Saturday, June 30, 2018

A Bloodless War

I was talking with some fellow students of economics.  We started discussing the 0.2% drop in estimates of Q1 GDP growth, but that quickly morphed into a discussion on politics.  With a bunch of economic nerds and with a rich assortment of economic datapoints, why were we talking about politics?

As we talked through that, it became apparent that, despite the overwhelming majority of the economic datapoints being positive, we were all experiencing a heightened anxiety, due to the current trade war.  That is an enormous economic variable, and nobody has much experience modelling such a war.  The history of trade wars is more confusing than instructive.  Besides, no country has ever declared a trade war against so many other countries at the same time.

So, the minor drop in Q1 GDP growth can be interpreted either as some developing weakness in the economy or, more likely, as simple noise from the collection of data.  There!  We discussed economics.  Now, what's the latest data from the front lines in our trade war?  And, why is it being run by politicians instead of economists?

Friday, June 29, 2018

President Zuckerberg

Zuckerberg is founder and CEO of tech giant, Facebook.  To my knowledge, nobody ever accused him of being a nice guy.  Still, he was man enough to recognize the intrusion and interference of Russia into both our 2016 election and 2018 election.

In May, he convened a meeting in Menlo Park of executives from all the major tech firms to discuss ways to prevent any further election interference by the Russians.  The FBI and Department of Justice were represented but offered nothing.  Obviously, protecting the integrity of our elections is a higher priority to tech firms than our Federal government.

Maybe, when they meet privately in Helsinki next month, President Trump can ask President Putin to be nice and stop interfering, please.

But, then again, to my knowledge, nobody ever accused President Trump of being a nice guy either.  So, which non-nice guy should be president?  Which non-nice guy is trying to protect our elections?

Wednesday, June 27, 2018

Paging Pandora

The opening salvo in this trade war was the immediate rejection of the Trans-Pacific Partnership (TPP), which I wrote then was a mistake.  The Administration looked only at the raw commercial aspect of the TPP, ignoring its wider significance, especially the economic containment of China.  It was a clear rejection of geo-politics as part of trade policy.

There is no disagreement that it is time to update our many trade agreements.  For example, the NAFTA agreement is 24 years old and does need updating.  However, I've written before that it is worrisome that we are trying to renegotiate our many bi-lateral and multi-lateral agreements -- all at the same time.

In particular, I'm worried about our bi-lateral negotiation with China, the world's second largest economy.  Our logic has been that our larger economy gives us a greater capacity to suffer economically.  After all, $50 billion is a smaller percentage of the U.S. economy that the Chinese economy.  Also, timing is thought to be on our side as our economy is booming, while the Chinese economy is somewhat sluggish.  (Unfortunately, the most recent data shows their economy is picking up.)  Their stock market has already entered bear market (down 20%), which is attributed to trade war fears.  Our President cares about the U.S. stock market, while the Chinese president Xi is immune to any pressure from the Shanghai stock exchange.

Other differences in perspective also matter.  The Chinese always take the long-term view, and trade negotiations normally take a very long time.  The Chinese are not motivated by any short-term WIN, which makes for good TV.  In addition, their leaders are in a better position of political strength.  Their hold on power is undoubted.  While Trump's political strength has increased significantly in recent months, imagine how that would change if there is a "blue wave" in November and Mueller's investigation is damning.  That is a strong motivation to conclude our trade negotiations sooner than later.  Long-term thinking versus short-term thinking?  Undoubted political strength versus tenuous political strength?

What, indeed, is in Pandora's box?  Who knows?

Monday, June 25, 2018

Sociological Wisdom ??

James Davison Hunter is a brilliant sociologist at the University of Virginia.  As he is an excellent but prolific writer, I have barely begun reading everything he has produced.  But, my thinking has already started to evolve.

There are military wars, and there are culture wars.  Military wars are usually caused by tribal conflicts or economic conflicts.  Culture wars are more complicated.  Because religions have been in conflict for centuries, we assume that conflict continues.  However, conflict today is less between religions and is greater within religions.  For example, there is more conflict between traditional Protestants and non-traditional Protestants and there is less conflict between, say, Protestants and Catholics.  The same tension exists within Islam and within the Jewish faith.  

