Sunday, October 29, 2017

Emotional Numbness

The President has declared opioid usage a national health emergency, and I applaud anything to help those people trapped in addiction.  Missing from the discussion, however, is the historical sweep of drug addiction.  There has never been a time in my lifetime that there was NOT a drug problem of some type.

As a boy, I remember my father making me watch a TV show about heroin.  Many decades later, I still recall one particular scene of an otherwise-upstanding young man literally laying in the gutter, while begging for more heroin.  As a teenage, I remember seeing "Reefer Madness" - a video showing marijuana as a killer of morals, which I was required to watch again in Army Officer Candidate School.  In college, the rage was LSD - a time of "turn on, tune in, and drop out."  Then, speed became popular - which would turn a lazy bum into a workaholic, until he collapsed.  The first time I saw coke, was on the hood of new Cadillac in Florida, as bankers swarmed to snort it.  Then, there was quaaludes and assorted other drugs that have crossed the stage since then and passed out of fashion.

My point is NOT that opioids are not a problem.  My point is NOT that opioid addiction is not a personal tragedy.  My point is NOT that addicts don't deserve help.  My point is that some other drug will take the place of opioids in the future.  Which drug will that be?  The most recent data from Colorado shows clearly that opioid usage has declined as marijuana has become legalized and used more regularly. 

My question is whether the drug is a cause or a symptom of another problem.  Because different drugs become fashionable at different times, I'm suspicious that there is a certain personality type that is prone to addiction.  Would it not make sense for psychologists to identify those people at an early age and begin treatment before they seek out drugs to deal with their problems?

Maybe, if Americans had taken Nancy Reagan's advice decades ago to "just say no," we would not have the opioid problem today.  But, we do!  Well-meaning admonitions like that won't give relief to those who need it.

Saturday, October 28, 2017

Cold Reality

Iceland is a fascinating little island-nation with a population of a mere 335 thousand, much less than the city of Virginia Beach for example.  Often called the "land of fire and ice," it is indeed a land of contrasts from glacier-covered active volcanoes to magnificent art galleries.  Despite a jaw-breaking language, the population is remarkably well-educated and well-read.

While I believe that people are just people everywhere and that "the Russians love their children too," I did find a special, laconic disposition of Icelandic people.  Their speech is melodic and hypnotizing.  Except for their politicians, I've never seen an angry Icelandic person.

Speaking of politics, Iceland neatly separates its economic and social issues.  It is progressive on issues such as same-sex marriage and abortion but conservative on business regulation.  (It is oddly conservative on alcohol consumption!)

Karl Marx famously said that capitalistic systems may be efficient, but they are also cruel.  Iceland could have been a case-study for him.  It's economy was traditionally built on fishing and farming.  In the halcyon days of minimal worldwide financial regulation before 2008, Iceland added a potent third new industry - banking - and proceeded to make loans worldwide and, more importantly, buying derivatives, such as credit default swaps.   This country consequently became the first country to collapse during the global financial crisis, and its people suffered greatly.  One important economic tool is the currency exchange rate.  Iceland devalued its krona over 50%, which means all imports suddenly cost 50% more.  GDP promptly shrank and unemployment tripled.  They saw the cruelty of capitalism up-close and personally.

Slowly, the capitalistic Icelandic economy fought back and recovered.  Today, it has the fastest growing GDP (7.2%) among developed nations and a mere 2.6% employment.  Their economy is booming.  Banking has been replaced by tourism.  Over two million tourists visit this tiny country annually.  Construction cranes dot the horizon in their capital city of Reykjavik.

But, like people are the same everywhere, politicians are the same everywhere.  Icelanders are voting today to replace their year-old government, because the leader's father wrote a letter asking for a pardon or "honor restitution" for a pedophile.  Understandably, snap elections were called immediately, and we will know soon enough who the new leader will be, but it doesn't really matter, because Iceland will continue to be socially progressive and economically conservative.

