Monday, February 26, 2018

The Wisdom of Geeks

The American Economics Association (AEA) is populated by mostly academics and is consequently more theoretical.  I was a member exactly one year.  The National Association of Business Economics (NABE) is populated mostly by economists working in the real world.  NABE is NOT a bastion of liberal college professors, and I have been a member for many years.

NABE just released their latest survey of members, and here a few highlights:

1.  The majority think fiscal policy is "too stimulative," while monetary policy is about right.

2.  The Trump tax cut is good for the economy in the short run but bad in the long run.

3.  There is a low probability of infrastructure legislation this year.

4.  The President's executive actions on regulations are good for the economy.

5.  The President's executive actions on immigration are bad for the economy.

6.  86% believe debt will be a larger share of GDP in ten years.

All I can add is . . . AMEN!

Sunday, February 25, 2018

Rifle or Shotgun?

Listening to the endless debate over gun violence, I am reminded of the difference between rifles and shotguns.  A rifle fires one bullet at a time and is usually more accurate than a shotgun, which fires many small pellets.  Our debate seems to search for a single "silver bullet" that will fix the problem of gun violence.  There is no one solution to this complex problem.  Each solution will have some exceptions.  Discussion of any single solution is time wasted!

The Republican Florida governor, Rick Scott, has put together a package of non-perfect solutions, including raising the minimum age for all firearms to 21, strengthening background checks, one police officer in every school with a thousand students, as well as one mental health counselor, hardening schools with bullet proof glass, steel doors, etc.  Importantly, he wants to make it easier for others to request confiscation of a worrisome person's weapons, while respecting the worrisome person's Second Amendment rights.

Don't forget -- None of these individual suggestions is a fail-safe solution that will absolutely prevent all future gun violence.  There is no "silver bullet." However, taken as a package, it is a giant step forward, and the Governor should be applauded.

Saturday, February 24, 2018

Tesla = TSLA

It is important to know what you don't know, and I know that there is much I don't know about technology stocks.  As a result, I am slow to invest in technology companies that I don't understand.  I did not buy Apple or Amazon when they first offered stock to the public.  Maybe, that is because I have watched so many technology companies go public and then disappear.

However, one technology company is getting interesting to me - Tesla or TSLA.  The company was named after a Serbian engineer, who died in 1943, after greatly advancing our understanding of electricity.  The company is known as just another car company, that also happens to make electric cars, but that is misleading.  It is a battery company that also happens to make electric cars.  Those batteries are lithium-ion batteries that require little maintenance, weigh much less, and last much longer than the one in your car today.  (Yes, there is a fire problem, but that is a decreasing problem.)

An interesting anecdote is that when there was powerful storm that knocked out the power grid of South Australia in 2016, Tesla offered to fix the problem within 100 days or he would do it for free.  He did it only 60 days.  He set up solar panels that absorbed enough sun light to power the lithium-ion batteries that supplied energy to their power grid.  Amazing!

The analyst community is deeply divided on this stock.  Argus calls it a BUY, Reuters and The Street call it a HOLD, while Standard & Poor's calls it a SELL.  The primary concern seems to be the heavy debt load.  One worrisome problem is the iconic but mercurial CEO, Elon Musk.  How thin can he spread himself?  This founder of PayPal is also CEO of SpaceX, shooting rockets/satellites into orbit.

Because it is selling for about $350/share now, I will continue to watch.  However, it dropped down to $311 when the market had a minor correction earlier this month.  I will revisit this question when the market re-tests the bottom, as I expect.

deju vu

It has been almost a year since I predicted that President Trump would be impeached.  That prediction was not made with any glee, as impeachments are painful for America and disturbing for the stock market.  However, like all predictions, it is framed by certain experiences.

First, at one time I was a division president in a huge real estate company, running the public syndication of properties.  I know the real estate industry has lots of hidden fees, markups, and conflicts of interest that are never disclosed.  (The fiduciary standard of registered investment advisors definitely does NOT apply.)  There are also lots of perfectly legal transactions that simply "smell funny."

