Wednesday, November 29, 2017

Chicken . . . or Egg?

Consumer confidence has reached the highest level in seventeen years.  The stock market has hit record highs.  Is that a coincidence or a real relationship?

Almost all economic data is related to other economic data.  But c onsumer confidence is more closely related to the level of unemployment than the stock market.  When jobs are plentiful, consumer confidence is higher.  Likewise, plentiful jobs indicate the economy is good, which also helps drive the stock market upward.

There is also a class distinction.  The stock market reflects the attitude of the upper income levels, while consumer confidence more closely reflects the attitude of the middle class.  Either way, it looks like it should be a good holiday season for retailers.  (One worrisome sign is that the savings rate has been decreasing for over a year.  To finance a holiday spending spree, consumers are likely to rely on their addictive credit cards, which favors financial stocks.)

Such economic data does not change greatly over a short period of time.  Both the stock market and consumer confidence have enjoyed a fairly steady improvement since 2009.  And, there is no sign of the next recession, especially during this holiday season.  So, enjoy! 

Tuesday, November 28, 2017

Very Bad Timing

I am a Supply-side economist . . . some of the time.  I am a Keynesian economist . . . some of the time.  And, I am an Austrian economist . . . some of the time.  There is a time and a place for each of the three major schools of economics.

Supply-side economics and Keynesian economics are useful for "jump-starting" a moribund economy.  Austrian economics is best for long-term management of the economy.

The good news is that the economy is doing well right now.  While there are always predictions of doom, there is no strong economic predictor of a recession in the foreseeable future.  The economy does not need to be "jump-started" right now. 

The current tax proposal would have been great in 2008 . . . but not in 2017.

Even worse, some salesmen are pulling numbers out of their imagination.  Secretary of the Treasury Steve Mnuchin is one of my favorite Cabinet officials, but he is overly-zealous in his sales pitch.  Repeatedly, he says the tax cut "will pay for itself."  Supply-side believers argue that a tax cut will so stimulate GDP that increased tax revenue will flow from increased economic activity.  They call this "dynamic scoring," and it works . . . some of the time.

According to Mnuchin, the $1.5 trillion tax cut will be replaced by the additional $1.5 trillion of new tax revenue from the newly-stimulated economy.  The non-partisan Wharton Budget Model predicts the tax cut will add at least $1.4 trillion and maybe $1.7 trillion to the debt.  Even the highly-partisan supply-side believers at the Tax Foundation believe the tax cuts in the House version will add $1.08 trillion to our national debt, while the Senate version will add $516 billion to our national debt.  Either way, even Supply-side "true-believers" cannot believe Mnuchin's numbers. 

When the true-believers don't believe, neither should you.

Monday, November 27, 2017

Non-Binary News

News from Fox News is considered true-news by Republicans.  Democrats consider most news from Fox News as fake-news.   This is the partisan perspective, and it is unfortunate that we take such a binary view of news.  It is far too multi-faceted for binary views.  There are more than two perspectives.

All the major news sources -- Fox, CNN, MSNBC, networks, etc. -- are overly U.S. centric.  There a big world outside the U.S. that gets too little coverage.  Yes, there is CNN International, British Broadcasting Corporation (BBC), even PBS.  There is also al Jazerra and Russia Today (RT) but their bias is easier to recognize than finding their station in the cable line-up.  This is the geographic perspective of news.

Now, there is another perspective -- the age perspective.  Republicans and Democrats view the world thru a partisan lenses.  Millennials have a different view that neither Fox nor non-Fox stations recognize.  They want their own lens and now have "newsy news".  Originally launched in mid-America Missouri in 2008, it has been acquired by E.W. Scripps & Company, which turned it into a network this year.

Just as baby-boomers view the world differently from the "Greatest Generation," the Millennials view the world differently than the older generations.  They have a refreshing look at how to present news.  (Locally, it is channel 136 on the Cox line-up.)   Of course, since it is non-partisan, Republicans and Democrats will both label "newsy news" as fake-news. 

Maybe, it's not??

Thursday, November 23, 2017

Happy Thanksgiving!

I was not captain of my high school football team, nor did I ever date a cheerleader.  Long ago, I accepted the reality that I would never be President of the United States, nor even an Army general.  That was fine for me but is not fine for many other people, unfortunately.

Wellschmerz is the German word for that emotional problem that develops when one realizes they will never reach their life goals.  It is more common in males and can be very debilitating.  Not infrequently, it leads to suicide.

