Saturday, December 31, 2016


As we usher out 2016 and usher in 2017, my thoughts turn to difficult transitions.  Which is more difficult:  ushering a child into the world or ushering a parent out of it?

The processes of ushering in versus ushering out are very different.  The first is largely a happy process, while the latter process is difficult.

With a child, you enjoy watching them develop their faculties. With a parent, it is heart-breaking to watch them lose those faculties.

Most children learn to think and reason better with time, but only until they become aged and the trend reverses.

Most children view the world and try to adapt to it.  Parents are often held hostage by the things they have already learned or experienced.

A child enjoys increasing control over their life.  A parent faces decreasing control.

You and your spouse have roughly the same emotional involvement with a child but not with a parent.  Ushering can be lonely.

While the measurement of difficulty is problematic, there is no doubt in my mind that it is far more difficult to usher out the older generation than usher in the new generation.

Parenting classes are commonplace for those ushering in kids.  What is the appropriate class for those ushering out parents and why are they not commonplace?

Friday, December 30, 2016

Drum Roll,Please

It is always amusing to see which blog posts were most popular during the year.  For 2016, the third most popular was "The Lehman Line" on October 22nd, when I worried about the probability of Deutsche Bank posing a systemic risk to our financial system.

The second most popular was "The Only Game in Town" on May 19th, when I explained why the stock market had been over-reacting so violently to anything and everything the Fed says.

Finally - drum roll, please - the most popular blog post of 2016 was "National Sock Day" on July 3rd, when I asked everyone to pull a dirty sock out of their dirty clothes hamper and carry it in their pocket until somebody bad-mouthed America on Independence Day and then stuff it into their mouth, explaining we already have 364 days to be negative.

Maybe, the lesson is that a little tongue-in-check humor is more needed than more serious discussion. 

Thursday, December 29, 2016

You Look Marvelous?

If somebody said to you that you looked really great today, would you feel good or would you immediately panic that someday you will not look great?

With the market hovering near all-time highs, you would think people would feel good.  Instead, "all-time high" must be some code word for immediate crash.

The market has been hovering just below the 20,000 milestone for ten days now.  Wednesday, it actually had a real "down" day.  Even interest rates dropped.  The sky is falling!?!  This means nothing, and I expect Thursday and Friday will be down days as well.

There is a well-discredited theory on asset allocation that says 90% of investment performance is a reflection of your asset allocation between stocks and bonds.  It is still part of the conventional wisdom for pension funds and institutional managers.  If your allocation is the commonplace 60/40, then your portfolio should be 60% stocks and 40% bonds.  If the stock market rallies and your stocks are now 75% of the portfolio, then you must sell stocks (driving down the price of stocks) and buy bonds (driving up the price of bonds, which drives down the yield on bonds).

Even though January is historically the best month of the year, the first week is often weak because investors wait until the new tax year before incurring capital gains taxes.  It will probably be somewhat worse this time, as investors are expecting lower capital gains taxes with the Republicans in power.

So, when the Dow does break 20,000, will you enjoy the moment or start looking for the apocalypse?   

Wednesday, December 28, 2016

Cost of a Strong Dollar

With the U.S. being the only nation that is actually raising its interest rates, it is not surprising that foreign savers are buying dollars, to move their savings and take advantage of the higher rates here.  However, the dollar has increased almost 5% over the last year, making dollars more expensive for foreigners to buy.  So, expect foreign inflows to decrease.

A strong dollar, that makes American-made products more expensive for foreigners to purchase and import into their countries.  Not only do those higher prices increase their level of inflation, it reduces our exports, which is a bad thing for us.

Since a great deal of foreigners' debt is dollar-denominated, that means foreigners must use an increasing percentage of their income to buy enough dollars to pay those loans.  That is true for governments, businesses, and a surprising amount of home mortgages. 

5 Cartoons: This Week on Wall Street - emerging markets cartoon 12.19.2016

One warning for U.S. investors is that all this becomes a "witch's brew" of inter-connected problems.  Which nation has the right combination of decreased spendable money with current credit needs and rising inflation?  Somebody is going bust, but who?  

It has been a long time since I have been this bearish on emerging markets, but that just means a buying opportunity is approaching.

Tuesday, December 27, 2016

Better In Theory

I have been a fan of Ayn Rand for a half century and think I have read everything she ever published.  She is the mother of Libertarians and their philosophy of the rugged, determined individual standing against the forces of conformity in general and government in particular.  That is not surprising considering she was a Russian refugee from Stalin's repressive regime.  Her vision of mankind dovetailed nicely with the existential image of every individual is an island, immeasurably alone.  I was enamored with her and was not alone in that feeling, because only the Bible has sold more copies than Ayn Rand.  She is that important!

Over time, I realized that her philosophy worked better in theory than in practice.  A world of individuals trying to be uncooperative is not a world that functions efficiently.  Her philosophy became one distant end of a continuum.

So, it is with some concern that I see so many of the President-Elect's appointees are Ayn Rand disciples.  Besides Trump himself, other disciples include the incoming Secretary of State Rex Tillerson, the incoming Secretary of Labor Andrew Puzder, and the incoming CIA Director Mike Pompeo.  That ignores the existing and powerful Speaker of House Paul Ryan, who gives Ayn Rand books to everybody in his office.

How might the nation look different under Ayn Rand principles, you ask?  She didn't believe in charity.  Poor people are poor because they are weak and should not expect job-creators to make them strong.  Because we are a strong nation, the world is ours to plunder.  She was also a proud atheist, putting church deductions at risk of losing their tax advantage.  Regulations might be enforced less vigorously.  Nobody knows.

I love Ayn Rand in a philosophy class but not in a political office . . . any political office!

Monday, December 26, 2016

2016 Lesson Learned

The last week of each year is probably the most intellectually satisfying week of the year.  It forces introspection, because it is both retrospective and prospective - a retrospective look at the year-ending and a prospective look at the year-approaching.  It begs the question of what did you learn this year that will help next year?

For 2016, my love of and my distrust of numbers crystallized and clashed.  The increasing difficulty of pollsters is only one example.  They were wrong on the U.S. election.  They were wrong on the BREXIT vote in the UK.  Even the legendary bookmakers in London were wrong on both!  The conventional wisdom is that millennials are under-counted, since they have gone wireless and have no land lines for pollsters to call.  Certainly, that is part of the problem.  Another is the refusal of some to share their opinions, either distrusting the pollsters or protecting the sole privacy zone in today's world, i.e., the space between their ears.

Republicans accuse Democrats of practicing "identity politics" or appealing to particular voter-blocs instead of appealing to all Americans.  Maybe?  Or maybe, there are 325 million individual voting blocs?  Maybe, Americans are just too self-isolated or too atomized to do more than ricochet off other atoms.

Polling is not the only business experiencing problems with numbers.  Public distrust of economic data has never been so high.  Few believe the data showing there is only minimal inflation.  The stage for this distrust was set by political parties, who didn't like whatever the data suggested.  Conspiracy theories are always so easy to believe and so hard to disprove.  But, there is more to this distrust.

The conventional wisdom is that our techniques for economic measurement are based on an industrial economy, not an informational economy.  Maybe so, but the volatility of that data suggests an unstable relationship between the data of an industrial economy and that of an informational economy.  We are rapidly reaching the limits of direct measurement without continuous measurement.

For 2017, I will continue to study the numbers, because I love them.  However, because I also distrust them, I will rely more on ad hoc focus groups to form conclusions.  Now, what will 2017 teach us?

Friday, December 23, 2016

2017 Transitions

The under-appreciated research department in the over-appreciated investment house of Goldman Sachs list four themes or transitions during the next year.  They are  (1) globalization transitioning to populism, (2) monetary policy transitioning to fiscal policy, (3) regulation to deregulation, and (4) stagflation to inflation.  These are not minor transitions and will take longer than any one year.  We have reached a "tipping point."

First, it pains me to see globalization get trashed, just because politicians wanted the immediate benefits of it but wouldn't pay the long-term costs of globalization, which include retraining and relocation.  The baby is definitely going out in the bathwater!

Second, I'm thrilled at the prospect of having a vibrant fiscal policy as an economic tool once again.  We have relied too much for too long on monetary policy alone.  This transition is a good thing.

Third, the debate over regulation is like watching a pendulum swing and forth and is equally as boring.  Republicans invariably complain about any regulation, while Democrats have seen very few regulations that weren't absolutely necessary.  Both are right, and both are boring.  Arguments about regulations must be specific to the particular regulation.  Yawn . . .

