Monday, May 30, 2016

Aging Agelessly ?

There are tests to measure how well a person understands the wide world of finance.  They are called financial literacy tests.  There are also tests to measure how confident people feel in their understanding of finance, called financial confidence tests.  Not surprisingly, both test scores rise as a person ages but only until a point, usually in the early 60's.

A new study out of Texas Tech University studied the spread between the two scores.  Once a person gets past age 60, their financial confidence continues to rise while their financial literacy starts to fall.  This appears to be true regardless of gender, ethnicity, or income level.  (The spread between the two scores increased the most in the area of insurance, as annuities are purposely made more and more complicated just to confuse clients.)

Naturally, this new study reinforced the perception of older people losing their mental sharpness.  However, I have three thoughts on that:

First, as any college freshman can attest, there is an art to taking exams, relying on different types of memory.  The lack of experience taking tests apparently catches up at some point after age 60, but that says nothing about intelligence, perceptional abilities, or judgment.

Second, older people have more trouble getting a good night's sleep.  An unrelated study from Uppsala University in Sweden noted that two rare proteins (NSE and S-100B) appear in the brain shortly after it has sustained even the most minute permanent damage and further noted those proteins appear after "just one night of sleep deprivation."

Third, the brain is just a glorified muscle.  If it is not exercised properly, it will atrophy or lose its strength.  After a lifetime of work that requires both brain-exercise and brain-discipline, seniors enjoy their well-earned freedom from that, but it is an unhealthy freedom.  One of the smartest people I know is 95-years-old and just as curious about the world as he ever was.  He is a perpetual student.

The best 25 cents I ever spent was in the bookstore of the Special Warfare Center in Fort Bragg for a cheap little poster.  It shows a wizened old First Sergeant, wearing his beret, saying "The mind is your primary weapon -- keep it working!"

It still hangs in my office today.

Saturday, May 28, 2016

Dying Inside-Out

This afternoon, the neighborhood will celebrate Memorial Day with an old-fashioned party of hot dogs, hamburgers, and all the unhealthy American food a red-blooded person could want.  Neighbors will re-connect after a long winter, I guess.  Everybody will be happy to see each other.

This morning, my 93-year-old father, who is a veteran of the European theater in World War II, sent me an email that he was remembering "the 18 and 19 year old boys lying under all the little white crosses in France - those boys who were unlucky enough to be the right age at the wrong time -- a time for war."  He now lives alone on top a mountain in the far western part of the state, lost in his memories, and will have a frozen TV dinner tonight.

In Infantry Officer Candidate School decades ago, there was another candidate whose first name was Bill and whose last name was so close to mine alphabetically that we were bunk-mates for 26 weeks there and another 3 weeks in Paratrooper school.  By the time, we got to Special Forces training, we were both commissioned officers and could afford our own apartments, but even our apartments were close together.  We were like brothers.

In the highlands of Vietnam, the Vietcong would sometimes burrow into the ground, digging elaborate tunnels.  (There was a nickname for those soldiers tasked with flushing out the enemy, but it is now lost in the layers of my memory somewhere.)  The standard operating procedure was to first drop grenades into the tunnels, hoping for a frag-kill or a tunnel collapse.  Sometimes, a flamethrower was used, but the bounce-back of flames could be dangerous.  As the officer, Bill would usually wait on the surface to direct fire on any escaping enemy.  One day, an enemy solder suddenly popped out of an unseen tunnel and sprayed him with "a burst of six."  It was the last thing that enemy solder ever did.  Fortunately, Bill survived but with shattered knees.

In 1990, he came to visit me in Texas.  As soon as I hugged him, I knew something was wrong.  On his third unhappy marriage and in pain from his wounds, he was "hollowed-out," as he described it.  We sat on the shore of Lake Hubbard, remembered old buddies, and cried together.  A few years later, Bill ended his pain with a 9mm pistol, unfortunately transferring some small part of that pain to his loved ones.

