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?