It just is!  Maybe, the better question is why do you keep a family member as a client?

It is never fun to fire a client.  Besides the minor loss in income, there is a real feeling of failure, because you really want to help every client.  While firing any client is difficult, it is even agonizing to fire a client who is also a family-member!  It is also more legally complicated.  A contractual relationship exists between an advisor and a client.  Firing a family-member-client may end the contractual relationship but does not change the family relationship, legally.  They are still in your family, just not in your book-of-business.

A family-member-client is like a tar-baby.  The more you do, the more stuck with them you are.

Hello, young advisors out there -- when asked to take a family member as a client -- RUN!

RUN AS FAST AS YOU CAN -- RUN AS FAR AS YOU CAN -- JUST RUN!

Investor Types

Some investors just want to make a profit and pay little attention to the number or the amount of risks taken.  They want to buy stocks and sell them quickly for a profit.  I call them "gunslingers."

Some investors just want a stable income and pay nominal attention to the value of their portfolio.  They accept a volatile portfolio value but not a volatile amount of income.  I call them "retirees."

Some investors have too much cash for FDIC guaranties and must expose some of the assets to the stock market.  They don't love profits as much as they fear losses.  I call them "depositors."

Some investors want "good" companies and then hold them "forever."  Because they don't sell, they pay little attention to taxes.  I call them "Buffett-babies."

Some investors want their portfolios diversified across various asset classes, which is re-balanced on a periodic basis.  They follow the textbooks.  I call them "theory-lovers."

Some investors want their portfolios diversified across various asset classes.  They believe re-balancing is over-rated and allocate some satellite portion of their portfolios to their strong convictions.  I call them "smart investors."

Some investors want "wholesome" companies that don't sell tobacco, alcohol, sugar, or other products that have hidden costs to society.  Called Socially Responsible Investing (SRI), doing good is as important to them as doing well.  Some advisors call them cry-babies.  I call them "conscientious."

Now, former Vice President Al Gore, of all people (?) is popularizing "sustainable investing."  It is different from the standard SRI.  He argues that the value of the stock must reflect the sustainable value of the product.  For example, sugar is instrumental to worldwide obesity.  At some points, governments will overcome the sugar-lobby and start taxing the product to pay for increased healthcare costs, thus driving down the value of sugar companies.  It is just a matter-of-time, they say.  Another example would be oil companies, who carry vast oil reserves on their books at market prices.  However, since that amount of oil will never actually be pumped out and sold, when fossil-fuels are obsolete, the value on the books is too high.  Normally, I would call all this "pollyanna-ish."

But, give the Nobel Peace Prize winner credit for this -- his investment firm has placed #2 in the U.S. over the last ten years!  I call that "impressive, very impressive, indeed!"

Life Imitating Ayn?

While the Bible remains the best-selling book in history, the second best-selling book has long been Atlas Shrugged by the late Ayn Rand, the iconoclastic mother of Libertarians.  The premise of her classic is that America's business leaders keep disappearing.  Conspiracy-lovers suspect the government is kidnapping them, swooping them away in black helicopters.  As it turns out, however, they have all fled to a secret hiding place, because they can no longer tolerate governmental control of every minute detail in their lives, especially in their businesses.

As much as I enjoyed the book when I read it some 50 years ago, I found the premise implausible, because the "government" is not competent enough to accomplish much of anything and certainly not anything as complicated and far-flung as a mass kidnapping.

However, something is happening in China!  Many of their top business leaders have recently disappeared.  Some have reappeared but without explanation.  Some may have disappeared forever.  Li Hejun was chairman of energy giant Hanergy who unexpectedly failed to show up at the annual meeting in May, causing the stock to drop a stunning 47% in one hour.  The CEO of China Aircraft has also disappeared.  There is some speculation that CEOs are disappearing due to the government's anti-corruption drive.  Maybe . . .

But, many of the disappearances have been among bankers and brokers.  For example, the CEOs of both the China Minsheng Bank and Guotai Junan International have also disappeared.  There is some speculation that the central government is seeking to punish anybody who may have contributed to the Shanghai market crash in August.  Maybe . . .

The Chinese do not hesitate when executing "wrong-doers."  But, there have been no reports of CEOs being executed, just disappearing.  At least, not yet . . .

Would you like to be the CEO of a Chinese company?

Thankful For . . .

I am thankful that jobless claims fell by 12,000.

I am thankful that durable goods production rose 3%.

I am thankful that worker pay rose 0.4%.

I am thankful that worker spending rose 0.1%.

I am thankful that the savings rate rose to 5.6%.

I am thankful I don't have to merely guess about the economy.

I am thankful for the numbers that guide my forecasts.

I am thankful for all the geeks who produce those numbers.

I am thankful for the freedom of information, so I can have numbers.

I am thankful my parents gave birth to me in America.

I am both thankful and proud to be an American!

Waiting For Janet Godot

Sixty-six years ago, Samuel Beckett wrote the great existential play Waiting For Godot.  In that play, several travelers are waiting for a very long time for the arrival of Godot.  The story focuses on the interrelationships while they wait . . . and wait.  Things get increasingly testy between them as they wait . . . and wait.

Waiting for the Fed to raise interest rates has become like Waiting for Godot.  To be clear, there is no economic reason for the Fed to raise interest rates.  Their dual mandates are to control both inflation and unemployment.  Guess what:  Neither is a problem, and neither needs to be controlled!  Neither inflation nor unemployment provides an excuse to raise interest rates.

However, the cry to "normalize" interest rates has become deafening, by both conservatives and investors.  The conservatives argue that the Fed has taken extraordinary steps to make a Democratic president look good.  I believe, however, that the Fed has taken extraordinary steps in monetary policy to prop up the economy while fiscal policy remains impotent, and I believe they would have done the same if a Republican was president.  Regardless, this complaint has become increasingly shrill.

