Sunday, December 31, 2017

The 10% Rule

After telling my father about a minor "dust-up" with four black youths when I was about 12 years old, my father explained to me that "10% of black people are bad people."  After scratching my head, I asked what percentage of white people are bad people, and he told me . . . 10%.

His point, obviously, was that 10% of all types of people are bad people.  That applies not just to blacks and whites, but also to Protestants, Catholics, Jews and Muslims.  It applies to Americans, Russians, Chinese and everybody.  Conversely, it means that 90% of all people are good people, who should not be penalized for the bad 10%.

Now, here comes the hard part:  90% of all Republicans are good people, and 90% of all Democrats are good people.

So, if you're still looking for a New Year's Resolution and you're a Republican, then be it resolved you will actually befriend a Democrat in 2018, and conversely for Democrats.  Note that befriend does not mean merely shake hands with them.  It means getting to know them, their family, their hopes and dreams, and to study their perspective on reality.

Or, are you part of the 10%?

A Banner Year

2017 was a banner year.  Stocks were up.  Bonds were up.  Commodities were up.  It was a very good year indeed!

The largest company stocks did best, with the Dow rising 28.11 percent.  (Your portfolio probably didn't rise nearly that much, unless you invested solely in the Dow without diversifying or invested very heavily in technology.)  The merely huge companies in the S&P 500 index rose 21.83 percent, while middle size companies rose 16.24 percent and smaller companies rose a "mere" 13.23 percent. 

This out-performance by the largest companies reflected the fact that most are multinational and benefited from the economic recovery around the world.  In addition, investors believed the multinationals would get a tax break on repatriating their cash from abroad, which they did with the new Republican tax plan.

The improving economy outside the U.S. should not be ignored.  European stocks were up 26.18 percent, while Asian stocks were up a whopping 45.06 percent.  Even Latin America stopped limping along and rose 26.93 percent (although it stumbled some in the fourth quarter).  This non-U.S. growth is one of the strongest fundamentals of our current U.S. stock market.  Pundits call it a "synchronous global recovery."

Increasing profits and decreasing taxes during a global recovery is the secret potion for a good 2018.

Saturday, December 30, 2017

Missing The Point

Point #1:

Fox News argues 24/7 that Secretary Clinton leaked national secrets and abused email protocols.  If so, the Secretary should be punished.

Point #2:

Non-Fox News argues 24/7 that President Trump colluded with Russia to influence our voting.  If so, the President should be punished.

Point #3:

All U.S. intelligence agencies concluded that Russia interfered with our election process.  If so, that country should be punished.


Why is it so difficult to focus on point #3 alone?  Punishment for the Secretary or the President would be national disgrace or even imprisonment.  What should the punishment be for Russia . . . or Putin?

The perpetrator of this crime - hacking our democracy - is known.  Merely improving our defenses against such hacking is not punishment for Putin.  It is merely another punishment for our taxpayers.

Forget Clinton.  Forget Trump.  A "pound of flesh" is due from Putin!

Wednesday, December 27, 2017

2018 New Year's Resolution

In the early nineteenth century city of Nottingham in England, working conditions for working men and women were barely human.  In a effort to gain negotiating strength for possible unionization talks with the textile industry, workers began destroying machinery.  When violence broke out, the mill owners began shooting the workers, and the rebellion from 1811-1816 was finally put down by military force.  The workers became known as Luddites.  While their motivation was to unionize and improve their working condition, their name has become synonymous to anybody opposed to increased industrialization or technology.

After a recent misadventure in the mysterious and treacherous world of software, I became divorced from my computer calendar.  As one of those jerks who made others wait in line when checking out of the dentist's office, so I could enter the next appointment into my phone, I suffered immediate withdrawal pains without my computer calendar.

Yes, I know that our electronic calendars spy on us, which is creepy.  Who cares if I get a haircut every 4.17 weeks?  Go ahead, enter into your calendar that you're traveling to Kansas City in July.  You'll start getting hotel advertisements in Kansas City as the date approaches.  But, I also know that calendars have been a disappointment to "data-gatherers" like Google, Apple, Microsoft, etc.  If it has been a disappointment to them, then it is probably safer for us to use.

My late mother always encouraged me to make a New Year's Resolution each year, in order "to become a better person."  So, I think my 2018 resolution will be to rediscover my inner-Luddite and to return to using a pocket calendar, foregoing my computer calendar.  I bought it last night and won't ever suffer those withdrawal pains again!

Sunday, December 24, 2017

Let It Snow. Let It Snow . . .

