Friday, March 31, 2017

Selling Somebody Else's Money

One rainy morning in 1981, I was in a well-lighted conference room on a high floor of Citicorp Center in Manhattan.  The weather was so bad that we could not see the streets below.  Into the room walked Congressman St. Germain of Rhode Island.  For an hour, he explained the problem with bankers is that they thought their job was to allocate credit in the economy.   Instead, bankers should be well-dressed salesmen - selling the use of somebody else's money.  The next year, Congress passed the Garn-St Germain Act, which greatly expanded the powers of Savings & Loan Associations.

Seven years later, I was appointed to the Texas State Depository Board, which was a four-member board composed of the State Treasurer, the State Banking Commissioner, the State Controller, and myself.  Our job was to "save" as many of the states Savings & Loan (S&L) Associations as possible.  In the end, American taxpayers paid $330 billion to enable bankers to think like salesmen.

By 2008, bankers had learned they didn't need to take lending risk if they simply made loans and then sold the loans (actually bonds) to third-party investors across the country.  The bankers didn't make money by making good loans.  They made money by converting loans into bonds and selling them to somebody else.  Losses easily exceeded a trillion dollars.

As badly as the U.S. economy was damaged, no country was hurt worse than tiny island-nation of Iceland, with a population of barely 300 thousand.  They drank the poison that bankers should be salesmen and made huge loans all around the world.  When those loans collapsed, unemployment quickly tripled from a normal 3% to 9%.  Even worse, the Icelandic banks were desperate to collect outstanding loans and were brutal to their Icelandic customers.  Fiery protests filled the few streets of this little country, and the government promised to "do something."

By 2012, the Icelandic banks still ran the country.  After considerable effort,  a referendum was held to urge the government to re-write the Constitution along seven principles, winning at 67%.  The government promised to curb the banks, but the banks still run the country..

Nonetheless, GDP growth has gone from a negative 9.3% during 2009 to a positive 11.3% -- a huge, breathtaking swing!  The shiny object of great economic growth has shifted attention from the failure of the Icelandic government to curb the loan salesmen.  Expect the next recession to bring out even more protesters in the few streets in Iceland.

Bankers should not be salesmen.  There are already too many former bankers sipping tropical drinks on tropical beaches, without a thought or care about their former clients.  If they are salesmen, they should relax on the beaches of Iceland!

Wednesday, March 29, 2017


Just as no person is perfect, no political party is perfect.  The Democrats are wrong about interstate health insurance, and the Republicans are wrong about privacy.  Allowing internet providers to sell information on users, including browsing history and Social Security numbers is just WRONG!  It is morally repugnant!!

Tuesday, March 28, 2017

A 10% Correction . . . So, What?

Bob Doll of Nuveen is one of my favorite "thought-leaders."  After a 1.4% fall in the stock market last week, I was looking forward to his thoughts.  Obviously, he thinks the President's disappointment with the Obamacare replacement makes it more difficult to get badly-needed legislation on the tax code revisions and rebuilding infrastructure.  The much-heralded "Trump Bump" is dependent on the three pillars of healthcare reform, tax reform, and rebuilding infrastructure.  Now, with one pillar missing, the other two look more tenuous.

He would not be surprised by a 10% correction but still feels bullish on the stock market.  Another analyst thinks Trump is given too much credit and surging corporate earnings are given too little credit.  In fact, Trump's priorities have lifted the stock market only 5.4% since the November election.  The rest is due to the solid earnings growth.  He argues if Trump fails completely, the stock market response will be softened by our earnings growth, and I agree with that.

However, he feels even more bullish about markets outside the U.S., and I also agree with that -- but not yet.  I will not be sanguine about the European market until the April 23rd French election is behind us.  If Marine La Pen wins, she will likely end the European Union, at great economic cost.   This would make emerging markets more attractive.

As the U.S. stock market re-calibrates to a less successful Trump agenda, as well as surging corporate earnings in foreign companies as well, it may be time to start looking abroad.

Caveat:  Some investors avoid mutual funds because they suspect the extra fee is not worth the result.   One can argue about that for domestic stock funds, but not for international funds.  You don't want any U.S. advisor, no matter how smart, buying stocks in Slovenia or Poland for you!  That expertise is not cheap!

