Wednesday, May 31, 2017

Lacking Data

The health of your portfolio is like a stool, dependent upon three strong legs, i.e., economic issues, market issues, and geopolitical issues.  But, how can you determine if the legs are strong enough to support the value of your portfolio?

Looking for economic data is definitely "drinking from a firehose."  There is almost too much to absorb and is never 100% consistent.  Nonetheless, I am confident when I say the economy is looking good -- not great, but good enough.  I can support that with lots of data.

Looking for market data is a little more academic, but there is plenty to study, e.g., trading volume, advance/decline line, VIX, etc.  There are lots of graphs, such as this one:

Chart of the Day

The graph shows there is no reason to expect the long-term bullish trend to change, which is good news.  Furthermore, corporate earnings growth looks to continue.  There are even old Wall Street adages, like "the trend is your friend," suggesting you should stay bullish.  There are lots of datapoints.

Looking for geopolitical data is another matter.  It is much more subjective.  What really matters?  What doesn't?  Is it presidential popularity?  Is it war somewhere?  Or peace elsewhere?  Is it elections?  How do you measure the strength of the geopolitical leg?

Your head can analyze the first two issues, but you need your stomach and decades of experience for the third issue.

Tuesday, May 30, 2017

Deficits Matter

The history of popular economic thought really started in 1776 with the seminal work of Adam Smith, entitled The Wealth of Nations.  It was the genesis of the classical or Austrian school of economics, popularized by Ludwig von Mises.  During the Great Depression, another school of economic thought was popularized by John Maynard Keynes, and it was understandably called Keynesian economics, although it is sometimes called Demand-side today.  Ronald Reagan brought the third school of economic thought to the country, called Supply-side economics.

As a college student during the 1960's, I was taught Keynesian economics almost exclusively.  During a lunch with Arthur Laffer, the godfather of Supply-side economics, in 1978, I became fascinated and studied various experiments in Supply-side economics.  However, as some experiments failed so badly, I have gravitated back to the Austrian school, which means deficits really matter a great deal.

With that in mind, I have studied the President's new budget proposal and am glad it is "dead-on-arrival."  It is pure Supply-side, meaning the deficit does explode if the economy doesn't explode.  It is dependent on explosive growth in GDP.  That ain't going to happen!

Our $20 TRILLION debt is going to jump, with this proposal. Trump is right to curb entitlement growth, but he is doing it in the most heartless fashion, such as cutting health care for the poor.  The two biggest budget gluttons are Social Security and Medicare, which are untouched by this budget proposal, because recipients of those huge programs vote in huge numbers.  As a beneficiary of both, I would recommend they both be cut.  At the very least, eliminate the cost-of-living increases and limit spending on high-income recipients like myself.

Am I happy about a tax cut for me?  Of course!  I moan and curse every quarter when I write that check to the IRS.  But, writing that check is good for the country.  Supply-side disciples believe I will take my tax savings and create new jobs.  No, that ain't going to happen either.  I will save the money, which creates no jobs, and hurts the country.  To suggest that all tax cuts increase revenue growth, then what happened to the Bush tax cuts?  Have you looked at what happened in Kansas?  Yet, the Administration wants us to believe GDP will grow, reducing the deficit.  This is called "dynamic scoring," which I describe as economic ignorance.

The Kennedy tax cut and the Reagan tax cut were successful in increasing GDP growth.  A tax cut today would not!  DOA is a good thing.

Saturday, May 27, 2017

Saluting the Best

I like holidays.

I like Christmas and Easter,
the high holy days for Christians,
as well as Hanukkah and Passover,
the high holy days for Jews.

I like Veterans Day,
a thank-you note to those who wore a uniform,
as well as Fourth of July,
a celebration of summer and politicians.

I even like the silly holidays,
such as Valentines' Day,
a high holy day for romantics and jewelers.
Did you know there is even a National Pancake Day?

But, Memorial Day is so very, very different.
It is the most emotional, the most meaningful.
It is a time to remember the very best of us.
To me, it is THE high holy day!

