Exporting Fear

Steve Schwarzman is CEO of private equity giant Blackstone (not Blackrock).  He is attending the world's most exclusive think-fest in Davos, Switzerland, and I watched an interview with him this morning on CNBC.

He touched on an interesting subject.  Is the anger in U.S. politics spilling over and polluting the world?  He seemed to think that it is scary for the rest of the world, when the world leader is angry and dysfunctional.  I think that is right, but this is not the first time that U.S. politicians behaved like petulant children.  However, it is the first time that such behavior had 24/7 coverage, which is beamed around the world in real time.

One of the most important duties of any president is to understand the importance of diplomatic speech.  After all, offending your negotiating partners, especially at the outset, just doesn't make sense!  Do we even consider that important quality when electing a president?

Does the U.S. have a duty to export confidence or fear?

Besides, who wants to cozy-up with an angry and petulant partner?

What, No Apocalypse ?

Despite being famously called "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," I nonetheless do respect and appreciate Goldman Sachs . . . well, their research department anyway!

Their latest predictions are interesting.  While their narrative seems somewhat sanguine, their conclusions are not.  They still expect the S&P 500 to end the year at 2,100.  In fact, they see stock markets worldwide to be positive for 2016, especially Japan.  They see long-term interest rates increasing 73 basis points in the U.S. this year (I don't!)  The dollar will continue to strengthen against the euro and the pound, but not yen.  Most importantly, they see oil rising $54/bbl over the next twelve months, while gold remains dead within a narrow trading range.

Like the dog that didn't bark, there is no mention of a recession or financial collapse in the foreseeable future.

Missionaries of Calmness

 I'm proud of my clients!  Even though the stock market has been historically awful so far in this young year, not a single client has panicked and wanted to sell everything.  There were a few who wanted to increase their level of cash, just to help them sleep, which is fine.

But, I have been getting a lot of questions - two in particular.  First, is it over yet?  No, it is not!  My best guess is that we are halfway through the downdraft.  Part of my thinking reflects the sheer speed of the decline.  It has its own momentum and will need time to slow down.

There is still a possibility of a genuine financial crisis being exported from China, but they do have one advantage most nations lack - they can make a quick decision.  So, sit back and help others who might panic.  After all, history tells us that sudden sharp downturns in the stock market are often followed by dizzying sharp upturns in stock values.

The second most-asked question is . . . why is it so bad that gas is below $2 a gallon?  Normally, a cut in gas bills leaves the consumer with more money to spend elsewhere.  That is not happening this time.  Instead, consumers are reducing debt.  Also, the oil-producing regions of the country are rapidly moving from recession into depression.  I know, I know . . . it is hard to feel sorry for bragg-ish Texans, but their growing economic misery has already spilled over into Oklahoma, Louisiana, and North Dakota.  Firms selling in those areas can expect decreased sales.

More importantly, one-third of high-yield or junk bonds sold since the last recession are bonds related to fracking companies, who are the high-cost drillers of oil.  When oil was $50/bbl, they could barely pay interest to their bondholders.  At $29/bbl, increased defaults in that bond market are inevitable. This is a big deal!

I appreciate my clients!  Now, I hope they will be missionaries - calming down those around them.

Quarterly Perspective

For the terminally bored who cannot wait to read my column when they receive their copy of Inside Business, here it is:

http://pilotonline.com/inside-business/jim-flinchum-fourth-quarter-financial-review/article_3792f69d-648e-5990-bd0b-07d280e87a87.html 

2016 . . . NOT 1929

One of the more interesting human behaviors is called "anchoring," which is the tendency to view things in a strict relationship with other things.  When we think of the Crash of 1929 in the stock market, we think of utter destruction, of stocks becoming worthless, of investors suddenly becoming penniless.  Now, when we see stocks plunge, we instantly associate it with the Crash of 1929.  We are anchored to that bad memory . . . of something before we were even born.

We are NOT experiencing the Crash of 1929!  We are not perched on the edge of a depression.  In fact, I seriously doubt if we will experience anything even close to the 2008/9 global financial crisis, when stocks dropped 52%.  Larry Fink is the head of the gigantic asset manager named Blackrock.  He said this morning that another 10% drop was "possible."  I think that is reasonable.

First, there is scant economic evidence that a recession is approaching.  The U.S. economy is doing comparatively well.  Furthermore, economic historians quibble as to whether the U.S. has ever imported a recession from another country.  The point is that importing a recession from somewhere else is very unlikely to happen.

