Thursday, June 30, 2016

What, Me Worry?

The increase in consumer confidence during May surprised me.  It rose a healthy 5.1 points to 118.3, the highest since last September.  The consumers were polled following the lousy jobs report earlier this month, leading me to expect a lousy report on consumer confidence, as is normal.  (Of course, the polling took place prior to the Brexit vote, which badly frightened stock markets worldwide.)  Subsequently, the personal income report showed a 2.4% annualized increase in both income and personal consumption expenditures.  No wonder their confidence soared!

This was a good sign, as the consumer has not bounced back from the 2008/9 financial crisis as well as the economy has bounced back.  The recovery has not been widely distributed.  Maybe, that could be changing, I hope.

Further, the Fed's preferred inflation indicator, the PCE Deflator, held at 2.4%, which reassures the Fed that deflation is not sneaking back.  (Remember, it is easier to defeat inflation than deflation.)  This theoretically makes it easier to raise interests rates, which is still a very low probability in this environment.

The open question is whether the Brexit vote will damage consumer confidence in America.  I doubt it, because Brexit was just a temporary tremor to "Joe Sixpack," who doesn't see the long-term threat. And, that's okay!  Be confident and SPEND!

Wednesday, June 29, 2016

Sideshow or Slideshow ?

For those of you smart enough to miss my June 14th presentation to the Hampton Roads Association for Financial Professionals, here is a link to their website, where you can click on the slideshow: 

It could be worse . . . they might have put the video online!

Tuesday, June 28, 2016

Miscellaneous BREXIT Thoughts

First, polling in the U.K. has never been as scientific as it-used-to-be in this country.  With the tsunami of cell phones and the now-stylish disdain for anything remotely "establishment," the percentage of the population actually surveyed has been dropping steadily for years in both countries.  In the U.K., it was thought that the betting odds were a more reliable indicator of the pending BREXIT vote than the polls.  Both indicated that the REMAIN voters would prevail, and both were wrong.  Next time, lick your finger and hold it up in the breeze!

Second, power, influence, and money normally transition from one generation to another in a slow, quiet, predictable manner.  In the U.S., there is considerable resentment among millennials toward "the greatest generation" which has burdened the millennials with unimaginable debt to pay for entitlements like Social Security and Medicare benefiting the seniors.  That resentment also existed in the U.K., but it just got much worse.  The young voted to REMAIN, while the old voted to LEAVE.  The U.K. millennials are now almost certainly facing a recession, courtesy of the older Brits.  Will this widening generation-gap upset the normal "quiet, predictable manner" of generational transfer?

Third, the European Union must do a better job of coordinating its compartmentalized fiscal policy with its unitary monetary policy.  Just as gerrymandering is the root of all political evil in the U.S., the lack of coordination between fiscal and monetary policy is the root of all economic evil in the E.U.  Optimists pray that BREXIT will drive home that point and start fixing that problem.  Let us pray!

American know-it-all Jim Cramer calls BREXIT "the dumbest financial mistake I've ever seen."  Another American know-it-all, Jim Flinchum, calls the lack of a unitary E.U. fiscal policy "the dumbest economic mistake I've ever seen."

Sunday, June 26, 2016

Intellectual Scapegoating

The last chapter is almost every textbook on introductory economics discusses international economics.  Unfortunately, many courses don't get to the end of the textbook, and the students miss the most interesting area of economic study.  One subject in that last chapter is always the Law of Comparative Advantage.

A full discussion is beyond the scope of this brief blog, but that law demonstrates that nations become more prosperous when they make and export their high-margin goods and import low-margin goods.  It is the intellectual basis for globalization, which I enthusiastically support.

But, notice that nations become more prosperous, not necessarily individuals, and certainly not equally.  It was always known that governments would have to provide political solutions for job retraining and relocation assistance to displaced workers.  Unfortunately, only token efforts were made.  As the misery of those displaced or disadvantaged workers increased worldwide, immigrants became an increasingly convenient scapegoat, which demands a political response, not an economic one.  Trade policy has also become a popular scapegoat, usually on both sides of the trade agreements, but that also demands a political response, not an economic one.