Describing this as conflict between conservatives and progressives is not helpful.  The division does not focus on the degree of centralized power.  It is more about the use of power to find truth.  Traditionalists find truth in the past and believe traditions are useful and reassuring.  Futurists find truth within individuals and believe traditions are interesting but restrictive.

As an example, traditionalists within the Protestant faith have more in common with traditionalists in the Catholic faith or the Jewish faith or even within Islam than one would expect.  While the trappings and traditions may vary, all wish to cherish the lessons of the past.  Likewise, the non-traditionalist or futurist wing of the four main religions have more in common with each other than with the the traditionalist wing of their own religion.  The futurists don't want "somebody else's truth."  

The conflict between traditionalists and futurists rarely leads to military war but is the predicate to culture wars.  In the U.S., the culture war is not between Republicans and Democrats.  Our culture war is between traditional Republicans and futurist Republicans, likewise for Democrats.  Because the conflict over truth takes place within the unrelated, arbitrary organisational structure of Republicans and Democrats, it is extremely unlikely there will be military conflict.  The conflict over truth is submerged in and contained by the phony political conflict between Republicans and Democrats.

Dr. Hunter, forgive me for my loosely-written interpretations, but I thank you anyway!

Sunday, June 24, 2018

"Crucify Your Mind"

Was it a huntsman or a player
That made you pay the cost
That now assumes relaxed positions
And prostitutes your loss?
Were you tortured by your own thirst
In those pleasures that you seek
That made you Tom the curious
That makes you James the weak?

And you claim you got something going
Something you call unique
But I've seen your self-pity showing
As the tears rolled down your cheeks.

Soon you know I'll leave you
And I'll never look behind
'Cos I was born for the purpose
That crucifies your mind.
So con, convince your mirror
As you've always done before
Giving substance to shadows
Giving substance ever more

And you assume you got something to offer
Secrets shiny and new
But how much of you is repetition
That you didn't whisper to him too.

Cold Fact
(c) 2008

Saturday, June 23, 2018

> 100 %

When was the last time you went to:  

Go, go look at it now.  There are lots of numbers, all rising rapidly.  Today, focus on two of them in particular.  First, in the upper left, find the national debt, which is now over $21 TRILLION.  Second, near the center, find the Gross Domestic Product, which is now over $20 TRILLION.  In other words, our debt is more than 100% of GDP.  That's an important relationship.

Economists debate whether a "death spiral" begins automatically at 100% or 110%.  The U.S. has several advantages, allowing us to exceed that automatic death spiral for now, but nobody knows how much for how long and in what interest rate environment.  So, why take that chance?

Keynesian economists and Supply-side economists focus in increasing GDP, which is fine.  Only Austria economists focus primarily on the level of debt, which is even better.  

The first step is to stop digging the hole deeper.  The second step is to raise revenue.  Good Luck!

Friday, June 22, 2018

Our Growth "Governor"

I hate to sound like a broken record, but . . . the Index of Leading Economic Indicators (LEI) was up again last month.  This traditionally means there is no recession on the 12-18 month time horizon.  Our economy being propelled by new manufacturing orders, consumer expectations, stock prices, and capital goods.

But, there is an interesting change.  The LEI has slowed over the last three months - still positive but slowing.  Apparently, the lack of available labor is starting to slow us down.  This doesn't indicate a recession, but does indicate that the labor shortage is becoming a "governor" on our growth.

The traditional Republican view is that we could get more workers if people were forced to work.  While I agree those people should get no welfare nor food stamps, I think American employers would prefer non-lazy workers.  Whether those lazy people get benefits or not, that sidetracks the issue --   we need more non-lazy workers.

The traditional Democratic view is that we should allow more immigration.  Visions of the Border Patrol pop into the mind, but don't forget - America is blessed with a long line of applicants for LEGAL immigration.  We need them, and they want us!  Unfortunately, our quota system is obsolete and will soon be limiting our economic growth.

More LEGAL immigration is NOT bad.  In fact, we need to OPEN the doors to more legal immigrants.

Thursday, June 21, 2018

Spread Too Thin ?