Sunday, March 26, 2017

Unthinkable -- Part Deux

There has been some interesting criticism of the "Unthinkable" blog last week.  It was NOT a call for the impeachment of President Trump.  Quite the contrary, I stated impeachment was indeed bad for the country.  But, I predicted it would happen nonetheless, reflecting the poisonous partisanship, the massive egos in Washington, and the lack of a clear definition of "High Crimes."  My objective was to start thinking about the unthinkable from an investment standpoint..

First, how much time do we have?  Impeachment cannot happen before 2018, when the opposition party historically gains seats during mid-term elections, and that's in a normal year.  If the Democrats gain significantly during that election, they will likely be motivated to file charges of impeachment early the following year, but it will be late in 2019 before any impeachment trial could begin in the Senate.  By that point, I expect the stock market would already be recovering.

Second, vast armies of investment advisors, including Warren Buffett, argue the time to be 100% out of stocks is . . . never!  It is more important to shade or shift allocation between asset classes.  While an impeachment would likely reduce stock values worldwide, the damage would be greater in the U.S.  This would make international stocks more attractive on a relative basis.

Currently, international stocks are trading about 10% below their 2014 highs and 20% below their 2007 highs.  Corporate earnings have been rising nicely in the U.S. since Q3 of last year but rising even better abroad.  It is time to start increasing international exposure, to get some assets away from the risk of impeachment.

Friday, March 24, 2017

Stepping on Rattlesnakes

Years ago, I ran the Rattlesnake Roundup 10K in Sweetwater, Texas.  All along the road, rattlesnakes were positioned on one side or the other.  Fortunately, each was tended by a "snake-charmer" who had a long tool to control the rattlesnake.  At the beginning of the race, the announcer gave us some advice I never forgot:  "If you must step on a rattlesnake, step on its head, not its tail."  The reasoning was that the rattlesnake would turn around and bite your leg if you stepped on its tail.

While Democrats invented the sin of gerrymandering, Republicans perfected it.  Unfortunately, they stepped on the tail and are getting poisoned by it.

The reliably Republican Wall Street Journal opined today, in an editorial titled "The Freedom-From-Reality Caucus" that "by insisting on the impossible over the achievable, these self-styled guardians of conservative purity could become the worst friends of conservative ideas and free markets have had in decades."

Extremist Republicans are no worse than extremist Democrats, but they are in power now.  Extremist Republicans are hurting the Republican Party more than extremist Democrats are hurting the Democratic Party.  For their own good, Republicans should renounce gerrymandering.

Wednesday, March 22, 2017

We're # 14 !!!

The latest "Happiness" survey listed Norway as the happiest nation on Earth.  It may be just a happy coincidence that Norway also has the highest financial literacy, compared to the U.S., which was 14th, just behind the Czech Republic.

So, should high school students be required to take a financial literacy course?  I doubt anybody would object to increasing financial literacy before students enter the adult world, but the courses I have reviewed for high school students look more like a laundry list.  It is not overly-important that a young person distinguish carefully between a preferred stock and a zero coupon bond.  My experience suggests that knowing your behavioral type is more important.  Are you an aggressive 18-year-old who is bullet-proof and can easily pick the next Apple, but who panics at the first pullback or market dip?  If you are, how do you manage your portfolio?  How will you learn to have a strong stomach?

Memorizing a laundry list of financial products is nice, but studying the different investment behavioral types is more important.

Physician - heal thyself!  Investors - know thyself!!

Tuesday, March 21, 2017

The Unthinkable

Q.  When is it time to start thinking about the unthinkable?
A.  When you find yourself awake at night, staring at the dark ceiling, and worrying.

Q.  Will the President be impeached?  If so, for what impeachable offense?
A.  Yes, but the offense doesn't really matter at this point.  "High crimes" can include most anything.  Impeachment is not about right or wrong.  It is about power.

Q.  How many presidents have been impeached?
A.  Three - Andrew Johnson, Richard Nixon, and Bill Clinton.  Johnson and Clinton faced a trial in the Senate and were acquitted.  Nixon was the only president to ever resign, and he was quickly pardoned by Ford.

Q.  Does it matter if the President is removed from office?
A.  Yes, it would, but it has never happened.  Plus, two-thirds of the Senate can agree on exactly nothing.  Think of an impeachment trial as another "OJ" trial, except everybody is angry.