The bad news is that government gridlock has prevented the political solutions.  That gridlock now drives the call for political action from the halls of an impotent Congress to the bellicose campaign trail.  Government has failed to release some of the expected pressure building from globalization.  Now, we have Trump, Sanders, and Brexit!

Yes, the bathwater has been soiled with immigration and trade issues by the politicians, but I pray we don't throw out the baby, which is globalization.  Once you understand Comparative Advantage, globalization will become YOUR baby too! 

Saturday, June 25, 2016

Brexit Questions

Q.  Will the Brexit vote lead to a depression?
A.  Of course, anything is possible but is not likely:

Q.  Why did the stock market react so strongly about the vote?
A.  Wall Street likes to worry but hates surprises.

Q.  Did the British voters make a mistake?
A.  The mistake was not going far enough in creating the European Union originally.  It has control over monetary policy but no control over budgets.  That remains the fatal flaw in a worthy project.

Q.  Do you suspect the European Union will become a "slow-motion train-wreck?"
A.  Unfortunately, it already is.

Q.  Where does something like Brexit fit into your tidy little economic concepts?
A.  Recessions are normal and not to be feared.  A financial crisis is sudden and should scare all of us.  Brexit was a political "2x4 applied forcefully against the head" of the global economy.

Q.  What is the best case?
A.  There is the possibility the British voters will reverse themselves very quickly, AND the E.U. will correct their fatal flaw.

Q.  What was the most telling demographic in the vote:
A.  Young people wanted to remain in the EU, while older people wanted to leave.  I guess older people have had enough change, while younger people were thinking about the future?

Q.  What really worries you about Brexit?
A.  It happens at a bad time in the U.S.  Our economy has long been the economic engine of the world and could pull the global economy along with us, but our fiscal policy is painfully gridlocked.  At least, China can make decisions.

Friday, June 24, 2016

The Morning After . . .

During election night in 1968 between Nixon and Humphrey, I was so fascinated by the role of demographics in elections that I stayed up all night, watching the returns.  The next day, I felt so lousy that I swore to never do that again.

Last night, I stayed up all night watching the Brexit election returns in the U.K., because I could see the reaction ricocheting around the globe.  First, the pound dropped like a ten-pound rock, driving up the relative strength of the dollar.  Then, Asia currencies went . . . well . . . wacky, if that's a technical enough term.  Asian stock markets opened up strongly, following the U.S. lead, but turned around dramatically when the first election results started to come in.  Oddly, the U.S. futures market turned down before the European futures did, which I will study further.

Regardless, both the U.S. and European stock markets will take a beating today.  As promised, they will overreact.  There may be minimal structural change in the English economy for the next two years, while they negotiate a painful withdrawal from the European Union.  Hopefully, the period of ambiguity will be as brief as possible, as the stock market hates uncertainty.  If anything, English businesses may be more inclined to deal with U.S. businesses during the interim, because our trade rules with England are not changing.

I do like the stock market at this "over-reacted" level!

Okay, I confess . . . I watched the election returns all night from the couch with my eyes closed part of the time . . .

Thursday, June 23, 2016

Binary Betting

Remember:  the only guarantee about stock market behavior is that it WILL overreact!  Judging from the number of questions I've received about today's BREXIT vote in the U.K., I expect a very volatile stock market in the short term.  This is a good opportunity to ask yourself whether you are an investor or a trader.  Warren Buffett is an investor.  Traders seldom live enough to become famous.

Here is an investing rule:  Don't make binary bets!

That is a vote when there are only two outcomes - positive or negative, in or out.  In the BREXIT vote, the polling is that U.K. will stay in, and the markets are already adjusting to that.  If the actual vote is to leave, the long-term economic implications will still be unclear, but the short-term stock market reaction will be ugly.  Do you really want to bet your hard-earned dollars strictly on a vote in another country?  Are you ready to place your bets/investments on the November presidential election in this country yet?

I think the only way to play this exogenous event is to hope for the U.K. vote to leave the E.U. and then to buy your favorite stocks when the market drops.

