Geek-Fest in DC

Because I have to feed three different certifications, life is a never-ending pursuit of continuing education credits.  Every year, I chase conferences around the country to get enough of the CE credits.

The most expensive and lavish is the Investment Management Consultants Association (IMCA).  It is more focused on investing and attended mostly by financial advisors, not financial planners.  It is attended by mostly males,  In fact, alpha males!  The song "Barracuda" always plays in the back of my mind.

There is also the National Association of Personal Financial Advisors (NAPFA), which is attended primarily by financial planners, not financial advisors, despite the misleading name.  The ratio of women is steadily rising, probably one-third of the attendees are now female.  Think social workers!  I'm confident the average compensation of attendees at a NAPFA conference is substantially less than at the IMCA conference.

Then, there is my favorite - the National Association of Business Economists, which is held each year in Washington and attended almost entirely by economists.  Think "pocket protectors" and slide rules.  They are a decidedly different type of attendees, and I enjoy them immensely.  I'll be attending their lectures for the next two days and cannot wait.

More Exercise, Drill Sargeant

Readers will recall a lady I knew in Texas, who maintained the best effective diet I've ever seen.  She fasted one day each week, usually Friday.  By maintaining tight self-discipline that one day, she made her self-discipline more effective the rest of the week.  I was fascinated by her notion that self-discipline was just another "muscle" that needs exercise - use it or lose it!

Readers will also recall I've been trying to limit the intellectual pollution I receive, which some people call the presidential campaign, and therefore avoid all TV news on Saturdays.  It is not really the same thing, because it is difficult to fast from food but easy to fast from intellectual pollution.  The most difficult part of fasting from TV news is sealing it off.  Televisions on Friday night must be set on a non-news station for the next morning.  Car radios must be changed.  Yet, this pollution still seeps into your day.  Yesterday, I maintained my isolation from the campaign quite successfully, until my excitable wife rushed into the master bath, where I was taking a shower, to announce breathlessly that "I just heard the latest poll out of Florida shows Trump beating Rubio by 22 points."  While that was interesting, what was I supposed to do with that information?  Do I therefore wash the left arm instead of the right arm?  It had no value, except entertainment value.  There was certainly no investment value to that information.

It is not the broadcast news I want to avoid but the breathless 24/7 live coverage of the campaign that pollutes the soul.  While we are being entertained by the tasteless reality show called the presidential campaign, we are paying too little attention to other things.  For example, there is a genuine humanitarian crisis building quickly in Europe right now, with a million people in jeopardy.  If Europe as a whole handles this crisis as poorly as France handled the refugee crisis from their Algerian war, then the Eurozone will cease to exist.  (It is not a coincidence that Europe's terrorist attacks have been primarily in France.)  After all, is it more important to be conversant about this huge pending crisis or Donald Trump's non-huge . . . hands?

So, what started out as an exercise in self-discipline is now too easy.  It has become more of a management problem - how to seal it off, rather than how to force myself to live without it.

Maybe, the problem is that television only has one real advantage over others news sources, i.e., the ability to convey emotion or urgency by being breathless?

Two words you never see in the same sentence are breathless and intellectual.

I think I need to find another way to exercise my self-discipline "muscle?  Without fasting from food, that is.  After all, why would anybody fast from food . . . when there are so many key lime pies out there, just waiting to be eaten?

One Data Point To Rule Them All

Many people feel bewildered when economists start talking.  It's the "drinking from a fire hose" problem.  Who can absorb all those numbers, data points, and graphs immediately?  It is not news to economists that we can confuse any situation by merely adding more data.

Years ago, I attended a three-day course in Washington for a deep-dive into economic measurement data produced by the Federal government, which ignored data produced by the many universities, trade groups, and other governments.  In a lighter moment (there weren't many), one professor suggested that only one economic report really matters, i.e., the monthly "Jobs Report" published by the Bureau of Labor Statistics (BLS).  He said, if the economy is producing enough jobs,  nothing else really matters.

The economy is producing enough jobs!

