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?