Second, our banking system and stock market practices are vastly safer now than 1929.  Banks have never had such a large capital cushion before.  Just try to get 90% margin in 2016!  There may be a remote possibility that stocks go down 50% again, but it is even a more remote possibility that individual stocks would go down 100%, like in 1929.  Besides, what happened last time that stocks dropped 50%?  The market came back up over 200%.

Third, long time readers know I have no worry about recessions.  They come, and they go.  I do fear another financial crisis like 2008/9.  If that happens, it will NOT develop here.  We would have to import it from abroad, probably from China.  If a larger financial crisis in 2008/9, which was based in the U.S., could only drive down our stock market by 52%, why are we so afraid of a smaller financial crisis elsewhere?

Forth, our investment psyche is not accustomed to geopolitical events in a globalized world.  That causes us to over-react.  The stock market was not wildly over-priced before this slide began.  Still, investors are selling because they don't understand the impact of a cold war between Saudi Arabia and Iran, as just one example.  If the Clueless Wonder of North Korea really has an H-bomb, should we sell all our stocks?  No, of course not!

We need to pull up our big-boy pants and start taking advantage of all these buying opportunities!

Cold Commodities

It can be difficult to separate the message from the messenger.  Legendary investor Jim Rogers is not my kind of guy - more Donald Trump than Warren Buffett.  While I would not have lunch with him, I am glad that I read his 2004 book titled Hot Commodities, which predicted the super-cycle in commodities began in 1998 and would continue at least fifteen years.

Here's a news flash:  Jim Rogers was right.  The super-cycle in commodities has ended!

Oil has crashed below $30/bbl.  Copper and other industrial metals have been crushed.  Nobody ever suspected rare-earth-minerals would lose value, but they have!  Even precious metals like gold are relatively lifeless.

Commodities reflect the emerging markets, many of whom have commodity-based economies and need different commodities from other nations.  China has been a huge buyer of commodities, but their economy is now slowing even faster and need fewer commodities.  Not many analysts are predicting strong growth in any of the emerging markets . . .

Commodities have been a driving force in stock values for a long time.  What will take its place?  Look up Singularity University, where they believe we are entering a Age of Abundance, which could propel the stock market, but how long before that lift-off?

Until we experience that lift-off from some propelling forces or engine, I suspect equity returns will be lackluster.  Instead of the 8% target we usually expect, those returns could be more in the range of 4%.

There has been a long-running argument as to whether passive investing beats active investing.  In other words, should you buy an ETF, that mimics an index like the S&P 500, or buy a more-expensive mutual fund, where a manager actually tries to beat the index?  Retail investors are fleeing mutual funds and loading up on ETFs.  Last year, they took $207 billion out of stock-picking mutual funds and put $414 billion into index investing.  I think that should be just the opposite.  If you know the index will be lackluster, why try to match that?  Index investing is easier when you have a propelling engine like commodities, but I expect old-fashioned stock picking is now more important.

Voodoo Charts

Last August, the Chinese stock market tanked, and the rest of the world followed it down.  The Dow dropped almost 10% but then rebounded.  This chart shows the Dow bouncing off its long term trend line, but we are now back to that green trend line.

According to technicians, if the Dow continues down, we can expect another scary bear-market slide.  If it bounces off the green trend line, the bulls are going to run hard -- a "rip your face off" stock rally.

Let us pray . . . 

Frankly, I just want to know how a silly chart like this can factor in the price of oil, Iranian relations, Fed actions, Russian invasions, a do-nothing Congress, terrorist attacks and everything else?

WRONG !!!

British banking giant has just issued their advice to investors to NOT PANIC but to sell everything anyway.  I understand what they are saying, because I am also worried about the increased possibility of a financial crisis.  But, unless you are sleepless with worry, this is bad advice!

In behavioral finance, we know there is a behavioral tendency called "anchoring," whereby a person makes decisions about the future based on decisions made in the past.  Investors who sell now will be reluctant to get back into the market later, when the market is again healthy.  In other words, the odds are high that they will miss the recovery later.

This is not the same thing as the "buy-and-hold" strategy that is often criticized unfairly.  That strategy suggests you buy the stocks you like and hold them forever.  Warren Buffet has often said his favorite holding period is forever.