I will remember . . . I will never forget!

Thursday, May 25, 2017

Youth Wasted ?

Conventional thinking about the current condition of the labor market is misleading.  That thinking is that unemployment is getting low, so low that it will pull discouraged workers back into the market to look for jobs.  They point to the low percentage of the population that actually has jobs, dropping from 63.4% in 2007 to 58.2% in 2010 although rising to 60.1% now.

The Republican viewpoint is that social programs, like unemployment & disability, are encouraging people to avoid jobs.  The Democratic viewpoint is that the decrease reflects the aging of our workforce.  Neither is correct.

Deeper analysis shows that the workforce contains more older workers (>54) than expected while the pool of discouraged workers (U-6 unemployment) contains more younger people that expected.   Normally, we stop counting people as eligible for work at age 55, even though many still hold jobs.  If included, the percentage of the population employed is about 62.2% -- close to the 2007 high.  This is a relatively simple measurement issue.

Not so simple, the problem is the large number of young people in the pool of discouraged workers.  This includes people who work part-time jobs, because they cannot get full-time jobs.  It is a more complicated problem, because it is structural in nature.  It is a reflection of an out-dated educational system, with huge legacy costs, that prepares young people for 20th century jobs, not 21st century.  It is a reflection of a parenting system, where a child's self-esteem is more important than his level of knowledge, and immaturity is unknowingly encouraged.  At this point, it is irrelevant what caused so many young people to find themselves in the pool of discouraged workers.  How do we get them out?

As the economy approaches very FULL employment, what companies can afford the training costs of hiring kids out of their parents' basements?

Tuesday, May 23, 2017

R.I.P. Manchester Kids

President Trump is correct in calling terrorists "evil losers," but I suspect they were losers first, who subsequently became evil.  Maybe, they were losers because they never had a chance to "hold a job or hold a woman's hand."  When the birthrate exceeds job growth, heartbreak follows.  Better birth control and more jobs would help.  Poverty often produces misfits, but religion can make them evil, and all religions feel persecuted.  Unfortunately, it is just too easy to blame their persecution and problems on Western civilization.

The most interesting thing on the President's first foreign trip is the impressive new Saudi center for monitoring terrorist recruiting on the internet.  There is very little public information on this new center, but I wish them well. The Sunni Saudis are finally getting engaged in the first against terrorism.  They even promised to crack down on their citizens funding terrorist organizations.  Better late than never.

Another day, another terrorist attack, another up day in the stock market, all is well . . . NOT!

Saturday, May 20, 2017

Gone But Not Forgotten

Young economists believe there are two types of economists.  There are those who STILL believe in the Phillips Curve, and then there are the young economists.  The Phillips Curve suggests there is a predictable relationship between inflation and unemployment.  Graphically, it looks like this:

Image result for phillips curve

In this academic example, if the rate of unemployment is 4%, it can be reduced to 2% by raising inflation from 3% to 6%.  Or, if you want to reduce inflation from 6% to only 3%, you can do so by increasing unemployment from 2% to 4%.

Our younger brethren argue that this is simplistic, in that other factors come into play.  AGREED!
They argue that it has broken down entirely since the global financial crisis.  AGREED!
They argue that the curve is not static but moves constantly.  AGREED but the relationship stays!
They argue that it cannot be proven mathematically.  AGREED, but you cannot prove the existence of God mathematically either.

The important thing is -- that the Phillips Curve still frames policy discussion.  Intuitively, it makes sense to me that inflation can be dampened by driving up unemployment, which removes spending power in the economy.  You can do this by raising interest rates.  This is exactly what Fed Head Paul Volcker did.  In March of 1983, inflation reached a nosebleed level of 14.8%.  Volcker drove up interest rates to a terrifying 20%.  The prime interest rate was 21.5%, and unemployment soared to 10%.  The economy promptly went into recession, but inflation fell to a mere 3% by 1983.  In the short-term, Volcker was condemned for putting the burden of ending inflation on the backs of the working poor.  In the long-term, he has been hailed as courageous.

