Tuesday, June 30, 2015

A Crisis By Any Other Name

Because a crisis seldom arrives alone, it is important to recognize each one as they arrive.  There is an economic crisis, a financial crisis, and a political crisis.  Either can begin a downward spiral.  Combined, they can destroy a country.

A garden-variety recession might be called an economic crisis, but it is actually routine, and in fact beneficial for the economy, in the long run.  There is part of the beauty of capitalism.  However, it can develop into a real economic crisis, if pushed by either a financial crisis or a political crisis.

The global financial crisis of 2008/9 started with an implosion of two hedge funds, obliterating Lehman Brothers, and igniting a first-class financial crisis.  An economic crisis promptly followed.  While we had a dysfunction government, we did not have a real political crisis, except for the failure to raise our debt ceiling, costing us our AAA credit rating.  (While some pundits think the severity of the financial crisis and economic crisis made our government even more dysfunction, I believe that is yet to be proven.)

The current Greek tragedy started as a political crisis, perhaps some sense of entitlement for the great contributions Greece has made to the "civilized" world.  Regardless, the political leaders of Greece lavished entitlements on the Greek voters, rewarding them with the lowest retirement age in Europe, if not the world.  As the devil of mathematics approached and wanted to be paid, Greece had the opportunity to escape by joining the euro, which bought them more time, allowing them to dig the hole even deeper.  Unfortunately, Greek political leaders jumped at the opportunity to delay the inevitable.  It was akin to selling drugs to an addict.  Finally, the devil still has to be paid, and here we are.

Since the Greek tragedy began five years ago, initial payments to the devil have reduced GDP by 26 percent, which is a first-class economic crisis.  Now, we are tipping into a financial crisis, which is usually the worst type of crisis.

Writing for Inside Business four years ago, I said the best thing we can do for our friends and loved ones in Greece is to send them a one-way plane ticket.  That is still true!

Monday, June 29, 2015

Buckle Up !

Thanks to Greek pensioners, the slow-motion train wreck that Greece has been for almost five years is finally coming to a head . . . for awhile.  This is not surprising.  The only real surprise would be if they didn't "kick the can down the road."  That could have theoretical implications for other weak European colonies, like Italy and Spain.

More important to the U.S. investor might be that the American Greece or Puerto Rico, which is also approaching a crisis point, but it is not yet as critical as Greece.  Would a bankruptcy in Puerto Rico destroy the American economy?  Of course not!  Would a bankruptcy in Greece destroy the European economy?  Of course not!

Nonetheless, the stock market will resemble a roller-coaster for awhile.  I'm glad -- let's get this drama behind us!

The global financial crisis of  20008/9 was a terrifying experience for many people.  Much has been written about its impact on Millennials.  They are less inclined to take on debt, even mortgage debt.  They are more inclined to start their business than any other generation, reflecting their deep distrust of the corporations that fired their parents.  They have been traumatized.  Less discussed, however, millions of investors during 2008/9 were also terrified and fled the market.  Since then, they have watched the stock market make a massive bull run and missed it.  With this major swoon in stock markets worldwide, it is an opportunity for former investors to get back into the market.  I hope they will take it.

For those who got back into the stock market, this would be a crazy time to sell.  It would be a much  better time to go to the beach instead!

This too will pass!

Thursday, June 25, 2015

The Hidden Cost

Congress is dominated by lawyers with little understanding of economics.  Wisely, they created the semi-independent Office of Management and Budget (OMB) to "score" or estimate the economic impact of the proposed legislation by lawyers.  It is strictly non-partisan.  However, there is a wing of the Republican Party (the Supply-Side wing) that insists the OMB is partisan, because OMB does not employ Supply-Side economics in their scoring or estimating.  To do this, OMB would increase the impact of changes in the marginal income tax rate.  OMB would have to show large, dramatic swings from small changes in taxes, according to this wing of the party.  It is the position of OMB that such arguments about economics belong in academia until resolved.  I agree with the OMB.  However, I wish there was some way OMB could calculate the cost of understanding.