Lastly, the expected transition from stagflation to inflation is more interesting.  Consumers see a slow-growth economy with rampant inflation, even though that view of inflation is not justified by the economic data.  Goldman Sachs obviously sees the growth rate improving and reinvigorating inflation.  Along the continuum of deflation-stagflation-inflation, deflation is the most pernicious and inflation is better than stagflation.  So, relatively speaking, this is also a good thing.

All-in-all, I hope they are right!

Thursday, December 22, 2016

"It is different this time" . . . ?

As we enter the brave new world of Donald Trump, it is useful to assess what still makes sense and what does not.  This graph shows the PE ratio since 1900.

The PE is the market price of a share of stock divided by the earnings-per-share of that stock.  Stocks with a high PE ratio are considered "expensive" while those with a low PE ratio are considered "cheap."  It is widely used and often discussed.

Looking at this graph, we see that the stock market has moved above the red line, making stocks at today's prices expensive.  Should you sell some stocks or just get out of an over-priced market altogether?

 Chart of the Day

There are a couple of things that skew this discussion.  First, it is based on earnings-per-share over the last twenty months.  But, that was during the earnings recession that we are now exiting.  In addition, Trump is promising a stimulus program and will probably deliver, which should increase earnings-per-share.  At this point, it is problematic whether his tax cuts will boast GDP like Reagan or just add to the deficit like Bush II.  Either way, corporate profits should benefit for the foreseeable future.  Reducing regulation should also improve corporate profits.

Importantly, stocks should benefit from rising interest rates.  This is a rare circumstance where stock prices rise with interest rates, but little has been normal since our economic collapse in 2008.  Bond prices are incredibly inflated, due to the low interest rates.  As those rates rise, the value of those bonds will fall.  As money flees bonds, the vast majority will move into stocks.  This is often called The Great Rotation from bonds to stocks and will drive the price of stocks up even more.

I have written often about the risk of another derivatives blow-up like 2008.  Considerable progress has been made by regulators to lessen this risk but it still remains.  Because most of this regulation has been an international negotiation, I don't think Trump can abrogate or un-do much of this regulation but will be watching it closely.

All of this reminds me of the sales pitches we heard prior to every economic collapse -- "It is different this time."  Take PE ratios as an example.  The higher the ratio, the more expensive the stock is.  That doesn't change!  Following the economic collapse, we have been a one-armed fighter with only monetary policy, which has literally saved us.  Finally, we may have the the other arm, i.e., fiscal policy.  These economic times are not normal, and things are indeed different . . . for awhile.  The importance of PE ratios will remain, but let's look forward a year or two but no more.  It is different only in the short term, not the long term.

This economic recovery has been a slow and ponderous, like a 6-hour marathoner, since 2008 but may finally be picking up speed over the next few miles.  Enjoy!

Saturday, December 17, 2016

Paging Ronald Reagan . ..

When I got out of the Army, I was well-steeped in the core belief of Special Forces that "the ultimate weapon is not the atomic bomb but is a guerrilla fighter."  It is the belief that isolated, unpredictable acts of savagery can bring down a nation more cheaply than a fleet of B-52's.

Also, when I got out of the Army, I knew my future was in economics and recall standing in the hallway talking to a professor.  When I shared that core belief with him, he said "the ultimate weapon is economic power."  He believed no nation could afford sustained military power without sustained economic power.

When Ronald Reagan was President, I thought a great deal about the professor's comments.  Reagan started an arms race that Russia could not win.  Milkail Gorbachev was the last General Secretary of the USSR and was forced to capitulate, sealing the collapse of the USSR.  Out of those ashes, modern-day Russia arose, but I question whether it has learned the lesson my professor taught.

Because it has such a large supply of nuclear warheads, Russia has more power/influence externally than internally.  Putin is a major player on the world stage today.  Things look good for him.  His popularity is far greater than any US president since 9-11.  While stock markets for the emerging markets are down 6% since the US election last month, the Russian stock market is up a stunning 16% -- an irrational difference of 22%.

Putin has made no fundamental economic change.  The Russian population is actually decreasing, as the death rate from diabetes, suicide, and alcoholism soars.  Actual unemployment is estimated in excess of 10%.  The economy is just as much of a "one-trick pony" now as it was in 1984 and is just as vulnerable to the price of oil as Saudi Arabia.  Flooding the world with shale oil now will hurt Russia more than sanctions.  In addition, Russia views technology not as a productivity tool but another foreign policy tool.

Russia is rotting from within, just like the USSR did.  This year, it has only the sixth largest defense budget and is expected to drop to seventh place next year, as it falls behind France.

Some people argue that Russia and North Korea leaders have the same psychological profile, i.e., a pathological need for international respect -- to be feared and consulted with.  Like my late mother always told me, respect has to be earned.

Thursday, December 15, 2016

0.25 and 20,000

Q. - What do these two numbers have in common?
A. - Neither really matters!

Yesterday, the Federal Open Market Committee of the Fed decided to raise short-term interest rates by a quarter of one percent.  That is the same thing they did in December of last year, when they incorrectly predicted three more rate increases in 2016, just like they predicted three more in 2017, which also will not happen.  There is always an immediate negative reaction that interest costs will decrease profits, pulling down stock prices.  However, if any company has not already refinanced their long term debt by this point, their stock deserves to take a dive.

An interest rate increase has other consequences.  With historically low interest rates worldwide, this increase will cause the dollar to strengthen, making American-made products more expensive for foreigners to buy, hurting our exporters.  Additionally, with $18 trillion in debt, a quarter point increase equals an increase in spending by $45 billion per year.  I don't recall anybody in Congress proposing such a large increase in spending?

More importantly, I think this rate increase is another long-overdue step toward normalization. where the Fed will have "dry powder" for the inevitable next recession.  That is a good thing!

Probably before year-end, we will see the Dow reach 20,000 for the first time.  It only needs to rise another 1% to reach that milestone, but would you really care if the market went DOWN a mere 1%?  It is just another number and doesn't really matter.  My concern is that it will receive a great deal of press attention, encouraging "Joe Sixpacks" to start "playing" the market.  Professionals don't like to see "dumb money" come into the market.  It is the final bit of froth before the market gets too frothy.  That is not a good thing.

Wednesday, December 14, 2016

Jumping Over Trump Tower

4 Economic Signals That Suggest U.S. Growth Is Accelerating - us economy

Traditionally, presidents receive more blame than they deserve for bad economic times and more credit than they deserve for good economic times.  While President George W. Bush can be fairly criticized for other things, he has received more blame than he deserves for the Great Recession of 2008.  After all, he had little to do with the financial deregulation of the 1990's or the housing bubble, especially since Greenspan and Bernanke were both telling him there was no problem.

Conversely, President Obama will be given too much credit for the good economic times.  He took over at the bottom of that recession and rode the recovery up.  In fairness, he tried to do much more but was completely blocked by Congress.  Thank God for autopilot!

All presidents like to pretend they are Superman.  At some point in the not-too-far future, President Trump will be taking credit for the good economic times we're now enjoying.  Let us not forget that the stock market is already reaching record highs, and that the economic data has become relentlessly good.  For example, GDP growth in the last quarter was a healthy 3.2%.  Last week, we learned that consumer sentiment is the highest since the internet boom of the 1990's.  Yesterday, we learned that small business optimism has jumped sharply and is finally back above its long term average.

But, even autopilot needs adjusting at some point.  We desperately need revamping of our tax code, trade policy, immigration policy, healthcare, etc., but have been drifting on autopilot for too long.  I pray that President Trump is more than a pompous, thin-skinned boy, who thinks he is Superman.    

Tuesday, December 13, 2016

Chicken? Or Egg?

As EVERYBODY knows, the stock market is booming!  Some people think America has finally hit the Reset Button.  Some think this booming market is merely a result of the traditional good-feeling around a White House rotation to a new president.  Some think it is just a another "Santa Claus Rally" but one on Trump steroids.  Some think it is the justifiable belief that corporate tax reform is at-long-last a certainty.  I think there is clearly some truth to all-of-the-above, that is not the whole story.

Because the economy has not gone into recession since 2008, most people didn't even notice that business has been in a "profits-recession" for the last year and a half.  In other words, there has been little if any growth in profits -- we stalled.  However, that ended in the third quarter of this year.

For 2017, per-share S&P earnings are expected to be $123 on a GAAP basis.  This reduces the stock market's PE ratio to a fairly-normal 18 times.  That makes the stock market expensive -- but not very expensive.

It may be the old "chicken-or-egg" argument.  Did the bull market cause consumer sentiment to reach the highest level since the internet bubble of the late 1990's?  Or, did the very good consumer sentiment cause the bull market?  

Sunday, December 11, 2016

Limits of Rivalry

Why can't dogs and cats just get along?