Now, what should Chair Yellen do today, when neither unemployment nor inflation are problems?

Young economists say that proves the Phillips Curve is irrelevant, since neither unemployment nor inflation are problems.  It is irrelevant only inside the bubble that has existed since 2008.  As economic conditions normalize, with higher interest rates and lower budget deficits, it will become increasingly relevant.  Of course, exactly when will that happen?

Friday, May 19, 2017

. . . On With The Show

It was March 21st that I predicted the President would be impeached.  My objective then was to study how impeachment might impact my clients' portfolios.  After studying the impeachments of Andrew Johnson, Nixon, and Clinton, I concluded there is no predictable pattern.  (Still, as the market goes down when uncertainty goes up, I felt it would be appropriate to remove some risk by raising cash.)

At the time, I expected Republicans to lose the House but retain the Senate in next year's midterm elections.  In that case, the President would be impeached by the House but not convicted in the Senate and therefore not removed from office.  (In Clinton's case, the market started rising as soon as the Senate trial began, as it was obvious he would not be convicted.)

Now, I suspect there is a greater likelihood the President will resign before he can be impeached.  His former ghostwriter says the President doesn't understand right or wrong, only winning or losing - that's a huge difference.  When he realizes he cannot win, he will just declare victory and resign.  Jeremy Siegel, the legendary professor at Wharton, predicted the Dow would suddenly jump a thousand points when that happens.

Right now, the Republican goals of tax reform and infrastructure stimulus are seeping out of Wall Street dreams.  A President Pence would reduce the drama and restore the GOP dreams.  It might cause the bear market I expect to occur sooner but to be less severe.

If so . . . on with the show, please!

Wednesday, May 17, 2017

Silent Costs

Economists are fond of discussing opportunity costs.  According to Investopedia:  (1An opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action.  Put another way, the benefits you could have received by taking an alternative action. (2.) The difference in return between a chosen investment and one that is necessarily passed up.

In other words, the cost of an aircraft carrier is not $10 billion.  It is 10 regional hospitals, plus the value of improved regional health, plus the incremental additional tax revenue produced by healthier people, plus . . . plus.  You get the picture.

As we begin wading into the deeper waters of the Trump presidency, the media will be blamed for his problems, ignoring the fact that media exists only to please advertisers.  Coverage of this train-wreck will be 24/7 because it brings eyeballs to advertisements.  If Americans would watch the Lifetime channel or National Geographic or anything else on cable, instead of news/opinion programs, the media would chase those eyeballs.

But, there is another silent cost.  We are not debating a new tax plan, we are not debating an infrastructure/stimulus program, we are not debating minimum jail sentences, nor a host of other important issues.  The oxygen is being sucked out of the room, and that's a shame!

Impeachment is bad for the economy, and it is not a one-time charge.  There will be a cumulative effect on the economy that continues for years.  Perhaps, that is the opportunity cost of democracy.

And don't expect the stock market to be happy about this!

Tuesday, May 16, 2017

The Right to Quibble

I don't know how many generations of my family have served in the military, except that we have served during every war since the Civil War.  We were always taught to love this great country, which makes it difficult for me to understand Republicans or Democrats.

When Democrats get in trouble, they blame rich people, like the Koch brothers.  When Republicans get in trouble, they blame the media.  (Sometimes, people just get themselves into trouble!)

Republicans believe "that government is best which governs least," and they are right.  Democrats believe "we are a village" including the "least among us," and they are right.  Why then is the partisanship so bitter?

Is it because we live in the separate echo chambers of Fox News and MSNBC?  Is it because we have nothing to bind us, like an old-fashioned war?  Is it because we have no "lift of a driving dream?"

But, we have passed the point of silly!  I remember when sexists would watch a beauty pageant and comment on the beauty of the ladies, while feminists would watch and comment on how accomplished the participants are, as well as their wardrobes.  The latest Miss USA produced a winner who was raised in Virginia Beach and has a degree in chemistry and a job with the U.S. government in nuclear engineering.  She is a very accomplished person, indeed!  Yet, there is a controversy between Republicans and Democrats, over her belief in health care being either a right or a privilege.  Is there anything partisans will not quibble about?