All of my clients are intelligent and educated, but they struggle to understand the many conflicting claims of healthcare in general and healthcare insurance in particular.  There has been a distinct increase in the number of questions from them since Obamacare was established. There has to be a way to simplify this.  What do poor people do without the benefit of a professional financial planner to help them navigate healthcare insurance?  What good is coverage if you're afraid to use it?

There are five modules to becoming a CERTIFIED FINANCIAL PLANNER professional, i.e., (1) Principles of Planning, (2) Estate Tax Planning, (3) Income Tax Planning, (4) Education Planning, and (5) Insurance Planning, which includes life, property, and health.  I am doing less and less education planning, while doing more and more health insurance planning.  The curriculum needs to change.

If it is difficult for financial planners and if it is difficult for the educated and affluent to understand, then how is the regular American supposed to understand it?  Is there no cost to this lack of understanding?  Even though it is difficult to estimate that cost, should it be ignored by OMB, by Congress . . . or by you?

Wednesday, June 24, 2015

Farewell "Stars & Bars"

As a son of the South, the old South, I grew up with great pride in my Southern heritage.  While I was never proud of the racist part of that heritage, I did have great respect for my ancestors who fought and for the mothers who donated their sons to bleed and die.

To understand the sentiment that I feel, here is a poem written by Alfred Lord Tennyson about a battle in the now-Russian Crimea called the "Charge of the Light Brigade."  Different war, same sentiment!

Half a league half a league,
Half a league onward,
All in the valley of Death
Rode the six hundred:
'Forward, the Light Brigade!
Charge for the guns' he said:
Into the valley of Death
Rode the six hundred.

'Forward, the Light Brigade!'
Was there a man dismay'd ?
Not tho' the soldier knew
Some one had blunder'd:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do & die,
Into the valley of Death
Rode the six hundred.

Cannon to right of them,
Cannon to left of them,
Cannon in front of them
Volley'd & thunder'd;
Storm'd at with shot and shell,
Boldly they rode and well,
Into the jaws of Death,
Into the mouth of Hell
Rode the six hundred.

Flash'd all their sabres bare,
Flash'd as they turn'd in air
Sabring the gunners there,
Charging an army while
All the world wonder'd:
Plunged in the battery-smoke
Right thro' the line they broke;
Cossack & Russian
Reel'd from the sabre-stroke,
Shatter'd & sunder'd.
Then they rode back, but not
Not the six hundred.

Cannon to right of them,
Cannon to left of them,
Cannon behind them
Volley'd and thunder'd;
Storm'd at with shot and shell,
While horse & hero fell,
They that had fought so well
Came thro' the jaws of Death,
Back from the mouth of Hell,
All that was left of them,
Left of six hundred.

When can their glory fade?
O the wild charge they made!
All the world wonder'd.
Honour the charge they made!
Honour the Light Brigade,

It was a different war in a different time in a distant place, but there was valor in dying for what they believed.  That profound respect doesn't change.  I have that respect for the soldiers who died in Crimea and in the Confederacy and everywhere else.

Unfortunately the tangible symbol of that pride later became the "Confederate flag", which has now been expropriated, confiscated, smeared, slimed, and desecrated by modern racists.  Like we lost that war, we have now lost our flag, the old "Stars & Bars."  So, we must now let it go.  Without that flag, we will still have our respect for those soldiers who fought and for the mothers who donated their sons to bleed and die.  That never changes!

Tuesday, June 23, 2015

Supporting The Republicans And A Democrat

Economists can often be as petty and spiteful as Republicans or Democrats.  But, sometimes, the over-whelming majority actually agree on something, and "free trade" is one of those somethings.  To really appreciate why this is true, you need to Google or Bing the law of  "comparative advantage."  Walking through the math is beyond the scope of this blog, but it would help you understand why so many economists favor "free-trade."