Yesterday, the BLS reported 242 thousand jobs were created last month.  This easily surpassed Wall Street's expectation of 185 thousand.  Not only that, the two previous months produced 30 thousand more jobs than previously reported.  Over the past twelve months, the economy has produced two MILLION new jobs!

Interestingly, the unemployment rate of 4.9% was unchanged.  If we produced so many jobs, why didn't the rate fall?  Because the labor force is expanding!  Over the last three months, more than 500 thousand disillusioned people decided the job market was finally strong enough that even they might have a chance of getting a job after all.  The Labor Force Participation Rate (I know, another data point) increased to 62.9%, which is up .5% in just three months.  That's real progress, believe it or not.  The U-6 level of unemployment (another darn data point) among the disillusioned and the part-timers who want to be full-timers, dropped below 10% for the first time since the Great Recession.

The economy is producing enough jobs . . . or, it was last month anyway.

Amen, Mitt !!

I just can't take it anymore!

Whenever you try to be an honest intellectual broker, it is necessary to be non-partisan, because people presume to know all your thoughts, just because they know one of your political thoughts.  I broke that rule last year by denouncing Donald Trump when he trashed John McCain.  I just couldn't take it!

It is more than bad manners for a rich, pampered non-veteran, who has never faced hostile gunfire, to trash a genuine American hero like John McCain.  It is proof-positive of pitifully poor judgment and is unworthy of anybody seeking the Oval Office.  As far as I was concerned, Trump was no longer worthy of ANY consideration at that point.  Trump has been trash to me since that day.

Yesterday, Trump was trashed by Mitt Romney, which was long overdue.  I stand with Mitt, another rich pampered non-veteran, who has never faced hostile gunfire, but one who does, at least, have the grace, decency and good judgment to respect an American hero.

Okay, I feel better . . . now I will be non-partisan again . . .

OCB du jour

The stock market is like an infant -- it is easily distracted by bright shiny objects!

Do you remember during the Great Recession how strongly the market reacted to anything said by Hank Paulson, Ben Bernanke, Jamie Dimon, and other banking elites?  Nothing they said was unimportant.  Eventually, the market recovered.

Do you remember a few years ago how strongly the market was focused on Greece?  Breathlessly, we followed every announcement by the ECB, by Germany, and by the Greek leaders.  Still, the market recovered.

Do you remember the last two years when the market was obsessed with when the Fed was going to raise interest rates.  Still, the market recovered.

Do you remember what a bright and shiny object the Ebola outbreak was, as our stock market dropped suddenly and dramatically.  Still, the market recovered.

Do you remember the beginning of this year when the market became obsessed with two shiny objects at once, i.e., the China slowdown and the collapse of oil prices.  Already, the market has apparently started to recover.

I suspect the next obsession will be the Eurozone, due to the Brexit possibility and the refugee problem, which could easily become intractable.  When that happens, I will remember what Warren Buffet said:

"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

Picking Poison

Have you been to http://www.usdebtclock.org lately?  This website is complex but fascinating.  Most people focus on the total debt of the U.S. government, which is now over $19 trillion.  While that has continued to increase during the recession, the more important ratio of that debt to GDP has been decreasing . . . until now.  Please find that number of the website, near the middle but closer to the top.  That number is now 106% and has started to increase.  It fell during the recession, as stimulus spending pushed it up and GDP decreased.  During sequestration, the ratio actually decreased modestly, as GDP kept increasing.

Several respected economic studies have argued that 100% is the "point-of-no-return" -- once crossed, the world becomes a slippery slope and hope is lost.

Look at the average federal taxes paid or revenue per citizen, which is about $10,320.  Compare that with the amount of interest paid on the national debt per citizen, which is about $7,450.  That leaves less than $3,000 per citizen to pay for Social Security, Medicare, Medicaid, Federal pensions, and, not insignificantly, to pay for the military.  Now imagine what happens when interest rates rise . . .

Only Libertarians argue that it would be good for the nation to increase interest rates.  On the other hand, it is bad for the nation over the long-run to have such artificially low rates.  Choose your poison carefully and decide whether you would decrease Social Security, Medicare, Medicaid, Federal pensions or the military.  The latter is clearly being crowded-out by rising debt expense and entitlements.