Q.  Would impeachment be good for the country?
A.  No.

Q.  Would it be good for the stock market?
A.  Not at first, but the market would rebound when the outcome becomes more clear.

Q.  When will it happen?
A.  Not until 2019, following the midterm elections, when Republicans lose control of Congress.

Q.  What should investors do?
A.  An old Wall Street adage is "the trend is your friend."  Enjoy the ride for now, but be sensitive to the 2018 midterm elections.  If it appears likely the Democrats will regain control, increase cash levels.  When the House Judiciary Committee begins impeachment hearing, increase cash substantially.  When the actual trial begins in the Senate, start buying.

Friday, March 17, 2017

Another Good JOLT

Wall Street, politicians, and the media pay very close attention to the monthly "Jobs Report" on the first Monday of each month.  Announcing the rate of unemployment, it is the "headline news" on the labor market.

On the other hand, economists pay closer attention to the JOLT report, which stands for Job-Openings, Labor-Turnover.  An increasing number of job openings is always a good thing, of course, and an increasing labor turnover tells you the attitude and confidence level of workers.  Job openings can increase but workers may be too afraid to give up their current jobs to look for another one.  How do you measure the amount of worker confidence?  Look at labor turnover.

The latest report shows about 5.6 million open jobs, which is the highest level this century.  In addition, about 3.2 million workers gave up their jobs, which is the most since 2001.  The labor market is solid.  (Even President Trump admits the labor reports are no longer "fake.")

Normally, a tight labor market would encourage the Fed to increase interest rates at a faster rate, but the average hourly earnings of workers is still not increasing enough to be inflationary.

A strong labor market with little indication of inflation is not a bad economy for a President to inherit . . . is it?

Wednesday, March 15, 2017

No Pomp and Circumstance ??

Do you remember the mixed emotions when your kid graduated from high school?  There was pride that they had accomplished something worth doing.  There was relief that your efforts to get them functioning in the real world had some measurable success.  There was excitement that they would now be standing on their own two feet, facing their own challenges.

That's how I feel about the Fed raising interest rates today.  Since the global financial crisis nine years ago, they have single-handedly sustained the economy, with no help from Congress.  Every move was scrutinized too-closely by everybody.  But, with today's increase, I feel they are graduating and passing the baton back to Congress where it belongs.  Fiscal policy returns to center-stage today.

Like high school graduates, the Fed will face continuing challenges.  Their next challenge will be accusations of  playing politics with interest rates.  The stock market clearly sees this increase as a vote-of-confidence in the strength of our economy.  But, no president has ever wanted higher interest rates, and President Trump will be no different.  He will soon be criticizing the Fed for raising rates and making the dollar too strong, which hurts our exporters.  There is zero possibility that he will reappoint Janet Yellen to the Fed chair when her term expires next year.

Now, where is my hankie??  Sniff, sniff . . .

Tuesday, March 14, 2017

Only Five ?

Bobby Doll is the Chief Equity Analyst for giant Nuveen Asset Management and has long been one of my favorite thought-leaders.  An affable, humble man with an ability to write succinctly, he remains confident in both the economy and the stock market.  However, his most recent commentary lists five risks we should pay attention to, and they are quoted as follows:

1.  U.S. Politics: Despite growing signs of disunity between President Trump and the GOP Congress, investors still appear optimistic about prospects for pro-growth economic policies. However, we expect investors may lose patience if specifics about issues such as tax policy and health care reform are not forthcoming.

2.  European Politics: Perceived risks in Europe have faded as Marine Le Pen’s standing in the French polls has dropped. But the rise of such nationalist candidates may pose a risk to economic growth and equity markets.

3.  Earnings: Corporate earnings have improved over the past couple of quarters, but
forward-looking expectations may be too high. Consensus expectations are for a double-digit advance in earnings growth for 2017.4 That level will be difficult to achieve, especially since profit margins remain under pressure.

4.  Economic Growth: We have seen an almost uninterrupted string of positive growth surprises in the U.S. economy over the past several months. We don’t expect growth to slow, but more bumps are likely in the coming months.

5.  The Fed: Investors have largely shrugged off prospects for higher rates, but rising rates could eventually dampen equity market momentum. Additionally, we see a great deal of uncertainty surrounding who Donald Trump will nominate to the Federal Reserve Board of Governors.