Which is worse . . . chauvinism or hyper-partisanship?

How many mothers's sons died to protect our right to quibble?  Or, is it a privilege?

Saturday, May 13, 2017

Rainy Day Gratitude

Sitting here on a cold rainy morning contemplating the political turmoil ahead of us, I am grateful for those who manufacture smiles: 

Friday, May 12, 2017

Ignoring the Economy . . .

A recession is coming!  There is ALWAYS a recession coming.  We just don't know when or how severe it will be.  But, we can ignore that!  This is not about the economy.  It is about the stock market.  They are certainly related but still different.

The economic data is a fairly even stream of good, if not great data.  It gives no indication of a recession in the near future.  Unfortunately, there are other factors than the economy, such as geopolitical issues, as well as stock market data.  Some analysts even seek guidance in history.

Geopolitical weight on the stock market is increasing.  It was April 5th that I predicted the President would be impeached in 2019.  (Some readers thought that was a partisan belief.  But, given enough accountants, I could find reasons to impeach anybody, especially somebody with complex business relationships.)  It is fortunate that corporate profits have been rising as geopolitical weight on the market has been increasing.  Also, a coordinated global recovery may be carrying some of that weight.  The stock market is holding up well.  But, the weight of impeachment will continue to increase.

However, one piece of market data worries me.  That is the Volatility Index (VIX), which measures the volatility in prices of options.  It is often called "the fear index."  As the VIX rises or as volatility rises, the stock market usually weakens.  As the VIX falls, the stock market strengthens.  Up to a point, that is!  Once the VIX gets low and stays low too long, it suggests the stock market is too sanguine or "asleep at the wheel."  A certain limited amount of fear is a good thing, not a bad thing.

The last time the VIX was this low was February of 2007,  A year later, the market was down 7.33%.  And, that was only the beginning of a terrible collapse.  This suggests there is no immediate danger.

While history is a poor predictor of stock market behavior, it has been a long time since March of 2009, when the recovery began.  I also cannot forget the old adage of "sell in May and go away."

Bottom Line:  Extra cash in your portfolio right now might be good for your long term financial health.

Thursday, May 11, 2017

Treadmill Thoughts

At the gym today, I was lucky enough to find a treadmill that could see two separate televisions, with Fox News on one and MSNBC on the other.  As you know, they are slightly different.  After all, one speaks Greek, and the other speaks Polish, i.e., languages coded to their particular viewers.

The Fox screen showed much consternation about the hypocrisy of Democrats,who cursed fired FBI Director Comey last year and love him this year.  The MSNBC screen showed much consternation that the probe into Russian ties to the Administration was threatened.  Fox is right that Democrats are being hypocritical, just like all politicians, including Republicans.  MSNBC is wrong to suggest Republicans don't care if Russia interferes with our elections.

My first thought is that it is vitally important for Republicans to watch MSNBC more often and for Democrats to watch Fox News.  (It is also important to avoid all news shows one day a week, particularly on Saturdays.)

With respect to Comey, he probably deserved to be fired, but that is wholly irrelevant.  What matters is the probe into Russian ties.  I was comfortable with Comey leading that probe, as I felt Americans could be confident with his findings.  Now, we do need a special prosecutor, which is expensive and crippling to the process of governing but more necessary than ever.  What good are findings by a bunch of politicians, now that the process has been so politicized.  No, it doesn't matter which party politicized it.  The only way to de-politicize the probe at this point is to appoint a special prosecutor.  The goal is to produce findings that both sides have confidence in!

Wednesday, May 10, 2017

Cheating Graph

Like most commodity prices, the price of oil reflects basic supply & demand for the commodity plus currency fluctuations.  In the case of oil, rising price has traditionally been an economic indicator of improving international growth.  Up to a point, rising oil prices have always been viewed as positive.  So, how would you interpret this graph:

Chart of the Day

A technical analyst would interpret this as saying oil prices are close to breaking out to the upside and could get much higher.  If so, that would indicate improving economic growth.