Resolution Update

Saturday was my second attempt to avoid political news on television, with all its breathless hyping of trivia, for a single day each week.  It was easier than the first attempt last week.  Between social duties, I watched The Golf Channel and almost finished reading another book.  Three times during the day, I checked the Bloomberg website, to make sure there were no economic or geopolitical events that actually mattered.  Nothing happened that actually mattered.

On Sunday, I watched the political news channels of Fox, CNN, and MSNBC and learned that I had missed nothing of significance, much less anything that left me breathless.  Avoiding political dribble is a worthy exercise in self-discipline, and I will continue.

My wife challenged me by asking if watching a golf tournament live is not the same thing as watching news.  That's a fair point, but I'm trying to limit only the amount of political news stories that I consume, not the many non-political news stories.

However, I've become more sensitive to the number of news items that is NOT covered by the political news channels.  There is an opportunity cost to watching political news, because you are not watching news that actually matters.  If you are more familiar with the rants of political bullies or different presidential hair styles than you are with "Brexit" (the potential exit of Britain from the European Union), then you are watching too much political pornography.

Goldman Thoughts

Some of the latest predictions from the good people in the research department of investment giant Goldman Sachs are:

1.  The S&P 500 will rise to 2,025 over the next three months and 2,100 over the next twelve months, which would be an 8.2% increase!
2.  European stocks will rise even more - up 11.1% over the next twelve months.
3.  Asia will rise 12.1%, with the Japanese Topix rising a stunning 25.7%.
4.  Ten-year Treasuries will rise 110 points.  (I doubt this.)
5.  The dollar will appreciate 12% against the euro and 7.3% against the yen, over the next twelve months.
6.  The pound will only lose 1.4%, suggesting Goldman is not worried about "Brexit."
7.  The volatility index or VIX is NOT predicting a recession.
8.  Most importantly, oil will rise to $43/bbl over the next three months and $54/bbl over the next twelve months.  This 55.6% increase in oil also explains the 8.2% increase in the S&P 500. This is a big deal!!

I wonder what the other people at Goldman Sachs think?

Slip Sliding Away?

Liberty requires autonomy or independence of the individual.  One of the things I enjoy about New York City is the knowledge that I can glide through masses of other people unseen and unknown.  I don't know them, and they don't know me, and that's okay.  The middle of crowds can be a very lonely place, but that can also be very enjoyable.  I am autonomous -- a free-thinking, independent unit.

But, am I really autonomous if my identifiable information, such as name, address, SSN, and credit report, is taped to my back?  No, some things must remain private.  It's important!

We've all heard Benjamin Franklin's famous statement that "those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety."

So, is Apple right that some areas of our digital life need to remain free from government snooping -- by any government?  Or, is the FBI right that this minor loss of privacy by a dead man is justified to "purchase a little temporary safety?"  Wouldn't you gladly sacrifice your privacy to a thug with a knife at a little girl's throat?

This is another one of those countless "slippery-slope" arguments.  That's what specialized FISA type courts are for -- not regular courts.  If a judge with specialized expertise in privacy issues orders a violation, then it is reasonable.  If some judge with expertise in domestic relations law orders a privacy violation, then it is unreasonable.

My concern is not the initial violation of privacy for "a little temporary safety."  Privacy can indeed be protected over the long term.  My concern is the unauthorized use of that information.  This is another one of those countless cases where too much attention is paid to writing rules and too little attention is paid to punishing violators.  If my privacy is violated, a mere fine is not sufficient punishment!  Likewise, a minor jail term is not sufficient punishment!!

Chinese Decision Making

Ever vigilant for another financial crisis, I have fretted about the possibility of a simultaneous commodity crisis, currency crisis, and credit crisis.  My conclusion was that the possibility of another recession may have increased but not necessarily the possibility of another financial crisis.  Part of my thinking was that the much-discussed Chinese banks are not the zombie banks that we all fear, despite all that has been written recently about the bad loans.

The totalitarian central government of China is able to help certain companies or, more importantly, certain local governments by requiring banks to lend to them, whether the bank thinks the borrower is creditworthy or not.  This is quicker and more clandestine than just supporting the localities or companies directly with taxpayer money.  But, the level of bad loans has reached a dangerous point.