Now, about all those other things you were worrying about . . . STOP IT!

Saturday, March 11, 2017

Freaky Libertarians

Easily, the most readable book on economics in this young century is Freakonomics by Levitt and Dubner.  There is also a Freakonomics podcast (which is available in the App Store).  I often listen to one of those podcasts when running.  A recent one concerned the Libertarian political party, complete with an interview by Gary Johnson, who ran on the 2016 ticket and garnered a slightly surprising 3.2%.

Libertarians are usually those who prefer less government in their life, both in their wallet and their bedroom.  This is in contrast to the stereotypical Republican who wants less government in their wallet but doesn't care how much government is in their bedroom.  It is also in contrast to the stereotypical Democrat who doesn't care if the government gets a little deeper into their wallet, as long as the government stays out of their bedroom and personal life.

Don't you wish life was that starkly simple?  That's why stereotypes are occasionally useful -- for drawing contrasts.  But, which is worse -- stereotypes or purists?

This podcast focused on the purist or extreme positions of Libertarians.  They would abolish most of the Departments in the President's cabinet, including the IRS, in favor of a regressive tax on consumption.  They would legalize most currently-illegal recreational  drugs.  The U.S. would practice isolationism from the rest of the world, like it was a religion.

The conclusion was that the purists of the Libertarian party have more control over that party than the purists in either the Republican or Democratic parties, but there is now a movement among Libertarians to shed their purists.  Maybe then, they can garner 3.3% of the popular vote?

I hope so!

Thursday, March 9, 2017

Oh, What A Relief It is . . .

During the Era of Gridlock, the United States was a one-armed boxer.  Gridlock made fiscal policy useless, as Congress was unable to do anything that mattered.  All we had was monetary policy, which is controlled by the Federal Reserve.  Therefore, Wall Street held its breath every time the Fed met to decide any changes.  If the Fed did anything unexpected, Wall Street invariably over-reacted.

Next week, the Fed will meet and is expected to raise interest rates.  Before the election, the stock market would have taken a swoon.  Now, we realize that increased interest rates are both needed and acceptable to investors.  This is a healthy sign.  It will actually be a relief to be able to raise rates without the market over-reacting!

When the Fed raised rates in December, they expected to raise rates three or four more times this year.  I didn't believe that then, as Chair Yellen is a dovish labor economist and has another year in that job.  Now, I think the stock market rally may have "sucker-punched" the Fed into believing the economy is better than it is.  It is only good but is not great!  The tepid signs of inflation are not enough to make that assumption.  One or two increases this year would be good.  Three or four would be bad.

Also, there is another important difference between fiscal and monetary policy.  Fiscal policy is the right arm of a right-handed boxer.  It is stronger than monetary policy.  During the Era of Trump, the United States is now a two-armed boxer.  As long as we don't punch ourselves, we are either more powerful or just more dangerous.

Tuesday, March 7, 2017

Arithmetic Matters ?

I would like a tax cut.
Who doesn't want more spending money in their pocket?

I would like Obamacare replaced with something "better," as the President promised.
Who doesn't want better health care?

I would like a stronger military forces.
Who doesn't want stronger defense?

I would like a modern infrastructure.
Who doesn't want better roads, bridges, port, airports, etc?

That's a nice wish list that collides with the reality of
Have you been there lately -- go now!

Keynesians don't mind the increasing debt.
Supply-siders assume growth will always cover deficits.
Austrian or classical economists believe arithmetic matters.

Sunday, March 5, 2017

An Economic Week

During the past week, did you observe and absorb the following economic data points?

1.  On Monday, we learned home prices increased 5.8% last year, with 0.8% coming in December.  The Pacific Northwest led the way.  On Wednesday, we learned New Home Sales rose very modestly in January, showing increased cancellations due to rising mortgage rates.  Still, New Home Sales in 2016 beat the prior year by a healthy 12%.  On Thursday, we learned that Pending Home Sales actually decreased in January.  This is a leading indicator that is constrained by the low inventory of homes for sale nationwide, higher mortgage rates, and a 9.8% decrease in the West, primarily due to weather.  Bottom Line:  The residential market is just fine.