Long ago, when I was living in Texas, I read a short book, whose name is now long lost inside my memory.  It speculated on how America would be different if Hitler had won World War II.  Not surprisingly, it described a dystopian America as merely a state of the Ayran Nation.  There would be no Blacks, no Hispanics, no Asians and no American Indians.  America would be lily-white.  There would be no churches, no Catholics, no Jews, and no Protestants.  He predicted a socialist nirvana, even comparing it to an idealized North Korea, under Kim Jung On's grandfather.

Obviously, he has been wrong, but he was trying to show how much hangs in the balance on major strategic decisions.  His argument was that it only took one wrong strategic decision by Hitler to save everything we hold dear.  That one decision was to open war with Russia, forcing him to fight a two-front war.

I worry that President Trump is fighting the current trade war on too many fronts.  First, he killed TPP before it even started.  Then, he threatened  NAPFA, fighting with Mexico and Canada, before declaring war on the Eurozone.  Now, he has declared war on China.  How many wars can we fight?

Yes, a trade war has a lower body-count that a military war, but trade wars have often led to military wars.  Make no mistake - trade wars are deadly serious!

Successfully concluding any one trade negotiation first would provide a useful template for future negotiations.  Instead, we are manufacturing maximum uncertainty, and we all know how much the stock market hates uncertainty.  As uncertainty rises, the stock market declines.

Wednesday, June 20, 2018

Invisible and Vulnerable

While it is painful to watch the vulnerable children along our southern border, it is at least visible.  Less visible is mistreatment of another vulnerable population, i..e., the elderly.  It doesn't happen to large groups but to one lonely invisible individual after another.

But, did you know that you can be fined between $500 and $1,000 if you know of any elder abuse and don't report it?  In most cases, that is because you don't know HOW to report such abuse.  It is quite simple -- pick up the phone and call 1-888-832-3858.  

Now, do the right thing and report anybody who abuses an elderly person!

Tuesday, June 19, 2018

At Any Cost

It was in Billings, Montana on May 26th, 2016, when the President promised:

“We’re going to win. We’re going to win so much. We’re going to win at trade, we’re going to win at the border. We’re going to win so much, you’re going to be so sick and tired of winning, you’re going to come to me and go ‘Please, please, we can’t win anymore.’ You’ve heard this one. You’ll say ‘Please, Mr. President, we beg you sir, we don’t want to win anymore. It’s too much. It’s not fair to everybody else.’”  

Intractable problems can be solved by moderates . . . or bullies!  Thanks to gerrymandering, there are not enough moderates in Congress to solve the immigration problem.  Maybe, we do need a bully?

I recall the logic of another president, who concluded it was better to kill a hundred thousand Japanese than to lose another ten thousand Americans.  Maybe, emotional scarring ten thousand brown kids is a small price to pay for making the President a "WINNER?"

That definitely would NOT make me feel like a winner.  John McCain is one of my personal heroes, and he described Trump's policy of separating kids from illegal aliens as "an affront to decency."  

Is "winning" really that important?  Who wants to win, if this is what you have to do?  What kind of ego demands "winning" at any cost?  Is the Wall really worth sacrificing our decency to get it?  

That is too high a price for solving even an intractable problem.

Monday, June 18, 2018


As 2018 dawned, it looked like we were enjoying synchronized global growth.  The U.S. had led the world out of the recession and now looked forward to the increasing growth in Europe and Asia.  But that didn't happen.  Instead, the U.S. has gotten stronger, while the others fell further behind.

For example, the Chinese central bank cancelled a scheduled increase in interest rates.  Capital Investment and Retail Sales both weakened last month.  The Chinese slowdown slowed the rest of Asia, as usual.

However, Europe has been an even bigger disappointment this year.  Eurozone growth has dropped from 0.7% in Q4 of last year to only 0.4% in the first quarter of this year.  The ECB has reduced its full year Eurozone growth estimate from 2.4% to 2.1%.  One big reason for this slowdown is Germany, the world's third largest exporter, the level of exports has fallen in three of the first four months, dropping 2.5% in April alone.  Germany's estimated full year GDP growth has been cut by half.