Investors also want interest rates to rise because they are tired of living under the guillotine.  If the Fed raises rates rapidly, the stock market is clearly over-valued.  If the Fed raises rates slowly, the stock market is probably fairly-valued.  This uncertainty is a serious worry for investors.  After the Fed declined to raise rates in September, the stock market fell, because the market was expecting the level of uncertainty to decrease, but that didn't happen.  If the Fed doesn't raise rates during its meeting next month, I expect stocks to fall again.

Madam Chair, please raise our interest rates once and then go away!

The Market That Didn't Bark

Just as Sherlock Holmes attached significance to a dog that didn't bark, the stock market is usually telling us something when it doesn't over-react.

Most pundits expected the stock market would be down sharply on Monday morning following the Friday terrorist attacks in Paris.  However, by Sunday night, the futures market has actually turned slightly positive.

When the market opened on Monday morning, it started sinking, not badly but sinking.  About eleven o'clock, there were rumors that the French air attack on Syria had destroyed oil facilities, and the price of oil started rising.  This focused the market's attention that reducing the oil glut would be good for most every economy.  Stocks began to soar.

So, why didn't the stock market tank?  First, it would have been more likely to tank, if the terrorist attack had occurred on U.S. soil, instead of foreign soil.  Second, since the attack was on Friday, investors had a two-day weekend to adjust.  Third, and I hate to say it, we have become more sanguine about terrorism.  There have been attacks, and the economy labored on.  There will be more terrorist attacks, and the economy will continue to labor on.  The economic cost of terrorist attacks is not as great as the emotional costs.

20/20 Hindsight

Was Saddam Hussein a bad man?  Absolutely!  Did he deserve to die?  Absolutely, as slowly and painfully as possible!  Is the world a better place without such a monster in it?  I'm not so sure anymore.

But, how could the world not be a better place without such a sick, degenerate monster in it?  If his presence in this world kept other even-worse monsters out of it, the world would be better off with Saddam in it.

Iraq sits on the great fault line between Sunni Muslims and Shiite Muslims.  Although a Sunni, Saddam didn't care about the tribal warfare inside his religion.  He executed both with equal indifference.  Iraq existed as a terrible police-state, where the people had no rights and lived in constant fear of the authorities.

Was Iraq a bad place to live?  Absolutely!  But, isn't it even a worse place now, with open warfare between the Sunni ISIS and everybody else?  Saddam shot lots of people.  But at least, he didn't behead them.  The Iraqi people have suffered greatly, since the execution of Saddam

His death opened the gates of Hell for all the demons of Islam to escape.

I keep remembering General Colin Powell's mention of the "Bed, Bath & Beyond" rule:  If you break it, you own it.  Last night, France made another payment on that purchase.  I am so sorry for them!

Peeking Into 2016

While I cannot recall ever hearing anybody say that the legendary investment bank of Goldman Sachs was kind or charitable or even decent, I have often heard people say respectful things about the research department of Goldman Sachs.  Therefore, I try to follow their research closely.  Here are some of their latest expectations:

1.  World GDP growth will pickup from 3.2% this year to 3.6% next year.  GDP growth in the U.S. will slow slightly from 2.4% this year to 2.3% next year.  China will continue to slow from 6.9% this year to 6.4% next year.  The Euro-zone will increase from 1.6% to 1.8%, while England will increase from 2.7% to a respectable 3.0%.

2,  The S&P 500 will be flat over the next twelve months, while European stocks will rise 6.7% and Japan could rise a whopping 12.3%.

3.  Interest rates (10-year) will rise 80 basis points (0.8%) over the next twelve months in both the U.S. and Europe.  (I don't believe this.)

4.  The dollar will continue to rise, compared to the euro or pound.  They expect the euro to breach parity and "break the dollar."  Specifically, they expect the euro to drop another 13.6% to only 95 cents.  The pound could drop another 5.2%.

5.  Commodities will continue to get crushed by the lack of global growth.  Gold will drop another 8.1% over the next twelve months.  (Don't you know Goldman hates to say avoid gold?)  Copper is sometimes called "Dr. Copper" because of its track record in predicting the global economy, and it is expected to drop another 12.4% over the same period.

Interestingly, Goldman believes now is a good time for Buy-Write funds, which are mutual funds that own stocks for growth but also sell call options against those stocks for income.  All I can add is -- Amen!

Forgiving and Forgetting

How long does it take to "let bygones be bygones?"  Years ago, I heard a minister preach that you should forgive and forget when you are young.  When you are older, the forgetting gets easier but the forgiving gets harder.  That may be true.

In January of 1970, I was discharged from the Army and returned to Old Dominion University to finish up my first degree.  With my short hair and rippling muscles (yes, long ago!), I walked into the Student Center for the first time.  On the left side was a long table with 7-8 students sitting around it, when one tall, lanky student with dirty long hair and ratty jeans pointed at me and said "Look, a baby-killer!"  The students at his table laughed and turned away from me.  Being tightly-disciplined, I ignored his comment and let him live.  But, I still remember him, even after 45 years, especially on Veteran's Day.

I have no idea whatever happened to him.  Even after letting my hair grow and becoming a lazy college student myself, I rarely returned to the Student Center before I graduated.  But, if the Good Lord would let me pistol-whip one person on this planet, I would have to track down that hippie-punk.  Perhaps, I could then let bygones be bygones and put it behind me.

Until then, I will just remember those veterans I was honored to serve with . . .

Fear Not The Reaper

One of the few affable economists in this nation is the highly-regarded Jeremy Siegel of Wharton.  Last week, he made two comments that, at first, appear incongruent.  First, he said the latest jobs report practically assures an interest rate increase when the Fed meets next month.  Second, he predicted the Dow could reach 20,000 next year, up 13.5% from yesterday's close.