It is good to remember those who died for us on the battlefield, but it is also good to remember that dying emotionally is different than dying physically.  I don't know if it is better to die laying in the mud in some Godforsaken place or slowly dying from the inside-out over many decades.  At least, if you die laying in the mud, you never have a chance to hurt anybody else.

So, I will consume a large quantity of unhealthy food today and will also raise a beer to all those who died . . . and to all those civilians who are still dying slowly on the inside.

Thursday, May 26, 2016

120th Birthday

Happy Birthday to you,
Happy Birthday to you,
Happy Birthday, Dow Jones Industrial Average,
Happy Birthday to youuuuuuuuuuu  !!!

Yes, today is the 120th birthday of the Dow Jones Industrial Average, and you would expect that it would be a time of celebration.  Instead, Wall Streeters have begun slinking into shadows, afraid to identify themselves.  They don't understand the hostility of Sanders' supporters and Trump supporters.  After all, their leader,  Lloyd Blankfein of Goldman Sachs, assured the Wall Streeters that they were "doing God's work."  The times, they're a'changing, indeed!

Now, there has been a controversial article in the May 23rd edition of Time entitled "Saving Capitalism."  Based on a new book by Rana Foroohar entitled "Makers and Takers," it argues that the financial sector has become too large.  It decries "the financialization of America."  That sector is now 7% of GDP, compared to only 4% in 1980.  That is not good for America, because it produces relatively fewer jobs.  With 25% of corporate profits, it represents a mere 4% of all jobs.  This is allegedly proof that the sector is not doing enough for Americans.  (Looking at it differently, 4% of all workers produce 25% of all profits.)

The writer correctly points out that the traditional job of finance has been to recirculate savings from consumers to small business.  Although unsaid, there is a tone that a conspiracy exists to expand that role, to make the industry "too-big-to-control."  Then, the fat-cat bankers can finally steal Grandma's money in the dark of night!

No question, the financial sector has grown considerably and has contributed too much to political lobbyists, but that doesn't imply any sinister plot!

Yes, the financial sector now has a larger share of GDP.  Be thankful, as the manufacturing sector has a smaller share, and that cannot be blamed on the financial sector.  Actually, all service sectors (such as legal, accounting, and real estate) now have a larger share of GDP, not just the financial sector.

Yes, the financial sector has a larger share of GDP, because it is doing more.  It is now helping business manage risk in ways that were unexpected just a few decades ago.  Airline companies now manage the risk of fuel costs better.  More farmers can manage the risk of crop prices.  More people have life insurance and property insurance than ever before.  This is not a bad thing!

Yes, the financial sector has a larger share of GDP, but it was an unintended consequence of the decision to provide old people with income.  This caused a tsunami of money into pension plans, 401(k)s, and IRAs.  Managing all that requires expensive talent, plus the cost of complying with complex regulations.

So, Happy Birthday to the DJIA!  Celebrate today, but then start preparing for a very different future!  The long knives are out there, looking for YOU!

Wednesday, May 25, 2016

A Glass Half FULL

There are bears and bulls, of course.  However, my experience is that there are fewer bears and bulls than expected but more perma-bears and perma-bulls than expected.  In other words, some observers never change their view, e.g., they always think the stock market will rise or always think the market will fall.  Their opinion never changes.  They either see the glass as half full or half empty.

During the forty years I've observed the stock market, there has never been a single day that someone wasn't predicting a crash, like Stansberry or Schiff today.  They are usually deeply steeped in Austrian economics and often recommend gold.  They are perma-bears.