What this is -- is extreme "market-timing," which could also be termed "mission impossible."  (I have the same disdain for extremist investors as I do for extremist politicians, i.e., extreme disdain.)  You need perfect knowledge when stock prices bottom, as well as when they peak - good luck on that!

There is an inverse  relationship between sleep and cash.  If you are losing sleep, then you need more cash in your portfolio.  Instead of more normal 5-10% in cash, you might need 20% or 40% or 60% cash in order to stop worrying and to start sleeping well.  No, this is not about maximizing profit.  It is about maximizing life.

Don't sell everything . . . but don't lose sleep either!

Watching Closely

I have no fear of recessions.  They are a normal part of the business cycle.  They come and they go.  If anything, they are good for the economy and the stock market in the long run.  Still, it is good news that there is little economic data suggesting a recession is approaching us any time in the near future.

However, I have great fear of a financial crisis, like 2008/9.  They happen quicker and do far more damage than a recession.  Normally, it comes from banks holding worthless loans or other assets.  There is no indication that is about to happen in the United States, especially since our banks have been required to increase their capital ratios.  (It is possible that Chinese banks may have this problem, but that is still unclear.)

It doesn't happen often, but a financial crisis can also be caused by currency issues.  In August, China began devaluing its currency, the yuan, about 6%.  An unintended consequence of the Fed raising interest rates in December was to put upward pressure on the dollar, forcing further depreciation in the yuan.  Knowing the Obama Administration was getting increasingly irate about this devaluation, the Chinese spent over $100 billion trying to support the yuan from depreciating further, but it didn't work.  I expect the yuan will continue to depreciate, as their economy slows and the Chinese move their money abroad.

The currency market is the largest market in the world.  Trading is dominated by hedge funds and large money-center banks.  Their trades/bets tend to be very large indeed.  My concern about a financial crisis has increased.  This is separate and distinct from the geopolitical gyrations we have seen over the past week in worldwide stock markets.  That will pass!

If I learn about some hedge fund getting wiped-out over the next few weeks or if some large bank is forced to increase their reserves, I will seriously consider selling some stock to increase cash levels.

The Logically Absurd Conclusion

Although often characterized as dour fatalists, existentialists normally have a good sense of humor, as well as a highly-sensitive nose for absurdity.  I can now pronounce that, with all existential authority, the debate over gun control has officially entered the realm of absurdity.

JOKE:  Why did God invent Ziploc plastic bags?
ANSWER:  So that good God-fearing Americans can bury some of their guns in the back yard or some remote wooded area where Obama cannot find them.

This is absurd!  Now, suppose you are a president who actually wants to confiscate guns.  (With 323 million Americans and over 350 million guns, we do seem to have a few extra.)  But, how do you actually take physical possession of those guns?  There are approximately 800 thousand police officers in this country.  You have to tell all of them to stop working on murder cases, rape cases, corruption cases, traffic safety and all the other important things that police officers do for us everyday.  There can be only one important duty for the police, i.e., confiscating hidden weapons by dismantling every house in America and digging up every square foot of the continent.  Favorite hiding places for guns are inside drywall and under the back porch.  You'll have to dismantle and dig!  This is logistically crazy!  In fact, it is even absurd!

I suppose you could require everybody on unemployment or welfare to begin dismantling and digging but just try getting that passed by Congress.  Even if you did that, how many would get shot dead when they approached the home of some "good old boy" to dismantle it.

Even if you think guns should be confiscated, how would you do it?  Mission Impossible!  You may think Obama is downright evil, but he is not stupid enough to attempt this impossible mission.


Full Disclosure:  I have lots of guns.  I say lots, because I really don't know how many.  They are scattered across several locations.  Like the late Charlton Heston, they will confiscate my guns when they pry my cold, dead fingers off the trigger.  Nonetheless, I favor compulsory background checks for every gun owner, new and existing.  In addition, I favor mandatory gun safety classes for every new gun purchaser and don't care what the NRA thinks.

Another Dramamine Day

The Communists,  who are trying to run a capitalistic stock exchange in China, are making worldwide stock markets quite seasick.  They don't know what they are doing!  Or, they may not be allowed to do the right thing?  Either way, investors are definitely "woozy" . . .

Most people think the stock market predicts the state of the economy, as it usually does in this country.  Therefore, it is logical to assume the Chinese economy is tanking, just because their stock market is tanking.  Certainly, that economy is slowing down, but nobody is predicting a real economic recession with two quarters of negative GDP growth.  That economic slowdown is masking the real problem of the Chinese stock exchange.