Second, my late mother must have told me a thousand times that "if you can't say something nice about somebody else, then shut up."  Attacking people is no way to make friends you may need later.  You may have a wide selection of "friends," but most of those friendships will only be an inch deep.

Third, I could never understand how Kenneth Starr spent $80 million investigating a failed real estate venture in Arkansas before finally catching a man with a strident wife lying about a frivolous sex act.  Yet, when I met him in 2002, I found that Starr was a surprisingly decent, honorable man.

So,  how could any real estate developer with many supporters but few friends escape an indictment by a special investigator?

I don't care if Mueller finds Trump was involved to some sleazy real estate deals, as I just take that for granted.  The regular justice system should deal with that.  What I care about is any potential "special" relationship between Trump and Putin!  Any other findings are just as irrelevant to me as Clinton's sex life.

Mr Mueller, I'm confident, is also a decent honorable man, but I hope he can stay better focused than Mr Starr.  Answer the question:  Was there any collusion with Russians or other foreign nationals in the Trump campaign or not?  If not, go home!

Friday, February 23, 2018

Skinning A Cat

Unlike many who lost respect for investment banking giant Goldman Sachs during the global financial crisis, I did not.  Instead, I lost trust in them.  Except for their research department, my conclusion has not changed.

In their arrogance, I doubted they knew or cared about that loss of respect/trust.  To my surprise, they set aside $500 million to "burnish their image," primarily by lending to small businesses.  Over 2,200 of those small businesses congregated in Washington this week.  That's a noble purpose and should be applauded.

But wait -- why did Goldman Sachs do such a thing?  In the past, the firm could exercise clout in Washington by its rather continuous flow of Goldman Sachs executives into government.  Some even joked the Federal government should be called "Government Sachs."  However, as their reputation suffered, the flow of executives decreased, and their influence dropped.

So, what did the small business people do at their convention in Washington?  They fanned out across Congress to pigeon-hole politicians!  Obviously, there's "more than one way to skin a cat" or to maintain clout in Washington! 

Thursday, February 22, 2018

Another Over-Reaction

Nobody is smarter than the market . . . but sometimes the market is stupid.

Two days ago, Walmart stock had their worst daily drop in 30 years, dropping over 10%, based on an unexpected squeeze in profit margin and a disappointing increase in the growth of online sales, which has increased 50% for each of the three previous quarters but only 23% last quarter.  This is the only company that has a chance to compete with Amazon, and it stumbled slightly.  (Some buyers call it a cheap way to buy Amazon-like market opportunity.) 

FYI - online sales are only 4% of Walmart's revenue.  There is every reason to believe their online sales will continue to rise dramatically and faster than Amazon's sales when it started.  (WMT just announced they will begin offering furniture online.)  More importantly, their same-store brick & mortar sales are still rising better than 2% annually, which is considerably above trend for retail.

I'm not selling any Walmart stock.  The market did what it does best . . . it over-reacted!  And, that's stupid!

Only semi-related, I have two words for Amazon, which recently bought Whole Foods and just announced their entry into healthcare . . . those two words are General and Electric . . .

Wednesday, February 21, 2018

The Spook Spoke

I remember a long-forgotten professor saying to his class that "if you cannot argue both sides of an issue, then you don't really understand that issue."

Last night, I had the pleasure of listening to John Brennan, the former head of the CIA, as he spoke to the Norfolk Forum.  Having served six presidents (three Republican and three Democrat), he discussed his conscientious effort to remain independent of partisanship.  After all, it is critically important that the president receive unbiased advice, and I suspect Brennan did the best possible job.  While he made clear that bellicose behavior was definitely the wrong strategy for handling the North Korea behavior, he didn't really attack or defend other Trump issues.  (Without mentioning Trump's name, he did comment that inexperienced leaders tend toward authoritarian regimes, to huge applause from the audience.)