In contrast, Warren Buffett and Jeremy Siegel are often described as perma-bulls.  Buffet feels history is a reasonable guide to the future.  After all, the American economy has always gotten better.  Just think long-term.  My favorite pundit is Siegel of Wharton, who just wrote that we are over-reacting to the Fed raising interest rates in the near future.  He wrote:

As far as equities are concerned, it is very rare for the bull market to end on the first, or even the second rate hike.  After the 2001-2002 recession, the Fed began raising the funds rate in July 2004, but stocks continued to rise for another 27 months.  After the 1990-1991 recession, the Fed began to hike rates in early February 1992.  After a brief pause, we witnessed the start of one of the strongest bull markets in stocks in history.  In my opinion, stock investors are far more concerned about a rebound of earnings, which is the likely outcome of a stronger economy, than about a 25 bp hike in the short rate.

My point is that "Wall Street is always climbing a wall-of-worry."  That wall today is a pending interest rate hike by the Fed.  Buffett would argue that is a sign of an improving economy.  Siegel would argue the stock market is over-reacting.  Indeed!

Friday, May 20, 2016

Branding America

Nobody will ever say Donald Trump is not a great branding genius.  He easily branded Jeb Bush as "low-energy", Cruz as "lying-Ted, Rubio as "little Mario", and Clinton as "crooked Hillary."

However, the brand he built around himself is worth billions, probably 40% of his net worth.  He makes millions each year from others who use his brand.

There may be something that the ill-fated Trump vodka can teach us.  A businessman with no experience in vodka came to him with the idea of selling upscale vodka.  For a minimum of $2 million plus a huge share of the profits, Trump agreed to loan his name.  As the businessman tried to find a distiller to actually make the drink, Trump focused on the glass bottle design and introducing the marketing campaign.  During the launch party, blondes licked a large chuck of ice encasing a bottle of his vodka.  One topless lady was there wearing only the Trump logo painted on her chest.

After repeated efforts to manufacture the drink economically, the businessman walked away.  Naturally, Trump sued.  It is no longer sold in the U.S. and little is sold abroad.  Not much of a success, indeed!

The irony is that Trump never tasted his own product.  After watching a brother die from alcohol, Trump despises it and never imbibes.  None of his children touch alcohol.  Smart employees are never seen having a drink at parties.  He once admitted the hypocrisy on a radio show, saying somebody else would sell it, if he did not.

Is there anything we can learn from this experience?

Thursday, May 19, 2016

The Only Game In Town

Starting at 1400 hours or 2 PM yesterday, I'm sure the traders on the floor of the New York Stock Exchange were calling for motion-sickness bags, as the 200-point roller-coaster ride began.

That's when the Fed released their minutes from the last meeting of the FOMC or Federal Open Market Committee, which decides on changes in interest rates.  Those minutes said they were serious about raising rates next month.  Of course, the stock market did what it does best - it overreacted!

You'll recall the Fed finally raised interest rates by a quarter-point last December, for the first time in nine years.  They also said they expected to raise rates four times in 2016.  At the time, I wrote they might raise rates once, maybe twice, but certainly not four times.  As much as I hate to agree with Goldman Sachs, the Fed will NOT raise rates next month.  Would you raise rates without knowing Q2 GDP growth nor the BREXIT vote?  Not a chance!

Their intentions are good.  They want to normalize interest rates as the U.S. economy stabilizes, following the Great Recession.  Increasing interest rates in the U.S. by a whopping one percent should not be a big deal, but the Fed has become the de facto central bank of the world.  Because the U.S. is once again the economic engine of the world, any increase in interest rates in the U.S. will impact the whole planet.  To be clear, slowing down the U.S. economy will slow down the whole world, and that is why the head of the International Monetary Fund has pleaded with Fed Head Yellen not to raise rates.

Under the old economic order (everything prior to 2008), the stock market watched Fed actions carefully and overreacted only slightly.  In those days, the market had the opportunity to overreact to fiscal policy (by Congress) as well as monetary policy (by the Fed).  With monetary policy the only game left in town, the stock market's overreaction to monetary policy is here to stay, unfortunately.

Wednesday, May 18, 2016

Advice 4 Young Advisors

Everyday, I receive emails from various firms that offer to teach me how to network and get referrals from centers-of-influence, such as attorneys, CPAs, and insurance agents.  My advice to young advisors is to hit the delete key.