In other ways, he is predicting a nice healthy bull market despite a rising interest rate environment.  Many investors find the two conditions incongruent.  That's why the market almost always drops when the Fed threatens to raise rates.  However, history teaches us something different.  The stock market normally rises until the third or fourth interest rate increase -- but only if the market thinks more increases are not imminent.

Even if last week's job report does push the Fed to raise rates in December, instead of March, there is no reason to suspect the Fed will launch a long series of rate increases.  Given the lack of inflation and given the relatively weak world economy, I still expect the Fed to raise rates once, just to silence its many critics.  The American economy can easily afford a minor interest rate increase, even though large multinational export companies will be hurt somewhat from the strengthening dollar, which results from an interest rate increase.  (The bigger problem is below everybody's radar screen --  with $18 TRILLION in debt already, a quarter point increase in interest costs will blow a $45 billion hole in our Federal budget and add to our national debt -- go slow, Janet!)

Dr. Siegel teaches us that an interest rate increase by the Fed is not to be feared.  He's right!

Little Problems

I have problems.  You have problems.  Everyone has problems.  But, not everyone has the same problems.

Once a year, the Financial Planning Association teams up with the National Council of Mayors to host pro bono financial planning in twenty cities across the country, by CERTIFIED FINANCIAL PLANNER (TM) Professionals, for those people who cannot afford such individualized attention.  Today was that day.

One person was a 64-year-old taxi driver, still without Obamacare, but with surgery for bladder cancer this coming Friday.  He doesn't have the luxury of waiting for Medicare.  I hate it when I have to recommend bankruptcy.  Another was a 62-year-old women whose husband deserted her AFTER he punched out her front teeth.  Even without those teeth, she somehow found a low-paying job and survived by maxing-out her credit cards.  Now, she has a job -- but way too much credit card debt.  And, to top it off, she also has problems with the IRS now.  I steered her into credit counselling and explained the OIC process or offers in compromise with the IRS.  She seemed grateful for my advice, or maybe she was just grateful that somebody actually listened to her problems.  I don't know.

Yes, I have problems . . . little problems.  I hope your problems are also little.  I wish nobody had big problems.  But, they do!

When I sit down for Thanksgiving Dinner this year, I will indeed be very thankful for my problems . . . my little problems!

Short Term Myopia

The most watched economic data point has always been the monthly "jobs report" published by the Department of Labor on the first Friday of each month.  Today, that report was just GREAT!

Last month, 271 thousand jobs were created, far more than the 182 thousand that was expected.  The previous two months were revised higher by another 12 thousand jobs.  The traditional unemployment rate dropped to only 5%.  The more important U-6 level of unemployment, which includes those forced to take part-time jobs when they want full-time jobs, fell to 9.8%, the lowest in seven years.

The reason this data point is so closely watched is that it is thought to be the best "real-time" indicator of the economy.  In an economy where almost 70% of all spending is spending by consumers, the health of the consumer is critical, and that depends on the health of the job market.  Therefore, a good report should push the stock market higher, right?

In a normal economy, that would be true.  When the report was released this morning, Dow futures quickly dropped 40 points - why?  Because good news is bad news, when the stock market is obsessing over the Fed raising interest rates.  The Fed's job is to depress both unemployment and inflation.  If unemployment goes too low, many economists believe that inflation will result.  The Fed must balance both priorities.

It is time for the Fed to "normalize" interest rates and begin raising them.  Unfortunately, that pushes the dollar up, which hurts our exports and our biggest industrial companies.  That short-term reality scares the market.  I expect the market will drop dramatically if the Fed does raise rates next month, before rebounding.  Logic only prevails in the long-term, not the short-term.

A great jobs report should be enjoyed, not feared.  So . . . ENJOY!

Investing Religions

There are religions in the investing world.  One example is the Warren Buffett religion, that preaches you should buy what you like and keep it forever.  Another is the Benjamin Graham religion, that preaches you should not buy anything until you have exhaustively studied all financial information, all public information, and maybe a little private information as well.  Another religion is Modern Portfolio Theory, which argues investment returns can be maximized while investment risks are minimized -- the Holy Grail -- if your portfolio is carefully diversified across many asset classes, not just many stocks.  Then, there is also the passive religion, which preaches you should just buy an index of the stock market, like the S&P 500, and then go to sleep, trusting the resilient American economy to make you healthy in the long run.

I'm attending a conference on another investing religion, called "chartism" or technical analysis, which preaches you can base your investment decisions on graphs alone.  Some adherents don't even know the names or businesses of the stocks they buy and sell.  They simply stare into computer screens,searching for graphs that appear to relate to each other.  This seems to have some magical hold on the adherents.  After all, sunspots do impact the stock market, you know!

Like all religions, it does have some merit.  Graphically illustrating the relationship between stock market and interest rates or price-earnings ratios, for example, is quite helpful in teaching concepts but should have no magical hold over investors.

Like all religions, it also has fanatics. Deep in the confines of my suspicious mind, I sometimes wonder if chartists would even know when to use the restroom without a graph to tell them.  Frankly, I find that making decisions by looking at a chart is merely a crutch for lazy investors.

Where Are The Lions?

Why did Romans spend good Roman money to attend contests between lions and Christians?  Wasn't the victor pretty obvious?  What was the contest anyway?

Why do I spend good American money to attend football games between the Dallas Cowboys and anybody else?  The participants are always changing.  I don't know and have never met any of the players, and I have no loyalty to any individual team member.  Does the contest even matter?

Jerry Seinfeld likens professional sports to "cheering for laundry," as the players wearing the uniforms are always changing.  Only the laundry remains.  It is not like cheering for your high school football team, where you probably knew some of the players.