I attended a viewing party for the classic Army-Navy football game yesterday.  That rivalry is far more than just another college game.  For the cadets of West Point and the midshipmen of Annapolis, it is the only match-up that really matters.  Either team would gladly lose every other game IF they could just win this one game.  The rivalry is intense!

During the game, Army fans cheered whenever the Navy quarterback got sacked, and Navy fans screamed "kill him" whenever an Army fullback broke through the line of scrimmage.  Whenever one side scored, the other side pulled out the rule book and tried to weaponize it.  The air was thick with insults of all varieties, including a few four-letter words.  Yet, when it was all over, everybody shook hands, slapped each other on their backs, and said "great game!"

So, why can't Republicans and Democrats just get along?

Is it because elections are more important than games?  That should only make it more important that they do get along?  Professional campaign managers certainly see it as just another game.  Is it because election campaigns are so long, more than a year?  Possibly, but some teams will prepare all season for just one game.  Is it because of the corrupting influence of money in politics?  College sports is also awash with cash.  Or, is it because of the media, which needs to fan the flames of controversy in order to sell advertising?  I think so . . .

I am hopeful that Trump's election may have scrambled the traditional continuum of Republicans versus  Democrats . . . of Right versus Left . . . of Red versus Blue . . . of active government versus passive government?  Trump's coalition of working-class "victims" and businesses weary of regulation and hard-core Republicans may prove more permanent than expected.  The substitution of the religious-right with the working-class may prove durable.  But, where does the religious-right go?  
Maybe the "new" Republicans can get along with the "new" Democrats.  As every homeowner with pets can tell you, dogs and cats can actually get along quite nicely.  So can Republicans and Democrats!

Even if they cannot behave as well as dogs and cats or cadets and midshipmen, scrambling the  political alignments may be healthy for America.

Saturday, December 10, 2016


Gray-haired readers may remember the brilliant NBC show during 1964 and 1965, hosted by David Frost, with the clumsy name of That Was The Week That Was or TWTWTW or TW3.  Sometimes, a weekly perspective helps, so here goes . . .

On Monday, we learned that the Institute of Supply Management's closely-followed Non-Manufacturing Index reached 57.2, the highest this year.  We also learned that economists no longer predict England will go into recession, as a result of BREXIT.

On Tuesday, we learned that our trade deficit increased more than expected, reflecting the increasing strength of the dollar.  We also learned that factory orders have increased four straight months, which is most unusual.

On Wednesday, we learned that the hiring rate is slowing, presumably due to the tightening labor market.  More interesting, we learned that the number of workers who quit their jobs is decreasing, presumably because their employers are taking better care of them.  We also learned that the growth in consumer credit is slowing down.

On Thursday, we learned that small business optimism has jumped 26 points this year.

On Friday, we learned that the ECB will remain "acommodative" or keep interest rates low and the money supply increasing.  The European Union may eventually collapse but certainly not this week.

So . . . That Was The Economic Week That Was . . . a pretty good week, I'd say!

Friday, December 9, 2016

Enough Already !

Historically, the stock market rallies, following a presidential election, until the inauguration in January, when the dismal political reality arrives.  If Clinton had won the election, I suspect that rally would have been minor, as the market already expected her to win and had priced that into market prices.  If Trump won, I predicted the market would experience a sharp dip and a quick recovery.  In fact, it was sharper and quicker than I predicted but still directionally correct.

This rally is stronger than normal.  The reason is that gridlock lost!  This Trump rally would have been much weaker if Democrats had held onto the Senate.  If Democrats had swept the White House, Senate, and House of Representatives, we would also have seen a strong rally.  However, the new CNBC survey shows Republican voters care more about economic issues than Democratic voters.  That is the reason that the end of gridlock by Republicans produces a stronger stock market rally than the end of gridlock by Democrats.  Investor confidence has jumped 17 points since the election.

I don't know if this rally will be longer than normal.  But, I can guarantee the rally will run out of steam in the near-future, because Trump cannot count on the House Republicans.  If he can "triangulate" like Bill Clinton, creating a coalition of moderate Democrats and moderate Republicans, Trump can actually accomplish something.  That will revive the by-then-dormant "Trump Rally!"

For now, the market is reflecting rising expectations, but there is no difference between realistic rising expectations and unrealistic rising expectation.  We are now expecting too much too soon.

So, don't get too excited when this frenetic rally corrects, because that is normal.  Just enjoy the ride!

Tuesday, December 6, 2016

Need Sunglasses ?

It was President Harry Truman who famously begged for a "one-armed economist."  He was desperate for economic advice that did not end with "on the other hand."  He needed hard actionable advice, not polite intellectual advice.  I suspect he was seeking advice from academic economists, not business economists.

Members of the National Association of Business Economics are used to giving actionable advice, and I have been a member for many years.  I don't always agree with their consensus, but I do follow it closely.

The latest survey found the election of Trump will be mildly beneficial for the economy and increased their projection of GDP growth from 1.6% to 2.2%.  In a stump speech, Trump said he expected 3.5% if he was elected.  I hope so!

Asked what is the most important thing the Trump administration can do to stimulate GDP growth, 40% replied infrastructure spending, 36% replied tax reform, 15% replied regulatory reform, and a mere 4% said immigration reform was the most important economic stimulus.  I agree!

They remain unworried about inflation, increasing from 1.3% this year to 1.9% next year.  I hope so!

Housing starts should increase from 1.2 million this year to 1.3 million next year.  I hope so!

Reflecting the stronger dollar, they expect the trade deficit to increase from $540 billion last year to $550 billion this year and $585 billion next year.  (Hey, do you want a strong dollar or not?)

Few expect a recession in the next two years.  I agree!

My perspective is that the stock market is getting ahead of itself but not greatly.  The increased profits from economic stimulus will not appear until 2018 at the earliest.  While not ignoring the continuing concern of a "Jim Fixx" moment, I see no recession in the near-term.  Infrastructure spending is a great Keynesian economic stimulus.  Tax reform is a great Supply-side economic stimulus, if it works this time.  Since that is unknowable at this point, I will just enjoy the sunny economic weather for now.

Friday, December 2, 2016

Weekend Worry Assignment

Some people are just wired to worry, and nothing worries them more than NOT knowing why they are worried.  Take a look at the recent U.S. economic data:

1.  The ISM data shows manufacturing, long thought dead, is actually "firming".
2.  Construction spending is also bouncing back.
3.  Consumer Income, Consumer Confidence and Consumer Sentiment are all increasing.
4.  Third quarter GDP growth was a surprisingly solid, robust 3.6%.
5.  Existing Home Sales are up.
6.  Unemployment and inflation are both low.
7.  And, did I mention that the stock market is close to record highs?

Of course, there is a recession somewhere out there in our future, -- there is always a recession in the future -- but it is not in the foreseeable future.  So, that is at least something to worry about!  In addition,we still remain vulnerable to another "financial heart attack" from the murky, unregulated world of derivatives.  So, that is something else to worry about.

If you are wired to worry, here is your homework assignment for the weekend . . .

Sunday, the Italians will decide whether to take a second step to rebuilding their nation.  The first step was liberalizing some of the highly-restrictive work rules last year.  The election on Sunday could end the perpetual gridlock of the government, where there have been ninety different administrations in the last century.  The vote is nothing more than a vote on wearing a strait-jacket or not?  Also on Sunday in Austria, another extremist ideologue will likely be elected President.

Following the near-death experience of Greece and Cyprus a few years ago, the Brexit vote in June, the pending "Frexit" vote in France,  Sunday's two votes may determine whether the Eurozone will survive.  The stakes are not small.

If you are wired to worried, stop worrying about the US economy and start worrying about the Eurozone economy . . . starting Sunday.

There!  At least, you now know what you are worrying about . . . don't you?

Tuesday, November 29, 2016

The Joy of Stimulus

The Organization of Economic Cooperation and Development (OECD) was not created for the sole purpose of criticizing the United States.  It just seems that way.

It is an outgrowth from the Marshall Plan, which oversaw the allocation of American aid to rebuild Europe.  Based in Paris, it was officially established in 1961 with 35 member-nations to "compare policies."  It has traditionally painted a picture of poor economic prospects, to encourage more assistance from the developed nations, like the "selfish" United States.

In the first major economic projection since the gridlock-ending U.S. election this month, the OECD has published a remarkably optimistic projection.  It projects world economic growth will rise from 2.9% this year to 3.3% next year and 3.6% in 2018.  For the U.S. economy, it projects growth will increase from 2.1% year to 2.3% next year and 3.0% in 2018.  As the President-Elect would say, this is HUGE!