Iceland is a must-see country!  Go, see it now . . . 

Friday, October 27, 2017

A Fake Hatchet Job ?

Hundreds of times, I've posed the question of "is 6% a good portfolio return?"  The answer, of course, is -- it depends!  If you take very little risk and get a 6% return, it is a good return.  If you take a lot of risk and only get a 6% return, it is a terrible return.  Your return has no meaning without knowing how much risk you took.

You would expect a novice who knows nothing about risk and investment management to make the mistake of ignoring risk, but you would expect something more from The Wall Street Journal.  They just completed a lengthy expose' on the use of Morningstar's star ratings of mutual funds, which is the starting point of any discussion of mutual funds.  A fund can have as many a five stars, but that doesn't have any predictive value.  Few five star funds remain that way for ten years.  Their investment returns can vary wildly from very good to very bad. 

Morningstar doesn't promise that a five star fund will increase in value.  They look at the risk-return relationship of the mutual fund, the level of fees charged in comparison to similar funds, the qualifications of the portfolio manager, the strength of the mutual fund sponsors and other factors.  Morningstar merely estimates if the particular fund has the tools and integrity to continuing earning five stars.  There is more to life and more to investing than getting a 6% portfolio return.

Your independent judgement of mutual funds cannot be out-sourced, but Morningstar is a good place to start your studies.  It is a launch pad, not a landing pad.

One would not expect to read "fake news" in the conservative Wall Street Journal . . . nor an article as misleading as this one.  What did Morningstar do wrong to deserve such a "hatchet job?"

Thursday, October 26, 2017

Parsing Capital Goods Orders

Economists have been waiting for the economic data to become misleading due to the impact of our terrible hurricane season.  Fortunately, the monthly "durables report" helps separate the one-time data from the more durable.  It is one of the more important monthly reports.

Overall, capital goods order rose another 2.2% in September, following a 2.0% jump the previous month.  That is a very strong increase, with stronger than expected growth in civilian aircraft sales and weaker than expected growth in auto sales, despite the hurricane damage to cars.  Stripping out defense spending and civilian aircraft sales, the rate of growth drops to a still very robust 1.3% monthly increase in capital goods orders.  Over the last quarter, this has risen at a very strong 11.3% annualized rate.

Bottom Line:  the one-time impact of the hurricanes has been less than expected and has not yet confused the economic data.  More importantly, the underlying data continues to look strong.

Party on, Garth!

Wednesday, October 25, 2017

It Matters

Janet Yellen has been Chairman of the Federal Reserve System since the retirement of Ben Bernanke, but her term expires in February, and President Trump is looking for her replacement.  She has indicated that she would like to continue in her current job, but is opposed by the Area 51 Republicans primarily because she was originally appointed by former President Obama.  The first choice of Area 51 Republicans is Stanford professor John Taylor, whose formulaic approach to regulating would be more predictable and less flexible in a crisis than now. 

Gary Cohn is the current Chairman of the President's Economic Advisors and is supported by the establishment Republicans.  With a long career at Goldman Sachs, he is probably too stained to be appointed, despite his other impressive qualifications.  Or, those establishment Republicans could content themselves with Kevin Warsh, who is very young and unproven but has already served a partial term as a Fed Governor under a Republican administration. 

Democrats would be most content with the reappointment of Janet Yellen or current Fed Governor Jerome Powell, who are less likely to raise rates quickly.  Democrats also know their opinion doesn't matter on this.

The President is a real estate developer, who are generally heavy borrowers and therefore prefer lower interest rates.  Besides, increasing interest rates will increase the cost of carrying our $20 trillion of government bonds, which takes money away from other Trump priorities.  It also decreases consumer spending by voters.  I would not be surprised if the President supports the Democrats on this important appointment and appoints either Yellen or Powell.  If so, expect little disruption in the credit markets. 

