Sunday, July 30, 2017

Another Slant on a Tired Subject

I have long believed that the dysfunction in Washington is a reflection of gerrymandering.  It doesn't matter whether it favors Republicans or Democrats.  What does matter is that it favors extremists over moderates.  A "safe" Republican district is more likely to elect a purist than a competitive Republican district, with the same being true for a "safe" Democratic district, of course.  Over the last twenty years, our dysfunction has become progressively worse.

Vladimir Putin is not a dumb man.  He studied how democracy was making us weaker, not stronger.  Democracy is a great idea on paper but difficult to implement.  On paper, Russia is a democracy.  Putin has no motivation to see America get stronger, only weaker.  If something as simple as drawing district lines could weaken us, there must be something he could do to make it worse?  Of course, he could interfere with our elections!  After all, he is experienced at doing this in his own country, as well as other countries.

I regarded President Trump as just another political buffoon, until that day in 2015 when he savagely trashed American patriot John McCain.  After that, I knew he was something worse.  When rumors developed that he had colluded with the Russians, I just assumed it was true and lost interest when the independent counsel was appointed to investigate, knowing that investigation would take forever, as the "wheels of justice grind slowly."

Now, Richard Engle, international correspondent for NBC. suggests Putin would be too smart to trust some feckless buffoon as President to weaken America.  He wisely figured he could cause more damage to our democracy by manipulating the media, by planting stories about possible collusion, by playing to Trump's enormous ego.

This makes more sense to me than assuming Putin would take a chance on any "deal" with Trump, when he could just play to Trump's vulnerable ego and manipulate our media.  That is a better deal for Putin, and he is not a dumb man!

The question is not how to "punish" Trump or Putin.  History will take care of that.  The question is how to protect our democracy from gerrymandering and from hacking, as well as other threats.  Our threatened democracy needs to be both protected and nurtured.

Saturday, July 29, 2017

The Zombie Graph

Dr. William Phillips was a New Zealand-born economist who died in 1975.  However, his name lives on with the famous Phllips Curve, which looks like this:

Image result for phillips curve graph

Basically, it says there is an inverse relationship between unemployment and inflation.  If you want to decrease unemployment, all you have to do is increase inflation.  If you want to decrease inflation, all you have to do is increase unemployment.  However, some call this "the zombie graph," because it will not die.  Belief in the graph is strong and enduring, especially at the Fed.  This relationship between unemployment and inflation appears to be realistic only in the short-run but not the long-run.  There have been numerous periods of low inflation and low unemployment.

Still, it remains one of the principal "tea-leaves" in predicting the Fed's next action.  After all, the very low level of unemployment currently means rampant inflation is imminent, and interest rates must be increased now, right?  The problem is that the Fed's tools (CPI and PCE) are backward looking.

Alan Greenspan's favorite inflation measure was the FIG -- Future Inflation Gauge.  It is forward-looking.  For the last year, FIG has been moderating, as shown in this graph:

So, should the Fed look at the current level of unemployment and raise rates or look at the FIG and hold rates steady?  Doing nothing is the right answer!

Of course, there are other reasons to raise interest rates.  For example, it is important to have some "dry powder" or room to decrease rates during the next, always-inevitable recession.  I expect one more increase this year but no more.

Wednesday, July 26, 2017

As the Band Played On . . .

Bob Doll is the Chief Equity Strategist for Nuveen, and I try to study his thinking whenever possible.  His latest weekly commentary remains bullish.  As long as corporate earnings remain positive and consumers remain financial healthy, he sees the bull market continuing.

I have mused that, if the "Trump Bump" really existed due to the expectations related to healthcare, tax cuts, and infrastructure, then why hasn't the market suffered, now that far fewer people expect legislation to actually accomplish that?  Apparently, as belief in the Trump stimulus faded and support for the market weakened, corporate earnings have improved enough to maintain support of the market.