One minor reason was the surprisingly widespread flu epidemic.  A major reason was the populist takeover of the Italian parliament, which strengthened the wait-and-see attitude of corporations across Europe.  (Everybody remembers the fiscal crisis in 2010 precipitated by Greece.)  In January, 26% of German consumers expected economic conditions to deteriorate, compared with 43% today.  There is considerable anecdotal evidence that corporations are hunkering down and conserving their resources to survive a possible trade war, which is prudent. Rising caution is a wet blanket on the stock market.

This is not to suggest an investor should sell their international stocks.  Don't forget -- A well diversified portfolio will include some exposure to international stocks.

The President said trade wars are "easy to win." 

Let us pray . . . for a quick peace!

Saturday, June 16, 2018

Suicide Mission ?

Republicans abuse Supply-side economics, which argues that a tax cut increases the budget deficit in the short run but decreases the deficit in the long run.  They are hostage to the baseless belief that all tax cuts are beneficial at all times.  Republicans are not aware that a tax cut will not cure the common cold.

Democrats abuse Keynesian economics, which argues that budget deficits are good during recessions, which are repaid when the economy improves.  They are hostage to the baseless belief that deficits don't matter.  Democrats have never experienced an economy good enough to pay down the debt (except for Bill Clinton, who did.)

Unfortunately, both Supply-side economics and Keynesian economics have become religions.  Austrian economics remains mere accounting, i.e., debits and credits.

For some reason, bond specialists in particular are true believers in Austrian economics.  In a recent speech, the current "Bond King" Jeffrey Gundlach, said "This is almost a suicide mission.  At some point, with debt and its service cost increasing, there will be a collision.  There could be a solvency problem."

Think about it:  interest rate increases are appropriate during the latter stages of business cycles.  Budget deficits are more appropriate during the early stages.  Assume you had an adjustable-rate mortgage, and you get notified that the rate will increase from 4.5% to 5.5%.  Would you want to increase your mortgage amount, or would you want to start paying it down faster?

Our national debt is increasing while interest rates are increasing, which is very rare.  A 1% increase in debt service on $20 trillion debt is $200 billion each and every year.  That would be enough to fund the beloved "Wall" and build a dozen hospitals . . . each and every year.

The inevitable train-wreck is not in the foreseeable future, but it is out there.

Thursday, June 14, 2018

Mixed Blessing

Those old enough to remember the U.S. economy during 1970's will remember the panicky headlines about runaway inflation.  Do you remember the stories about elderly women eating dog food?  Do you remember Gerald Ford's WIN Campaign, which meant Whip Inflation Now?  Nobody wishes for a return of that level of inflation again!

But, a little inflation is a big blessing, and it looks like we're getting a little.  The Producer Price Index (PPI) was just released and shows 3.1% over the past year, while the Consumer Price Index (CPI) showed 2.8%.  Of course, the recent rise in oil prices boosted both indexes somewhat, but the "core" level of inflation was still well above the 2% goal of the Fed.  In fact, a little more would be good!

Why is inflation a good thing?  In a macro sense, it reduces the burden of debt.  The rule-of-thumb is that national debt should not exceed the GDP.  Our national debt of $21 TRILLION is a little over 100% of GDP but rising.  (The 2019 deficit alone is expected to add another 4.5%.)  To bring that ratio back below 100%, we need to inflate GDP.  If you worry about the level of national debt (and I do), then pray for more inflation.

At the corporate level, the same thing happens.  Whatever the level of debt, it is being paid with cheaper dollars, because inflation devalues currency.  As an example, if the level of debt payments is fixed while income is driven up by inflation, the debt payments require a smaller and smaller percentage of the rising income.  Likewise for the consumer level.  A little inflation is your friend!

Economists argue incessantly about the desired level of inflation, but all agree anything below 2% is bad, and anything above 8% is bad.  It is a big sweet spot, and it will be sweet to "inflate away" our debt.