Psychology-types suggest it is a collective "Walter Mitty" wish to somehow live vicariously through the "heroic" players, experiencing both emotional highs and emotional lows.  Sociology-types suggest it reflects a longing for more heroes in a disappointingly complex society.  Maybe, it is just an excuse for guys/dudes to get together, drink beer, eat chicken wings and act stupid?  Maybe, sports allows us to feel like we are part of something bigger than ourselves?  Maybe, sports satisfies some primeval male-bonding need?  I remember reading somewhere that women talk face-to-face, while men talk shoulder-to-shoulder.  Between cheers, I guess?  A more existential view is that, as long as we are experiencing emotional highs and lows, we must still be alive.

An economist might look at professional sports as just one part of the vast entertainment industry.  It is no more noble than a soap opera.  But, it does contribute to GDP, employing thousands of non-players, and paying billions in salaries.  Maybe, it even lessens negative social costs, such as juvenile delinquency, by keeping kids off the street.

Of course, the only thing that really matters is whether the Cowboys win or lose!

Rolling Crisis?

When I moved from the barely-growing mid-Atlantic to rapidly-growing Texas in the late 1970's, I was grateful that at least some part of the country was growing.  A few years later, Texas experienced an oil crash.  I remember seeing bumper stickers that read:  Please God, let there be one more oil boom, and I promise not to waste it next time.

As Texas slipped into recession, the northeast started booming. A few years later, Texas enjoyed a housing boom caused by the Garn-St Germain bill, that allowed Savings and Loan Associations to do almost anything.  Of course, that caused lending excesses, which then caused a real estate recession scandal  in Texas, while California began enjoying a boom in technology.  Economists reasoned that the United States is so huge that some sort of recession is always "rolling around" the country and called them rolling recessions.

Some pundits humorously suggested there is only one recession, and it just keeps rolling around the country.

In 1997, Asia entered into a serious recession.  However, their recession became a financial crisis and pulled most of the developed world into a recession.  In 2008/9, the United States endured a financial crisis that pulled the global economy into a recession.  In 2010/11, Europe endured a financial crisis and almost pulled the global economy back into recession.  (While we didn't go back into recession, our stock markets certainly suffered.)

Today, there is concern that Asia is slipping back into recession and possibly another financial crisis.  The Shanghai Stock Market collapse sure smells like a financial crisis, at least to the nose of a financial economist.

I wonder if those now-older pundits would humorously suggest there is only one financial crisis, and it just keeps rolling around the world.

Thank You, John !

Almost every family has some goofy, old aunt or uncle who always complains "the end is near, and we're all going to die."  Wall Street is like that, especially about all things political.  When the sky is not falling, it is like Sherlock Holmes' dog that didn't bark.  The lack of an expected response can be very telling.

Did you know the Federal debt ceiling has to be raised next week?  Did you know that the Federal budget expires December 11th?  Did you know the Federal Highway spending ends in two days?   Now, what could possibly go wrong?

Yet, Wall Street is not over-reacting.  Uncertainty increases bearishness, but Wall Street is not particularly bearish.  (In fact, October has been kind to the bulls.)

The Fix is in!  Wall Street is not over-reacting to this uncertainty, because it is not uncertain.

My expectation is that John Boehner is now free of his radical Republicans and can cut a deal with Democrats.  What a refreshing change!  His expected response would be to delay, blaming it on the Democrats, instead of his own right-wing extremists.  He is above partisan dictates and can now be a statesman!  He can even c-o-m-p-r-o-m-i-s-e . . .

Finally!

All this tells me the market has already factored in a deal.  Therefore, I don't expect a bullish response when the deal is announced.

Obama Is A Failure

But, so was Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush.  All promised to "do something" about the loudness of TV commercials.  That has been the most common complaint to the Federal Communications Commission since 1980, averaging over twenty thousand complaints each year.

At least Obama "did something" and got Congress to pass the Commercial Advertisement Loudness Mitigation Act (CALM).  In 2013, commercials were supposed to become less loud.  Did you even notice?  I didn't think so.

The burden of compliance is on TV broadcasters and cable providers.  They have purchased equipment to insure that average commercial loudness is no greater than the programming.  Quickly, the advertisers found a way around this by introducing a few seconds of silence at the beginning and end of commercials, keeping the average acceptable but changing peak loudness even more abruptly, still making viewers look for the remote.  Now, there are arguments about excluding the increased bass during the commercials.  The battle has temporarily shifted from the legislators, who are claiming they "did something," to regulators, who are being over-whelmed with technicians and lawyers.  The battle will eventually have to return to the legislators.

If the President of the United States is the most powerful man on the planet, why are they impotent against the advertising business?  Because the advertising business is the most powerful business on the planet!  That business is powerful enough to convince people they should eat unhealthy food.  It is powerful enough to convince people that credit card debt is good.  It is even powerful enough to make people vote against their own best interest.  It has no moral compass.

And, it is more powerful than five different Presidents of the United States of America!

Shelter In A Storm ?

For those of us who worry about a global economic slowdown, there is one sector of our U.S. economy that should remain largely immune, and that is homebuilding.  First, relatively small amounts of inventory have been added since the Great Recession, while population has increased.  With demand for housing rising faster than the supply of housing, it is not surprising that rents are rising faster than the rate of inflation, especially among Millennials.  This has made builders quite optimistic, with the Builders Sentiment Index reaching it's highest level in ten years, since October of 2005.  With that confidence, they have been building and building, especially multifamily.  The third quarter of 2015 was 13.1% higher than Q3 of last year.