Over many decades of experience, I have received a handful of referrals from attorneys and exactly zero from either CPAs or insurance agents.  Almost all insurance agents are your competitor, with their array of mutual funds, and many CPAs maintain "sweetheart" arrangements with other advisors.

Of course, one can argue that just proves that I did need their service in getting referrals.  My experience has been that existing clients are the best source of additional clients, especially those additional clients who are worth keeping.

Don't waste your time . . . and don't waste your money!

Moderation In All Things

I like, enjoy, and respect Warren Buffett.  He is not an advocate of frequent trading, especially to time the market ups-and-downs, and he has said his favorite holding period for a stock is forever.  His comments are frequently cited as corroboration for the "buy-and-hold" approach to investing.  Unfortunately, this approach has become more than a theory.  It has become a religion to some advisors and their clients.

Frankly, it is difficult to deny the impact of market timing.  Take a look at this graph:

 Chart of the Day

While it is true that a clairvoyant investor with perfect knowledge could have realized a gain of 119%, IF they had invested all their money at the market's nadir on March 19th, 2009 and held it until today, NOBODY actually did that.  It is strictly a theoretical possibility!

But, if a less clairvoyant investor had invested in December of 1999 at the peak, the Dow is up a mere 7.4% on an inflation-adjusted basis - over SIXTEEN years -- so, how happy is that "buy-and-hold" investor? 

Like most things in life, moderation is more appropriate than the extremes of either "buy-and-hold forever" or frequent trading to "time the market."  Some advisors insist their clients always remain fully-invested.  I subscribe to the notion that your cash level should reflect your anxiety level.  As your fear rises, so should your cash level.  Yes, that may hurt your investment performance in the long run, but it will also protect your health if you can sleep better at night.  After all, what is more important -- your investment performance or your health?  No, seriously??

"Buy-and-hold" investing ignores a person's shifting risk tolerance.

Monday, May 16, 2016

Uncertainty = Inflation ??

Back in the good old days (you know, the 1970's), inflation was a real problem.  The solution to solve that problem depended on your economic dogma.  The Monetarists argued that inflation occurred when you had too many dollars chasing too few goods.  The goods available for purchase would soak up whatever dollars are available for those goods.  The Keynesians argued that inflation occurred when the demand for a good was greater than the supply of those goods.  The demanders bid up the sales price of the goods.

The non-dogmatic economists noticed the relationship between wage growth and productivity growth.  When wages grew faster than the productivity (output per man-hour), inflation occurred.  So, to cure inflation, simply slow down wage growth or improve productivity.  There are two ways to improve productivity, i.e., employees can work harder, or management can buy machines/computers to make workers more productive.

Monetarists have been screaming for years that the rapid increase in money supply will ignite inflation.  Keynesians have been disagreeing, arguing that demand is far too weak to cause any increase in prices.  Non-dogmatic economists have said it is a purely academic discussion, since there is no inflation today, despite popular misconceptions.   However, things may be changing.

Over the past twelve months, wages have grown slightly over 1%, while productivity has increased only 0.6%.  Given increased awareness of the rising income inequality, few will argue wages are rising too rapidly.  This discrepancy between wage and productivity growths suggests business is a drag on the economy, and this could ignite inflation.

This is not to suggest business is somehow evil for not increasing business investment faster.  It is to suggest that business is fearful of increasing their cash outlay in the face of uncertainty.

Sunday, May 15, 2016

Everybody A Victim

Every religion has been persecuted.  Some have been persecuted horribly on a huge scale, like the Jews.  Some have been persecuted for long periods, like the early Christians in the Holy Lands or, more recently, the 22 young men beheaded on a Libyan beach for being Christians.  Some persecutions have already receded in our Western memories, like the cruel multiple Crusades against Muslims.  But religions have long memories.  Persecutions are never forgotten.  The histories of Asia and Africa are little different -- just different names for the persecutors and the victims.