It also predicts U.S. unemployment will fall from an already low 4.9% to 4.5% next year, with inflation rising from 1.2% this year to 2.2% in 2018, which will allow the Fed to increase interest rates from 0.5% now to a still-low 2.0% by the end of 2018.  All this good news is a result of Trump's stimulus plan, which he sees as Supply-side and which the OECD sees as Keynesian.

Elsewhere, it projects slightly slower growth in Britain and China.  The euro zone growth will only increase from 1.6% this year to  only 1.7% next year.  The difference between them and the U.S. is that gridlock has ended in the U.S.!  In other words, change has come to America . . . I hope!

My Prediction:  The OECD will be laying a major guilt trip on the United States in the near future to increase foreign aid.

Sunday, November 27, 2016

Emotional Void

It was early in 1960, when I was a boy, that I recall studying the photographs in the now-defunct Life magazine about the dashing young lawyer named Fidel Castro, who ousted a corrupt dictator named Batista.  My father told me that the corrupt dictator was taking from the poor and giving to the rich.  In later years, as an economist, I learned that such a problem was called the unequal distribution of wealth.  Castro's cure for this problem was not to redistribute wealth and/or opportunity.  His cure was to abolish wealth, which is what socialism does.

Two years later, I sat in class, looking out the window, toward the south, where I knew I'd see a mushroom cloud, as the missile crisis came to a head.  A decade later, there was even an intense military interest in Castro, and there were numerous assassination plots.   I was fully prepared to do my part.  It is fair to say we were obsessed with Castro.  However, as time passed, he faded into irrelevance.

When he died, I expected to feel some remorse -- remorse that we never administered the fate he deserved.  To my surprise, I felt no emotion about his death -- a typical existential reaction, I suppose.  For some reason, I feel obligated to despise the man but don't have enough emotion to spare or even to care about him.

He was the illegitimate son of a wealthy rancher and could have benefited from a continued Batista rule.  It is still unclear whether he was a closet-communist when he took power, but he seemed to convert quickly and conveniently.  Whereas communist leaders worldwide eventually accepted the futility of communism, Castro didn't.  This bright young lawyer became intellectually constipated after suppressing dissent and years of being surrounded by sycophantic yes-men.

Such a pity . . . what he could have done and what he did do to the people of Cuba!

Thursday, November 24, 2016

The Mystery of Thanksgiving

I remember hearing a sermon about Thanksgiving
The minister didn't give thanks . . .
for food or family.

he was thankful for
his freedom to worship . . . or not,
his freedom to pray . . . or not, and
his freedom to give thanks . . . or not.

He said the mystery of Thanksgiving is
how is it possible that
those with so much can be thankful for so little,
when those with nothing can be thankful for everything?

I like to think
whatever success that I have
resulted from being bright and working hard.
But, that ignores luck!

My good luck includes
good family, good friends,
and a great country!

Happy Thanksgiving!

Wednesday, November 23, 2016

Financing Stimulus

With the stock market in record high territory, you can guess the most common question:  Is it time to sell?  No, the stock market is high, but it is not nose-bleed high.  While the charts for the Dow, S&P, and Russell are all similar, the chart for the Nasdaq is easier to see.  Take a look at it:

Chart of the Day
You can see it has fluctuated within a "channel" since the global financial crisis in 2009.  At almost 5,400 now, you can see that a run to 6,000 is still within the channel.

So, from a technical standpoint, the market is not too high.  In addition, there is plenty of cash on the sidelines that has missed this strong rally, which means that the cash for increased demand is readily available.  In recent history, however, the stock market seems to react, make that over-react, to macro or larger environment.

For the last six years, the nation has merely treaded water. as Congressional gridlock stymied everything.  This was unnecessary, unfortunate, and unpatriotic.  What is driving the market now is the belief that Congress will finally approve a real stimulus plan.  Fortunately, gridlock has now been broken.  The Fed has fought a lonely battle to save the economy with its only weapon - Monetary Policy.  Finally, Congress may actually help, instead of obstruct, and actually use Fiscal Policy, like a stimulus plan.  

The battle to watch is between Supply-side Republicans and Austrian Republicans, not Democrats or Republicans.  Supply-side Republicans believe tax-cuts,especially to the affluent, gives a caffeine injection to the economy.  It is explained by a diagram popularized by Arthur Laffer.  Take a look at it:

You can see along the bottom axis that income tax rates can rise from 0% to 100%.  At each point on the bottom axis, go up to the red bell-shaped curve and then move to the left to see the government revenue at each tax rate.  In an ideal world, the tax rate should be at the midpoint, where government revenue is maximized.  If you are on the right side of the midpoint, government revenue will actually increase if you decrease taxes, according to Supply-side Republicans.  

So, why were the Kennedy tax cut and the Reagan tax cut successful, while the Bush tax cut failed, causing deficits to soar?  Presidents Kennedy and Reagan correctly thought the economy was on the right side of the midpoint, while President Bush was wrong.  Supply-side Republicans seem to think we are always on the right side.

Austrian Republicans are old-fashioned Republicans who follow the Austrian school of economics.  To get a visual understanding of what Austrian Republicans see, go to: 

Do you want to finance a stimulus plan with tax cuts or deficits?  Can we afford a mistake by assuming a tax cut will NOT increase deficits?  A failed Supply-side tax cut is nothing more than Keynesian economics!

Tuesday, November 22, 2016

Long-Running Debate

One of the longest running debates in the investment community is whether passive investing is "better" than active investing.  Passive investing involves trying to match a stock market index, such as the S&P 500 or the Nasdaq.  Examples would be exchange-traded funds (ETFs) such as SPY or QQQ.  Active investing tries to do better than the index.  Examples are most mutual funds.  ETFs are also cheaper than mutual funds.  Passive investing has "beaten" active investing for 22 of the last 26 years.  Is that proof of anything?

Active or passive should not be a binary decision, like voting.  Both types of investing have a place!

First, most studies of relative performance are based on the S&P 500 over some period of time.  That index is entirely large-cap stocks or big companies.  Those companies are better known to analysts, and their financials have been closely audited by many analysts for many years.  There is little new to be discovered.  However, studies of the relative performance of active and passive investing are much less convincing for small-cap stocks.  It is not imprudent to use ETFs for large-cap stocks and mutual funds for small-cap stocks.  And, I cannot say that ETFs or passive investing is ever appropriate for international stocks.

Another distinction is the stage of the business cycle.  The last 26 years have, on the whole, been in a bull market, where ETFs have the advantage, because they are 100% invested.  Mutual funds usually maintain a cash cushion, such as 5%, which is a drag in a bull market but a blessing in a bear market.  Mutual fund managers can increase their cash when the market is going down, exchange fund managers cannot.  I would rather have a mutual fund in a bear market than an exchange-traded fund.

A hard distinction to describe is value of expertise, which drives up expenses.  In passive investing, you are not buying any investment expertise.  In active investing, you are buying the advice of a portfolio manager.  Many investors find comfort in this.  I often find comfort in this extra expense but not in all cases.  The value of that expertise increases in a bear market, especially among small or mid-cap stocks.

Most of all, this debate is too broadly-brushed.  Even if passive investing is superior at all times for all assets, that does not mean that 100% of all ETFs beat 100% of all mutual funds.  For example, so far this year, 30% of all large-cap mutual funds have beaten ETFs, even though ETFs have the advantage with large caps.

Lastly, the "odd-lot" theory applies to this debate.  That theory suggests that small investors invariably do the "wrong" thing.  Today, we see small or retail investors getting out of mutual funds and piling into exchange-traded funds.  They bought the "sales-pitch" of passive investing.

Like life, investing ain't that simple . . . even passively.

Saturday, November 19, 2016

The Power of Positivity

Many of us were raised in austere, utilitarian households, where frivolity was discouraged.  Your life should also be austere and utilitarian.  There was little need for others in your life, aside from the obviously utilitarian value of procreation.   Hermits were respected.

Education also isolated us from each other by increasing our cynicism, especially the "scientific method."  Words are not to be trusted, because they can either reveal or conceal, and you might misinterpret them.  The same is true for numbers.  They can either reveal or conceal.  Those of us in the investment business start from the premise that everybody is a liar, until proven otherwise.

The classic imagery of exitentialists is a forlorn individual stranded on an ice floe, floating down a deep and wide river of negativity.  Obviously, people can easily become isolated by negativity, and our society is full of it.

Recently, I had the opportunity to attend an NFL football game in a huge stadium, for which I had paid an obscene amount of money, to be surrounded by a hundred thousand strangers all screaming in support of the hometown favorite.  The point was not to watch grown men play a silly, frivolous game, with a funny shaped ball, that meant nothing.  It was neither austere nor utilitarian.  It was simply fun and positive.  A hundred thousand people paid an obscene amount of money, not to watch some silly game, but to briefly escape all the negativity and embrace positivity.