The faster inflation of rent for Millennials and the record-low mortgage rates should continue to pull them into home-buying.  Of course, having watched their parents or friends' parents lose their homes in foreclosure, a great many Millennials have been slower than past generations to "put down roots" and buy homes.  Interest rates are not going to get lower, and houses are not going to get cheaper.  The Millennials have some catching-up to do, and that will be good for the country, regardless of the rest of the world!

Quarterly Column

My latest column for Inside Business lives at:

http://insidebiz.com/news/paying-globalization-third-quarter 

My Thoughts Exactly

https://www.youtube.com/watch?v=LORVfnFtcH0

A One-Handed Clap

Psychologists say constant negative feedback creates a certain numbness to feedback, so we should offer some positive feedback whenever possible.

How many times have I asked readers to take a cold shower at www.usdebtclock.org ?  That website shows the spiraling problem of increasing debt.  It is frustrating, frightening and maddening!

But wait!  The budget deficit for the Federal government's fiscal year that just ended was "only" $439 billion -- the smallest deficit  since 2007!  That is great progress!  There's your positive feedback . . .

But, once you look into the details, it is not so positive.  The deficit is decreasing for the wrong reasons.  It is decreasing because the economy is growing, not because of governmental spending restraint.  While it is certainly not unimportant that the economy is growing, that smokescreen does make it easier to avoid dealing with the obvious spending inefficiencies.  It is not just the total number of dollars spent but also what those dollars are spent on!

No matter what the problem is, the answer is always the same . . . more revenue!

Medicare premiums are about to jump.  It is easier to increase premiums than, for example, to stop spending 40% of all lifetime medical costs during the last ninety days of life.  Saying yes to more revenue is easier than saying no to spending.

As a financial planner, clients always scream when I tell them to spend less.  After all, everything we buy is a necessity, isn't it?  Unfortunately, that is true for both individuals and nations.  Can we really expect our government leaders to eliminate spending when we cannot do it ourselves?

Still 98.6 Degrees

Is the stock market over-heated?  The shorthand answer on Wall Street deals with the Price-Earnings (PE) Ratio or how many times the stock market values each dollar of earnings per share.  In other words, if a stock earns $1.00 per share and sells for $20 per share, then the PE ratio for that stock is 20 times.  If the earnings per share for the whole stock market is $100 per share and the S&P 500 index is 2,000, then the PE ratio is also 20 times.  Since the long term average over the last sixty years is 16.5 times, we would call 20 times over-heated.

The trick is figuring out what are earnings per share (EPS) for the entire market.  Currently estimated at about $112 per share, that makes the current PE ratio about 18 times, which would be only slightly over-heated.  However, investing legend at Wharton, Dr. Jeremy Siegel, has dug into the numbers and thinks the $112 estimate is too low.  One reason is the dramatic fall in energy prices has triggered huge balance sheet write-downs that are ending as oil prices stabilize.  That adds about $8 per share.  In addition, the strong U.S. dollar has depressed earnings about $5 per share, which also seems to have stabilized.  Adding that $13 to the current estimate of $112 means real EPS is about $125, which drops the PE ratio to 16 times or about average.

So, is the stock market over-heated?  No, not by the normal measure of PE ratio.

Now, go back to sleep . . . with one eye open!

Bold Predictions ?

I would never hire anybody who worked at investment banking giant Goldman Sachs, UNLESS they worked in the research department, which I do respect.  Here are some of their latest forecasts:

1.  GDP growth in the U.S. remains essentially unchanged at 2.4% last year, 2.5% this year, and 2.4% next year.
2.  GDP growth in Europe increases from 0.9% last year, 1.6% this year, and 1.8% next year.
3.  GDP growth in China continues to slow from 7.4% last year, 6.8% this year, and 6.4% next year.
4.  U.S. stocks should increase 6.2% over the next twelve months.
5.  European stocks should increase 18.8% over the next twelve months.
6.  Japanese stocks should increase 20.4% over the next twelve months.
7.  Interest rates on the benchmark 10-year Treasury bond should increase a whopping 73 basis points or about three-quarters of one percent over the next twelve months.
8.  The dollar will appreciate 15% against the euro and 3.8% against the pound but depreciate 7.6% against the yen.
9.  Oil will remain essentially unchanged,while natural gas will cost 23.6% more.
10.  Gold and cooper continue to lose value, with a loss of 8.4% for gold and 5.8% for cooper.

Notable in its absence, there is no discussion of any potential recession or bear market!

One Joy of Education

We've all heard about the increasing concentration of income among the top 5%.  You might even think the 95% are treated unfairly.  Or, maybe the 5% are just better protected.

If you are having trouble convincing your kid that he should stay in high school and then go to college, consider the latest research from the National Center for Health Statistics:  In 1995, a high school dropout was 2.5 times more likely to be killed in a car wreck than a college graduate.  By 2010, they were 4.3 times more likely to be killed.  Who knows what it will be like in another five years?

Is it as simple as the rich get richer, while the uneducated get killed.  Or, is it because dropouts are less responsible than college grads?  Or, is it the company they keep?  Or, is it an secret government plan to kill off Americans with less education than the President?  Or, is it because the newer cars are too expensive for the dropouts but protect the educated who can afford the newer cars -- an unintended consequence of government regulation?

Regardless, the message is clear . . . stay in school!!

Majority vs Minority

Q.  What is the difference between Republican congressmen and Tea Party congressmen?

A.  Republicans believe in majority rule, not minority rule.

Senatorial Sense

Democrats are right:  The seeds of the next financial crisis are sown in the ashes of the last one.

Former Senator Hillary Clinton is right:  She wants to tax high-frequency trading and "dark pools', making them more transparent and less profitable.  High-frequency trading poses a systemic risk to our financial system by overwhelming it with vast numbers of cancelled trades.  Dark pools are ways for investors buy and sell large quantities of stock in secret.  Think about that!