During the past week alone, we have learned:

1.  New home sales are surging, up 17.5% in November.
2.  Consumer Sentiment was the highest in 2017 since the year 2000.
3.  Personal Income is rising nicely, up 0.3% in November alone.
4.  Inflation is quiet.  The PCE deflator is up on 1.8% year-over-year.
5.  Core inflation is up even less, only 1.5% year-over-year.
6.  Consumer spending rose twice as much as expected in November.
7.  Shipment of non-defense capital goods (less aircraft) has risen for ten straight months.
8.  The current account deficit with other nations dropped 24% between Q2 and Q3.
9.  The Index of Leading Economic Indicators has risen 15 straight months.

You have to look hard to find negative economic news.  While there is always a recession ahead of us, it is very far ahead of us indeed.  There are very few signs on the horizon.

I don't recall a period when good economic news was so abundant.
Like snow, good news falls quietly. 
Happy Economic Holidays, America!

Saturday, December 23, 2017

Mourning the Dead

Bill was my buddy.  He was from Kentucky, and we were bunk-mates in Officer Candidate School, room-mates in Paratrooper School, and next door neighbors in the Special Forces Officer Course.  In Vietnam, he commanded a platoon of "tunnel rats" - those guys with the terrifying duty of flushing the Vietcong out of tunnels.  Accepting his immediate death, one Vietcong soldier bravely popped up from a hole along the treeline and began firing.  Both of Bill's shins were shattered.  His war on the battlefield was over, but the far worse war in his mind was just beginning.  He killed himself in 1985, and I cried.  What had been a treasured friendship in my life became a gaping emptiness.

A bit dramatic maybe, but it is not unlike the emptiness I feel when a treasured value is lost.  While nobody patronizes me about the loss of my Army buddy,  I am patronized about my feelings with respect to privacy.

At one time, privacy was central to being American.  We were a sturdy people who braved the wild to make a better life and, as an example, didn't "cotton" to Federal revenue agents snooping around the farm during Prohibition.  We were men of few words.  The Second Amendment was not just about protecting our guns but protecting our freedoms, including our freedom of privacy.  There are 350 million guns in America, and we still lost our freedom of privacy anyway.

The mother of the Libertarian Party was Ayn Rand, who wrote convincingly of the need for strong individuals to stand up against the government, who snooped on everything you did.  George Orwell's classic book called 1984 described a government dedicated to destroying privacy.  Orwell had no idea that corporations were a greater threat.

Today, younger people patronize those old fools who remember privacy and still treasure it.  Just like they can't even pretend to understand my loss with Bill, they will never understand why the loss of privacy is important to an old fool.  They just snicker or chuckle at the obsolete value.

The only thing worse than an old fool is an old existentialist, who sees life as a wide frigid river, full of ice floes, each inhabited by a single individual, flowing toward their inevitable death.  Younger people laugh at old existentialists, saying "at least you can die alone in privacy."  (Apparently, they are unaware of the myriad machines, tubes, & electrodes that monitor the dying process, whenever possible.)  There is more privacy on the ice floe.

Before retiring last night, I checked my iPhone and found that Apple had gone into the pictures on my phone.  By facial recognition, they determined the most common face, which was my wife, and arranged a photo montage of her.  Apple could tell the date of each photo and arranged the photos of my wife in chronological order.  They even set it to music.  Kindly, they allowed me to choose between four or five innocuous songs.  Thru the kindness of artificial intelligence, it allowed me to choose between the long or short version of the montage and even to stagger the length of time each photo was displayed.  Of course, they did not extend to me the courtesy of asking whether I wanted such a wonderful montage, much less whether I wanted their software program to organize my life.  They violated my privacy!  Creating something nice doesn't change that.  Regardless, my privacy was violated, which I'm sure was legal.  However, should it be legal?  Ayn Rand railed against government snooping, but does that make corporate snooping acceptable?

The point is this:  The loss of a freedom hurts as much as the loss of a great friend.  Freedom of privacy is gone, and that makes me sad.  Emptiness doesn't always fill up again.  Sometimes, the emptiness remains.  Please be considerate of the emptiness of others, without patronizing old fools.

Wednesday, December 20, 2017

Only Two Choices

Q.  What's the difference between Democratic economists and Republican economists?

A.  Democrats like Keynesian economics,while Republicans like Supply-side economics.

Q.  What's the similarity between Democratic economists and Republican economists?

A.  Both love budget deficits but strongly deny it!

Q.  How do they justify such budget deficits?

A.  Republicans use deficits to make the economy better, while Democrats use deficits to keep the economy from getting worse.