In China, when the stock market falls 5%, "circuit breakers" automatically kick in, and the market simply closes down.  That began in December, in response to their market collapse last summer.  It was supposed to calm nervous investors but did the opposite.

Now, suppose you are a typical Chinese investor.  You know the economy is softening, and you know that your stock market took a terrifying fall last year.  Because you never know when you will need your money and because you never know if your stock market will be open for you to sell stocks, you just want out now.  When you try to sell, the market shuts down.

The problem is the 5%!  Change it to 20% (like the U.S.), and that problem goes away.  While they still need to control their currency (at a 5-year low) and to get their economy growing faster, they should fix this problem with their circuit breaker immediately.  Until then, investors worldwide will just  keep getting seasick.

I wonder if I should buy stock in Dramamine?

A Geopolitical Year ?

This is the third trading day of the year, and we'll looking at our third geopolitical crisis.  First, a cold war broke out between Saudi Arabia and Iran.  Second, China's stock market rattled our stock market by rigging their market, as only an ignorant Communist could.  Now, North Korea has exploded a hydrogen bomb.  Futures predict the Dow will lose over 250 points at the open.  Who can guess what will happen on the fourth day?

The good employment picture of the U.S. doesn't matter.  Nor does our rising consumer confidence and spending.  The amazing technology developments expected later this year don't matter.  It also doesn't matter that the stock market normally rises in the second half of years with a presidential election.  Nothing else matters when geopolitical events dominate the headlines.

So, what should an investor do?  First, don't panic - this too will pass!  Second, if you are losing sleep, consider selling a small part of your portfolio, just to raise your level of cash.  Third, look for any unusual side-effects.  For example, an increasing possibility of war normally causes the price of gold to increase, but not this time.  Increased turmoil in the Middle East normally causes the price of oil to increase, but not this time.  Increased fear normally causes a flight to quality or the purchase of Treasury bonds, which drives down interest rates, but that has barely happened this time, even after three geopolitical surprises in three days.

I have two thoughts on this.  First, only the panicky small retail investors are fleeing the market.  Large institutional investors normally don't sit on cash.  They invest elsewhere.  Second, there is a growing sophistication and awareness that the "safety" assets of gold, oil, and Treasuries are can also lose money.  This is a good thing!

I wonder if it is possible to have 365 geopolitical flare-ups in one year? 

Trading Day #1 of 2016

If you think it was crazy for American northerners and American southerners to be killing each other, what do you think about Sunni Muslims and Shiite Muslims killing each other?  At least, the Americans were fighting over an economic system, albeit an immoral agrarian system based on slavery.  But, the Muslims are fighting over the methodology and hierarchy of worshiping Allah.

Like, who cares!  Oh, yeah, the Muslims care . . .

But, how do we stay out of their religious civil war -- militarily and financially?

Over the weekend, Saudi Arabia executed a Shiite cleric.  Iran promptly over-reacted.  (Saudi Arabia is predominately Sunni, while Iran is predominantly Shiite.)  This increased uncertainty is largely responsible for the lousy opening of the American stock market this morning.  The futures market indicates a drop of over 300 points in the Dow at the open.  Because there is no realistic possibility that either nation will invade the other, this crisis will pass, eventually.  In the meantime, American portfolios and 401(k)'s will suffer, due to religious differences in the Middle East.  On the other hand, this could be a historic buying opportunity!

The interesting aspect of this is that a major flare-up between the two leading oil-producing nations in the Middle East a decade ago would have caused a major upward spike in oil prices.  Yet, it is only up about a modest 1-2%.  That shows just how over-supplied the world markets are with oil.  That is proof that the futures market is reacting to the lousy Shanghai market, as well as the Muslim civil war.  More on this later . . .

A Historical Lesson?

Those who ignore the lessons of history are condemned to . . . reading graphs, or something like that.

Looking at 2016, it is hard to ignore the upcoming Presidential election in November.  Have these elections affected the stock market in the past?  First, you have to remember the hobgoblin of Wall Street minds is uncertainty - they simply hate it!  Now, take a look at this graph:

If history is indeed our guide, we can expect the ugly recent churning in the stock market to continue until June, as election uncertainty increases.  But, as that uncertainty begins to fade, we usually see a strong rally into the next New Year.  Looking at all Presidential elections since 1900, the stock market has gained about 11% during election years, almost entirely in the second half of the year.