Monday, October 23, 2017

Clear Sailing

As a long-time member of the National Association of Business Economics, I follow their surveys closely.  In their latest, it is clear they see no prospect of recession during the next two years.  Here are some thoughts:

Look at the sharp rise in earnings from the third quarter (Q3) of this year to the next quarter.  Obviously, other members are more optimistic than I am, and I hope they are right.

Also, notice the declining growth in earnings while sales remains relatively flat.  That is a normal behavior for later stages of the business cycle.  But, we are not near the end of the business cycle.

Thursday, October 12, 2017

A Time and A Place

During the Great Depression, Democrats faced a moribund economy and needed to jump-start it.  To do so, they adopted Keynesian economics which calls for deficit spending.  This is sometimes called "demand-side" economics and is the mirror image of "supply-side" economics, which has been adopted by Republicans.

One calls for the government to increase its demand for goods & services, while the other calls for businesses to increase the supply of goods & service whenever they get a tax cut.  BOTH jump-start stagnant economies, and BOTH cause huge government deficits, and BOTH promise the deficits are temporary, which will decrease over time, as the economy gains strength.

Does either approach make sense now, in 2017?  NO!  This is time for Austrian economics.

Nobody likes to admit the economy is doing just fine.  It doesn't need to be jump-started.  Trump's cutting of red-tape will do more good for the economy than a tax cut will.  When the economy is doing well, you don't cut taxes -- you should repay debt incurred during the last round of supply-side or demand-side deficit creation.  That's the Austrian approach, i.e., balance revenue & expenses whenever possible and keep debt minimal.

President Trump is drinking the supply-side Kool-Aid, when he actually needs a good Austrian beer!  Let the economy grow and use the surpluses (once we get some) to repay debt.  Cutting spending is good, cutting taxes is not . . . at least, not now!

Wednesday, October 11, 2017

Losing Our Focus

Political parties are obstacles to clear thinking.  My Democratic friends are incensed that Trump & Company colluded with the Russians, while my Republican friends call it a "big nothing-burger."  Their thinking is polluted.  Neither has identified the all-important issue: 


We should be talking about punishment for the Russians.  We must have an agreement with the Russians never to do this again, or we must launch a major cyber attack on them immediately.  Why are we talking about "nothing-burgers?"  Whether it impacted the election or not is totally irrelevant.  Do you think they were trying to NOT impact the election?


To my Democratic friends, show some faith in Mueller.  He is like a tumor, growing more malignant every day.  If anybody at Trump & Company colluded with the Russians, Mueller will identify it.  There are only two things you can do -- Be patient and focus on the important issue:


To my Republican friends, get out of denial.  If somebody colluded with Russia, they sold out their countrymen, both Republicans and Democrats and deserve to punished.  If not, this too shall pass.  Your job is to focus on the important issue:


There must be retribution!  How would you do it?  When?  Would you negotiate a preemptive treaty with the Russians or just attack?  Do you limit the attack to cyber-attacks or extend to military attacks?  How can anybody talk about "nothing-burgers" when the United States has been attacked?  Remember:


Nothing else matters . . . nothing else matters . . . 

Tuesday, October 10, 2017

Good Guy Finished First

University of Chicago professor Richard Thaler wins this year's Nobel prize for economics for his groundbreaking discovery that human beings are . . . well, human!

You see, for the sake of convenience, economists have always assumed that people act rationally, in their own best interest.  Supply-siders like to believe taxpayers would set aside any tax savings and invest it to "create jobs," despite over-whelming evidence that people either just save it or pay down debt instead.  When gas prices drop, do people use their cost savings to create jobs or switch to premium gas or make another trip to McDonald's with the kids?  It is irrational that the overwhelming number of baby-boomers have no savings, but who needs savings if you're going to live forever?  Are people rational decision-makers?  No!

People behave irrationally, because they are . . . well, people.

Dr. Thaler elaborated that obvious fact and developed ways to make economic assumptions about human behavior.  He is the father of "behavioral economics" and absolutely deserves the Nobel prize.