Tuesday, June 21, 2016

R-Rated Fiduciary Explanation

The National Association of Personal Financial Advisors (NAPFA) has long been opposed to "hidden fees" being charged to clients.  One example is the sales commissions paid to stockbrokers when clients buy into mutual funds.  Another is the mysterious "12b-1" fee paid each year to stockbrokers.  Another is the value of exotic vacations for stockbrokers and their spouses for putting client money into the favored funds.  Another is selling bonds into a client portfolio for more than the purchase price, making a substantial profit on each investment of client funds, which is called a "mark-up."  And, the list goes on . . .

That is one primary reason that all investors should have a "NAPFA-Registered Financial Advisor" and the confidence they are not being charged any hidden fees.

NAPFA has encouraged the adoption of a "fiduciary standard" which means the stockbroker must put the clients interest first . . . and not a free exotic vacation with their spouse, for example.  The choice of a mutual fund should actually be based on the needs of the client.  After years of lobbying, the Obama Administration ordered that all retirement accounts be managed according to a fiduciary standard beginning next January.  Of course, stockbrokers are fighting mad!

But, the notion of a fiduciary standard has confused many investors.  Leave it to a comedian to explain it in a way that is both funny and understandable.  Unfortunately, the messenger can sometimes over-shadow the message, especially with coarse language.  If such language offends you, please don't click on this link for a 20-minute explanation: 

But, do you understand it better now?

Saturday, June 18, 2016


There is one thing that older Republican men, older Democratic men, and older moderate men can all agree on -- those increasingly frequent "sleep interruptions" are really annoying!  However, serendipity can sometimes make lemonade out of that lemon.

In the wee-time of 0230 hours, I stood at our window overlooking the entrance to the Chesapeake Bay from the Atlantic.  In the darkness was a huge even-darker moving image!  It was worthy of a scene in any Star Wars movie.  Then, I noticed a very long line of faint blue-white lights that ran along a very long deck.  As it entered the Norfolk channel, passing the Chesapeake Bay-Bridge Tunnel, the faint blue-white lights merged into the same line as the lights on the Tunnel - lending an eerie appearance to the long line of lights changing colors, as the ship passed in front of the bridge lights.

I stood there a long time and watched.  While I have seen many aircraft carriers come in and out of the ocean over the years, this was the first time in the dark.  Knowing there are about 5,000 crew members on each aircraft carrier, I thought about all those individuals.  While few of them will ever see combat, hopefully, all were protecting us, by projecting American power around-the-clock and around-the-world.

Thank them for their service!

Que Sera Sera

Making no decision is an actual decision!  It is a decision to let whatever will be . . . just be . . . without any guidance or effort to change the inevitable. Some may think you cannot make a mistake if you do not make a decision, but they are wrong, because that is a decision to accept whatever will be.

In a rapidly changing world, societies and institutions choose between evolution and revolution.  If there is too little evolution, there will be revolution.  (Just as surely, if there is too much evolution, there will also be revolution.)

But, what happens when decision-making becomes constipated?  Evolution ends, and revolution begins, violent or otherwise.  It can happen in nations, like the United States, or in confederations, like the EU.  Perhaps, the E.U. was doomed from the beginning, with no formal institutional linkage between monetary policy and fiscal policy.  It is like charging the Fed with U.S. monetary policy, while leaving fiscal policy to each of the fifty states.  That would be insane!  A difficult concept to imagine, Brussels is even more constipated than Washington,  A noble ideal, the European Union was thought to be the first step toward a United States of Europe, but making no decision on that lack of linkage between monetary and fiscal policies was the fatal flaw.

The BREXIT election next week is making worldwide stock markets breathless with anxiety and uncertainty.  If the U.K. votes to leave, markets will drop and reset their trading ranges at some lower levels until the short-term impacts are clear -- such as how painful will be the "pound of flesh" that the EU extracts when the exit begins.

After much thought, I would vote for LEAVE -- but with tears in my eyes.  I have no desire to agree with the anti-immigrant bigots who lead the LEAVE campaign, but I'm afraid the U.K. is moored to a sinking ship.  The European Union is such a noble ideal.  I wanted it to work but believe it is fatally flawed.  It is like learning a childhood hero is merely another actor, likely with feet of clay.  It is hard to let go of such a wonderful ideal!