Persecution is not limited to religions.  Tribal or ethnic persecution is also commonplace.  Remember the Balkans in 1991, when Serbs and Croats made killing each other a sport.  Remember the Rwanda massacres in 1994, when the Hutu tribe massacred not less than 500 thousand members of the Tutsi tribe.  The most deadly long-running tribal persecution has been the continuing conflict between the Sunni and Shiite tribes of Muslims.

Although often presented humorously, the feud between the Hatfields and McCoys in the US was just persecution based on family names.  Persecution is easy -- so easy, it can be almost humorous, unfortunately.

I attended an award ceremony last week, where the government employee receiving the award lamented the fact that government employees are disrespected (read:  victimized) by business workers, who believe government employees are pampered with expensive benefits, making business employees victims.  A lawyer whispered to me that nobody is more disrespected (read:  victimized) than lawyers.  (Lawyers are victims too??)

Is it ever good to be a victim?  A relative of mine believes there are only two types of people -- the minority who need respect and the majority who need pity.  It is not that respect has to be won, while pity is reserved for the losers.  Instead, it is a question of whether persecution serves the purpose of delivering pity to the majority?

As long as "them vs. us" exists, persecution will continue.  I think existentialists are less likely to see the world in term of "them vs. us."  Because we tend to see ourselves as individuals drifting anonymously through existence, we see it as "them vs. me".  Persecution makes no sense in a world of existentialists, where all "them" are the same -- regardless of religion, tribe, family, or occupation.  In a world of existentialists, there is nobody to persecute -- only other drifting individuals.

Thursday, May 12, 2016

Bernie Sanders Is Right

Bernie Sanders and I share at least one attitude, i.e., neither of us trust Goldman Sachs.  Of course, one of us does respect the research department of that investment banking giant.  For example, here are some of their latest thoughts:

1.  The GDP of the U.S. will drop from 2.4% last year, to only 1.4% this year and 2.1% next year.  Both Japan and the Euro area will continue to grow at last year's pace for both this year and next.  This suggests we are in the middle of a "growth" recession but not a "real" recession.  (A growth recession is simply a slowdown in the rate of growth but not an actual contraction.)

2.  Over the next twelve months, the U.S. stock market will appreciate a mere 2%, compared to 9% in Europe and a whopping 16% in Japan.

3.  Interest rates (10-year Treasuries) will increase from 1.8% to 2.9% over that same period, over twice as much as the increase in interest rates in Japan and Europe.  (This would be bad news for U.S. bondholders, but I don't expect rates to rise that much.)

4.  The dollar will gain 4% against the pound and 16% against the euro but lose 20% against the Japanese yen.

5.  Oil will gain 30% in value over the next twelve months, while gold will lose 21%.

There was also an interesting discussion, explaining the difference between millennials and baby-boomers.  We senior citizens buy fancy possessions for status among each other, while millennials buy fancy experiences for the same reason.  "Experiences could mean anything from a great weekend trip to a good education, running a marathon to a selfie with a celebrity.  Experiences tend to be more unique and hence more likely to be shown off in front of friends." 

Is it time to sell the Mercedes and take a vacation . . . or just get a face-lift?  

Tuesday, May 10, 2016

Red Sky At Night

Because the spew of economic data is similar to drinking from a fire hose, it is helpful to focus on the most important data -- employment.  If employment is improving, the economy cannot really be too bad.

After a string of good employment reports, the April report released last week disappointed most analysts.  Of course, one month does not a trend make!

Looking deeper, the number of jobs openings increased to 5.75 million, which is the highest in ten months and close to all-time highs.  The number of actual hires decreased to 5.29 million.  This gap between job openings and hires is increasing, suggesting it is becoming harder to find qualified job-seekers in a tightening labor pool.