Currently, our Democratic President finds himself allied with the Congressional Republicans to give him "fast track authority" in negotiating a hugely-important trade deal with the 12-nations of the Trans-Pacific Partnership.  Our future growth lies with Asia, not Europe nor Africa.  We must formalize our trading relations with them to realize the real growth potential.

Historically, when the president negotiates a trade deal and presents it to Congress for approval, the politicians treated it as a Christmas tree to be decorated, creating a Frankenstein treaty that our trading partners could not accept.  (After all, why negotiate in good faith with the U.S. when you know Congress is going to change whatever you agreed to?)  Giving the president this fast-track authority means that Congress gets to vote on the proposed treaty as an all-or-nothing deal, without adding any extraneous ornaments.  This authority has been granted to other presidents and should be granted to this one.

To be balanced, Democratic politicians argue the objective is "fair trade."  Treaties that merely give foreign nations the opportunity to steal our jobs may be free, but it is certainly not fair.  Complicating this political drama is a new study by a respected MIT economist named David Autor, which "proved" that the Democrats worst fears were confirmed - trade agreements do cost U.S. jobs.

Of course, the jobs lost were mostly factory jobs that would eventually be lost anyway, but there is more to considering a trade agreement than jobs that are going to be lost anyway.  There are many other things that need to be negotiated, such as intellectual property and tariffs and tax transparency and terrorism.  Don't increased sales matter at all?  (Now, study the law of comparative advantage!)  Even the author of this study, David Autor, supports the new trade deal, as I do!

This "triangulation" between a lame-duck Democratic president, allied with Congressional Republicans, against Congressional Democrats is not new.  President Clinton used it successfully and repeatedly.  A lame-duck president does not need to appease his base - he just needs to do the right thing, and this is the right thing!

Friday, June 19, 2015

Equal But Opposite

Sir Issac Newton (1642-1726) was an important English physicist and mathematician.  His Third Law of Motion says that every action produces an equal but opposite reaction.

Or does it?

As a thirteen-year boy, I was one of the larger boys my age and wanted to play football.  Unfortunately, my mother would not permit me to try out for the football team,  She was afraid I might get hurt.  However, she did permit me to join a bowling league, but that probably just made things worse.  Naturally, when I joined the Army, I volunteered for Officer Candidate School, Parachute School, Ranger School, Special Forces School, Pathfinder School, and Sniper School - capped off by a rare request for service in Vietnam.  While I didn't get everything I requested, I did get enough to make up for lost time.

There has been much hand-wringing among sociologists that young people are being given an unrealistically optimistic and possibly unhealthy view of reality.  When everybody gets a trophy, somebody has a lesson unlearned.  For reasons beyond my skill set, girls are maturing much faster than boys.  Their college boards are increasing faster than that for boys.  Locally, girls were valedictorians in twelve of fifteen high schools.  Last year, a reporter for The Wall Street Journal complained that men her age reminded her of the kids she babysat -- igniting quite a controversy.  My opinion is that boys are being over-mothered.

At the same time, one of the fastest growing industries in country is extreme sports - you know, crawling in mud, swinging on ropes over water, submerging in nasty water, leaping over fiery pits, etc.  In 2013, I did the Spartan Race in Wintergreen, which was a 10-mile obstacle course up and down summertime ski slopes, (winning first place in my age group, mind you!).  I was accompanied by 6,000 other lunatics.  Since 2010, over four million - 4,000,000 - people have done this and similarly insane events, like Tough Mudder and Warrior Dash.  This would be an equal but opposite reaction to what exactly?  Maybe . . . over-mothering?  Other generations never felt the need to crawl in mud, did they?

So,mommies, don't let your babies grow up to be cowboys . . . or bowlers!