Maybe, BREXIT will be a signal to all the capitols of Europe -- to allow the E.U. to evolve, by shifting fiscal authority to Brussels, which is actually giving away some degree of sovereignty.  The United States of America was born in a revolution, and I'm afraid the United States of Europe will have to be born the same way.

The short-term issue is whether the U.K. stays or leaves.  The long-term issue is whether the E.U. evolves or . .. que sera sera!

Friday, June 17, 2016

Millions . . . down the drain

As a strapping young economics student in the last century, we studied how prices allocate resources.  If a product has a high price, more people will want to sell it.  Eventually, the new suppliers of that product will provide more than consumers want and will have to start discounting the price in order to sell their inventory.  As profits decrease, the number of people wanting to supply that product decreases, which puts upward pressure on prices.  Eventually, supply and demand for the product will come into equilibrium at some price.  But, what happens when the government sets a ceiling on the price that is below the equilibrium price?  Suppliers quit making the product.  The problem with socialism is that they set prices low enough to win votes, but those prices drive out the suppliers.

With all the bad news drowning us, it is easy to miss the most tragic story of all.  Venezuela is circling the drain, dragging MILLIONS of people down the drain and into chaos.  That nation adopted socialism decades ago.  Today, there are food riots.  Five people were killed just yesterday, fighting for food.  The price of food was been set so low that nobody can afford to provide food to the grocery store, where the shelves are now empty.  Would you grow food if you couldn't sell it for enough to make a profit?

Prices can allocate resources efficiently when prices can float.  When the government fixes prices, trouble follows, as Venezuela is learning.  This is a lesson that was learned in Russia and China, where they have made considerable progress in deregulating prices.  Maybe, Cuba may yet learn and not succumb to call for artificially low consumer prices, but I doubt it.  Venezuela is already toast!

Socialism comes in many shades of gray.  Not all try to set arbitrarily low prices, but when they do, the government subsidizes the low prices for as long as they can, which is what Venezuela stopped doing.  Hence, food riots!

No government is smart enough to set prices.  Only the "free market" can do that!

But, let's not be too intellectual about this and lose sight of the human tragedy unfolding for millions of people in Venezuela.  It is a man-made disaster! 

Thursday, June 16, 2016

Leaderless ??

The war began in 2008.  Our armies arrayed themselves on the battlefield and waited for their generals.  Alas, only one general showed up, and that was only a lesser general.  The other generals stayed in the barracks and pointed fingers at each other.  The armies had no choice but to follow the one general who had the courage to lead.  Yesterday, that general was badly wounded!  The armies must now beg for the other generals to show up and lead . . .

Last December, the Fed raised short-term interest rates by a quarter-point and predicted they would raise the rates four more times in 2016.  I wrote then that the increase was for political reasons, not economic reasons, and predicted the Fed would raise rates only once in 2016 at most.  For the last two months, members of the Fed have been warning the next increase would be this summer.  I was hoping they would.  Yesterday, they said they really didn't know when they would be raising rates again.  They have become sadly irrelevant.  Monetary policy has now been used exclusively since 2008.

General Monetary Policy has led bravely up to this point but is now wounded and exhausted.  We now must beg General Fiscal Policy and General Immigration Policy and General Trade Policy and General Tax Policy to take to the battlefield and finally win this war!  Unfortunately, those generals are still cowering inside Congress and the White House, bathing in their ideological purity, without any pretense of filthy compromise.

This impotence among generals has been brought to you from safely Republican districts that don't produce moderate Republicans and safely Democratic districts that don't produce moderate Democrats, all void of any filthy, unprincipled compromise.  In our form of government, redistricting is the root of all evil.

We need those other generals NOW!

Wednesday, June 15, 2016

Shocked and Saddened

As someone who sees the world economy as a fascinating and almost living organism, it is rare that I can take my eye of it.  But, I have been shocked and saddened by the senseless massacre in Orlando.  The heavy fog of sorrow has fallen over Orlando, just like it did over DC and New York after 9-11.  While the body count may be less, I doubt the shock and sadness in Orlando is much less that the earlier cities experienced.  Mass murder feels personal.