Apparently, psychologists believe the cause was obviously unrealistic goals and that only the passage of time will solve the problem of Wellschmerz, but that time can be shortened considerably, by remembering a half-empty glass is still half-full and being grateful for the half-full.  It is important to be thankful for the half-full glass every day.  To all sufferers of Wellschmerz, our American Thanksgiving should be your reminder . . . to be thankful for something every single day!

Numerous studies have shown that being grateful provides a positive impact both in the workplace and in relationships.  Famously temperamental Mark Zuckerberg challenged himself to write a thank-you to a different person each and every day of 2014.

Can you write a thank-you note to any single person TODAY?

Wednesday, November 22, 2017

Tax Support

The S&P 500 has set 54 new all-time highs so far this year.  Most believe the elevated level of the stock market is due to the flooding of cash into the economy by the Fed since 2009.  That was an important factor but is decreasingly so, as the Fed reduces its balance sheet by selling off some of its bonds and raising interest rates..

More importantly, the stock market reflects higher corporate earnings, and those earnings are expected to continue increasing next year.  But, there is something else supporting the stock values right now.

A price normally reflects the supply and demand for that product.  If demand increases, buyers will bid up the price.  If supply increases, sellers will have to lower their price to sell their products.  The same is true for stocks.  If more people want a particular stock, it will rise in value.  If fewer people want that stock, it will fall in value.

Right now, there is a shortage of sellers in the stock market.  One reason is that sellers think prices will continue to rise.  Another reason is that they think their capital gains will be taxed at a lower rate next year.  Why sell it today and pay a 20% capital gains tax, when you can ride the increasing value and sell it in January, paying only a 15% tax?

The combination of higher expected corporate earnings next year and the reluctance of sellers to sell this year are both contributing to the 54 new all-time record highs.  If the stock market gets scary in January, don't be surprised . . . nor frightened.  

Monday, November 20, 2017

Present Shock ?

In his iconic 1970 book Future Shock, Alvin Toffler pointed out how the rate of change was increasing.  At first, it seemed to elaborate the obvious.  However, deeper analysis demonstrated that the rate of change was feeding on itself and would continue to increase at a faster and faster rate.  He argued that we need to increase the speed of our decision-making to accommodate the increased rate of change.  In the 47 years since then, I've seen nothing that suggests Toffler was wrong.

During the last six years of the Obama Administration, we had political gridlock in Washington, primarily driven by the radicals elected due to gerrymandering.  I had hoped that the Republican takeover of all branches of government would have resolved the problem of gridlock, but it has not.  The radicals remain.

Now, I read the latest survey out of India, which is the world's biggest democracy, where 53% of the voters favor a strong-man form of government instead of democracy, just to break the deadlock and get things moving again.  Surveys in Indonesia and South Africa found the same thing -- exasperation with democracy.

The strong-man president of Turkey, Recep Erdogan, famously said "democracy is like a street car.  When you get to your stop, you get off."

It may be that we have out-lived the need for democracy, but many of us still have a romantic notion of what democracy can be and are reluctant to let it die.  The only way to save democracy is to increase the speed of decision-making or legislating in Washington.  How?

Sunday, November 19, 2017

Happy 2018 ?

There is a difference between trust and respect.  For example, I have no trust for the giant investment house of Goldman Sachs but have great respect for them, especially their research.

Their latest forecast is (1) that the stock market should be as strong in 2018 as in 2017 and (2) that, if Trump doesn't get a "win" on tax reform, he will be too politically weakened to renegotiate NAFTA.

With respect to 2018, they note that worldwide economic growth continues to improve and that monetary policy remains very easy worldwide.  The biggest threat to this forecast remains policy errors, like a trade war.

With respect to Trump renegotiating NAFTA, they argue that he will have lost political strength, if he goes a full year without any legislative proof that he really can do anything to make America great again.  While NAFTA is a good thing, it does need to be updated, although President Trump might not be the right person to update it. 

"A Mind Is A Terrible Thing To Waste"

It started as a trickle and soon became a stream and now it is a river.  The current news coverage on sexual harassment has focused our attention on a low profile but very real problem.  This is a good thing!

First, there can be no justification or excuse for sexual harassment, but a little perspective is always helpful.

About 17 years ago, I worked with a woman who was both a good employee and a good person.  After she left the bank for a better job, I quipped that I would miss "her beautiful green eyes."  My boss then chastised me for "inappropriate language in the office."  If complimenting a person whom I had never touched and whom I was unlikely to ever see again was wrong, I did the only logical thing and thereafter avoided all unnecessary contact with women employees.