The most interesting observation was that, due to their demographic problems of an aging population and their economic dependence on energy exports, Russia thinks tactically, while China thinks strategically.  Short-term tactics such as election interference suits Russia, whereas China is better suited to long-term thinking, such as building islands in the South China Sea.  Interesting . . .

The most heartfelt comments concerned Trump's continuing criticism of the U.S. intelligence services and Department of Justice.  Good and decent people are impacted by this, Brennan said, as well as hampering their ability to recruit future "spooks" or secret agents, especially among those addicted to one particular news universe.  I doubt even Brennan is dispassionate enough to argue both sides of this issue, and that's OK!

Tuesday, February 20, 2018

What! No Santa?

There has never been a time in my life that the massive conglomerate of General Electric was not one of the most respected companies in America.  Sadly, since the stock hit $53 per share in 2000, it has repeatedly lurched downward and is only $15 per share today.  The total market capitalization from dropped from nearly $600 billion to barely $130 billion now.  Sad!

Many analysts believe the decline was predetermined by the rapid expansion of an excellent industrial company into many unrelated industries.  After all, what does a company in both aviation and healthcare know about show-business or financing giant parcels of commercial real estate?  The obvious answer is "not enough."

Some believe it is time to break apart the company.  Probably, the aviation and health care divisions would be more valuable as separate companies than mired under GE's myriad problems.  However, that will be difficult.  As an example, GE used its cash to pay dividends and work out of problems but neglected to make the required contributions to its generous pension plan -- to the tune of $31 billion.

After losing half of its value over the past year, some bulls think the relatively cheap PE ratio of 15 and dividend yield of 3.2% make it attractive.  Maybe . . . but the ultimate indignity would be for this stock to be thrown out of the Dow.  What!  No GE?

Warren Buffett warns you should never fall in love with a stock - any stock.

But you can still be nostalgic!

Monday, February 19, 2018

Intellectual PTSD?

Most people think existentialism is a dark, dour, and depressing philosophy, but I have always found its emphasis on absurdity and self-determination to be refreshing.  Because I read most of the classic books on this subject years ago, I no longer look for additional books.  However, I find myself reading Left Bank by Agnes Poirier about "Art, Passion, and the Rebirth of Paris 1940-50."

Paris was the birthplace of existentialism, parented by Jean-Paul Sartre and Simone de Beauvoir.  The book described their life before the German invasion, during the occupation, and following liberation of the "city of lights."  While their suffering during occupation is trivial compared to the soldiers on both sides, there was a different type of suffering - a type of suffering unique to intellectuals, who tend to be overly-sensitive and self-involved.  War does different things to different people.

The darkness of existentialism and its preoccupation with death should not be surprising, maybe a form of intellectual PTSD.  One comment by Simone de Beauvoir seemed to say it best, comparing their memory of war to holding a rotting corpse in their arms.  Of course, all other concerns seem absurd, compared to that memory.  And, self-determination does permit a person to drop the corpse and move on with their own life.

While I appreciate the author's effort, because it does capture so much detail about the development of existentialism, I do not recommend the book to normal people, as it is a fountain of irrelevant names and details.  Sadly, she also missed the opportunity to discuss post-war Paris as the birthplace of the "free love" movement.

Normal, healthy people should stick with reading textbooks on economics . . .

Sunday, February 18, 2018

More Than Half Full

Economists often joke that a president gets more credit than he deserves for good economic times and more blame than he deserves in bad economic times.  This reflects the fact that long term trends affect things more than any one occupant of the White House.  Consider this:

1.  Thirty years ago, the homicide rate in the U.S. was 8.5 per 100,000.  Today, it is only 5.3.

2.  Thirty years ago, the poverty rate was 11%, compared to only 3% today, even after adjusting for inflation.

3.  In 1988, there were 23 wars or conflicts killing 3.4 out of 100,000, compared to 12 wars today killing 1.2 people per 100 thousand.

4.  In the early 19th century, average life expectancy was a mere 30 years.  Today, it is 81 years in the developed world, reflecting a huge decrease in childhood deaths.