But, there is a difference.  This time, it is more layered or nuanced.  While we have mutated from attacks by Big Evil to attacks by Small Evil. we now see other social fractures being exploited.

I don't understand the violent hatred of gays, probably because I had a gay uncle who was a good guy and certainly not a pedophile.  I know parts of the Bible condemn homosexuality, just like it also condemns lying, stealing, and killing.  But nobody works themselves into a lather about anything except gays.  Any day now, I expect some psychologist will announce an association between a person's hatred of gays and confusion about their own sexual feelings.  If I can kill people based upon who they sleep with, can I also kill them based upon what church they attend or how they vote?  Can I throw them off rooftops as well?

As a certified "gun-nut" who has more guns that he can easily recall, I nonetheless believe the NRA has become a cancer on the body-politic of America, and it needs to be excised.  It is nonsense to say that all amendments to the Constitution can be modified, except the Holy Second Amendment.  Allowing people on the no-fly list to buy assault weapons is past nonsense - it is criminal stupidity.  As a former member, I can say that the NRA is an example of a good organization that has mutated into an evil organization.  It needs to be "put down!"

The method of radicalization is also different.  The violent Islamic extremists of 9-11 were radicalized in foreign countries.  That almost sounds quaintly old-fashioned.  Our modern, crazy lone-wolves are radicalized by the internet in nice, safe American bedrooms.

The next evolutionary step will be from Big Evil to Small Evil to Smart Evil, as the computer is used to research methods of mass poisoning.  Evil computers will eventually be used to attack other computers, controlling most everything.  "If you see something, say something" may work on the street, but it doesn't help on the computer.

I understand how the world economy mutates but, how does Evil mutate?

Thursday, June 9, 2016

5.79 Million Useless People

It is important to remember that recessions and bear markets are different.  Recessions happen in the economy, while bear markets happen on Wall Street.  There is a relationship but not a tight one.  We like to think that, since the average IQ on Wall Street is higher than the average IQ on Main Street, bear markets precede recessions by six months or so, because investors foresee the recession before mere humans can see it coming.  But, this is not a reliable predictor.

There is a slight seasonal pattern to bear markets.  Stocks usually take a summer swoon and rally by year-end.  There is no seasonal pattern to recessions.

Following last week's awful Jobs Report that only 38 thousand jobs were created in this country during the month of May, there has been much hand-wringing that a recession is coming.  The answer is that YES, there is a recession coming . . . at some point . . . but not today.  There is ALWAYS a recession out there somewhere.

This week's JOLTs Report offers reassurance that the next recession is not this week either.  (JOLT stands for Job Openings, Labor Turnover.)  There are 5.79 MILLION job openings right now - an all time high.  This doesn't indicate a recession this month.  If businesses could find qualified people, they would hire another 5,790,000 people, and that's a lot of taxpayers!

I side with the Democrats on this issue.  The Republicans argue we have 5.79 million too many lazy people in this country.  They cite the fact that 43% of the unemployed have stopped looking for a job.  The Democrats argue we have failed to educate or train 5.79 million students properly.  But, I do seriously question whether throwing more money into our hidebound educational system is the right answer, which is more concerned with maintaining the status quo than re-inventing itself.  One-third of the unemployed are between age 18-29, fresh from their experience in our hidebound educational system.

So, yes, a recession is approaching, which will be followed by a recovery.  And, yes, a bear market is approaching, which will be followed by a bull market.  Those things are sure to happen, as sure as the tide coming in and going out.  I just hope another 5.79 million people don't get washed out to sea and left behind by our 20th century educational system.

Wednesday, June 8, 2016

Coffin Fights?

One of my closest relatives is retired from law enforcement.  I am quite proud of him!  He has handled investigations from "routine, run-of-the-mill" murders to real headline-making mass murder.  Now in retirement but as a courtesy to a long-time friend in the funeral home business, he will occasionally get a request to attend funerals -- to break up fist fights among the grieving family.

What . . . "attend funerals to break up fist fights among the grieving family" ??

I know family members can often disagree and not speak for decades . . . but fist fights??

Oh, how the world has changed . . .

sibling rivalry illustration

Certainly, we are a more violent society, and we can debate the reasons.  Maybe, violence has become just another form of entertainment.  But, violence at funerals is still unthinkable!