Senator Elizabeth Warren is right:  She wants more criminal prosecutions of white-collar professionals on Wall Street, who knowingly sell overly-risky investments to unsophisticated investors.  All I can say is . . . ditto!

There will be another financial crisis, I promise.  If you assume the 78 years between the Crashes of 1929 and 2007 means anything, we should not expect another in our lifetimes.  However, if we learned nothing else from Alvin Toffler's classic Future Shock, we learned that the rate of change keeps increasing at an increasing rate, suggesting the 78 year interval means little if anything.

There is no reason to believe another financial crisis is in the near-future, but these senatorial reforms will help keep another financial crisis in the future.

According to the Good Doctor(s)

Republicans are right:  When your corporate income tax rates are the highest in the developed world, they are too high.  That is the reason that American corporations have maintained $2 TRILLION overseas, where it doesn't have to pay 25-40% (depending) income taxes on it.

Dr. Ben Carson is right:  He has proposed a six-month window to repatriate the entire amount tax-free, as long as 10% is spent on some social good to be determined, such as Red Cross or Headstart or whatever.  Would such a huge cash injection help the United States?  Absolutely!  Would it help us a great deal?  Probably not.

Dr. Gabriel Zucman is also right:  He is a professor at the University of California and just wrote a book entitled The Hidden Wealth of Nations, in which he deduces there is now about $7.6 TRILLION (about 8% of the world's total wealth) hidden in such tax/secrecy havens as Panama, Channel Islands, etc. (Even though it has been illegal since 2009, the amount of foreign money in Switzerland has increased 18% since then.)  Of course, not all of that hidden money is from Americans, but wouldn't the world benefit if 8% of its wealth was returned to it?

Does that mean Dr. Carson should be elected President of the United Countries of Earth?

Symmetrical Response ?

The Dow rose 304 points yesterday.  Were you elated?  Were you open and communicative with your family?  Did you go out to dinner?

If the Dow had fallen 304 points instead, would you have been depressed?  Would you have sat with a sullen face in front of a television without watching it?  Would you have called your financial advisor, as if they were responsible?

There is a great deal of emotional distance between elation and depression.  Most people think they handle market swings pretty well, but their spouses often disagree.  Go ahead, be brave -ask your spouse how well you handle market swings!

When I had my first job as a trust officer decades ago, my boss taught me that "the pain of losing money far exceeds the joy of making it."  I've learned that is absolutely true.  The difference is how well you handle . . . pain & joy . . . or elation & depression.

But, don't blame your financial advisor for the emotions you cannot handle.

Amen, Ben !

Readers know I have long argued that punishing individuals is more appropriate than punishing non-individuals, like corporations.  (See blog on September 25th for the most recent.)

It is satisfying when a major player agrees with you.  Ben Bernanke was Chairman of the Federal Reserve System during the global financial crisis of 2008/9.  In his new book, he says:  "it would have been my preference to have more investigation of individual action, since obviously everything what went wrong or was illegal was done by some individual, not by an abstract firm."

He points out that bringing criminal actions is not the Fed's job.  That job belongs to the Department of Justice.  In fairness, I recall reading former Attorney General Eric Holder say that it was much harder to find individuals guilty than corporations.  Going after corporations was the low-hanging fruit.  Assuming that is correct, why are the laws designed to excuse bad individual behavior?

Some will argue that prosecuting individuals in corporations without also prosecuting individuals in government is not fair.  I argue that you don't prosecute individuals simply for doing the wrong thing.   It is not illegal to do something stupid.  You prosecute individuals who knowingly did the wrong thing for personal greed, like salesmen who tell you certain bonds are safe, because they have subprime mortgages as collateral, when they already know the truth . . . oh, the sweet smell of personal greed!

Curse of the Y Chromosome

I confess - I have a male ego.  I want to win!  More than I love winning, I hate losing.  It's a guy-thing, I guess.  Sometimes however, if you cannot win, it can be enjoyable to watch your opponent lose.

For years, I've wondered how the United States got caught in the crossfire from a tribal duel between Sunni Muslims and Shiite Muslims.  They've only hated each other for 800 years, yet we seem to think there is something to win?

Remember the long gas lines and short tempers during the Arab oil embargo 1972?  Back then, the Middle East mattered, because they had the oil.  In the long 53 years since then, a few things have changed.  One is that the Middle East is not nearly as important - not unimportant but certainly less important.  That is one big advantage to fracking.  (Besides, with Venezuela collapsing, we may get access to even more oil.)  We just don't need the Middle East now as much as we needed them in 1972

What would you like to do in Syria?  Take your choice between supporting the murderous Assad or watching another hundred thousand civilians die.  Maybe, we don't have to make that decision.  Maybe, egocentric Putin would like to take our place.  Are we that lucky?

From his standpoint, it would give the Russian people a bright shiny object to focus their attention somewhere besides their lousy economy and election fraud.  Assad would remain in power, but Putin would have to deal with him, not us.

From Iran's standpoint, they get the "American Satan" out of the Middle East.  In the long run, they will alienate the Russians as bad as they do everybody else.  Don't think the Islamic government of Iran will ever get too cozy with the Russian infidels from the north.

Together, to destroy ISIS, they will have to destroy the majority of Sunni Muslims in Iraq.  Once done, the Shiites of Iran and the infidels of Russia will have to deal with the rest of the Arab world, which is almost entirely Sunni, including Saudi Arabia.  Good luck with that!  (85% of all Muslims are Sunni.)

From our standpoint, we have to deal with the male ego of withdrawing from the Middle East, after losing thousands of lives, wounding tens of thousands of good Americans, and spending over THREE TRILLION DOLLARS.  The rest of the world will say we retreated, with our tail between our legs.  Darn it, there's that male ego thing again!