That might be correct in the textbooks, but I suspect the textbook needs to be updated.  Today, the greatly-increased oil production from the U.S. has made OPEC a weak "swing-producer," whose production causes oil prices to change wildly.  This graph now reflects OPEC honesty.

You'll recall early last year that oil prices collapsed, as all producers were maxing production.  OPEC got together and agreed to limit their production.  That worked for awhile, until prices got over $54/bbl, but then the pent-up greed easily overwhelmed OPEC discipline.  When individual OPEC producers started cheating or supplying more than they promised, oil prices got stopped rising and became volatile again.

It would be racist to call the price of oil an Arab honesty index, but it is fair to call it an inverse OPEC cheating index.  The more they cheat, the lower the price of oil.

Monday, May 8, 2017

Partisan D.E.W.

Traditionally, financial advisors have been strongly Republican.  My unscientific feel is that they are split about 60% Republican and 40% Democratic.  So, it was slightly surprising to see 50.6% of financial advisors disapprove of the President's first 100 days, while only 40.6% approve and 7.9% have no opinion.

Far more surprising to me is the difference between those who strongly approve or strongly disapprove.  40.3% of financial advisors strongly disapprove of the President, while only 20.3% strongly approve.  The strength of this emotion is surprising to me and should be worrisome.

It reminds me of the famous Distant Early Warning line in Alaska or screaming "INCOMING" on the battlefield.

Saturday, May 6, 2017

Shameful Parity

During the Obama Administration, I marveled at the sheer, blinding and irrational hatred that some Republicans had for him.  They would not support the President, even when they agreed with him.  While it was not entirely racial bigotry, it was still bigotry, and it reflected badly on Republicans!

Now, with the nascent Trump Administration, I see the same bigotry - from Democrats toward the President.  I didn't vote for President Trump but think Stephen Colbert's shameless berating of the President is in bad taste, and that he should apologize.  While it is obviously not racial bigotry, it is still bigotry, and it reflects badly on Democrats!

If Colbert has a political stand he needs to convey, he should take a lesson from Jimmy Fallon's memorable and classic takedown of Trumpcare.  If you haven't seen it already, you can at: 

A Beautiful Tragedy

A beautiful tragedy is still a tragedy.  That's the way I see the U.S. territory of Puerto Rico.  I fell in love with her beauty in 1970 when I first visited her, with her lush hills surrounded by white beaches and crystal-clear azure water.  I worried about her in 2006 when the U.S. withdrew the income tax credits that had transformed her agricultural economy into a growing manufacturing one.  In 2013, Detroit became the largest municipal bankruptcy in history at $8.9 billion.  This week, beautiful Puerto Rico became the largest at $73 billion - over eight times worse than Detroit.  That's a tragedy!

It has been a long, slow slide for this island of less than 3.5 million, beginning in 2006.  It is the only predominantly Catholic nation that has been losing population.  With gallows humor, residents joke that some citizens leave their key in the front door and their car in the airport parking lot, when they leave, for the benefit of those that cannot leave.  

Despite this "bankruptcy" filing, hope for Puerto Rico is on life-support, as the negotiations unfold with bond-owners, that include numerous "vulture" hedge funds and contentious bond insurers.  And, nobody has addressed the additional $45 billion in unfunded liabilities from their overly-generous pension obligations.  Again, it has been joked among economists that Puerto Rico existed for the sole purpose of paying pensions.

A comparison with Venezuela, another Latin American nation-state that is circling the drain, is both interesting and useful.  With the large tax credits in Puerto Rico and the oil riches in Venezuela, both economies boomed.  Some of that new wealth was spent on infrastructure and healthcare, but most was of it was wasted on providing unnecessary jobs and lavish pensions.  There was no financial room for an economic slowdown, which is always inevitable.  That is the similarity between them.