Friday, November 18, 2016

"Smartest" Expectations

The "Smartest People on Wall Street" were also surprised by the Trump election but have recovered enough to issue ten themes or expectations that might inform your investing decisions:

  1. "Expected returns: Only slightly higher."  (Probably!)
  2. "US fiscal policy: A pro-growth agenda."  (Only in the short-term  . . )
  3. "US trade policy: Concerns are likely overdone." (Probably!)
  4. "EM risk: 'Trump tantrum' is temporary."  (EM = Emerging Markets)
  5. "Trump and trade: Hedge with RMB."  (RMB = Chinese currency)
  6. "Monetary policy: Focusing the toolkit on credit creation."  (Leading a horse to water . . .)
  7. "Corporate revenue growth recession: Signs of inflection."  (Signs of ending already.)
  8. "Inflation: Moving higher across DM."  (DM = Developed Markets, like U.S.)
  9. "The next credit cycle: Kinder and gentler."  (Thanks to Dodd-Frank?)
  10. "The 'Yellen Call' 2.0: Now with contingent knock-in."  (Only if inflation surges.)
Now that you know what Goldman Sachs thinks, what do you think and why?  
Now, what will you do with that information?

Wednesday, November 16, 2016

Historical Clue

We tend to confuse normal business cycles with rallies.  A business cycle reflects the expansionary and recessionary phases of the economy, usually in the neighborhood of four-to-six years.  A rally refers to a recovering stock market (which should not be confused with economy) that occurs after a 30% decline in stock prices.  In the last 116 years, we have seen thirteen rallies, averaging about nine years each.

Chart of the Day

You can see the rally in the Dow since the bottom in March of 2009 is about average in duration but much weaker than the average rally, despite setting a new market high yesterday.  The bottom line is that history gives us no reason to suspect a market collapse is due.  There is still plenty of room for the bulls to run!

Tuesday, November 15, 2016


The Market Price (MP) of a stock is equal to Earnings-Per-Share (EPS) times the Price-Earnings (PE) ratio.

Conservative pundit and serious Supply-sider Larry Kudlow is fond of saying that "corporate earnings is the Mother's milk of stock prices."  As corporate earnings increase, market prices should logically increase.  (EPS is nothing more than the corporate earnings divided by the number of shares of stock.)

A year and a half ago, corporate earnings stopped growing.  During the third quarter of this year, earnings finally started growing again, at a respectable 2.9% pace.  Analysts now predict 3.5% increased earnings in this quarter, followed by a whopping 11.4% and 10.5% in the first and second quarter of next year.

So, we should expect stock prices to rise, right?  Don't forget you have to multiply EPS times the PE to get the market price.  If a firm's earnings-per-share is $1, and I'm willing to pay 20 times the annual earnings of $1 per share, the market price of the stock is $20.  ($1 X 20 PE)  This is where investor confidence and sentiment influence the market price.  In recent years, investors have been willing to pay 18-20 times the EPS.  Of course, in times of economic fear, the PE may fall, pulling down market prices, even with rising earnings.  This is not one of those times.  We have rising earnings and rising optimism, which is the recipe for a bull market.

I think the election of Trump will increase the PE, as the "sugar-surge" of a robust fiscal policy (read: deficit spending) spreads across Wall Street, lasting at least until Springtime.  With complete control of government, the gridlock over fiscal policy (taxes and spending) will finally be broken, lending some badly-needed assistance to an over-worked monetary policy.

Party on, Garth . . .

Saturday, November 12, 2016

Change or Anti-change

Aleksandr Dugin is a Russian political scientist and has been given credit/blame for convincing Putin to invade the Ukraine.  Indeed, he has been called "Putin's Brain" by the highly-respected Foreign Affairs.  Born in 1962, his father was a lawyer and senior military intelligence officer, while his mother was a doctor.  Dugin eventually earned a PhD and taught at Moscow State University, until he was fired in 2014.  He is a very bright person indeed!

He is also alleged to be the intellectual genius behind Breitbart CEO Paul Bannon, who was Trump's campaign manager.  Of course, that allegation comes from Glenn Beck.

Still, there is a subtle reflection between the two men.  Dugin is a strong nationalist and advocate of returning Russia to the stature it had during the USSR days, arguing forcibly for the reunification of all Russian-speaking populations.  He wants Russia to return to its past historic greatness, and he is leading the way.  To appreciate how he clings to the past, consider that when the Russian Orthodox Church split over procedures and liturgy, Dugin stayed with the side avoiding any change.  Is he just another anti-change agent?  Or, is he pushing Putin to change Russian reality to the way it used to be?

Is he dangerous?  The reason he was fired from the University was that, when asked about what should happen to the non-Russia-speaking people in the Ukraine, he said "Kill them, kill them, kill them. There should not be any more conversations."  And, this is Putin's Brain??

I pray Dugin is not an intellectual godfather to Bannon, but it concerns me that Breitbart predictably rails against things having changed, always suspecting there is a Fifth Column of sneaky people behind every change.

If change for change's sake is a bad idea, then why isn't no-change for the sake of no-change also a bad idea?

Prediction Post-Mortem

As is normal, I've been getting some ribbing about my election forecast that an unexpected Trump victory would cause the Dow to drop 500 points before rebounding in a week.  This prediction was informed by the Brexit election in late June, where the pundits were wrong, and the FTSE tanked, only to be normal a week later.

What happened here is that the U.S. pundits were also wrong, the Dow futures dropped 800 points before the Dow finally closed up 250 points - a thousand point swing in one day.

So, my prediction was correct directionally - there was a violent drop.  I predicted 500 points but it was 800 points, which was due to the fact that the markets were still open in Asia and Europe, where Trump is far less popular.  My prediction was correct that the stock market would snap-back quickly, and even I was shocked just how quickly it actually snapped-back..  (I give some credit to Clinton's gracious concession speech, which was probably the best speech of her career.)

All-in-all, I feel good about my prediction,but I am very curious as to why polling has become so much less reliable than even a few years ago.  I recognize many young people don't have land-lines, making them difficult to contact and therefore to include in the survey.  Even when contacted, an increasing number of people refuse to participate.  Are people less cooperative?  Are people just less available, working in a 24/7 global economy?  Maybe, people suspect the caller is not really a pollster and don't trust them.  I like to think that people are finally discovering how little of their privacy they still have and choose, at the very least, to keep their political opinions to themselves . . . I know that I never talk to pollsters.  

Friday, November 11, 2016

Over-reacting to a Reaction ?

How can the stock market have a strong Clinton rally, followed by a strong Trump rally?

One explanation of stock market behavior is uncertainty.  When the market thought Clinton would win, uncertainty decreased, driving up the market.  But, didn't uncertainty increase with a Trump victory?  Maybe not?

Another explanation is the "true-believer" argument, i.e., that Republicans are rushing to put their money back into the stock market, after sitting out the Democratic administration.

Another explanation is that the market is getting sucker-punched into believing all the "come-together" platitudes from both parties.

Another explanation is that the market is celebrating the death of gridlock.  Who cares how infrastructure improvements are financed?  There is a lot of money to be made, before the infrastructure bonds have to be paid.  The miracle of capitalism is being reborn in America, and everybody better get on the train now, before it leaves the station?

Personally, I think this rally is getting too far ahead of the economy and hope that President-Elect Trump will begin managing expectations.  He never promised to make America great TODAY!

Wednesday, November 9, 2016

The Morning After . . .

I confess to believing that Clinton would win the election.  So did Wall Street!  The bloody aftermath today proves that.  Readers will remember that I predicted, in the unlikely event of a Trump win,  an immediate 500 point drop in the Dow, followed by a Brexit-like recovery in a week or two.  I still believe that the stock market will recover from this in a relatively short period of time.

One can look at the election as a loss by Clinton.  However, I see it as a loss of gridlock.  There is a chance that Trump will actually be able to do something, which Obama could not do for the last six years.  As an old infantry officer who learned that the failure to command was the worst thing that can happen when you come under fire, I am delighted to see gridlock die.  Whether you approve of the direction of the change that is coming, it will be refreshing to simply be moving again.

The lordly investment giant of Goldman Sachs said this morning that "broadly speaking, our fundamental economic outlook is unchanged."  Long-term, I agree . . . but it could get choppy, even scary, in the short-term.

They also said "we think the chances of the Fed raising rates in December have diminished."  Unfortunately, I have to agree.

Continuing, "we see near-term pressure on the dollar versus core markets and downward pressure on Treasury yields."  I doubt this!