2.  Construction outlays during winter should normally be ignored, as they are just too volatile.  Such spending still increased in January but barely.  The three-month moving average is still 4.4% better year-over-year.  Bottom Line:  While both residential and commercial construction look fine, the weakness is in the public sector -- nothing that a major infrastructure redevelopment wouldn't fix!

3.  Both the ISM Manufacturing Index and the ISM Non-Manufacturing Index improved.  This suggests both the manufacturing sector of the economy, as well as the services sector, are doing well.  Despite NAFTA, manufacturing employment is increasing.  Since inventory levels of manufactured goods are so low, continued job growth should be expected.  Most interesting, despite a stronger dollar, manufacturing exports are increasing.  Bottom Line:  Things are fine.

4.  Personal income growth and spending growth started the year nicely with 0.4% and 0.2% in January respectively, but looked somewhat anemic with inflation approaching 2% . . . finally.  Also in January, we saw Durable Goods Order improve, primarily due to the always- volatile increase in airplane orders.  In February, consumer confidence improved nicely, which should support increased consumer spending.  In a consumer-based economy like the United States, this is all good news.  Bottom Line:  Things are fine.

Does the economy look steady?  Yes.  
Does this mean the stock market cannot go down?  No!
Am I worried about either right now?  No.

Saturday, March 4, 2017

Consorting With The Devil ?

As a boy, I remember being told that the oratorical skills of Adolph Hitler would rob a person of their own internalized principles and beliefs.  That was added to the growing list of things I didn't understand as a boy about the grown-up world.  Later, I was told that I would understand the holocaust IF I would just read Mien Kampf.  I did but still didn't understand.  In high school, certain books like Catcher in the Rye were banned, because they might corrupt my weak mind, causing me to forsake my own internalized principles and beliefs.  Of course, I searched for and read as many of those books as I could and was left wondering what was the point of so much consternation.

All these thoughts came back during one recent hotel stay, when I channel-surfed my way into RT television.  RT stands for Russia Today.  It is an English-language version of the Russian perspective on international news.  Frankly, I thought the international coverage was surprisingly thorough.  (Later, I learned it is available 24/7 online at )

Watching saturation coverage by the American news media of Trump's problems with Russian connections, I wondered how the Russian media was covering it and went to their website on Friday night.  The lead story was about a demonstration in Grand Central Station by activists urging the U.S. to get out of Syria.  Five stories later, they barely mention "media claims" that Trump and his associates had improper contacts with Russian officials.  No big deal, nothing to see here, keep moving on . . .

Now, I am really suspicious!

Friday, March 3, 2017

Gridlock = Gridlock

In 1792, some "wannabe" stock traders gathered under a buttonwood tree on Wall Street to develop some agreement to trade stocks and the New York Stock Exchange was born.  Today, over twenty trillion dollars of stocks trade there and is the biggest in the world.  It has become synonymous with "the market."

Initially, it merely traded existing stocks.  Later, it allowed new companies to sell stocks or initial public offerings.  (Eventually, economists noticed it was often a predictor of economic activity, usually six-to-nine months.)

Warren Buffett's mentor was Benjamin Graham, who famously said the market was a voting machine in the short run and weighing machine in the long run.  He meant that popular stocks rose in value and unpopular stocks fell in value in the short run, while the market carefully assesses the substance of each stock in the long run.  But, what would he say when all stocks become popular, like they are today?  I suspect he would say . . . be patient, they will stop rising in the short run and may even fall in the long run.

It is hard to discuss today's market without looking through the prism of politics.  There is a litmus test of whether you are willing to give President Trump the credit for the market rally or not.  I don't see it as that simple.

First, the market rallied with the death of gridlock.  Then, the market rallied, when analysts re-crunched 2017 and 2018 earnings with the lower corporate tax rate, increased infrastructure spending, and increased defense spending.  Now, the market is in rally-mode because President Trump finally acted presidential in his "SOTU" speech, but I suspect this will be the final and weakest leg in the bull market we've enjoyed since November.

At some point soon, the President will run up against the faceless wall of 485 egos in Congress.  My concern is that the new gridlock will not be between Republicans and Democrats but between Trump and Republicans.  Still, gridlock is gridlock.

Will the new gridlock bring us back down to pre-election levels?  I doubt that, but current stock prices are too high for any gridlock.  The new gridlock in Washington will be reflected on Wall Street in New York.