Their differences are obvious. Venezuela became just another socialist dictatorship, while Puerto Rico retained democracy as its political system and capitalism as an economic system.  Puerto Rico will suffer but survive without killing its people.  Venezuela is already killing its people.  It will not survive, as we know it, and will disappear into the drain.  If you have family or friends in Venezuela, just send them a one-way plane ticket.  If you have family or friends in Puerto Rico, send them a round-trip ticket.

Puerto Rico was a beautiful place and will be again . . . but not for years.  Venezuela will be a bloody state . . . hopefully not for years.

Thursday, May 4, 2017


My monthly spending was cut today,
because my grandson has a "pre-existing medical condition" and
because his parents are proud entrepreneurs, who depend on Obamacare and
live in the deep red state of Texas.

Because I know his health insurance costs are going up and
because I will have to help his parents
because I don't know how much I will need to help,
I do know that I will need to start saving more money for that uncertainty and
decrease our monthly spending.

Just don't tell my wife . . .

Advisor: Heal Thyself

USC professor Cary Frydman has been doing some interesting research into "neuro-finance" or how the workings of the brain impact investing.  His latest research suggests that the two biggest mental blocks to successful investing are the Disposition Effect and the Repurchase Effect.

The Disposition Effect is that investors are so afraid of losing their book-profit that they sell too soon, thinking it is important to lock-in a little profit now than taking a chance of a bigger profit later.  They often cite the old trader's adage that "nobody ever went broke taking profits."  They cannot "buy-and-hold" for the long term, because they are fearful in the short term.

The Repurchase Effect is a hesitation to buy back a stock that has hit bottom and started to rise again in price.  To them, this may seem like a repudiation of their earlier decision to sell, but it compounds the mistake of having sold out earlier.  Of course, a slow decision is often lost profit.

In other words, investors are too quick to get out and too slow to get back in, especially if a sold-investment has started to rise..  They tend to cite the old adage "once burnt, twice shy."  My thought on this is that the financial advisors are particularly prone to the Repurchase Effect -- in fact, even more prone than investors.  That was especially prevalent after the global financial crisis in 2009.

If advisors do a good job of holding their clients' hands during a crash, which protects their clients from the Disposition Effect, they also preclude the Repurchase Effect, which protects both the client and the advisor.

If advisors do a good job of holding their clients' hands during a market boom, which protects their clients from the Disposition Effect and minimizes taxes, they again preclude the Repurchase Effect, protecting both the client and the advisor.

Monday, May 1, 2017

Economic Intuition

I've never been called a man of superstition, as far as I know.  I flatter myself, thinking I'm more a man of science, despite the fact that I do have respect for intuition.  According to Psychology Today, intuition is described as: 

"We think of intuition as a magical phenomenon—but hunches are formed out of our past experiences and knowledge. So while relying on gut feelings doesn't always lead to good decisions, it's not nearly as flighty a tactic as it may sound."

At a popular nightspot in Dallas years ago, my wife suddenly said "we have to leave now."  In the newspaper the next day, we read about the riot that broke out shortly after we left.  She just knew something was wrong.

That's the way I feel about the latest GDP reading, which showed economic growth slowed to only 0.7% in the first quarter, down from 1.7% in the fourth quarter.  The preliminary data showed the turndown was primarily in consumer spending.  This is despite the robust level of consumer confidence  Digging deeper, it looks like a slowdown in auto sales, which has declined for four straight months pulled down overall consumer spending .  But, I just know something else is wrong.

For the last three years, GDP growth has fallen suddenly in the first quarter, only to bounce back in the second and third quarters.  There is a problem with the data -- maybe in the collection of data, selection of the data, smoothing of the data, aggregation of the data, or analysis of the data.  Having confidence in the data is important, as politicians love to attribute partisan motivations to data.

If you strip out the impact of changes in trade and inventory replacement, the economy grew at a more routine 2.2%.  Is there no way to annualize this data or adjust trade for dollar strength?  Apparently, we used to handle this differently.  How has it changed during the last three years?

Just because I cannot put my finger on the problem doesn't mean there is no problem.  Whether you call it an educated guess or intuition, something is wrong with one of our most important economic datapoints.