"Heavy fiscal stimulus may support growth and inflation, and benefit targeted infrastructure sectors, but may face considerable opposition from Republicans."  There will be a genuine battle between the Austrian wing of the Republican Party and the Supply-side wing of the Republican Party.

"Trump's proposed tax cuts may support growth."  Watch the $20 TRILLION national debt skyrocket, at least in the short term!

If your candidate won, celebrate modestly.  If your candidate lost, celebrate being an American.  But, know that this too will pass .. ..

Saturday, November 5, 2016

Celebration of Hyperbole

Next Tuesday, I'll vote in a presidential election for the 13th time.  In every single election, it was described as the most important election in American history.  Yet, after every single election, America survived.

In every single election, my family has advised me that my vote should be for the "lessor of two evils."  In other words, there has never been a worthy candidate.  Still, America has survived.

The only certain winner will be the media which hypes election season to sell advertising and increase profits.  Election season is a commercial celebration of hyperbole.  America will survive hyperbole, I promise!

So far, only five clients have called me with election anxiety -- from four Republicans and one Democrat.  Cable news would therefore argue that 80% of worried Americans are Republicans.  So much hype, so little significance . . .

Months ago, I decided that Saturdays would be my news-free day each week, and I'm so glad I did, because I still have the sanity to know that America will survive this election!

Friday, November 4, 2016

Get Out !!

Some people get songs in their head and hear those songs constantly.  Some thoughts get caught in my head, and I wish I could get them out.

For example, Turkish President Erdogan said "democracy is like a street car - when you get to your stop, you get off."  What does that mean?  Where is your stop?  What is post-democracy?

The senior Republican senator from South Carolina, Lindsey Graham, said "there'll come a time when love of country will trump hatred of Hillary."  What does that mean?  You don't love America if you vote for Trump?  If I do love America, I will vote for Hillary?  And, Graham is a strong Republican.

The presidential campaign manager of Republican senator John McCain was named Steve Schmidt.  He said (paraphrasing him) "when fascism came to power in the 1930's, it was not because fascism was strong.  It was because democracy was weak."  What does that mean?  How do you recognize weakness in democracy?  When does democracy become too weak?  How would you recognize it?  How would you strengthen it?

Yogi Berra would be proud . . .

Why don't moderators in presidential debates ask these questions like this?  

Thursday, November 3, 2016

Get It Over With !

It's not nice to fool Mother Nature . . . nor the stock market, which hates uncertainty.

I've written that the stock market has believed that Clinton would win the election since late Springtime.  In fact, I predicted a 500-point drop in the Dow the next day, if Trump pulled-off an unexpected win.  During that time (except for the Brexit Bear in late June), the market has just bumped along . . . until recently.

With the latest DOJ surprise and the narrowing polls, the stock market is questioning the belief that Clinton will win, which explains the 7-straight days of small losses.  Confidence is seeping out of the market.  You can see the sharp downturn in this chart of the gray line.

Chart of the Day

The 500-point drop in the Dow may already be happening.  

If you want to fret, you'll remember this presidential election has been wildly unpredictable and so is the stock market.  If you want to celebrate, look at how the market has historically ended during election years . . . UP sharply!

Wednesday, November 2, 2016

Big Trouble in Big D ?

Back during the 1980's, I was a vice president with New York-based Citicorp, primarily lending for large commercial construction projects in Texas, whose economy was booming at the time.  I'm proud to have financed construction of the iconic Infomart with $92 million of strip-funded eurodollars (see pic), as well as the very first Wyndam Hotel.  There was so much construction that we joked the official state bird of Texas was the crane . . . as in the many construction cranes above downtown.  Of course, such hubris almost always ends badly, with overbuilt markets and falling prices, as it did in Texas.

When visiting Dallas last weekend, I had the eerie feeling that I had seen this movie before.  While I have not yet seen any analysis of construction completion schedules and annual absorption rates, I've seen enough to be very worried.

So, I was relieved on Monday, when I read that nationwide private commercial nonresidential construction was 1% less than last year, the largest decline in nine months.  Public construction dropped to the lowest level in the last 2.5 years.  I would wish for a larger decrease, except that commercial construction contributed such  a large portion of the 2.9% GDP increase in Q3.

It may be that commercial construction is slowing down because it is getting overbuilt, meaning the rental market is over-supplied with space.  Or, it may be that "cap rates" are rising.  Remember that the value of commercial real estate is largely determined by dividing net-operating-income by the capitalization rate, which normally rises with interest rates (assuming the cost of equity remains constant).  The market believes interest rates will increase next month, and an increasing divisor decreases value.  This is an example of the classic self-correcting mechanisms of capitalism, i.e., too much demand for money to finance construction raises the "cap rate", which drives down the value of real estate.

I don't relish another Texas recession, as that hurts our national GDP disproportionately, but will not be surprised if that happens.  More specifically, the same rise in capitalization rates that hurts Texas commercial real estate will hurt such projects nationwide.

A lesson from the past is talking . . . and I'm listening!

Saturday, October 29, 2016

Pesky Little Devils

I wish it wasn't so hard to get the cork back into champagne bottles!  After release of the latest report on GDP growth in the third quarter (Q3), showing it grew at an annual rate of 2.9% instead of the expected 2.5%, I was ready to pop the cork and celebrate.

Unfortunately, there were two devils in the details.  First, exports were stronger than expected.  But, wait a minute - how can exports be improved when the dollar is so strong?  The reason is soybean crop failure abroad caused increased exports of US soybeans.  The second devil in the details was that inventories increased, causing an increase in GDP.  But, wait a minute - is that good or bad?  Businesses increase inventories when they expect sales to increase and need the inventory to sell, so it must be good, right?  Maybe!  When customers decrease buying, inventories tend to build, so an inventory build-up must be bad, right?  We don't know yet, as economic data on the consumer is conflicting.  Stay tuned . . .

Now, I wonder if the inventory level for champagne is increasing or decreasing?

Friday, October 28, 2016

Enough = Enough

Did anybody notice that, while the stock market is leaking, the dollar has gained 2.6% so far this month?  This reflects market confidence that the Fed will raise interest rates in December.  But, it comes on top of a 36% appreciation since 2011.  The dollar has gotten too strong and presents a major headwind to US businesses trying to sell their goods abroad.  For the third quarter of this year, the current account deficit was 22% worse than Q3 of 2014.  Large changes in the current account deficit usually signal a top in currency exchange rates, which would be good for the stock market.

Normally, an appreciating currency reflects a strengthening economy, relative to other countries AND ignoring interest rates.  The US economy may be anemic, but it is not bad, especially compared to other countries.  The dollar is simply too strong.  This reduces the ability of the Fed to raise rates, as that puts more upward pressure on the dollar .  But, be careful what you wish for, as the price of oil will likely increase as the dollar weakens.

Maybe, it is time to book that European vacation . . .

Thursday, October 27, 2016

Guilt + Disappointment = Suicide

Everybody is aware that suicide is a major problem among veterans, averaging 20 dead veterans every day.  (A terrorist bomb killing 20 Americans every day would not be tolerated.)  Veterans are only 8.5% of the population but are 18% of total suicides.

A new study by the Veterans Administration showed something else:  60% of all suicides are age 50 or older.

We think of vets killing themselves as young men who are riddled with guilt over atrocities they saw or committed or unable to adjust to a non-violent world when they returned.  While the age group of 18-29 does have the highest rate of suicide per thousand veterans, that age group is small compared to other age groups.

The over-50 age group is a much larger group.  It is also the age when most people begin to realize their dreams will not come true - becoming disappointed and disgruntled both at work and at home.  The bad memories they carry become too great a burden when normal disappointment is piled on top.  The pain of living inside their heads becomes unbearable.

One ironic factoid:  68% of veterans kill themselves with firearms - a skill many learned in basic training.

Wednesday, October 26, 2016

A Difference Without A Meaning?

An unscientific survey by my untrained ear suggests there may be a nuanced difference in the adjectives that Republicans and Democrats use to describe each other.

Democrats describe Republicans as "stupid" or "Neanderthal," while Republicans describe Democrats as "bad" or "evil."  Which is worse - stupid or bad?

If racial diversity is a virtue, why isn't political diversity also a virtue?

Tuesday, October 25, 2016

For Your Listening Pleasure

We interrupt this nauseating presidential campaign to bring you this breaking news:

There is a big world out there!

In Iraq, the battle to retake Mosul is underway, with 100 thousand Arab soldiers rooting out 5 thousand ISIS members inside Mosul, the scene of the first dramatic victory by ISIS.  This suggests that Obama's strategy of making Arabs fight ISIS was a good strategy.