He also commented on the strong consumer, with increased spending, increased credit card usage, continued relatively low interest rates, and a strong labor market.  As consumer spending is the single largest component of GDP, economic growth is dependent on their health.  Subsequent to his latest commentary, the Consumer Confidence Index for July rose to 121.1, up from 117.2 the previous month.  That is the second highest level of Consumer Confidence ever recorded.

If the stock market can flirt with new record highs on almost daily basis WITHOUT an underlying belief in the Trump stimulus, then imagine how high we could go WITH the stimulus.

As a former CEO of Citicorp said in 2008, just before the global financial crisis, "as long as the music is playing, we'll keep dancing."

Sunday, July 23, 2017

The Peace of Small Sounds

As I watched my father adjust to his hearing aids, I focused on his embarrassment, the inconvenience, and the cost.  Yesterday, I took a two-hour walk in Seashore State Park and wondered why I did not also focus on the deprivation -- he was slowly being deprived of life's little pleasures.  There are more bird sounds than I can catalog.  Tiny waves make very little sound, but it is such a soothing sound.  Gentle breezes not only feel good, they sound slightly haunting or even alive.  A pine cone dropping into the swamp water sounds more like a blast than a drip.

Not hearing such sounds is a form of deprivation.  Hearing aids are not sensitive enough to capture most of the sounds I savored yesterday, but I'm grateful for what they can do.  That's a good thing, because my wife swears there is one in my future . . . someday.

Saturday, July 22, 2017

Pence Agenda

Since the days before air-conditioning, when Wall Street moved en mass to the Hamptons to escape the heat, pundits have been saying "sell in May and move away" until the Fall.  Summer swoons are not unusual.  Given how "hot" the market is now, I have been expecting it to cool off during this Summer.  At the same time, it is increasingly apparent that the President is not going to be able to enact his agenda of  (1) healthcare reform, (2) tax cuts, and (3) the rebuilding of infrastructure.  If belief in that agenda drove the "Trump Bump" last November, why hasn't removal of that belief weighed on the stock market?

One reason is that second quarter earnings have been better than expected.

Another reason is the inflow of cash from increasing global profits.

Yet another reason is that the market believes the worst case is that Trump is impeached and resigns.  So what?  That turns Vice President Pence into President2B Pence, who has the same agenda as President Trump.  He is the experienced Washington insider who can ride into the White House on a white horse with the political capital to actually accomplish something.

The most significant difference between the Trump Agenda and the Pence Agenda is the latter contains socially conservative goals, which have a low probability of passage.  If he advances those social goals first, like Trump advanced healthcare reform first, his agenda will likely become stalled as well.

But, what happens to the Trump/Pence Agenda when President Pence takes over, if either the House or the Senate is then controlled by the opposition party?  Their agenda remains in greater peril than Wall Street seems to recognize.

Thursday, July 20, 2017

More Than A Mere Politician

There may only be one person in Washington that I truly respect -- John McCain -- and I am profoundly sad to learn he has an aggressive brain tumor.  Although I've never met him, it would be an honor to salute him.

There is nothing I can write that is half as poignant as this short note from his daughter:

Statement regarding my father @SenJohnMcCain:

Fight on, John, your country needs you NOW more than ever!

Wednesday, July 19, 2017

Enigma Solved

I have been expecting a traditional "summer swoon" in the stock market, especially since the "Trump Bump" no longer exists, if it ever did.  While second quarter earnings have been somewhat stronger than expected, those earnings were not enough greater to justify new market highs, especially during the summer doldrums.

When things seem illogical, look abroad!  Sure enough, $119.7 billion flowed into the U.S. from foreign private buyers during the month of May alone.  This also suggests the global economic recovery is real and that foreigners are starting to make real profits, which they ship to safety in the U.S.  Remember:  increased demand for U.S. equities drives the price of those equities higher.