In addition, total separations decreased slightly, due to significantly fewer layoffs.  Offsetting this is the rising number of quits, which is a good sign.  People don't usually quit their jobs unless they think any unemployment will be temporary.

Regardless of what individual economic data points might indicate and regardless of  what the politicians might say, a recession is NOT on the horizon.

I am told that sailors often say "red sky in morning, sailor take warning - red sky at night, sailor's delight."  While I know nothing about weather, the economic sky tonight looks pretty red to me!

Sunday, May 8, 2016


George Washington, Thomas Jefferson, Dwight Eisenhower, my father, Chesty Puller, Irene Gut, Trammel Crow, all American POWs, especially John McCain, and all soldiers who died on the battlefield, of all armies.  They are all personal heroes of mine.  I'm not sure if I love them more or respect them more, but they are all personal heroes to me.

One name may seem out-of-place -- Irene Gut.  In the Fall of 1939, she was a skinny 17-year-old Catholic girl from Poland, who was gang-raped and beaten by the Russians, captured by the Nazis and forced to work as a waitress in the officers' mess (or dining room).  Twelve Jews worked for her in the officers'laundry, whom she courageously saved from extermination by becoming mistress to a Nazi major, finishing the war as a POW held by the Russians.  Eventually migrating to the U.S., she became old and destitute, burdened with a husband suffering from Alzheimer's.  To brighten her last years, the Jewish community in America came together to care for her husband and support Irene until her death.  Jews refer to such courageous people as "Righteous Gentiles" and give them great respect.  Irene Gut also deserves that respect!  Yours too!

You can learn about this remarkable woman from her highly readable biography, called In My Hands:  Memories of a Holocaust Rescuer I went to a remembrance ceremony for Irene last week and wondered how anybody could ever forget her . . . ?

Friday, May 6, 2016

Neutron Bonds II

Do you recall the initial collapse of the stock market in 2008 was caused by "securitized mortgage-backed securities?"  A bunch of mortgage loans were assigned to a bundle, and pieces of that bundle would be sold to bond investors.  It was ideal for the banks making loans, because those newly-made loans would not stay on their books, thereby restricting their capital.  Turnover of mortgage loans is very profitable.  It was ideal for bond investors, because the interest earned on mortgages was greater than interest earned on corporate bonds.  It was even thought to be safer than corporate bonds, because each mortgage had a piece of physical security -- collateral called "somebody's home."  What could go wrong?

Recently, I needed some expensive dental work, where the front desk suggested I get an interest-free loan for one year.  Obviously, they were getting paid a commission for anybody who got an interest-free loan, so it was good for them.  To a financial advisor, that meant I could keep my money invested in the stock market for another year.  As an economist, I knew the lender was making money somewhere, somehow, from somebody.  As a financial planner, I knew a devil was hiding in the details somewhere, so I studied those details and found that the lender has a "gotcha" interest policy, i.e., one day late on anything, and the interest rate immediately jumps from 0% to 25% on the original balance.

You guessed it -- in order to make more health care loans, plans are now being made to securitize them, or put them into a bundle that bond investors can buy.  All that penalty interest would provide a better return to the bond investors than they can get elsewhere.  Of course there is no physical security or collateral.  Plus, health care debt can be discharged or wiped out when the borrower files for personal bankruptcy.  What could possibly go wrong?

It is probably a year before these "neutron-bonds" become available and should be treated like the plague -- avoid all contact -- RUN!

Slowing Success ??

Marketwatchers will testify that the most important economic report each month is the "Jobs Report" which is issued on the first Friday of each month.  In other words, today!

Briefly, 160 thousand new jobs were created last month, with the unemployment rate remaining at 5%.  Economists were expecting 200 thousand new jobs.

But, what does that raw data mean?  It means there has probably been some slowdown in expected GDP growth but nothing worrisome yet.  Republicans spin it as proof of failing Democratic policies.  Democrats spin it by saying unemployment is getting so low that it is increasingly difficult to create 200 thousand jobs each month.  I see both arguments as irrelevant, maybe bordering on stupid!  We need 80-90 thousand new jobs per month to absorb new people coming into the workforce.  Anything above that is gravy!  One report means nothing to economists.