5.  Literacy worldwide has increased from 12% to 85% since the early 19th century.

6.  At the beginning of the 20th century, women could vote in only ONE country.  Today, they can vote in almost every country.

7.  Life is a lot less dreary for Americans who now work 22 fewer hours per week and 43 fewer hours doing housework each month.

Enough already! 

The first question is which one U.S. president deserves credit for all this? 

The second question is why do we habitually think everything is so bad?

Saturday, February 17, 2018

Crystal Clear

It was July 18th of 2015 when I took the measure of Donald Trump . . . as a man.  That was the day he needlessly  attacked and trashed a personal hero of mine, i.e., John McCain.  It doesn't matter to me what the Mueller investigation eventually concludes, as I already know all I need to know about Trump . . . as a man.  What I don't know is Trump . . . as a President.  I pray he is a good President.  If he rises to combat the Russian attack on our electoral process, he will be a better President than he is a man.  If not, he should be impeached.

Friday, February 16, 2018

Thumbnail of Economic History

In the beginning, there was the Austrian school of economics, which argued that government tax revenues must equal government expenses every year.  The problem was that Austrian economics is "pro-cyclical," i.e., it makes cycle highs higher and cycle lows lower.  The only time the government can increase its spending is when revenues are rising, which is when the economy is already improving.  Conversely, when the economy is weakening, government tax revenues decrease, driving the cycle low lower.  Originally adopted by the Republicans, it has been abandoned to the Libertarians.

During the Great Depression, Lord Maynard Keynes developed his theory that governments should engage in deficit spending to stimulate a weak  economy when tax revenues are also falling.  The Democrats have largely adopted this theory of economics.  Actually, Democrats adopted half of Keynesian theory, because Keynes argued that deficits are acceptable during weak economic times but that debt should be reduced during strong economic times, and that has not happened since the Clinton presidency.

Arthur Laffer called Keynesian economics "demand-side," because it focused on economic demand from spending, and he argued that a "supply-side" approach was superior.  Cutting taxes would allow the economy to produce more, driving up the economy.  Since Ronald Reagan, Republicans have largely adopted this theory.  Unfortunately, they only adopted the easy part.  Laffer never argued that a tax cut was appropriate at all times.  (Google the "Laffer Curve.")

One thing that both Keynes and Laffer agreed on -- was that budgeting should be planned for each economic cycle, not each year.

Wednesday, February 14, 2018

The Needed Non-NRA

I like guns.  I like the way they feel.  I marvel at the engineering of them.  I appreciate the fine milling and the workmanship.  I respect the power they constrain.  I like guns and own plenty of them.

But, I hate and loathe the National Rifle Association.  They don't understand me, and they don't represent me.  They are traitors to the Second Amendment!

The world is not simply "black & white."  Intelligent people can understand the lame "slippery-slope" of gun regulation.  Not all gun regulation is an affront on the Second Amendment.  The NRA is no longer the protector of the Second Amendment but is instead the greatest threat to the Second Amendment.  As a former member, I think the NRA is now simply crazy and will doom gun enthusiasts.  Their unyielding, unreasonable attitude will cause an eventual over-reaction by sane Americans.

It is not enough to merely abandon the NRA.  There must be a non-NRA organization for responsible gun-owners, but I haven't found it yet.  I want to make a donation . . . but to whom?

Economic Contradiction

Except for their excellent research department, I have not respected investment giant Goldman Sachs since 1981, and that opinion was affirmed in 2008.  Therefore, it pains me to agree with their CEO, Lloyd Blankfein.

The governmental tools to govern the economy fall into two categories, i.e., monetary policy and fiscal policy.  Monetary policy is controlled by the Federal Reserve, using interest rates and money supply.  Rising interest rates and restricting the growth in the money supply is restrictive monetary policy, to be used when the economy is "hot" and needs to be "cooled" before inflation begins.  Right now, this is the policy of the Fed.