Vice President Pence does the same - he has no lunches alone with a woman and attends no parties without his wife if alcohol is served.

Extreme Judaism and extreme Islam both separate the genders as much as possible.  While it is difficult to believe that extreme religious beliefs are ever right, maybe they are not entirely wrong.

While sexual harassment is morally wrong, the shunning or marginalization of women is an economic wrong. 

Thursday, November 9, 2017

A Weakening Euro ?

So, the central banks in the United States, Canada, and England have all started to raise interest rates, as part of their normalization after the global financial crisis.  The ECB says they will also -- someday.

Rising interest rates push that country's currency exchange rates up.  Since the ECB declined to raise rates last month, the euro has declined 2% against the dollar.  That's a huge move in one month.

The spread in interest rates between the U.S. and the ECB can be expected to rise, according to the futures market.  That spread is 151 basis points now but 200 basis points in twelve months.  That means the futures market expects the euro will continue to fall.

A weakening euro provides a tailwind to business in the ECB and a headwind to business in the U.S.  More importantly (?), that also means it will be cheaper to wait until next year before booking a European vacation.

Wednesday, November 8, 2017


Economists often advise people who cannot follow all the economic data each month to simply follow the monthly "jobs report" issued by the Department of Labor on the first Friday of each month, because the economy must be strong if the job market is strong.  It includes the normal monthly unemployment rate.

Some economists prefer the U-6 unemployment rate, which measures the long term unemployed.  Some politicians prefer the Labor Force Participation Rate, which measures how many people are not looking for work.  (Spoiler Alert:  Both numbers are much improved since the global financial crisis of 2008/9.)

The economic report I prefer to watch is the "Jolts Report" or Job Openings Labor Turnover Report.  Last month, there were 6,100,000 job openings in the U.S.  That is the most this century!  Businesses are finding it difficult to find qualified applicants.  If you cannot find a job now, you need to go back to school instead.  The jobs are out there waiting.

The Quit Rate seems to have stabilized at about 2.2%, which means 2.2% of the labor force quit their jobs last month.  That is the highest since 2007.  Because workers seldom quit without another job waiting for them, a rising Quit Rate means greater confidence among workers and is a good thing. Interestingly, the Quit Rate seems to have stabilized at this high level, as the average age of workers has continued to increase.  Older workers are less likely to quit than younger workers.  A younger workforce would have a higher Quit Rate.

The job market is great.  The stock market is great.  So, why do we need to stimulate the economy with a huge tax cut?

The argument is that the economy is only good, not great.  It is also argued that the job market is not truly great until average wages rise faster.  Another argument is that too many people are not in the workforce.  All of that is true, but I still don't see how a huge tax cut will help, while I do see clearly how another $1.4 trillion of national debt will hurt us . . . and our grandchildren.

Wednesday, November 1, 2017

Roses Are Red, Violets . . .

Let's see . . . GDP growth last quarter was unexpectedly high at 3%, unemployment is very low, stock market values are up . . . it is small wonder that the latest Consumer Confidence Index is the highest in almost seventeen years.  There is always another economic recession somewhere out there, but it is not visible on the horizon yet.

Watching for an economic recession is one thing, watching for a financial crisis is something different.  And, a financial crisis is much worse than a normal recession!

Those confident consumers have nearly stopped saving, down to 3.1% of income, which is down from 6% just two years ago.  The national debt continues to rise, credit card usage is up, and corporate bonds are being issued at a rapid rate (to lock-in low rates on money they may need in the future)  Total debt is rising.

Remember the Minsky Moment, named after the American economist, Hyman Minsky, who believes a debt balloon will continue to expand -- until it pops, producing a financial crisis.  It is very premature to start worrying about a financial crisis, but it deserves more attention right now than the economic data deserves.

The decision by the Chicago Mercantile Exchange (CME) to begin a futures market in bitcoins worries me, and I will be watching it carefully.  You should too!

Rhetorical Question

If you are one of my Democratic friends, please stop reading now.  You won't understand it and will have that silly "deer-in-the-headlights" look on your face.

If you are one of my Republican friends, I have long agreed that the news media has a Democratic bias, at least a 51% bias.  (However, since Fox-world has a 30% share of the news market, the Democratic bias cannot be more than 70%.)

So, if we suspend the first amendment and only allow Fox to report the news, will Donald Trump be a great President . . . or will he still be an egotistical egomaniac?