Normally, investors are in a hurry to get their money invested into the market.  But, every four years, you can take your time.  Cash is also an asset -- sometimes the best performing asset, even if only for relatively brief periods.

Required Viewing

Nobody ever sat at some polished conference table in a gleaming skyscraper in New York City and said "it sure would be fun to collapse the world economy."  Nobody ever said "I want to see eight million Americans lose their jobs."  Nobody ever said "the world would be a better place if six million families lost their homes."

Still, it all happened during the Global Financial Crisis of 2007/9.

The movie version of Michael Lewis' book The Big Short has been released and is required viewing for anybody with any curiosity about how the crisis happened.  Fortunately, there is some comic relief in this mostly dark movie, when various celebrities face the camera to explain technical terms, such as celebrity chef Anthony Bourdain explaining a CDO or collateralized debt offering.  This movie is actually a good learning vehicle.  See it!

Unfortunately, the movie doesn't beg the question of who gets the blame.  Was it the unscrupulous bond salesmen who sold those worthless mortgage-backed securities to pension funds across America and then retired young and rich?  Was it the fault of mortgage-brokers who made mortgage loans to undeserving borrowers with no income verification?  Was it the fault of borrowers who took out loans they could not understand nor handle?  Was it the credit-rating agencies who got paid big fees for giving triple-A ratings to bonds secured only by garbage subprime mortgages?  Was it the fault of CEOs who allowed their companies to sell products they didn't understand themselves?   Was it the fault of Federal regulators, the SEC, the FDIC, the Comptroller of the Currency, the Department of Treasury or even the many state regulators?

In true Libertarian fashion, they were each pursuing their own economic self-interest?  They were simply working their own incentive plan.  What is wrong with that?  Virtually nobody has been convicted of any crime.  After all, how could a CEO see something wrong, when Alan Greenspan and Ben Bernanke could see nothing wrong?

Exodus 20:5 tells us that God will punish children for the sins of their father.  Karl Marx refined this by saying the sins of management are visited upon the worker.  The global financial crisis proved that the sins of capitalism are visited upon the taxpayers.

Measuring Value

Economics is about the allocation of our limited supply of resources among the unlimited demands for those resources.  Idle resources are viewed as unacceptable, if not downright sinful.  Idle resources are no different than wasted resources.

That makes Christmas and other holidays difficult for economists to understand.  Look at all those man-hours of labor that are gone - forever!  The old adage about "idle hands being the devil's tools" rings so true to economists, not from a moral viewpoint but from an economic viewpoint.  Idle hands are wasted labor.

In addition, people should be out there buying stuff or consuming products, which contributes to gross domestic product.  Plus, numerous economic studies have shown us that gift-giving produces a very inefficient allocation of resources.  Recipients of gifts would spend their own money more efficiently, if they were spending their own cash.  It is just hard to justify the holiday concept to economists.

The problem with economists is their reliance only on those things that can be measured.  The joy of watching a kid who believes Santa just left their home . . . cannot be measured and is therefore not part of the gross domestic product.  A baby's smile makes no contribution to GDP either.  Holding the hand of a loved one on their deathbed also has no economic value.  Waking up, snuggled against your gently-sleeping spouse, is just another example of waste.

Some non-economists argue that, if the economic value of something can be measured, then it has no real value.

Maybe, they're right?

A Boring Christmas Wish

My Republican friends in Virginia suspect I am a closet Democrat.  My Democratic friends in Maryland suspect I am a closet Republican.  They're both correct.  The cause of this confusion is my profound belief that gerrymandering is just wrong -- no matter who does it.  It is the bane of democracies everywhere.

Gerrymandering is the practice of drawing political districts to benefit one party or the other.  Currently, Republicans appear to be the worst offenders, but they learned the practice from Democrats long ago, who lumped as many black voters into a district as possible, in order to insure the black population would have some elected representatives.  Republicans quickly realized that the neighboring districts instantly became more conservative, with fewer blacks in them.  The downhill race was on - to see who could gerrymander the worst.

Today, Republican districts are more conservative than ever before, while Democratic districts are more liberal.  As a result, we are discriminating against moderates of both parties.  The result is gridlock.