Fiscal policy consists of both regulatory policy and, more importantly, budgetary policy, which is the taxing and spending of money.  A budget surplus "cools" the economy.  A budget deficit "heats" the economy.  Reducing taxes and increasing government spending, that produces a bigger deficit.  Right now, that is the policy of our Federal government.

The tools of monetary policy and fiscal policy are in conflict with each other.  The Fed is worried about inflation and is trying to slow down, while the Trump Administration sees no inflation and is trying to speed up.

CEO Blankfein says the president is spraying lighter fluid on a bed of hot coals . . . I agree!

Once More . . .

In the wee hours this morning, Dow futures indicated the market would be up about 150 points.  After the release of the latest inflation data, the futures dropped to negative 350 points -- a swing of 500 points.

That's ridiculous!

Like I said in my last article for Inside Business, inflation is breaking out.  Paul Volcker was chairman of the Fed from 1979 to 1987, and he demonstrated that high interest rates will curb inflation.  Lesson learned!  Expectations for Fed interest rate hikes for this year increased from 3 to 4 -- big deal!!

Increasing interest rates will decrease corporate profits somewhat but not as much as the corporate tax cut increased profits.  Earnings-per-share will be largely unaffected.  Stocks will slowly recover from this news.

The most predictable characteristic of the stock market is that it will faithfully OVER-REACT!

Tuesday, February 13, 2018

Emotional Asymmetry

Most investors think the stock market is a cold, heartless place without emotion.  Not true!  Warren Buffett says the market has two emotions, i.e., fear and greed.  He suggests you should be fearful when others are greedy, but be greedy when others are fearful.  Good advice!

But, those two emotions are not equal in strength.  Fear overwhelms greed for probably 99% of investors.  If I told you the Dow rose 330 points one day and 410 points the next day, you will smile and enjoy the rest of your day.  However, if I told you that the Dow dropped 750 points over the last two days, I would have ruined your day.

In economics, we say that "prices are sticky to the downside."  When inflation hits, retail prices rise quickly.  When deflation hits, retail prices fall slowly.  There is no symmetry.  The greed vs. fear emotions are similar.  Greed is tantalizing, while fear is crippling.  There is no symmetry to those emotions.

If you are one of those who are crippled by fear -- first, recognize and accept that you have this problem.  Talk with your financial advisor.  Don't wait for him to call you.  Keep your eyes on the long term, not the daily fluctuations of the market. 

Then, take your spouse to the movies.

Saturday, February 10, 2018

R.I.P. Two Great Guys

America became poorer last week.  She lost two more members of the Greatest Generation -- two great Americans, who were also two great guys.  Both achieved better than ninety years of life.  One was a tall, aristocratic doctor from New England, who radiated good humor.  The other was a shorter, muscular waterman from Ocean View, who radiated sincerity.

Certainly, they were different in many ways.  The doctor was an athlete and educator.  The waterman was a speedboat racing champion and restaurateur.  The doctor had a big family, while the restaurateur had a small family.  The doctor enjoyed the symphony, while the restaurateur enjoyed "westerns."  The doctor discussed politics with tongue-in-cheek, while the restaurateur was more quiet, until he became direct and blunt.

But, they had more similarities than differences.  Both were born into modest circumstances and rose high above it.  Both loved this country and the people in it.  Each left behind the secret of their success, i.e., a grand, insightful lady as their widow.  Although both were financially secure, each demonstrated that a person will never "work" a day in their life, if they do what they love.

I learned from both of them and am grateful to each of them.  Some of the things I learned are:

Education need not replace humor.  

Don't ever regret taking a chance.  

The air already has enough words in it.

And, never, never take a grand lady for granted.

Friday, February 9, 2018

Two Excedrin, Please

Most people have a strong fear of recessions, which are just routine characteristics of economic growth.  Recessions remove inefficiencies from the economy.  Losing your job is more worrisome than any temporary drop in portfolio values.

However, a financial crisis is a much more worrisome event.  They happen quicker, hurt worse, and take longer to recover than a typical recession.  That's what happened during the global financial crisis of 2008/9.  I have long suspected the next financial crisis would be caused by derivatives.  But, there are derivatives, and then there are derivatives.