Q.  Do either Republicans or Democrats ever reduce the national debt?

A.  No.  (Bill Clinton was the rare exception.)

Q.  How long will we keep hitting ourselves in the head with a hammer?

A.  I don't know . . . until we kill ourselves?

Q.  How will we know when the political system is broken?

A.  Don't you already know?

Monday, December 18, 2017


Pacific Investment Management Company (PIMCO) is a giant, well-respected bond firm.  However, their latest market commentary actually made me laugh.  They see continued economic growth, unless there is a ZOMBIE APOCALYPSE.

The flow of economic data in the U.S. is remarkably positive, and it has been joined by a flow of positive economic data around the world.  This is an extremely rare situation, where most of the world is enjoying solid growth.

They also believe the Republican tax cut will stimulate the economy slightly in the short term (maybe a modest 0.3% next year), but like myself, they believe it will stimulate the economy at the wrong time and only create inflationary pressures in the long term.  This will cause long-term interest rates to increase.  PIMCO would encourage you to refinance your mortgage now.

In other words . . . investors should continue to enjoy the ride!

Sunday, December 17, 2017

Mystery Manipulator (s)

I believe the U.S. intelligence agencies, that the Russians meddled in our presidential campaign last year, and think it deserves further examination.  Unfortunately, any discussion of this subject gets mixed into a discussion about potential involvement by the Trump campaign.  Whether anybody from the campaign colluded is a separate issue from the Russian meddling.  Forget collusion and stay focused on Russia trying to mold public perception!

Separately, the Federal Communications Council (FCC) was proceeding to shut down net neutrality.  Part of that process is to solicit feedback from the citizenry.  Apparently, there were two million fake responses.  Literally thousands of dead people apparently sent emails from the grave.  It's not funny.

I can understand what Russia gains from the U.S. electing a Russia-friendly president, but I don't see what the Russians gain from a regulatory agency transferring control of the internet to cable companies and other internet service providers.  This makes it possible that someone besides Russia is trying to mold public perception.

You may argue that molding public's perception of what they need is done everyday by the advertising industry, and you would be correct, but this is different.  Somebody was trying to mold public policy at the FCC.  Who and why?

Some may argue that non-Fox news is all fake news, but is public opinion becoming fake-public opinion?  If public opinion is polluted, why should politicians pay any attention to it?

If Proctor & Gamble can tell you the best soap, what is wrong with the Russians telling you who would be the best president.  What is wrong with a mystery manipulator encouraging you to surrender control of the internet?  The mystery is the problem.  As Justice Brandeis said a century ago "sunlight is the best disinfectant."

Keep digging . . . 

Saturday, December 16, 2017

And, You Are . . . ?

Long ago, my father told me not to discuss politics or religion, because people take offense so easily.  I cannot ignore politics in my profession, but I never write about religion.  But, sometimes you read something so amusing that it has to be shared.  During a recent sermon, I learned churches and synagogues have too many of the following individuals:

Mrs. Eve Environmentalist, who tells us to be gluten-free, vegan, organic, tree-hugging, hemp clothed, and drive a hybrid.

Mr. Adam America, who tells us to work hard, start-up a business, go from rags-to-riches, honor the flag, do military service, and sing the national anthem.

Mr. Sam Community Service, who tells us we must do social work, pet-adoption, save-a-starving child-in-Africa, and make a difference.

Miss Patty Pious. who tells us we must do church-on-Sunday, prayers-at-night, grace-before-meals, prayer-warriors, and must share-our-testimony.

Mr. Jim Social Justice, who tells us we must march, protest, advocate, resist-the-man, dismantle patriarchy, and fight oppression.

Since there are too many of these individuals, I wonder what type of individuals are too few?

Thursday, December 14, 2017

Choice of Altars

Hillsdale College is a well-respected conservative think-tank in Michigan.  A good friend gave me one of their recent policy opinions to read, which I did gladly.  The gist of it was that the problem with Democrats is that they worship at the altar of identity politics, dividing America instead of unifying it.  The writer argued Democrats are less patriotic than Republicans.  That may be a fair criticism, but it is not a new one.

The Republicans have been criticized for worshiping at the altar of ideology, i.e., if something works in theory, it must therefore work in practice.  An example is the belief that human behavior can be dictated largely by taxes.  Personally, I cannot imagine many normal people actually quitting a job, selling their house, leaving their friends, and moving his family to another state just because of taxes.

Despite this difference between the parties, there is one huge similarity, which is largely ignored.  The majority of both parties don't believe in Keynesian economics nor Supply-side economics.  They believe in Austrian economics, i.e., that budget deficits do indeed matter, contrary to what former Vice President Dick Cheney counseled President George W. Bush.  They don't believe that deficit budgets are required when the economy is good.  They don't believe that tax cuts are necessary when the economy is good.