In Virginia, there are 40 members of the Senate and 100 members of the House.  In the last election, 50% of the incumbent Senators and 71% of the incumbent Delegates campaigned without an opponent.  In other words, their district was so overwhelmingly Republican or Democratic that running against the incumbent was hopeless.  Who won -- the incumbents, of course!

The law requires districts be re-drawn after each census or every ten years.  In those states where districts are drawn by elected politicians, who draw lines to protect their seat, lawsuits quickly follow.  After the 2010 elections, 42 states had to deal with these lawsuits.  Courts traditionally expedite these cases, because it is hard to correct the damage.  Besides Virginia and Maryland, lawsuits continue in Arizona, North Carolina, Texas, and Florida -- five years later.  There is no assurance these suits will be settled before the next redistricting in 2020.  The system is broken!

My Christmas wish is that the extremely important function of redistricting be removed from incumbents and instead be put in the hands of a independent non-partisan commissions, such as Ohio and California.  Some things are simply too important to be left to politicians, who have a proven inability to be non-partisan!

That would not produce "peace on Earth and goodwill toward Man" but would be a positive step in the right direction.  There can never be peace as long as extremists continue to win elections.

Thank You, Art!

I have never heard an unkind word about Art Cashin, who has worked on the floor of the New York Stock Exchange for well over 50 years -- yes, well over fifty years!  Now the director of floor operations for UBS, he knows the old traditions and the new technologies better than anybody I follow.  He also has a wry sense of humor that I love.  As published by CNBC, here is his annual Christmas poem . . . enjoy!

'Tis two days before Christmas
and at each brokerage house
The only thing stirring
was the click of a mouse

Down on the Exchange
the tape inches along
Brokers bargained and traded
as they hummed an old song

The Fed turned data dependent
or so they would claim
Yet they hiked in December
though the data looked tame

KC took the series
and the Pats grabbed the Bowl
While American Pharoah
had the Crown as his goal

Our girls took the World Cup
they were just over-joyed
And we found us a new star
who was named Carli Lloyd

Letterman, he retired
and he quick grew a beard
And so did Paul Ryan
I'm thinking that's weird

The Pope came to visit
and he drew quite a crowd
And hundreds of selfies
he even allowed

The Broadway play — "Hamilton"
as a show caused a flap
They've a sold out box office
with Founding Fathers who rap

Yet there's still Cosby and Kim K
they still don't bring us cheer
But it's Christmastime, Alice
And Santa is near

So stop looking backwards
have a cup of good cheer
And kiss you a loved one
raise your hopes for next year

And amidst all the trading
Christmas themes we will heed
And share our good fortune
with families in need

And tomorrow they'll pause
as we wait on the bell
To sing a tradition
a song for old "Nell"

Don't let this year's problems
impede Christmas Cheer
Resolve to be happy
throughout the New Year

And resist ye Grinch feelings
let joy never stop
Put the bad at the bottom
keep the good on the top

So count up your blessings
along with your worth
You're still living here
in the best place on earth

And think ye of wonders
that light children's eyes
And hope Santa will bring you
that Christmas surprise

So play ye a carol
by Mario Lanza
Unless you are waiting
to celebrate Kwanzaa

Hanukkah's over
And Ramadan's long gone
Different folks, different holidays
yet each spirit lives on

Whatever your feast is
we hope you all still
Find yourself just surrounded
by folks of goodwill

Thursday, as the bell rings
hark to your heart's call
And as Santa would shout
Merry Christmas to All!

— By Art Cashin Prepared by UBS Financial Services.

2016 Peek

The real, honest-to-God, know-it-all's at Goldman Sachs work in their research department, and I value their thoughts.  Here are some of their latest:

1.  GDP growth in the U.S. will slow slightly from 2.4% this year to 2.3% in 2016.  Japan will increase from 0.6% to 1.0%, while Europe will increase from 1.5% to 1.7%, which is disappointing.  The closely watched GDP growth rate for China will continue to decrease, from 6.9% to still robust 6.5%. but far below their double-digit growth a decade ago.

2.  Interest rates (10-year Treasuries) will increase 73 bps in the U.S. to 3% -- far above 0.8% in Europe and 0.6% in Japan.  This should cause the dollar to rise 5.6% against the Yen and 7.8% against the Euro, which will reach parity ($1 = 1 Euro).