Earlier this week, there was a derivatives failure when Credit Suisse shut down one of its exchanged-traded-notes (ETNs).  Actually, it was a derivative of a derivative of a derivative, which doesn't make it more scary, just more difficult to explain.  Let's try:

Puts & calls are examples of derivatives and are known as options.  Their price or value is "derived" from the price of the underlying stock.  For example, if you buy a put on Amazon stock and the price of AMZN goes down, the value of the put you bought goes up, because you can then force the seller of the put to buy the stock from you at the original price instead of the current price.  He will pay too much for it, and you have limited your  downside risk.

Now, you can measure the relationship between the puts sold and the calls sold, to approximate the volatility in the stock market.  Often called the "fear index," the symbol is VIX.  When fear goes up, the VIX goes up.  When fear goes down, the VIX goes down.  It is a derivative-of-a-derivative.  If you have a lousy financial advisor, you can actually buy or sell the VIX -- to gamble on the level of fear in the market.

If you believe the VIX is giving a non-believable reading of fear, you can gamble on an "inverse VIX," which is an ETN.  That means your ETN goes up in value when the VIX goes down.  Conversely, if fear or VIX goes down 10%, your ETN goes up 10%.  But, what happens when the VIX doubles?  That makes your ETN worth zero.  What happens if fear triples?  The ETN issuer pays!

But, here's the kicker -- there is a difference between an exchange-traded-fund (ETF) and an exchange-traded-note (ETN).  An ETF actually owns the underlying stocks.  An ETN only has the guaranty of the bank that issued the note, which was Credit Suisse in this case.  When the fear index jumped last week, the Credit Suisse ETN (inverse VIX) plummeted.  Credit Suisse could have found itself in the position of actually having to pay owners of the ETN it issued when the value fell below zero.  Rather than risk that, the bank simply cancelled the fund, locking in huge losses for the ETN holders.  It was not a "blow-up" or default.  It was a carefully managed cancellation (even though I do find it unethical).

I didn't watch the value of the ETN that day, but I did watch the price of the credit-default-swaps (CDS) on Credit Suisse.  The price barely moved, telling me that the bank had little exposure to their ETN and would not have been in serious trouble if they had failed to cancel the ETN.  If their CDS had spiked, that would have told me that the bank was in trouble.  Since Credit Suisse is the counter-party to billions of dollars in other CDSs from other issuers, there would have been a chance for a real "blow-up" or default.  Fortunately, that was not the case!

A first-level derivative like a CDS is much more worrisome than this exotic derivative-of-a-derivative-of-a-derivative. 

Wednesday, February 7, 2018

Buggy-Whip Regulators

While I am often called an economist, I have never been called a technologist or computer engineer.  Technology is a "black box" that absorbs power, perogatives, and flexibility from people, especially the regulators.   

The stock market gyrated wildly yesterday.  The Dow spent the day in a roughly thousand point range, from down 500 points to up 500 points.  While that alone is highly unusual, it doesn't the tell the whole story.  The Dow traveled an amazing record 5,000 points in one day, gyrating both up and then down and then up again.  What does this tell us?

Did that stock market action reflect gyrations in the economy?  No, the economy is huge and changes slowly.  FYI - The latest ISM is at a record high. 

Did the market reflect gyrations in the profitability of American businesses?  No, earnings have been steadily improving.  FYI - So far, better than 70% of companies have beaten their forecast Q4 earnings!

Over half of all stocks traded are not sold by people.  They are traded by machines -- computerized programs that buy/sell automatically based on some secret algorithm.  This huge market share of machine-based trading did not happen overnight.  But, it has been increasing faster - faster than the regulators can regulate it.  Now, some managers are deploying artificial intelligence (AI) to out-race their own algorithms.  I'm afraid the hidebound regulators are falling behind, putting the American financial system at risk.  It is not a question of additional regulations but of faster and more flexible regulations.  Regulators tend to be accountants or lawyers, not technologists. 