Thursday, June 18, 2015

One And Done

Wall Street wags like to say the stock market is completely unpredictable, except for one thing -- it will always over-react.  To either good news or bad news, it will over-react!  The most recent example is known as the "taper-tantrum."  That occurred when the Fed announced that it would slowly decrease or taper the amount of monthly purchases of government bonds during the days of Quantitative Easing (QE).  The stock market promptly tanked!  Of course, the monthly purchases are now zero, and the market has set several new highs since QE ended.  Certainly,the stock market over-reacted!

Listening to Fed Head Janet Yellen yesterday, it is obvious that she remembers that lesson well.  No interest rate increase has ever been so well-telegraphed.  Is there anybody left in the United States who does not know the next movement in interest rates will be up?   Why will the stock market tank when it actually happens?  Because it over-reacts!

But, I think it will be a sharply V-shaped recovery.  One reason is that a rate increase is already "baked-into" the stock market, which has been listless all year.  Another reason is that traders will remember that Yellen is primarily a dovish labor economist, who is very concerned with unemployment, and does not want to take the chance of prolonging long-term unemployment by raising rates.  They will also remember that she NEEDS to prove to the market that she will raise rates.  She needs to "earn her stripes" and this is the way to do it.

She has been consistent in reminding the Street that the Fed is data-dependent, not calendar-dependent.  In the past, the Fed has often had a mechanistic approach to raising rates, by raising rates a modest amount at each meeting.  She explicitly rejected that approach and base decisions on the most recent data.  I suspect the rate increase will be "one & done."  That way, she earns her stripes, she temporarily quiets the Libertarians, she doesn't hurt unemployment too much, and she doesn't cause the dollar to appreciate too much more.

So, fear not the rate increase! 

Tuesday, June 9, 2015

Reporting On Redistricting

Redistricting is the practice of allowing politicians to draw the lines of their district, which is akin to allowing them to pick their voters, instead of the more traditional view of letting voters pick the politicians.  It is not uncommon for people on one side of a street to vote in one district, while neighbors on the other side of the street vote in a different district.  Politicians know what types of people are most likely to vote for them, and they know where they live.  For example, Democrats would draw the lines to include as many minorities, as many young people, and as many government employees as possible.  Republicans would draw the lines to include as many older voters, as many affluent voters, as many veterans as possible.  That information is readily available.

In Virginia, a panel of Federal judges have ruled that our districts must be redrawn, and I applaud this decision.  They found that one particular congressional district had been packed with minorities, insuring that district would be represented by a black Congressman but eliminating any influence those minorities might have in neighboring districts.  Unfortunately, that decision is being appealed.   So far, taxpayers have paid $224 thousand to defend "packing."

My complaint is that news coverage of this issue deals with the Republicans versus Democrats dynamic.  It is more important to see this along a moderate versus extremist dynamic.  A district that is 80% Republican is more likely to elect a Republican extremist than one that is only 50% Republican, which would be more likely to elect a moderate Republican.  The same is true for Democratic districts.

Since extremists or "true believers" cannot govern, it is more important that we elect moderates, be them Republican or Democrat.  Too bad the newspapers do not report it that way!

Monday, June 8, 2015

Entrapping Debt Collectors

Many decades ago, one of my college professors said that anybody who actually wanted to become a police officer was inherently unqualified for the job.  His argument was that beating up on your fellow citizens was so heinous and disgusting that no sane, mentally-healthy American would want such a job.  As I had a relative who briefly held such a job - without remorse - I have also wondered if the same logic applied to debt collectors.

Mike Cardoza was a fellow Rotarian with me and nearby-neighbor.  He was also president of a debt collection company.  In his new book, The Secret World of Debt Collection, Mike paints a very different picture of debt collectors.  Only once does he remind us that debt collectors are also human beings, but that is a weapon against them.

The world of debt collection is just another business, with millions of computer lines of numbers.  Like any business, it wants to pick the "low-hanging fruit" of people who actually want to pay their debts.  Debt collectors have one huge advantage, i.e., the overwhelming majority of people feel a moral obligation to repay their debts.  Isn't that silly?  Why do you have a moral obligation when you don't have any legal obligation?