Wednesday, June 13, 2018

Braking While Accelerating

Traditionally, increases in interest rates in one country draw money from other countries, seeking the higher rate, which causes the currency of the first country to appreciate and the currency of the second country to depreciate.  For example, to move funds from Japan to the U.S., you have to sell your Yen to buy dollars, which drives up the value of the dollar, because the demand for the dollar increased while the demand for the Yen decreased.  So far this year, interest rates have risen and the dollar has strengthened.  With today's expected increase by the Fed, it is expected the dollar will continue to strengthen.

But, to an unusual extent, currencies are reacting less to interest rates and more to political expectations.  When Italy spooked the market recently, there was no change in interest rates by the ECB.  Yet, the euro took a beating.  The increase in interest rates in the U.S. is too small to explain the big rise of the dollar.  Geopolitical enthusiasm for the Trump Tax Cuts (AKA the Trump Fiscal Stimulus) increased demand for dollars to buy equities more than the increase in demand to buy bonds.  That geopolitical enthusiasm was rocket-fuel to the dollar already propelling upwards by interest rates.

It is not happened in U.S. history before, that we have the Fed applying monetary brakes, while the central government is hitting the accelerator with a stimulus plan. In the short run, it doesn't matter but could be important in the long run.  That means, in the short run, the dollar will remain strong, but, in the long run, who knows?

Sunday, June 10, 2018

R.I.P. The Right Thing

For far too long, investors have been confused about investment advisors and stockbrokers.  Investment Advisors are just that -- stockbrokers are just salesmen.  Stockbrokers have loyalty to their companies.  Investment Advisors have loyalty to their clients. 

Also, stockbrokers can charge hidden fees.  Investment Advisors can NOT!  For example, stockbrokers can invest your money into mutual funds that pay "kickbacks"  (12b1-1 fees) or send the stockbroker and spouse to Hawaii or whatever.  Stockbrokers do NOT have a fiduciary responsibility to their clients.  Investment Advisors do!

A fiduciary responsibility does not mean an Investment Advisor cannot do something stupid.  It does  mean we can NOT hide anything from the client!  (No mutual fund company ever pays us a dime.)

For years, we have asked that stockbrokers stop selling and adopt the fiduciary standard.  They fought vigorously.  However, Congress was on our side and instructed the SEC to establish the regulations, which would require stockbrokers to be fiduciaries.  After years of inaction by the SEC, the Department of Labor (DOL) finally acted and issued rules requiring the fiduciary standard for all retirement accounts (but only for retirement accounts).  Stockbrokers fought back, delaying implementation for over two years.  But, neither the President nor the DOL Secretary stood up for the fiduciary standard.  Investment Advisors then resorted to the courts, but it looks like that effort was killed by the Fifth Circuit Court of Appeals last month. The Trump-controlled SEC still says they will do something, but it is unclear what or when.  More confusion, not less confusion is expected.  The Right Thing will wither away . . .

The battle has been lost.  Stockbrokers are free to keep getting hidden fees and withholding the truth about their conflicts of interest.  They won, and investors lost!  

Saturday, June 9, 2018

The 13th Step

I know, I know . . . America is going to pot, and the young Millennials will only make it worse!  They're lazy know-it-alls.  They eat healthy but don't attend church?  They even have premarital sex!  I know, I know!  However, they do see one thing clearly -- the vileness from the Republican Party and the Democratic Party. 

They also clearly see the vileness of Fox and MSNBC, the propaganda arms of the Republican and Democratic Parties.  That's why Millennials created "Newsy" for themselves, but you can watch it too.  (Channel 136 on Cox.) 

Republicans will call it Fake News, because Newsy does NOT have the Republican slant.  Democrats will be condescending about Newsy, because it does NOT have the Democratic slant.  Therefore, it must be just right for Millennials . . . and me!

As part of a 12-Step Program, I've often recommended that "news addiction" be treated by avoiding news one day each week.  Maybe, we should first ease into our addiction recovery by spending the day watching the laconic news of Newsy as the first step.  It doesn't have the breathless anxiety of Fox nor the indignation of MSNBC.  Newsy lacks emotions, which is refreshing! 

Just the facts, ma'am!

Thursday, June 7, 2018

Friend or Foe

Most people realize their knowledge is limited when discussing stocks, bonds, and other types of investments.  But, everybody thinks they're an expert on cash, probably because they use it everyday.