3.  Oil will rise 25.6% to $54/bbl, and natural gas will increase 37.2% over the next year.

4.  Gold will lose another 25.6%, while cooper will lose another 2.4%.

5.  Unemployment rates in the G-7 countries are now the lowest since 1970 -- 45 years ago.  

The End Is . . . NOT . . . Near

It was certainly an interesting week on Wall Street.  It began with a stampede of bulls running up stock prices and ended with bears clawing those prices back down . . . violently.

To add to Friday's dramatic sell-off, don't forget it was an expiration Friday, when most options and futures expire or rollover.  That is is called "triple witching day" and is almost always one of the most volatile days each quarter.  Since Friday was the last time in this year, there was even more "window-dressing" than normal, to make year-end statements look healthier.

The only weak spots in the economy that cause me to lose sleep right now are energy and junk bonds, which are inter-related.  Solve the energy problem and you will also solve the junk bond problem.  As we've discussed, the energy problem is too much supply, both oil and natural gas.  Maybe, that is just too much of a good thing?  Remember 1972?

Many analysts are concerned that corporate earnings have stalled.  That is a legitimate concern, but I suspect it will be transitory.  Recent outbreaks of cooperation in Washington have fueled my optimism.  2015 was an exciting year on Wall Street, but very little value was created, if any.  I suspect that "wheel-spinning" will continue until next summer, especially if uncertainty about the presidential election begins to fall.

Most portfolios should just sit tight during this spasm.  If you are nervous, you could increase your cash level by selling energy-exposed assets.  If you still do the traditional Christmas gift-giving, please don't stop or decrease it, just because of the stock market spasm.

Don't grab your chest, screaming "this is the big one!"  It is NOT.

This too shall pass . . . now, go enjoy the holidays!

Drowning Santa

Finally, the Fed raised interest rates a small amount.  The stock market rallied a few days, as it always does when some uncertainty is reduced.  Now, it has suddenly remembered "oh, yeah, we have that major uncertainty about the energy business."

That uncertainty is not going away anytime soon!  And, without a recovery in energy prices, the high-yield market cannot recover, as so many junk bonds were issued to pay for fracking expenses.

The world produces somewhere between 1-2 millions barrels of oil too much every day.  This means inventory levels or "overhang" is increasing every day, putting downward pressure on prices.

Fracking accounts for only 3-4% of daily oil production worldwide.  Shutting down these high-cost producers will not solve the energy problems.

Average annual increase in temps worldwide are 20% higher this year than last, reducing the demand for heating oil.  How do we lower temperatures worldwide?

Speculators have long been the traditional savior of the energy business, by bidding up the price of oil when they think bottom prices have been established.  But, they are scared to participate, because nobody knows what happens when the Iranian oil enters the market.  That is another 400 thousand gallons a day that the market doesn't need.  (Goldman Sachs predicts oil could fall to $20/bbl.)

Now, it looks like the U.S. will start exporting oil, further flooding the oil market worldwide and further weakening prices.

Normally, we look forward to a "Santa Claus" rally this time of year.  Unfortunately, it looks like Santa and Rudolph are drowning in oil, instead of delivering stock market gains.

The Official Version

Recently, I wrote about a moving memorial service for a unsung fallen hero buried in Quantico and have received numerous kind comments from readers.  Since then, the CIA has posted their own description, and you can find it here:

https://www.cia.gov/news-information/featured-story-archive/2015-featured-story-archive/remembering-cias-heroes-greg-wright.html 

Go, Fed, Go . . . please!

Wall Street is just atwitter over the Fed raising interest rates tomorrow -- for the first time in nine years.  (Back then, millions of current investors could not even find Wall Street on a New York City map.)  Five years ago, three years, and even last year, Wall Street was terrified of a rate increase, but no longer.  It wants a rate increase, and it wants it now!  In September, Wall Street thought the Fed would act then.  When it didn't, the stock market threw a tantrum and tanked.  The latest CNBC survey shows a whopping 95% of investors believe the Fed will act tomorrow and raise interest rates modestly.  They finally see an increase as a vote of confidence in the economy from the Fed.  (If they don't raise interest rates tomorrow, expect another tantrum, also known as a buying opportunity.)

Given the dual mandate of the Fed to hold down both unemployment and inflation (which Keynesian economists argue is next to impossible), I have long believed there is no reason to raise the rates, as both unemployment and inflation are well contained.  In September, however, we learned the Fed is also paying attention to  international considerations, especially currency exchange rates.  Raising interest rates in the U.S. makes the dollar stronger and other currencies weaker.  This is bad for large companies who sell abroad, as it makes their products more expensive for foreigners to buy.  This is especially true when the central banks of Europe and Japan are more stimulative, while our central bank is becoming less stimulative.  This also argues NOT to raise rates, but who cares?