The biggest disadvantage for debt collectors is the numerous and sometimes conflicting laws on consumer lending and consumer protection.  They don't want to fight cases that require too much time and attention.  So, Mike's advice is to be nice to the annoying debt collectors but get them to write letters to you, and be sure to save every one of those letters.  When in doubt, stall them -- sooner or later, they will violate some law, and there are many attorneys who love to sue financial institutions on a contingency-fee basis.

It is a short book, but I highly recommend it.  Mike has a certain missionary zeal to help debtors, and we should help him "spread the word!"

Friday, June 5, 2015

Get Off The Stage !!

Many years ago, a client went to Greece on vacation.  As a souvenir, he bought me a "genuine" set of Worry Beads, explaining it was my job to do his worrying for him.  It is ironic that much of that worrying has to do with where he bought the Worry Beads -- Greece.

There is no subject that I've spent so much time worrying about and so little time writing about.  That's because most of the worry is just free-floating anxiety, not worth writing about.  The economics are clear, i.e., overly-generous pensions and health care combined with lax tax collection and an over-valued currency.  They borrowed money to pay pensions, which is crazy.  The current left-wing government is adamant that social spending is just as important as debt repayments, which is also crazy.  After all, once you start spoiling a child, you can never stop spoiling him . . . or can you?

When this problem started percolating to the surface four years ago, it had the possibility of tearing apart the European Union.  That was akin to saying that the bankruptcy of Wisconsin would tear apart the United States.  Since then, tiny little Greece has whip-sawed stock markets around the world.  That is the part that has both worried me and annoyed me - its potential to roil stock markets.  After long last, this problem appears to be reaching a conclusion this summer, and I'll be happy, no matter what happens.  Some of the problem will certainly be "kicked down the road," but we are at a turning point.

The bonds of Greece are now held in strong hands that understand the problem.  The European Union will survive Greece's bankruptcy.  Let's just get it over, so we can start paying attention to fundamentals again -- like sales and profits and dividends, etc.

Thursday, June 4, 2015

Poison Rolls Downhill

I have belittled and ridiculed the U.S. Securities & Exchange Commission many times for being far more interested in the minor, technical details of the law than the true spirit of the law.  But, we still need them!

The current Chairperson is Mary Jo White, who was considered a tough, hard-nosed prosecutor of white-collar crime.  She is now being criticized intensely by both Republicans and Democrats.  Republicans are mad because she has brought a record 755 enforcement actions, and Democrats are made because she is "too soft on repeat offenders."  I fear she will be considered just another failure,  like the past two chairmen of the SEC, i.e., Mary Schapiro and Harvey Pitt.  It may be that this job has become impossible, due to mindless partisanship.  (If Presidents Bush & Obama got down on their knees, begging me to run the SEC, I would laugh in their faces.)

The SEC has a five-person board, which currently agrees on almost nothing.  They are appointed as either Republican or Democratic and faithfully, mindlessly vote the "party-line" on all things.  I think the impotence of Congress is spilling out onto important agencies.  One may argue we can do without a Congress, but we do need an SEC!

Due to his other legal troubles, there has been much conversation this week about the "Hastert" Rule of former Speaker-of-the-House Denny Hastert.  This rule says that no vote can be taken in the House until the "majority-of-the-majority" permit it.  This keeps votes being taken on proposals brought by the minority or, in this case, the Democrats.  Blaming the dysfunction of Congress on Mr. Hastert is short-sighted and may be a case of "piling-on."

I suspect more blame can be laid at the feet of Newt Gingrich, a prior Speaker-of-the-House, who cautioned members of his party to avoid members of the other party.  They should 'hang with their own kind."  As a small child in the DC area, I remember being told how members of Congress would call each other names during the day but drink together in bars at night.  That practice stopped under Newt Gingrich.