Our currency says "In God We Trust."  It does NOT say "In Cash We Trust!"  There is nothing sacred about cash.  It is just another asset class.

But, it is an asset class that impacts the rest of the portfolio.  Too much cash limits portfolio growth, in the long run.  Too little cash limits portfolio losses, in the short run.  (If you are so scared of short term market gyrations that you cannot sleep, then you are too timid to be a long term investor anyway.)

As a portfolio manager, I see cash as insulation, like you have in your attic.  It stays the same year-round, about 5% of the portfolio, even in the face of recessions, which come and go.  However, I do like greater insulation in the face of a financial crisis and try to increase cash then, to maybe 25%.  That gives a little "dry powder" for when the crisis passes, which it will. 

There is nothing sacred about cash.  It is neither friend nor foe.  It is merely a portfolio tool to maintain minimal liquidity and insulate risk over the long term.  Love your portfolio, not your cash!

Monday, June 4, 2018

Just Say No

I was visiting with one of my Democratic friends, and she said "Scratch any Republican and they will automatically complain about the lamestream media."

The irony of this is that, she said, since the viewership of Fox News exceeds the viewership of CNN and MSNBC - combined - that Fox is now the lamestream media.

She went on to say Republicans laugh at their allegiance to Fox, while Democrats have little allegiance to CNN or MSNBC.  Democrats are not united by CNN or MSNBC, but they are united in their revulsion at Fox . . . interesting!

It is well-known that we choose our political cocoons.  Republicans choose Fox, while Democrats choose anything but Fox.  But, she said political cocoons are as addictive as street drugs.  "Just say no" doesn't work with drug addicts or partisans.  We have twelve-step programs for drug and alcohol addiction, but how about our addiction to partisan news?

How do we get Republicans to watch less on Fox, while Democrats watch more on Fox?  She strongly agreed with my practice of a news-free day each week.  It builds discipline.  I agreed!

But, news-free is not the same thing as non-partisan news.  The best we can do is balance partisan news between Republican and Democratic news sources.  Or, as she styled it – “Break out of your cocoon!  Watch both!”

Sunday, June 3, 2018

YTD Snapshots

From time to time, it is useful to look for underlying trends in the market.  Looking at the YTD data through May 31st, it would be hard to miss the impact of two trends, i.e., a possible trade war and the increase in interest rates.

The large multinational companies would be more impacted by a trade war than smaller companies.  To prove the point, large cap stocks were up 2.2%, while small cap stocks were up 8.17%.

When interest rates rise, investors wait for the higher rates and slow down their purchases of those stocks that are normally bought for the stable dividend income.  To prove the point, S&P growth stocks were up 6.62%, while value (dividend-paying) stocks were down 2.84%.

To further prove the point, technology stocks (which pay little or no dividends) were up 11.26%, while consumer staples and telecoms (which usually pay handsome dividends) were down a whopping 12.49% and 10.48%, respectively.

There is no obvious impact from the Mueller-malaise hanging over Washington.  As the November elections approach, I expect uncertainty to increase, which is a weight on the market, but I expect a robust "Santa Claus" rally late this year.

Friday, June 1, 2018

More Good News

Today's "Jobs Report" was simply great.  Headline numbers are:

1.  New jobs created in May was 223 thousand, substantially more than the 188 thousand estimated.
2.  The previous two months were revised higher by another 15 thousand jobs.
3.  The unemployment rate is only 3.8% - the lowest since the global financial crisis
4.  Under-employment (U-6) dropped from 7.8% to 7.6% - also the lowest since the global financial crisis of 2008/9.
5.  Unemployment among blacks dropped to an all-time low of 5.9%.

The futures market were largely unchanged.  For every investor delighted with the American job engine, another investor was frightened that a good jobs report makes the Fed more likely to raise rates, and they balanced each other.

I am concerned that the President, who is always given the number late the day before, tweeted this morning that he was excited about the jobs report at 8:30 AM.  I'll give him the benefit of a doubt that he was not telegraphing the good report to his Wall Street buddies, but hope he will learn that his tweet was inappropriate and doesn't do it again.  Every investor should get the news at the same time, whether they read the President's tweet or not.