Yep, a good guy with a great sense-of-humor finally finished first!

A wider perspective is that economics has been dominated by econometrics or applied statistics for the last twenty years or so.  I can see the tide is changing, and there is finally room in economics for non-economictricians, who can actually speak "human." 

Friday, October 6, 2017

Third Quarter Wrap-Up

For those interested in my latest column for Inside Business, you can read it here: 

Labor Market

Even though the United States LOST 33 thousand jobs in September, the jobs-market is HOT!  The unemployment rate is only 4.2%.  The more important U-6 level of unemployment, which includes the long-term unemployed and those only marginally attached to the workforce, like those who hold serial part-time jobs, has fallen to only 8.3%, which is the lowest level since 2007.

The only reason the U.S. lost jobs last month was due to the hurricanes.  Many of our economic data points will be skewed by this over the next few months, so we have to "look around" the data.  If you look around today's jobs-report, you will see the jobs-market is HOT!

If you still have a kid living in your basement, who believes he/she cannot get a job, NOW would be a good time to evict them forcefully if necessary.  Do them a favor and EVICT them.  It is not even tough love, it is just love to evict them. Of course, there is something called "frictional unemployment" that recognizes a job in Oklahoma is not much good for a person in North Carolina, who doesn't even know a job opening exists.  That's why they call it a job-search, which is so simple on the internet.

Despite the good news that the jobs-market is HOT, the stock market was not happy.  The conventional wisdom is that the Fed is more likely to raise interest rates when the job-market is HOT.  Interestingly, the current Fed-head, Janet Yellen, finds the relationship between jobs and inflation is not as strong as before.  With unemployment so low for so long, inflation should be a problem now, but it is not, contrary to what hand-wringers say.  I do believe Yellen will again raise interest rates in December anyway, not because she wants to preclude an inflationary outbreak but because it will be her last opportunity to do so before her term expires -- a fitting "swan song."

Did I mention the jobs-market is HOT?  Now, go worry about something else . . .

Wednesday, October 4, 2017

Advantage: Males ?

On the first Monday of each month, the Department of Labor releases its closely-watched "jobs report."  Democrats focus on the unemployment rate and advocate more help for the unemployed.  Republicans focus on the labor force participation rate (LFPR) and complain people are obviously lazy.  (The LFPR loosely measures what proportion of the population either works or wants to work, with the rest being too lazy to support their families.)  The LFPR is currently 62.9%, which is much improved but still suggests 37.1% are students, homemakers, or "useless."

During the global financial crisis, the unemployment rate was very high and the LFPR was low.  Fortunately, that has reversed.   There is no question that, once unemployment benefits expire, the long-term unemployed often fall out of the work force.  (Frankly, if I was a unemployed factory worker stuck in some backwater town of the Midwest during 2009, I would have also been tempted to simply watch "Wheel of Fortune" every day.)

That's the old spin on LFPR.  Inside that number today, there are some interesting changes going on, particularly that women are more likely to be part of the workforce and men are less likely.  One reason is that man-dominated manufacturing sector has not recovered enough but has been mechanized enough that the sector now needs fewer workers.  The female-dominated service sector, on the other hand, has continued to grow, increasing demand for more workers.

Also, with longer life expectencies and the demise of pension plans, we watched the number of males over age 55 retiring actually decline for many years.  Men over 55 were working longer, because they had to!  That appears to be changing now, as more men over 55 are now retiring than entering the market.  That is not true for women.  Stuck in lower-paying service sector jobs, women over 55 continue to flood the labor market.  Another reason for this is that women are less-likely to be disabled and can actually work longer, having been stuck in jobs that were less physically demanding.  Plus, with their longer life expectencies, they need a larger retirement "nest egg" than men do.  Women have to work longer.

Assuming work is bad, it looks like things are getting better for older men, while getting worse for older women.

Tuesday, October 3, 2017

One More Time

I like guns.