At the same time, U.S. residents only moved about $3.6 billion into foreign equities, suggesting it is not too late to increase our allocation to foreign stocks.  We'll see . . .

Sunday, July 16, 2017

Land-Lines and Dinosaurs

Classical economic theory suggests that, as demand for a product decreases, then the price of that product will also decrease.  Why then is the price of land-line telephone services going up?

There was a time, back when dinosaurs roamed the Earth, that early-adaptor American households had a rotary telephone.  As they began putting telephones into other rooms, as new technology allowed touch-tone dialing, caller-ID, call-waiting and numerous other "bells & whistles", more Americans got land-lines.  As the base cost of providing land-line service was spread over an ever-increasing base of users, the cost per land-line started going down.

The introduction of cell phones stopped the growth in land-lines.  The introduction of smart-phones with internet started to decline in land-line usage.  With millennials avoiding land-lines en mass, the future of land-lines looks uncertain at best.  So, why are land-line prices increasing?

One reason is the growth in home-based businesses that need fax support.  This creates an artificial level of demand for land-lines.  However, once cellular technology improves enough to offer fax support reliably and simply or once scanning technology gets more widespread, this support for land-lines will go away.

The main reason is the low-profile of land-line charges in the numerous "bundling" choices offered by land-line providers.  Bundling was a brilliant strategic move to save land-lines and land-line companies.  If getting rid of your land-line means getting rid of your internet, it will not happen.  However, as we start accessing the internet in different ways, the value of bundling will decrease.

All of my career, AT&T and Verizon and other land-line providers have been considered "blue-chip," but I suspect that will not continue, unless they move more rapidly to jettison their land-line businesses and expand their cellular businesses.

. . . tick, tick, tick . . .

Saturday, July 15, 2017

Boomers' Youthful Impression

Generalizing, the "greatest generation" makes the assumption the economy is weak and weakening, which reflects their youthful impressions during the Great Depression.  Baby-boomers make the assumption that inflation is wracking the economy, which reflects their youthful impressions during the late 1970's and early 1980's.  Millennials/Gen X'ers make the assumption that the economy can never be trusted, which reflects what happened to their parents during the Great Recession.  Only technology can be trusted.

Focusing on the Baby-boomers, just try telling them that inflation is non-existent.  The popular Consumer Price Index continues to run about 1.6%.  Stripping out energy and food, it is even less.  In February, it was 2.7%.

The only sectors showing any inflation are the usual suspects, i.e., health care and rent.

So, if inflation is non-existent, why talk about it?  Because that largely drives the decision to raise interest rates by the Fed.  At the beginning of the year, Wall Street expected four rate increases this year.  It got one and now expects only one more this year.  Savers can expect little relief from the low rates.  Savers lose if we do have inflation, because the purchasing power of their savings is reduced.  And savers lose if we not have inflation, because their interest income is stagnant.

Sorry, Baby-boomers, but you cannot complain about inflation.  Of course, you could complain about the low interest rate on your savings accounts.

Friday, July 14, 2017

On Cleaning Out

Dust-bunnies multiply even faster as eyes age.
Trash cans are harder to "hit" -- or even find.
Finding the right file becomes a hunt in the dark.
It becomes further to bend over to pick up any droppings.

Maybe, dust-bunnies become pets?
When does clutter become comforting?
One can never have too much paper laying around.
Does one ever get over that "depression-mentality"?

As a financial planner, I help people prepare financially for old age.
But, what is the point if they are not also prepared emotionally?
Hoarding mementos is still hoarding!
As Art Linkletter said "old age is not for sissies."

Thursday, July 6, 2017

Hiding Behind Statistics

Long ago, Mark Twain realized that the truth is often hidden by "lies, damn lies, and statistics."  Of course, he was right then and still is.

Jack Bogle is the crusty, venerated founder of investment giant Vanguard Funds.  He has long argued that investment returns are badly hurt by high fees.  Of course, he was right and still is.