In fairness, Mr. Gingrich points out that name-calling and hostility have always frequented the halls of Congress, and he is right.  But, does it have to frequent the bars and restaurants as well?  A more important point is that we have been through periods of impotence before and always recovered.  That begs the questions of how we got through it and recovered.  We need to do so quickly!

It is painful for me to admit this, but we do need the SEC, as well as the other agencies that are being poisoned . . .

Wednesday, June 3, 2015

Unstable Consumer Staples

It has been a decade since I took my father to the World War II Memorial on the Mall in Washington, DC.  I remember we discussed the fact that 6,000 members of the Greatest Generation were dying each day.  It was hard to get our heads around the idea of a generation suddenly shrinking so rapidly.

Now, there is increasing discussion about the babyboomer generation, that is also shrinking.  The speed of that shrinkage has now begun increasing more quickly.  Interesting, that discussion seems to have started and is still centered in the stock analyst community.  For example, babyboomers eat cheese from Kraft, corn flakes from Kellogg's, soup from Campbell's, and carbonated soda from Coke.  Later generations, particularly the millennials, increasingly avoid such foods.  Importantly, they are willing to dedicate a larger portion of their income to eating healthy, non-processed, organic foods.  This has huge implications for companies like Kraft, Kellogg's, Campbell's, and Coke.  While those companies are aggressively buying more natural food producers, it must be worrisome to them that the consumers of their main products are now dying, not unlike the cigarette manufacturers.

Portfolio managers refer to companies such as Kraft, Kellogg's, Campbell's, and Coke as consumer staples.  This means consumers will always buy their products, regardless of the economy.  For example, people will buy toothpaste and toilet paper regardless of the economy.  But, looking at consumer staples from a generational standpoint reminds us that those companies will not survive without evolving their product mix.

For an individual, Ronald Reagan once described Alzheimer's as the "long good-bye."  For a generation, General Douglas MacArthur once said "old soldiers never die, they just fade away."  It will take a long time for the enormous babyboomer generation to fade away, but it has begun.

Monday, June 1, 2015

Fox Focus

Never was when I expected to be asked to comment on one Fox News TV star interviewing another Fox News TV star.  Last week, Chris Wallace interviewed Mike Huckabee -- on Fox News, of course.  During that interview, Rev. Huckabee laid out his proposed tax plan to eliminate the overly-complicated Internal Revenue Code and replace it with a 30% consumption tax or national retail sales tax.

Critics immediately howled that this was "regressive," which means poor people pay a higher percentage of their income into taxes than rich people.  Those critics are correct!  If a person only makes $20,000 per year, it is likely the whole $20,000 would be subject to this 30% consumption tax, creating a $6,000 tax bill.  However, if a person is taking is making a million dollars a year and investing $800 thousand a year, then only the $200 thousand that he is spending on consumption would be subject to the 30% consumption tax.  The poor person would pay $6,000 in taxes each year, whereas the rich person would pay $60,000 in taxes or ten times as much as the poor person.  That is not regressive.  But, the tax rate on the rich person is only 6% while the poor person pays 30%.  The poor person pays a larger share of his income in taxes but the rich person pay a larger number of dollars.  That is regressive.

Is this fair?  Personally, I don't think so . . . but Huckabee offers a solution, called prebates, which is a repayment that occurs before purchase -- unlike rebates, which are repaid after purchase.  So, if we give our $20,000-a-year person $6,000 in prebates each year, then their effective tax rates become zero.  Some call that the largest welfare handout in history.

Without prebates, Huckabee's plan is definitely regressive and unfair.  With prebates, it could be an efficient and effective tax system.  The critical unknown is whether the prebates will actually be large enough to offset the regressiveness of consumption taxes.  Without that information, I do not know if Huckabee's plan is fair or not.

To coin a phrase, the devil will be hiding in the details . . .