In ten years, the broke Russians will be both bankrupt and hated.  Iran will be isolated in the Arab world, controlling their own oil plus Iraqi oil, in a world less oil dependent than ever before.  (10% of Texas electricity already comes from wind power, as an example.)

Try telling a man that you'll respect him at some point in the future -- he wants respect NOW.  Unfortunately, so do nations.  Or, is that just male national leaders?  Is our Y-chromosome keeping us from making the best strategic decision for the long-term?

The Only Guarantee

Friends often struggle to understand why I normally get up by 5AM each day.  The primary reason is that my "body clock" is genetically set for it.  The professional reason is that I want to check the foreign markets before U.S. stock markets open.

I can save my clients a little money by using "market orders" which execute when they hit the market, regardless of price.  The only time I have a really solid grasp of the buy or sell price is when the market first opens.  (During the day, anything can happen, and I might have to use other types of more expensive orders.)  To predict opening prices, I rely on the futures market.

One rule-of-thumb is don't rely on futures until 9:29AM, just before the market opens, especially if there has been any breaking news.  Yesterday, early futures indicated the Dow would gain 109 points when it opened.  At 8:30AM, the disappointing jobs report was released.  Futures promptly dropped to a loss of 100 points at the open, a 200 point reversal.  When the market did open, it actually dropped 258 points.  However, when the market closed at 4:00PM, the Dow had GAINED 200 points, a 450 point reversal.  It was wildly volatile, the biggest upside reversal in four years.

It was a typical example of the stock market doing the only thing it is guaranteed to do -- it over-reacted!  

Fill In The Blanks

ASSOCIATED NEWS (AN) - Yesterday, some psychotic nutcase in [insert city and state here] named [insert name of loser here] used a [insert type of guns] to kill [insert number] innocent people and to wound an additional [insert number] innocent people, between the ages of [insert number] and [insert number].  The senseless slaughter took place in the [name of institution] at [insert time of day].  The wounded were taken to [insert name of hospital here].

The National Gun Lobby (NGL) expressed their condolences to the loved ones and reminded the public of NGL's school educational program, known as the "3-Rs of Safety" -- Reading, wRiting, & Rifles -- which is offered free-of-cost to all first grade students, if the school will simply provide loaded handguns and concealed weapon permits to the students, so they may protect themselves from psychotic losers.

How Utterly Absurd!!

The Passing Storm

The third quarter is finally over .. . GOOD!
It was the worst quarter on Wall Street in four years.
Most stock averages were down about 7%.
Most hedge funds were down 15-20%.

The bad news is that there will be more bad news in this quarter.

Historically, stock prices suffer during the month of October.
Historically, stock prices rally in late December into January.

By then, Congress will have passed a fiscal budget & raised the debt ceiling.
But, there will be lots of anguish and hand-wringing before it happens.
Buy some Rolaids!

Also, be patient - corporate earnings are not as bad as they appear.
Stripping out the collapsing energy profits, corporate profits are up 5%, which is good.

Just like Joaquin, the storm on Wall Street will pass . . . 

So Much Noise !

As we know, stocks don't always move up, nor always move down.  Often, they bounce along sideways in a range.  For the last two months, the U.S. stock market has traded in a range.  This is not unusual.  What is unusual is the violence of the moves within the range.  We keep slamming into the upper and lower edges of the range.

Yesterday, the Dow lost 312 points or 1.92% and approached the lower edge of its range.  Even worse, the S&P lost almost 50 points or 2.57%.  The day got off to a bad start with the news that corporate earnings in China were less than expected.  Then, we learned that debt-ridden commodity giant Glencore in England may be in serious trouble, following the unimaginable self-immolation of Germany's largest employer, VW.  Then, investing legend Carl Icahn released a video promoting his new website by saying "the end is near."  Lastly, Nasdaq's 50-day-moving-average crossed below its 200-day-moving average, which is the "fourth horseman" of the "death cross."   That is considered a very ominous market signal.

In the background, investors are facing up to the continued dysfunction in Washington with a naive President and a Congress that cannot even spell c-o-m-p-r-o-m-i-s-e.  Remember the Fiscal Cliff?  This year could be far worse, with a government shutdown - plus a government default if the debt ceiling is not increased.  This could happen shortly before Christmas - throwing a terribly dark cloud over the joyous holiday season and crushing holiday sales.

The next important market signal is whether the S&P will break its previous low.  The belief is that the recovery begins when the stock market re-tests its previous low and bounces upwards.  The previous low was 1,867 on August 25th.  Closing yesterday at 1,881 - it is less than one percentage point away.  If the S&P goes below 1,867, it will set a new low that then must be re-tested before recovery can begin.

Is the world coming to an end?  Of course not!
Should you sell everything and get out of the market?  Of course not!

Would you run out of a store that just put everything on sale?
Stocks in America's greatest companies are now 12% cheaper.

Justice Defined ?

You may remember some years ago when a Chinese toy maker allegedly used a toxic red paint on toys that infants were prone to put into their mouths.  I happened to be in China shortly afterwards and read the English translation of the Shanghai newspaper about the incident.  It said the CEO was arrested and tried, where it was determined that the CEO had prior knowledge of the harm to children.  Without appeal, he was taken out of the courtroom and executed.  I respected that rule of law.

All during the aftermath of the 2008/9 global financial crisis, I kept hoping I could find an article about some bond salesmen, who making $5 million a year to sell subprime bonds that he knew was trash, (even referring to selling those bonds as "putting lipstick on a pig"), eventually being executed for ruining the retirement of good and decent American workers and the education of the next generation of Americans.  I'm still waiting for some justice.  Apparently, people who knowingly caused genuine harm were not guilty, simply because they worked for a corporation.  Some corporations were executed (think - Lehman) and hundreds of thousands of people lost their jobs, but I guess nobody did anything wrong . . .