For the last 15-20 years, there has been considerable controversy on the question of fees, and marketing types have been quick to confuse the situation by asking if "active" managers actually earn their higher fees.  Or, would clients be better served by simply buying super low-cost index mutual funds or exchange-traded funds (ETFs)?

Passive investing means "owning the market" and not trying to beat it.  Active investing means trying to beat it.  A passive investor, for example, will just buy SPY which replicates the S&P 500 and nothing more.  It owns the 500 stocks of the S&P and holds very minimal cash.

Intuitively, smart educated analysts could avoid weak stocks and concentrate on the strong stock performers.  Active management "ought" to outperform passive index investors.  There have been numerous "definitive" studies on this.  The most recent appeared in The Wall Street Journal in April, showing low-fee ETFs beat high fee mutual funds over the last fifteen years and did so by convincing margins.

Not to get into the weeds too much, but this is where "lies, damn lies, and statistics" start making a difference.  There is such a thing as "survivorship bias," meaning that time matters -- firms come into the market with new mutual funds and then close some of them.  (A few ETFs have done the same but few).  This latest study looked at all funds on the market on January 1st, 2002.  As the weak funds closed down over the next fifteen years, their closing values became zero, badly skewing the performance of the entire group of mutual funds.  In the real world, I've never seen a fund go to zero value or 100% loss of client money.  Usually the fund drifts down for a few years, the fund is closed and the remaining investors are paid whatever remains.  That money returned to the investors is not accounted for, which certainly hurts the performance of mutual funds.

Also, the longer the time period, the more likely funds are to disappear.  All past comparisons between actively-managed funds and passively-managed funds (both mutual & ETFs) have been studied over ten year periods.  By extending this study to fifteen years, it increased the survivorship bias, against mutual funds and favoring passive-investing vehicles like ETFs.

The study also did not distinguish between bull markets and bear markets.  Any statistic that says - increasing cash during a falling market is a bad idea - is a bad statistic.

Another factor not accounted for -- is the impact of the investor stampede out of actively-managed funds and into passively managed funds.  There is a self-fulfilling issue.  As more investors "drink the Kool-aid" and move into ETFs, it becomes more difficult for mutual funds to remain in business.

Importantly, the study also found that low-fee mutual funds with active management often beat ETFs, but shouldn't that be the headline?

This is not to defend high-fee mutual funds nor low-fee ETFs.  I have watched feverish debates about large-cap stocks, and I don't believe there is any benefit to broad mutual funds in this space.  Although the WSJ survey shows that active investing is not more helpful than passive investing in the small-cap space.  I simply don't believe it!  They don't receive the analytical scrutiny that large-cap stocks receive.  I like passive-investing for broad sweeps of the market but not for narrow segments.

I enjoy attending the church of index or passive investing, surrounded by all those true believers, and find much to believe in, but I don't think I will join.

Tuesday, July 4, 2017

Wisdom of Jay Leno

In 1998, Tom Brokaw permanently branded the generation that fought in World War II as "the greatest generation."  Given the enormous historical sweep of the war, it is not surprising.  They returned home to parades and hugs.

The generation that fought the Korean War went almost un-noticed, dwarfed by the sheer number of World War II veterans and lost in their shadow.

The generation that fought the Vietnam War got plenty of recognition, if not the type they wanted.  Being called a "baby-killer" is not a hug.

The generation(s) fighting the Iraq/Afghan wars feel trivialized by the perfunctory "thank you for your service."

Comedian Jay Leno has a different viewpoint.  He believes whatever generation is currently wearing the uniform to protect our nation is the GREATEST generation.

Good point!

Monday, July 3, 2017

As we approach the 242nd birthday of the Great American Experiment, there is a new study by the Pew Research Group, suggesting that partisan intolerance now exceeds racial intolerance.  One-third of all Democrats would be upset if their child married a Republican, and fully one-half of all Republicans would be upset if their child married a Democrat.  This is crazy!