Monday, December 11, 2017

A Non-Theory

When I was taught the "scientific method" long ago, I recall the arduous process of moving an idea from hypothesis to theory to principle.  While I don't have time to go through that lengthy process, I do have a hypothesis.

While the stock market invariably over-reacts, it over-reacts to different news, depending on where it is in the cycle.  During bear markets, the stock market largely ignores political news and over-reacts to economic news.  During bull markets, it largely ignores economic news and over-reacts to political news.

During bear markets, politicians can't do as much damage to the stock market as they can during a bull market.  Conversely, economic data is considered less of a risk during a bull market, leaving politicians as the primary risk factor.

Another distinction is that economic data can predict the future, while politicians cling to the past.

Bitcoin, Bitcoin, and Bitcoin

After months of 24/7 saturation coverage, you can recall that certain exhaustion you feel the day before an election.  You have hope, because the election is the next day.  Still, you can barely tolerate coverage for another 24 hours.  That's the way I feel about bitcoin!

In the business media, coverage has been bitcoin, bitcoin, and bitcoin.  That one crypto-currency began trading in the futures market yesterday, and the world did not end.  In fact, bitcoin was up nicely but only on low volume.  It is a triumph for the "true-believers" of bitcoin.  For myself, it is just one step closer to a potential financial crisis.  The total value of bitcoins is now about $300 billion and rising.

So many questions, so much hype:

1.  Bitcoin solves what problem?  That's assuming you are not a criminal needing money that cannot be traced.

2.  Doesn't the world have too many currencies already?

3.  Money can already be wired around the world in minutes, without the wild price fluctuations of bitcoin.

4.  While there are a finite number of bitcoins, there is no limit on the number of other crypto-currencies. (There are already a hundred such currencies.)

5.  It is not like gold, that you can touch.  There is no collateral.

6.  It is not backed by or guaranteed by any government anywhere.

If you desperately want the "cocktail party" bragging rights of owning bitcoin, I wouldn't buy more than one.

The accounting behind bitcoin is called blockchain and may have great value, but must first demonstrate some ability to be audited.  Patience is recommended.

Tomorrow, my prediction is that business media coverage will still be bitcoin, bitcoin, and bitcoin.  Of course, I'm praying for an election- ANYTHING - to silence the constant, breathless coverage of bitcoin?

What bubble?

Sunday, December 10, 2017

More Technology = Less Privacy

Being a sports fan offers a fun opportunity for both competition and silliness.  American football fans are no different.  As a long-suffering fan of the Dallas Cowboys, I have a Cowboys jacket, a Cowboys sweatshirt, a Cowboys tee-shirt, a Cowboys watch, and even a pair of Cowboys underwear (TMI).  But, the Cowboys' reach for profits has reached new heights with the sale of drones, complete with the Cowboy logo for only $69.95 this holiday season.

Unfortunately, it is not funny.   Drones are dangerous toys - dangerous to privacy.  While the overall construction industry is booming, the association of pool builders has reported that drones are a primary reason for the decrease in the building of swimming pools.  The privacy of your backyard is just one more privacy right to lose.

In addition, I know of no pilots who think more drones will make flying safer.  Drones are dangerous toys - dangerous to air travelers.  Already, some states have found it necessary to make flying a drone while drinking alcohol a crime.  But, who cares?  There is profit to be made in selling drones!

While the loss of privacy from drones is tiny compared to the loss of privacy by Google, it just proves, once again, that the pursuit of profit overwhelms the right to privacy.

Shame on the Cowboys and other corporations that enable the loss of your privacy . . . for their profit!

Sorry, Cowboys, but honesty is another form of tough love!

Friday, December 8, 2017

Fond Reunion

Absence makes the heart grow fonder, even for economic data.  While the monthly jobs report is not the most instructive economic report, it has long been the most popular and has the most short-term impact on the stock market.

Today's report continued a long string of good reports, with 228 thousand new jobs being created last month, more than the 195 thousand that pundits expected.  The unemployment rate remained unchanged at 4.1%, near a seventeen year low.  Average hourly earnings inched up 0.2% last month and 2.5% over the last year, which is not bad.  The Labor Force Participation Rate remained 62.7%, which is unchanged.  The only negative was that the U-6 level or long-term unemployed inched up to 8.0%.

Because of the dislocations caused by the terrible hurricane season, the monthly jobs report for the last three months have been tainted and confusing.  Finally, we got a clean, traditional jobs report, and it was a good one.