But, there is hope!  The CEO of a Peanut Corporation of American was just found "guilty on dozens of felony counts, including conspiracy to conceal that many of the company's products were contaminated with salmonella.  Between 2008 and 2009, nine people died and more than 700 others fell ill after eating peanut butter . . . "  The 61-year-old man was sentenced to 28 years in prison, where he will receive better health care than many poor people in this country and elsewhere.

It's too bad our judicial system could not sentence him to 28 years in hell instead!

Patience Will Be Rewarded

The current turbulence in the stock market has not been following the conventional script.  Does that mean we are facing a potential market collapse?  No!  There is no financial crisis on the horizon.  If anything, U.S. banks have TOO MUCH capital, not too little.

But, the current turbulence is slightly different from the normal garden-variety bear market that precedes the normal garden-variety economic recession.  The economic data for the U.S. remains remarkably good.

The difference is that we have never experienced a normal garden-variety bear market in such a highly globalized world.  For the first time, it is not international news, such as a war, that drives down the U.S. stock market.  Instead, it is slowing global growth, not slowing national growth.  Further, there is a free-floating anxiety that global growth is actually negative, meaning a real global recession might be possible.  Possible - yes, anything is possible.  Probable - no!

Making it more difficult for analysts is the lack of quality information about economic conditions in other countries.  Regardless of what conspiracy-theorists in Congress imagine, the U.S. economic data is believable.  On the other hand, Chinese economic data is notoriously skewed for political purposes.  Naturally, this lack of "trustable info" increases the one thing Wall Street hates the most . . . uncertainty!

How long will it take Wall Street to figure out the sky is NOT falling?  I don't expect that before the holiday season begins in late November, when we normally enjoy a "Santa Claus rally," which is my favorite holiday present.  Your's too, I'll bet?

Pandering Season

If Greece is the birthplace of democracy, they failed to teach the U.S. one important lesson - short campaign seasons are a blessing.  Yesterday, Greece held a national election for President.  The people of Greece were able to make a decision in a mere five weeks.  (The recent campaigning for British election was also five weeks.)  Why then does it take Americans 18 months to do the same?  No other sport has an 18 month season.  Our Presidential election is just another sport, isn't it?

We still have to suffer through another fourteen months of meaningless, anti-intellectual pandering before we can vote.  Can we learn nothing from the rest of the world?

Good Custodian !

Like most everything in life, technology is a double-edged sword.  It can open new worlds for you or trap you in a circular hell.  That is especially true for financial advisors.

Since TDAmeritrade is custodian for the funds of my clients, I was pleased to see their technology offerings are the top-rated in the country.  49.4% of all respondents reported they were "very satisfied" with TDAmeritrade's technology offerings, which easily out-paced runner-up Schwab at 39.8%.

Technology is not inexpensive, and I appreciate TDAmeritrade spending enough money to be the best.

Let Him Pray !

We were in Philadelphia most of last week and were quite impressed with all the preparations the City is making before the Pope's arrival this week.  I'm expecting it will be a first-class spectacle and well worth watching.

However, I remember working in D.C. when foreign heads-of-state would visit and the preparations for those visits.  There seems to be a difference, at least to my untrained eye.

Preparations in D.C. were all about security, i.e., closing streets, removing trash cans along the routes, prohibiting parking on certain roads, insuring access to rooftops to post snipers, sealing manhole covers, etc.  Preparations in Philadelphia seem to be all about pageantry, i.e., hundreds of flags and huge banners, large stages with speakers and outdoor video.  That does not necessarily mean Philadelphia is ignoring security, but it does appear that the pageantry is over-shadowing the Pope's security.  Let us pray for a peaceful papal visit! 

Take It From The Top

When I was a boy, I aggressively pursued learning.
When I was a teenager, I aggressively pursued "wine, women, & song."
When I was a young man in my twenties, I pursued my career goals.
When I was a man in my thirties, I pursued "ostentatious consumption."
When I was a man in my forties, I pursued wisdom.
When I was a man in my fifties, I pursued meaning.
Now, as a man in his sixties, I pursue "continuing education credits" to feed my certifications.

Huh . . . maybe, I should just start all over again . . . ??

Fed-Punting

Most economists are delighted when their prediction comes true.  While I predicted the Fed would not raise interest rates this year, I was secretly hoping they would - not because inflation was out of control, not because unemployment was too high - but because it would reduce uncertainty and be good for the stock market.

The Fed should be above politics.  Instead, they have become a political football, with much of the Republican party indignant that the Fed even exists.  Democrats are not defending the Fed, meaning the Fed has no defenders.  Raising interest rates by a quarter of a point would not damage the economy in any meaningful way.  Yes, the dollar will rise, hurting our exports.  Yes, it would slow our GDP growth a small amount and world GDP growth more.  But, it would take the heat off the Fed and help preserve an important U.S. economic instrument.

Some cynics suspect the Fed "punted" just before Congress must deal with the budget, as a reminder that fiscal policy is more important than monetary policy.  Congress is too constipated to do the right thing, meaning we have no fiscal policy.  Apparently, the Fed is also too constipated, meaning we have no monetary policy.

Looking at the futures market this morning, it looks like the stock market also wanted an increase, as it appears the Dow will drop about 200 points at the open.  With a rate increase already priced into the stock market, the Fed missed a perfect opportunity to raise the rate.

Other critics of the Fed are complaining that the Fed actually paid attention to the rest of the world, alleging the Fed's two mandates are to reduce both unemployment and inflation in this country.  The Fed has no responsibility for the rest of the world.  However, the rest of the world affects our economy.  Those critics have apparently never heard of globalization.

No change to my prediction - the Fed will not raise rates until next year.