In Europe, the onslaught of Syrian refugees will affect their culture for generations to come.  This suggests that Obama's strategy of not using air power against the Assad government when they crossed the infamous "red line" was not a good strategy.

In Columbia, voters decided to continue the longest-running civil war in Latin America history, when they rejected the truce with FARC.  This suggests voters will vote against their best political interest.

In England, voters decided to leave the European Union, suggesting that voters will vote against their best economic interest.

In Myanmar, the explicit effort to jump-start small businesses demonstrates the lingering belief that capitalism can strengthen democracy, especially a nascent democracy.

In China, the Communist Party is meeting this week to increase its power to demand loyalty, suggesting that the political system of communism can withstand the economic system of capitalism, if the "people" are properly bribed.  (And, have you noticed that their currency, the yuan, continues to depreciate, suggesting an undeclared currency war is already underway.)

In Venezuela, there is widespread hunger - real, genuine hunger - and riots in the street, presenting a slow-motion train wreck.  This suggests that communism and dictatorships are not the same problem.  Communists know how to bribe the great unwashed masses of people.

In Russia, forty million people participated in a civil defense drill, suggesting a rebirth in the Cold War there, if not here.  We may not bomb each other back to the stone ages, but both may be returned to the pre-information age by a cyber-war.

More importantly, did you hear the unconfirmed rumor that  The Donald's hairdresser might be gay?

Sunday, October 23, 2016

Incentive To Binge

Discussion of most economic issues usually come from one of the three primary schools of economics, i.e. Classical or Austrian, Keynesian, or Supply-side.  But, the divide changes when discussing whether the Fed should be raising interest rates.  Austrian economists would want the budget balanced every year and would see an increase in interest expense as a threat.  Keynesian economists want the budget balanced over an entire business cycle instead of every year (even though the debt is never decreased during the "good" years).  Keynesians see an interest rate increase as causing an increase in the unemployment rate, because the increased interest expense of businesses will discourage new hires.  Supply-side economists are generally more of a one-trick pony, advocating tax cuts to solve all economic problems.  But, hidden among the Supply-siders, you will find Libertarians, who hate the notion of the government "interfering" with the economy.

Discussion of whether the Fed should increase interest rates is between hawks and doves.  The hawks want to increase rates, while the doves want interest rates to fall.  The doves are Keynesian, while the hawks are generally Libertarians, who think the low rates for so long has caused a misallocation of capital.  They are correct!

Because debt-capital, as compared with equity-capital, has been so cheap for so long, it is not surprising that the world has binged on debt,  The IMF estimates total worldwide debt, including governments, at $150 TRILLION today.  This is an increase from the 2007 estimate of $112 TRILLION and far more than the 2002 estimate of a "mere" $67 TRILLION.   Capital has been misallocated!

The hawks are not crazy.  They know rapid "normalization" or increases in interest rates will cause enormous harm to the world.  They also know it is time to stop digging the hole any deeper.  A quarter-point increase in December is a good step, albeit a small step, in the right direction.

Bring it on!

Saturday, October 22, 2016

The Lehman Line

Readers know I've been worried that the next "Lehman Moment" or Black Swan event, triggering a financial collapse, was more likely to come from Deutsche Bank (DB) than any other company in the current environment, and I have been watching it closely.

You'll recall this company is the largest bank in Europe, with a net worth of about $16 billion, who got fined $14 billion by the United States for sales practices of mortgage-backed securities.  The company was already over-leveraged with $164 billion in debt and, more importantly, had derivatives exposure of $43 trillion (which is bigger than the whole GDP of Germany).

The good news is that the U.S. Department of Justice has agreed to negotiate a smaller settlement, probably in the neighborhood of $5-6 billion.  In addition, there is a rumor that the Bank has entered into enough cross-agreements to reduce their derivatives exposure to "only" $20 trillion.  Their stock has now recovered to the level before the DOJ fine.

There is a rule-of-thumb that the tipping point in the spreads of credit default swaps (CDSs) is about 300 basis points, which was the tipping point when Lehman collapsed.  The CDS spread for DB is down to 130 points, meaning the DB counter-parties are now less fearful of a collapse.  This is all good!

Does that mean the danger has passed?  Absolutely Not!  There is still no indication that Germany's Merkel will try to recapitalize its largest bank, although most observers think the European Central Bank will eventually backstop Deutsche Bank.  But, nobody knows . . . for sure.

Does all this mean we can stop worrying about systemic collapse?  Never!

Thursday, October 20, 2016

Client Service !!

I'm proud of my wife!

We have an 86-year-widow who has been our client over twenty years.  This lady has enjoyed remarkable health and has never had any surgery.  Finally, she needed dental surgery and had some understandable anxiety about this.  My wife volunteered to stay with her the night before, to drive her to the surgery, wait for her, and spend the second night to make sure she was well.  Now, THAT is outstanding client service!

I'm proud of my wife!

Wednesday, October 19, 2016

Second Deadly Sin

For those gluttons of punishment, my latest quarterly column for Inside Business lives here: 

Better To Know or . . . Not

Different people like to use their financial planner in different ways.  Some see us a family CFO and consult with us regularly, which is our preferred role.  Other people see us as investment managers.  Still others see us as estate planners.  Some see us as budgeting experts.  We wear many hats, indeed!

One of our least appreciated roles is that of monitor - to be a vigilant lookout for potential problems.  Of course, it is sometimes painful to describe potential problems.  For example, how do you tell a healthy, rational person you suspect they are at risk for Alzheimer's?

Well, one way is to write a blog, listing the ten warning signs, which are:

1.  Memory loss that disrupts daily life.
2.  Challenges in planning or solving problems.
3.  Difficulty in completing familiar tasks.
4.  Trouble understanding visual images.
5.  New problems with words in speaking or writing.
6.  Confusion with time and place.
7.  Misplacing things and losing ability to retrace steps.
8.  Decreased or poor judgment.
9.  Withdrawal from work or social activities.
10. Changes in mood or personality.

So, if your planner hands you a copy of this blog, he/she is honestly concerned about you.

Don't you wish everybody was?

Tuesday, October 18, 2016

Losing Like A Man ??

Former P.O.W. John McCain has long been one of my political heroes.  When he was trashed last year by Donald Trump, I wrote that Trump was just another egocentric egomaniac and unworthy of consideration.  Don't forget -- when McCain lost to Obama, McCain never whined that the election was rigged -- because his love of country exceeded his personal ambition.

Al Gore became a political hero to me in 2000.  Even though he believed that he had won Florida and therefore the Presidency, he graciously conceded to his opponent, in order to end the nagging national uncertainty.  Never forget that more people voted for Gore nationwide than for Bush!  Yet, Gore never whined the election was rigged -- demonstrating that his love of country exceeded his personal ambition.

Donald Trump has become an existential threat to the United States, by "pre-whinning" to his supporters that they are being robbed of the Presidency by election fraud.  Even the reliably Republican Wall Street Journal said "there's zero evidence that the [election] process is compromised."

The beauty and magic of our democracy is the peaceful transfer of power.  If he fails to take his loss like a man and fails to instruct his supporters to respect the results, Trump could become the greatest threat to America since the Civil War.

My fear is that Donald Trump loves himself more than he loves our country.

Sunday, October 16, 2016

The Boglelization of America

I love Jack Bogle, and I love Harry Markowitz too . . . but I fear Kool-Aid drinkers.

Jack Bogle is the legendary founder of the Vanguard Group and father of many, many long cost mutual funds and exchange traded funds.  He is famous for minimizing fund expenses.  He is also famous to telling investors to "buy and hold" their investments, without regard to business cycles.

Harry Markowitz is the father of Modern Portfolio Theory (MPT) and won the Nobel Prize.  He is famous for determining that long-term investment returns are maximized and investment risks are minimized by spreading your portfolio across many different asset classes, such as big company stocks, small company stocks, real estate, bonds of all types, commodities, AND cash.  The trick is what percentage of your portfolio goes into each asset class, especially since that is a moving target.

While I subscribe to both theories, to some degree, I'm afraid the U.S. government fully subscribes to both theories.  If you don't subscribe to the "buy and hold "strategy of ignoring business cycles, the Department of Labor's new fiduciary rule, which starts taking effect next April, raises the question of whether you employ a "prudent process" in the management of client funds, as you have a fiduciary responsibility to do.  The same is true for MPT.  How do you manage the "optimization" of allocating across all the asset classes?  What "prudent process" do you use to optimize that allocation?

There is a difference between religious doctrine and conventional wisdom.  The theories of Bogle and Markowitz are conventional wisdom, but the government sees them as religious doctrine.  Enforcing these theories will limit originality and innovation among investment managers and make hedge fund managers even richer, because the movement of investment balances between asset classes (and therefore stock prices) will become more predictable.