As a boy, I remember the adults discussing politics without getting mad at each other.  How did we ever get so polarized and incapable of polite conversation?

The first cause is gerrymandering, which discriminates against moderates in favor of extremists. Moderates can talk, while extremists just scream.  I have written extensively about this.

Another cause is the separate echo chambers we inhabit.  Republicans limit their news intake to their safe providers, and Democrats do the same.  Related to this has been the death of debate.  Safe news providers regularly stage "fair and balanced" debates on every subject, by inviting two political hacks to spin their talking points.  Nobody has ever accused news anchors of being good debate judges. Debate is more than mere pugilistic spin.  As this pugilistic spin increased, honest debate decreased.

One analyst thinks the Republicans are slavishly devoted to their ideology, while Democrats are slavishly devoted to their constituencies.  Maybe?  But, discussing such a question will anger both sides.

The explosion of news sources had the unintended consequence of commercializing news.  Now, the sole purpose of news is to sell advertising.  Do you think Rupert Murdoch would have allowed Roger Ailes to create the conservative juggernaut of Fox News if he couldn't make a profit?  He saw a large segment of the population feeling under-served.  He served it by selling advertising and made more billions.

If I had to point the finger at any one person most responsible for the polarization of political discussion, I would say Newt Gingrich.  He encouraged Republicans to avoid fraternizing with Democrats, such as for drinks after work or dinners or family cookouts.  It is hard to demonize your friends.  He did the country no great service.

Over the last 242 years, we have survived enemies abroad and enemies within.  In 1970, Alvin Toffler wrote the classic Future Shock , predicting the rate of change would keep increasing -- enough to threaten the stability of a slower moving political system.  Maybe?

But, America is more than a nation.  It is an ideal -- a durable ideal.  We will continue celebrating our birthday for many years to come!  I just pray we can evolve our political system as the times evolve.

Sunday, July 2, 2017

Warren Buffett Is Right

Bitcoin is a solution in search of a problem.  Warren Buffett called  bitcoin a mirage, urging investors to "stay away."

Railing against the cost, slowness, and open transparency in the international movement of money, bitcoin was one of the original crypto-currencies, which are stateless currencies backed by nothing, not even by bankrupt governments.  They are the ultimate "fiat" currencies, which means they have no value unless someone is willing to accept them as currency.  Just try to buy groceries or a tank of gas with bitcoin.  Amazon will not accept bitcoins.  Yes, they have recently risen dramatically (up 300% this year) in value, but look at the wildly volatile charts.  It is no place for retirement assets.

The total value of crypto-currencies has increased SIXFOLD so far this year.  It reminds me of the tulip bubble in 17th century Holland.

In a world with too many currencies already, why do we need more?  Europe consolidated their myriad currencies into the euro.  Many nations have simply nailed their currency to the dollar, effectively abandoning their own currencies.  If we need more currencies, maybe each city and state should issue its own currency??

Of course, criminals, drug lords, and terrorists love bitcoin, because they can receive value while maintaining their secrecy.  Now, why would I invest in something like that?

Those who believe market value is determined by "supply and demand" assure us that the world cannot be flooded with bitcoin, because there are only 21 million that are possible to "mine" in the internet by complex algorithmic puzzles, and 14 million have already been mined.  Of course, that ignores newer crypto-currencies, like ethereum, ripple, nem, litecoin, dash and other new currencies appearing almost daily.  (Bitcoin's share of the market dropped from 85% of the crypto-currency market in the first quarter to only 41% now.)

The only plausible business model of crypto-currencies is the blockchain, that secretive ledger that records all transactions without identifying the players.  Again, why would I invest money in
something with no redeeming social value?  I have no desire to own any business for the benefit of criminals, drug lords, and terrorists.

I may be wrong, and crypto-currencies may someday become a legitimate asset class commanding a percentage of a modern portfolio, but that is definitely not today.