Libertarians have long feared the Fed and give it no credit for avoiding a depression in 2008.  They claim, with some justification, that keeping interest rates this low for so long causes other bubbles to form, like we now see in art, antique autos, and even wine.  Knowing the public doesn't like the notion of raising interest expenses, they have fashioned a term-of-art for it -- normalizing interest rates.  But, after nine years, I'm not sure the definition of normal is unchanged.  I am sure that I'm tired of hearing the Libertarians whine.

Now, I just want it over with.  It is not unlike losing your virginity.  Long afterwards, you laugh that it was ever such a big deal.  This interest rate increase is just a huge distraction for Wall Street.  Once this is past us, we can then obsess about something else, such as the much-too-low price of oil.

And, The Non-Oscar Goes To . . .

 . . . Robert Redford for his searing portrayal of a lone man adrift-at-sea in All Is Lost, which is arguably the best existential movie of the decade.  Unlike Hemingway's The Old Man And The Sea, Redford's movie is not a contest between a man and a fish or even against another man.  It is a contest between one man and one death.

The classic image of existentialism is the image of Jean-Paul Satre drifting down a river, alone of an ice floe, appearing helpless against the environment but still in possession of his intellect and ingenuity.  The image applies equally to Redford, who is the victim of bad luck but bounces back thru sheer ingenuity.  First, his sailboat is disabled, then further damaged in a storm, before sinking, just as Redford steps into a floating raft, where he stays until the movie's surprise ending.

Unknowingly, we watch Redford progress thru the five stages of dying made famous in Dr. Elisabeth Kubler-Ross's 1969 classic On Death and Dying.  First, Redford went into denial - how could a cargo container puncture a hole in his sailboat in the middle of the Indian Ocean?  What are the odds?  Then, he become angry - why me?  The third step is bargaining, where Redford merely becomes pensive in the movie, suggesting a lack of spirituality in his life.  But, if the third step was short for Redford, the fourth step of depression consumes most of his time in the raft, as ships pass closely but without seeing him.  The final and most important step is acceptance, when hope is lost and the release of death becomes a better option than the continued burden of life.  After accidentally setting his raft on fire, while signalling a distant light on the horizon, he finds himself alone in the dark waters, accepts his fate, and slips below the surface.

Only the Hollywood-dictated "happy ending" keeps this movie from existential greatness.

This movie is so different.  The singular focus is on one speechless person.  That speechless person allows us to insert our own thoughts and emotions.  It doesn't tell a story.  It shows the story.  It shows the emotional progression of dying  . . . maybe not alone on an ice floe, but certainly against a hostile environment that overwhelms both intellect and ingenuity.

Springtime At Christmas ?

It is probably too early to find long-lost hope, but there is something good going on in Washington.  With all the drama of the stock market and the pressure of the holiday season, you may not have noticed that two significant pieces of legislation have passed and been signed by the President, plus the predicted government shutdown next week has been avoided.

First, a five-year transportation bill was approved.  Not only was more money committed to infrastructure, but it was committed over a five-year period.  Imagine you're a road-builder with only a one-year contract, knowing your contract will almost certainly lapse every year for lack of funding.  Better yet for taxpayers, just imagine more and better infrastructure!

Second, an updated "no-child-left-behind" education bill was approved.  It still required annual testing, which teachers hate, but delegated remedial solutions to the state level, which Republicans love.  Nonetheless, the President signed it.

I'm sure there are enough details that everybody can find something to disagree with.  The point is that both pieces of legislation passed anyway and were signed.  For years, I've referred to Congress as "elected-children."  What caused this change of season, from bitter Wintertime to pleasant Springtime.  Could it be Republicans want to prove they can govern?  Could it be that Democrats are embarrassed and tired of low approval numbers?

I suspect much of the credit for this improved legislative climate goes to the new Speaker, Paul Ryan.  Certainly, there are no fewer Tea Party members in the House, but Ryan has found a way to corral them and harness their anger.

Attaboy, Paul !!

Nothing could help the stock market more than a functional fiscal policy, reducing the lop-sided need for stimulative monetary policy.

Go, Paul, Go !!!