I fear that the regulators will drink this Kool-Aid of investing, probably for intellectual convenience, and become "true believers."  May God save us from true believers!  At least crusty, old Jack Bogle knows he is a mere human . . .

Thursday, October 13, 2016

More Scary Than Halloween ?

My regular quarterly column will be published by Inside Business this weekend.  In it, I remind readers how much the stock market hates surprises, including presidential elections.  Being "the brightest kid in the class," the stock market concluded months ago that Clinton would win.

The point in my column is that I expect a dramatic fall in stock prices if Trump wins, but that it will be relatively short, just like the market drop after the Brexit vote.  Investors will realize a Democrat-held Senate would effectively neuter Trump, and the market drop would offer a good time to buy more stocks.  (Frankly, even a Republican held House would stop Trump from accomplishing most of what he has promised.)

But now, investors are afraid of a possible Democratic sweep of the White House, Senate, and House, effectively ending gridlock.  Investors are no more afraid of a Democratic sweep than a Republican one, but the investing environment changes when gridlock ends.  One reason that policy issues have been discussed so little during this campaign season is that policy positions don't matter during conditions of gridlock, because nothing gets done.  The sudden possibility of a Democratic sweep means Congress will actually do something, and we have to figure out what.  Immediately, health care stocks and biotech stocks have started crashing.  What sectors of the economy will benefit from a Democratic sweep?

It is not nice to frighten Mother Market, which was expecting gridlock under Clinton but may be getting actual action.

From my standpoint, there are so many needed things that have been bottled up by the impotent Congress for so long that I welcome a sweep by either party.  As an example, both parties agree that we need to update the tax code but cannot pass even the code changes that they both agree on.  There are numerous other examples of needed legislation, unfortunately.  Some will be stupid, and we will learn from those errors.  But certainly not everything!

As Nike says . . . Just Do It!

Wednesday, October 12, 2016

Paging Alfred E. Neuman

Cartoonists don't get the respect they deserve.  They illustrate reality in more stark terms.  They beg questions to ask.  They generate thinking and discussion.  Consider this one:

Recession cartoon 04.14.2016

Is the cartoonist saying -- the country is unaware that we are about to fall into a recession.

Is the cartoonist saying -- recessions are not uniformly bad, only the "o" part is bad, the "r,e,c,e,s,s,i and n" parts are not so bad.

Is the cartoonist saying -- is the pit bottomless?

Is the cartoonist saying -- one part of a recession is a financial crisis.

Is the cartoonist saying -- we need to whistle less and worry more!

Or, is the cartoonist saying -- I am both a pessimist and alarmist.

Or, is the cartoonist saying -- you fill in the blank!

Friday, October 7, 2016

Goldilocks Jobs Report

Today's "Jobs Report" was just hot enough to know the economy is still growing and just cold enough to keep the Fed from raising interest rates in November.  It was perfect!

Against expectations of 175 thousand new jobs created last month, the Bureau of Labor Statistics estimated only 156 thousand jobs were created.  That is still healthy but not healthy enough to overheat the labor market.  Better news is that both the average hours worked and the average weekly earnings increased.

Over 200 thousand people entered the workforce, but that still leaves 94.2 million of people who don't work.  Approximately half are students and the other half are retirees.  The Labor Force Participation Rate ticked up, showing 62.9 percent of Americans work, which is up 0.5 percent in one year, which is good.

So, if the labor market is so good, why isn't the GDP growing faster?  Because the stubborn U-6 level of unemployment is still 9.7 percent.  These are the unemployed, the under-employed, and those who work part-time because they cannot find full-time work.  Call them lazy, call them uneducated, call them victims of globalization, if you like.  But, they are a valuable economic resource that is being wasted.

Wednesday, October 5, 2016

24/7 Pollution

When we returned to Virginia Beach, we were looking for a church home and visited several.  During one visit, we stood up in the middle of the church service and simply walked out.  The pastor started telling church members how to vote.  While I defend his right of free speech, my value system does not permit religion and politics to mix.

When I watch a football game, I like to focus on the sport and don't care about somebody's political opinion.  While I defend the right of any rich quarterback to sit on his butt during the National Anthem, I wonder what manners his mother taught him.  My value system does not permit sports and politics to mix.

Last weekend, Virginia Beach held its annual Neptune Festival, including its famous sandcastle competition.  Naturally, somebody had to exercise their right of free speech by creating a political sand sculpture.  The good news is that the officials removed it, but the bad news is that the partisans feel persecuted because it was removed.  My value system does not permit beach festivals and politics to mix.

Go down to city hall and stand on a soapbox to force-feed your political opinions on other people, if you must.  My value system does not permit good manners and politics to mix.

Is there no escape?

Saturday, October 1, 2016

With All Due Respect

The huge investment bank of Goldman Sachs is the most respected bank on Wall Street, by Goldman Sachs anyway.  Regardless, I do respect the soothsayers in their research department.  Here are some of their latest forecasts:

1.  GDP growth in the U.S. will increase from 1.5% this year to 2.0% next year.
2.  Japan's will increase from 0.6% to 1.0%, while Europe and England continue to shrink slowly.
3.  China will continue shifting to a service economy, with GDP growth dropping slowly.
4.  Other emerging markets will grow quickly from 5.1% this year to 5.8% next year.
5.  The S&P 500 will be unchanged over the next 3 months and up only 2.2% over 12 months.
6.  European stocks will increase 4.0% over the next twelve months.
7.  Interest rates will increase about 60 basis points over the next year.
8,  The dollar will appreciate about 10% against the euro and 6% against the pound. 
9.  Oil will increase about 18% over the next 12 months to $57/barrel.
10. Gold and copper will drop 6.1% and 13.5% respectively.

I think they see the world economy going into slow-motion for the foreseeable future.  They are not forecasting any serious recession . . . nor boom times, which is hard to dispute.

Investors should ask themselves about their risk-reward perspective.  Assuming Goldman Sachs is right and the world is slowing down, has market risk gone down . . . or up?

Friday, September 30, 2016

Thinking The Unthinkable

It is not news that governments give out very generous pension plans.  Such generosity was originally considered a trade-off for relatively low wages compared to non-government workers.  That may have been a nice gesture then, but there are consequences now.

To pay the pensions, governments put aside a certain amount of money each year to be invested in a pension fund for the benefit of retirees.  The amount put aside reflects some assumptions about investment returns.  When their portfolio earns smaller returns, there is a deficit in fund.

Republican politicians rightly complain about our national debt approaching $20 trillion.  But, we need to pay more attention to a different debt of another $2 trillion, which is the amount of money that state and local governments need to immediately add to their pension funds.  Poor investment returns and low interest rates are the cause.  This means there is $2 trillion less to spend on roads, schools, colleges, health, etc.

Of course, one way to avoid such spending cuts is to cut the pensions.  There is actually some talk about this in Dallas.  Seeking to retire before these cuts happen, the number of police officers and firefighters retiring  this year is twice as many as last year.

Let me say that again . . . "cut the pensions."

As a retiree receiving a pension check each month myself, I would hate to see it reduced, but it might be necessary.  Should retirees like myself require spending cuts in roads, schools, colleges, and health just to keep receiving our full pensions?  Or, should we raise taxes on "job creators?"  Or, should we cut the pensions?  Or, should we stick our heads-in-the-sand?"

Thursday, September 29, 2016

A Gun-Free Death ?

I like guns and have lots of them.  Except when I travel by air, I am never without one.  Nonetheless, I believe this Second Amendment cult is stupid.  A country like Switzerland was safer, because veterans were encouraged to keep their rifles when they were discharged from military service.  A country like the United States is less safe when 99% of people have easy, legal access to small, more-easily-hidden pistols.

In my never-ending pursuit of continuing education credits, I attended a class yesterday entitled "Transfer of Firearms at Death."  Because the gun-cancer needs to be dealt with and because Congress will not deal with it, regulators are filling the void.

Effective July 13th of this year, the liability of executors and trustees has increased dramatically, whenever the decedent dies with a firearm.  They can face jail time for not realizing that pieces of guns (magazines) are considered the same as working guns.  They also must determine if the person who inherits the firearm is a legal recipient and document it . . . or go to jail?  To transport a firearm, the executor must complete ATF Form 4 or 5 and submit his/her photograph and fingerprints or . . . go to jail.

Do your executor a favor -- do NOT die while owning a gun, any gun.  Get rid of it before you die!

One sadistic smart-alec suggested transferring title of all assets into your trust - except your gun - and then appoint your ex-spouse as the executor . . .