Normally, a good report decreases the probability of the Fed increasing interest rates, but I don't think that is true this time.  The Fed is committed to removing monetary stimulus, because the economy is strong and doesn't need it.

So, why do we need a tax cut if the economy is already strong enough that the Fed is raising rates?

Thursday, December 7, 2017

A Little Wine Is A Good Thing, Just Like Inflation

Arguably, the oldest living Libertarian is Alan Greenspan, who is more famously known as Chairman of the Federal Reserve immediately prior to the Global Financial Crisis of 2008/9, when he argued for loose governmental regulation, particularly of financial institutions.  As any good Libertarian would, he believed that people would always act in their own best interest, and it is not in the best interest of bankers to destroy their financial institutions.  Therefore, bankers would be prudent, instead of working to maximize their short term compensation plans.

He now believes the new tax bill, which is pending in joint committee, will not increase growth but will cause stagflation to return.  I agree with one of his points, i.e., that the decreased spending should occur first and then a tax cut later.  Our national debt is far more dangerous that a GDP growth rate of "only" 3 percent.

But, he uses the Keynesian argument to reach his conclusion on inflation.  Deficit spending increases the demand for goods & services, making buyers "bid up" the prices of those goods & services.  The alternative argument is Monetarism, which believes that inflation is "everywhere and always a monetary phenomenon."  In other words, increasing the money supply causes inflation.  They like to say that the available supply of goods & services will "soak up" all the available money.  Inflation can be controlled by decreasing growth in the money supply. 

While decreasing the balance sheet is not exactly the same as decreasing the growth of the money supply, it is certainly analogous, and that is what the Fed is currently doing.

I don't think Mr. Greenspan is correct, but I hope he is.  Moderate inflation cures many ills, at least for a short period.  The Fed has been trying to increase inflation for years and failed.  So, I'm not overly worried about inflation . . . for now!

Friday, December 1, 2017

Shiny Objects

Readers will recall that I predicted in March that President Trump would be impeached.  Today's news only makes me more confident that it is true.  Only a resignation could preclude the impeachment.  But, I mourn for the country, because impeachment is an agonizing experience and is bad for the country.  It will not make us any less partisan.  If it must be, then I pray we pull the band-aid off quickly and get it over with!

With respect to the stock market, it will always over-react, and this is no exception.  With today's announcement, the market plunged before recovering somewhat.  Once the market realizes that a President Pence is more stable than the current president and once the market realizes this news doesn't make a recession any more likely, then the market will stop over-reacting.  Until then, fasten your seat belt!

Remember:  Focus on corporate earnings, not politics -- which are shiny objects distracting us.

Thru The Looking Glass

When I was a young economics student, I was fascinated by economic cycles.  Wouldn't it be great to be an investor with full knowledge of the next recession?  Those cycles ranged from 4 years to 52 years and had exotic names like Juglars and Kondratieff.  However, regardless of the cycle you choose, we are late and should have already had a recession by now.  In other words, we are overdue for a recession!

So what?

It is hard to over-emphasize the importance of how unhinged the economy became during the global financial crisis of 2008/9.  The heroic actions of the Fed, which I strongly support, overhauled the economy in general and the stock market in particular.  Economic cycles became obsolete, as our highly capitalistic economy became a managed economy.  Because the Fed recognizes that it has pushed us into a strange new world, they are attempting to slowly dis-engage, restoring capitalism a little bit each month. 

The Fed controls monetary policy but not fiscal policy, which is controlled by Congress and the President.  America fought the greatest recession since the Great Depression with one hand tied behind our back.  The Fed did their job, and Congress did nothing.  Now that the Fed is withdrawing slowly, Congress is finally attempting to do something to fight the global financial crisis of 2008/9.  The Pentagon is often accused of fighting the last war, and Republicans now are doing the same.  I would have applauded the pending tax bill if they had done it in 2008/9.

Wall Street had adjusted to an impotent Congress and has been positively giddy that Congress may not be impotent after all.  Wall Street should be reacting to corporate profits, not politics.

Speaking of profits, there is one economic cycle that may still be useful.  As a percent of GDP, corporate profits increase during the recovery phase before peaking and then decreasing.  Corporate profits have reached historic highs but so has the GDP.  As a percent of GDP, corporate profits have stopped growing.  That does not mean a recession is close or worrisome.  But, it should temper our expectations for continued growth in the stock market.  Everybody knows the market cannot rise 30% year-after-year.  Unfortunately, if we only grow 10% next year, it will feel lackluster.  It shouldn't!