How many times have I started a blog with that simple statement?  After each mass tragedy, I try to explain all gun owners are not gun nuts and not all gun nuts are "Area 51" Libertarians.  There are degrees of madness.

My father originally taught me about guns, when I was a little boy.  They were tools, like hammers or saws.  You kept them nearby, in case you saw a snake or a rabbit for the dinner stew.  Guns were mere tools!

I remember my grandfather showing me his shotguns, saying he was ready for the Communists to come over the hill in mountainous rural Virginia during the late 1950's.  He knew perfectly well that was not going to happen but found it a convenient justification for his shotgun collection.  He had no idea of Ayn Rand's Libertarian beliefs of evil Federal government forces trying to enslave us.  He just wanted a justification.

Often as a boy, I saw shotguns but never saw a fully-automatic assault rifle until I was in the Army.  They were useful in spraying rice paddies or other open areas with maximum firepower.  They had no purpose except killing other human beings.  Is that a mere tool?  A hammer drives nails.  Assault rifles kill humans.

Now, our country is terrorized by "Area 51" gun-nuts, who swear any regulation on guns is a slippery slope to confiscation of all guns.  They are simply NUTS!  The NRA started off legitimately but has descended into madness.  It is now clearly a terrorist organization and should be treated as such.  They are the most dangerous lobbyists in America.  While they have a convenient "slippery slope" theory, they have no decency as human beings.

From a regulatory standpoint, Americans can "walk and chew gum at the same time."  We can allow the sale of handguns while forbidding the sale of bazookas.

From a psychological standpoint, I've never seen any research that a guy with 43 guns has some sort of penis-related issues but would not be surprised.

From a religious standpoint, since you can buy a $50 conversion kit on the internet to convert your semi-automatic rifle into a fully automatic one, I pray that whomever sold those kits to the Las Vegas shooter burns in hell forever!

Monday, October 2, 2017

Letting Grudges Go

Many times, my late mother cautioned me not to carry a grudge.  She wisely said the weight of that grudge gets heavier over time.

I've just finished watching the epic new documentary by Ken Burns on "The Vietnam War" and  thought of her advice frequently.  That film is a seminal and definitive work on a long-running national agony and is highly recommended.  During the closing credits, Paul McCartney's iconic song "Let It Be" played mournfully, and I wished that was possible.  I want to let it be and realized then that the grudge may have become heavy.

I'm not mad at John Kennedy for sending the first Special Forces units there.  "SF troopers" expect to be the tip of spear, to be the "eyes & ears."  But, their assessment was confused and tragically wrong.  However, I am mad as hell at Lyndon Johnson for escalating the war. and I'm mad as hell at Richard Nixon for uncorking a torrent of lies and deceit, as he plunged us deeper and deeper into an unwinnable war.  But, I am not mad at Gerald Ford who accepted our obvious defeat and withdrew our remaining forces, preventing the waste of more American boys, although he had to abandon almost a million of our allies.

There will be many who say this documentary ignores the nobility of trying to save a remote country from the clutches of Communism.  Likewise, there will be many who say this documentary ignores  the permanent breach of trust caused by this war between the government and the governed in America.  I'm mad as hell at both sides.  Surely, we are now post-spin and willing to accept that both sides have valid points. 

I'm mad as hell as those who labelled returning veterans as baby-killers and worse.  I'm not mad at  today's young people, whose lives are too full of exciting things to remember Vietnam -- which is just another war in a long line of wars, like Afghanistan.

And, I'm mad as hell at people of good intentions and pretty words, who believe you can successfully fight a guerrilla force with conventional forces.  Not learning that lesson has already cost the lives of many Americans in Afghanistan.

The documentary left me with one strong impression.  Other veterans have figured out a way to "let it be" and have moved past the experience.  The Vietnam Memorial has been sitting there for 35 years, and I've been too cowardly to visit.  Maybe, it is finally time to visit . . . and to find a place to bury this grudge.