Do these poorly-regulated computerized trading programs pose a systemic threat to the stock market?  Not yet!  It is more likely to cause another "flash crash," which terrifies the retail investor, but then quickly recovers.  However, at some point, a flash crash could trigger a systemic problem, if the counter-parties get thrown into default, but I don't see that for several years at least.   

We don't need economists as specialized regulators.  We certainly don't need computerized-regulators, as some have suggested -- computer programs regulating computer programs.  We do need technologists as regulators . . . and soon!

Tuesday, February 6, 2018

Rising Uncertainty

Concluding that a high-speed car crash was caused by high speed is a bit simplistic.  The high speed  was just a symptom of too much pressure on the accelerator or gas pedal.

Concluding that the current stock market correction was caused by rising interest rates is also a bit simplistic.  True, rising interest expense decreases net income, thereby making the stock less valuable.  But there is more to that.

Productivity can be defined as output per unit of input or the number of widgets produced per hour, for example.  Everyone knows that increasing productivity must be a good thing but why?  Here is the general rule:  Inflationary pressure tends to increase when wage gains or other expenses rise faster than productivity increases.  The low productivity increases since the financial crisis of 2008/9 haven’t really matter because wage gains were minimal.

In the past two weeks, the latest economic data shows productivity actually decreased 0.1% last month, while wage gains have been 2.9% on a year-over-year basis.  Long dormant, inflation may be rising.  In 1981, Fed Chairman Paul Volcker proved the only way to control inflation is to raise interest rates.  While the Fed was already increasing interest rates slowly, the latest data suggests the Fed may “hit the brakes” on inflation by raising rates higher and faster than the market expected.

Compounding this fear is the realization that the fiscal stimulus of the tax cut will come at exactly the wrong time, when inflation is breaking out.  This tax cut increases the urgency to increase interest rates.

A month ago, the stock market was enjoying certainty.  It does not like nor tolerate uncertainty very well!  How bad will inflation get, and how high will interest rates get ....... and when?

Monday, February 5, 2018

The Lesson of Old Cars

Those readers with gray hair may recall when cars had a manual transmission.  To shift gears, you had to push in the clutch.  When you did so, the car temporarily slowed.

The stock market is shifting into a higher gear, and the clutch is now pushed in.  It is shifting from the sugar-high of low interest rates in a one-trick-pony-world where the U.S. was growing alone to a new world of worldwide growth amid rising interest rates.

Will it be messy?  Yes!

Will it be scary!  Yes!

Will the clutch be released & the market return to new record highes?  Absolutely!

Saturday, February 3, 2018

Not For The Weak of Heart

Yesterday was the eighth time the Dow Jones Industrial Average (DJIA) dropped 600 points or more.  How soon we forget!  The last time was in 2016 when the Brits voted for Brexit.  Most of the drops were in the 2008/9 global financial crisis.

I hope it drops another two thousand points!

Stock market corrections of 10% or so are actually good for the market.  A correction flushes out the timid and leaves stock in stronger hands.  Pundits have been noting, since the crisis, that the market has good upside, because there has been so much cash on the sidelines.  Warren Buffett has often said investors only know two emotions — fear and greed.  During the 2008/9 crisis, many investors pulled out of the market when it was down and missed one of the strongest rallies in history.  They only made the stock market fall even more.  Fear cost them a fortune.

As the stock market rallied and rallied last year and as the President lauded the market more and more, greed took hold of those investors, and they stormed back into the market, driving it higher and higher.  Yes, the economy was growing nicely, and corporate earnings were growing nicely.  Good news and good predictions lured those formally-fearful investors back into the stock market.  Greed will cost them another fortune.

The stock market is healthier when timid investors stay out.  So, the market drops another two thousand points?  You will have lost the last six months of growth, so what!  Paraphrasing Warren Buffett, I have no idea when the stock market will be next month, but I do know where it will be in five years . . . UP!

Stay calm and say good-bye to the timid!