Some blame goes to my fellow estate planners.  For the sake of families, we must convince our clients that "hope is not a plan."  It is malpractice to let clients merely hope their families will just "work it out."  If possible, the family members should be informed of any property divisions and distributions while the client is still alive and vibrant.  Sometimes, that is not possible.  When it is not, release of that information should be controlled.  It should be made clear that the lawyer or financial advisor will release that information AFTER the funeral.

In addition, provision can be made that, in the sole and non-contestable judgment of the lawyer or advisor, any family member causing violence at the funeral can be dis-inherited on-the-spot.  This would be an unwanted and problematic liability for the lawyer or advisor, but is it really any different than a "no-contest" provision?  Lawyers, you need to start drafting . . .

Fighting at funerals . . . just unthinkable!

Tuesday, June 7, 2016

Investors Think the Darndest Things

Earlier this year, I had to take a 22-hour course on behavioral finance, which is about peoples' attitudes and misconceptions about money and investing.  After all, there is considerable ongoing research in this field.  Frankly, it reminded me of Art Linkletter's 1957 classic book, Kids Say the Darndest Things!

However, one important point in that course was "garbage-in, garbage-out."  If a person doesn't see reality clearly enough, they can NOT be expected to think about it clearly enough.  I thought about that when I read the following from the respected research firm, Cornerstone Macro:

It's not often that you can say oil prices are up over 30% year to date, and investors are worried about deflation.  It's not often you can say that the market is (close to) an all-time high, yet investors are worried about growth.  It's not often you can say "risk-on" is working, yet bullish sentiment is sitting near all-time lows.  It's not often you can say the VIX (the volatility index) is at 13, yet investor uncertainty is at modern highs?

In fairness to the average investor, how can they develop an accurate perception of reality, if they have to rely on a media that benefits financially from selling fear?  My advice is not to read more -- but to read less -- financial and economic news.  While censorship is bad, self-censorship has advantages.  Avoid extreme predictable opinions, like perma-bear Stansberry and perma-bull Siegel.  The glass is neither half-full nor half-empty at all times.  Read a more neutral market observer, like Bob Doll of Nuveen.

Or, you could just read The Flinchum File . . . 

Thursday, June 2, 2016

Jobs, Interest Rates, and Libertarians

On average, there are about 160 economic reports each month.  Those are just the reports from the Federal government, various state governments, agencies, and trade associations.  That doesn't include reports from the many banks, brokerages, and other commercial companies.  I would guess the combined total approaches a thousand reports per month.

Can the average person process that many reports?  Of course not!  Pick your favorite and follow those.  The one report that Wall Street follows most closely is the Jobs Report or Employment Report, which is published on the first Friday of each month.  That would be tomorrow . . .

Wall Street is expecting that about 156 thousand new jobs were created in May.  If America created more jobs than expected, you would think that would be good news, and the stock market would rise.  You would also be wrong.

Tomorrow's report has been made even more "market-moving" by the various Fed members who have been warning that the next interest rate increase could easily be this summer, as in June or July.  If the Jobs Report is good, they can argue the economy is strong enough to withstand an interest rate increase, which will upset the stock market.  (Remember:  increased interest costs are a direct hit to the net profit line.)  This may be the Jobs Report that pushes the Fed to raise rates.

I think an increase in interest rates would be good, in terms of managing the Fed over the long term, so they will have ammunition for the inevitable next recession.  I hope they do raise the cost of borrowing.  After all, when was the last time you invested in a certificate of deposit?  Besides, the Fed would improve their standing with Libertarian wing of the Republican Party, which is more important than most people realize.

But, that view ignores the rest of the world.  The IMF is begging us not to raise borrowing costs, as that might slow down the world's economic engine -- the U.S.  In addition, the June Fed meeting will be shortly before the Brexit vote in England, which reduces the probability of an interest rate increase in June to zero, in my opinion.  However, July remains a real possibility, which makes the July Jobs Report even more earth-shaking than tomorrow's report.

When the Fed raised rates last December, they said they expected to raise rates another three or four times this year.  I predicted one more increase would be all we'd see in 2016.  July is probably it!