But, why is all this important?  Those dinosaurs, known as "long-term thinkers" (anything longer than 90 days), fret that the trend line for new jobs may be changing its gradient or slowing down.  Short-term thinkers, otherwise known as CEO's and most investors, will celebrate this report, because it means the Fed will not raise interest rates next month.  This report means investors have another month to live in needless fear of the Fed.

Wednesday, May 4, 2016

Trump-care ??

Some people are smart.  Some people are smart and educated.  Some people are smart,educated, and nice.  Carolyn McClanahan is one of the latter.  Trained as a medical doctor, she subsequently became certified as a financial planner, combining two arcane disciplines into something understandable.  She also writes a blog, and here is the link to a particularly interesting blog entry about Trump's views on healthcare:  

(Please "cut and paste" it into your URL box.)

I Was Wrong

I predicted Donald Trump would surely implode long before now, but he is now the presumptive nominee.  Kudos to him on that accomplishment!

But, why are my many Republican friends bouncing between despair and embarrassment?  My many Democratic friends seem to be bouncing between glee and rapture.

I would caution my Democratic friends not to be so optimistic.  I dismissed Trump when he badly trashed the former nominee and 5-year POW John McCain.  That was a bright red line for me!  I thought the good Republican voters would feel the same way, about trashing a genuine American hero.  I was wrong!  Promising everything to everybody is always a winning strategy.

Apparently, it is okay to trash anybody . . . except Trump.

Tuesday, May 3, 2016

Negative Interest Rates

The concept of negative interest rates is getting a lot of attention in the financial press and on Wall Street.  This reflects just how "upside-down" the world has become.  Imagine going to the bank for a car loan.  You still have to pay it back, but they will pay YOU interest for borrowing the money, reducing the monthly payment.  Who wouldn't do that?

Clearly, the purpose of negative interest rates is to increase borrowing, but that can be analogous to "pushing on a string."  You cannot make businesses or people borrow, if they fear the future.  Negative interest rates would increase the supply of funds to be borrowed but not necessarily the demand to actually borrow those funds.  Six central banks have already adopted the concept, but it is still too soon to gauge any success.  The Fed has said it is simply studying the concept.

Is pushing down interest rates good for the economy?  If so, how much?  Former Fed Head Ben Bernanke said modestly negative rates will have no effect.  How much longer should savers be penalized with low rates?  Does the interest rates on bonds really reflect the underlying credit risk?  I think not, and this greatly affects the traditional asset allocation between stocks and bonds.  Does that increase risk for the average investor?  Probably!

Plus, banks are more likely to lend money, when they are already profitable.  Negative interest rates would actually reduce profitability of banks, because the Fed would no longer pay banks for their reserves held at the Fed and would require banks to pay the Fed for the privilege of leaving money at the Fed.  Bank of America estimates its earnings-per-share (EPS) would drop 7%.  Instead of encouraging loan growth, negative interest rates may discourage loan growth.  In addition, other banking fees paid by customers are almost certain to increase.

Economists are busy cranking up arcane econometric models of negative interest rates, but nobody really knows the impact.  The great unknown revolves around the impact such interest rates will have on the velocity of money or how many times will the money supply be used in a year.  Nobody knows.

Investment genius Warren Buffett also has a genius for crystallizing complex subjects.  He said negative interest rates make money in the mattress more valuable than money in the bank.  He's right, because you don't have to pay your mattress to store your money.

From my perspective, this is the turning point, when monetary policy is virtually exhausted, and the economy can wait no longer for fiscal policy, which is controlled by Congress.  If Congress remains impotent, the Fed may be forced to buy a little extra time by using negative interest rates, but I hope not.  Negative interest rates are not good . . . unless you are desperate!