The central government has put a ceiling on loans to localities at 16 trillion yuan ($2.45 trillion).  In addition, they are now rolling off higher-rate, shorter-maturity bank loans into lower-rate, longer-maturity bonds sold to the public.  While debt is still debt, some debt is worse than other debt.  China is converting very bad debt into slightly bad debt.  The distinction is important, because it improves the health of Chinese banks, if not the new bondholders.  Albeit small, the risk of a Chinese credit crisis just decreased.  More changes should be expected.

Isn't it nice when a decision can be made?

Isn't it nice when fiscal policy and monetary policy work together?

News-Fast

Yesterday was my first attempt to minimize my intellectual and emotional pollution by avoiding television news for one day each week, normally Saturdays.  The day got off to a bad start.  When I turned on the TV, a news channel popped up. Not to be a purist, I learned that I need to change channels before I go to bed at night, so a news channel doesn't pop up again.  Getting past that hiccup, I trolled other channels.  Did you know that The Golf Channel has a delightful live show called Morning Drive?  It was great!

That afternoon, we drove six-hours to check on my 93-year-old father.  Long drives are much easier with satellite radio, like Sirius.  Normally, I would be listening to CNBC or Bloomberg, with interludes on FNC, MSNBC, CNN, and especially CNN International.  Yesterday, we trolled the world of music, instead of news.  Did you know that both Frank Sinatra and Jimmy Buffet have their own dedicated music channels playing their songs 24/7?  It was great!

Arriving at my father's house, I had forgotten his addiction to Fox News.  I asked for the remote and turned the volume down to zero and turned my back to the television.  Nonetheless, it was still hard to miss the breathlessness of their political coverage.  It wasn't much pollution, and I think I minimized as best as I could.  Still, it wasn't great!

The take-away from this first attempt is that it is more important, if not more difficult, than I expected.  Part of learning is exploration, and I had more time for exploration yesterday.  I'm already looking forward to next Saturday!  In fact, I'm even going to make Saturdays great again . . .

Financial Crisis 2.0

Are we going to have another financial crisis?  Absolutely, but we will survive it, just like all the others.  More importantly, are we going to have another financial crisis in the near future?  A month ago, I was worried.  Today, I am less so.

My concern was that a perfect storm of a commodity crisis, a credit crisis, and a currency crisis were hitting us at the same time.  I was worried all that could overwhelm the financial system.  With respect to the commodity crisis, there is now some reason for hope.  In the case of oil, the world is no longer in denial that it is a over-supply problem, not an under-demand problem.  The suppliers or producers of oil are beginning to talk, which is a needed first step.  Each also recognizes that truth is merely another political tool and don't pretend to believe each other,which is a honest first step.  They are almost at the capitulation stage.  Another leg down, and they'll be there!  After maintaining an incredibly tight 97% correlation between oil prices and the stock market during January, that linkage appears to be fraying . . . good!

This commodity crisis is also largely responsible for the credit crisis.  The high-yield bond market in the U.S. financed most "frackers," and it is estimated that 25% of those producers will take bankruptcy.  However, that is already factored into the market.  Junk bonds have already tanked without any major destabilization of our credit markets.  U.S. banks also hold a great deal of loans to oil companies, but with $700 billion of "excess capital," our banks would survive if every single dollar of their oil loans was written off.  (As bad as it may be, the Dodd-Frank Act gives me comfort at a point like this.)  Don't worry about the U.S. banks!

But, oil is not the only contributor to bad loans.  How about the developing world, such as China?  Wells Fargo just published an interesting study on this and found only 5% of the world's banking assets are exposed to the developing markets.  (Naturally, developed markets borrow far more than developing markets.)  The two developed nations most exposed to the developing nations are Austria and (shockingly) Greece, both of which are quite small.

Another component of the credit crisis are the "zombie" banks of China, which have enormous bad loans on their books.  (This reflects the central government causing a gross miss-allocation of resources, which is covered up by bad bank loans.)  Is there any realistic possibility of the large Chinese banks failing and dragging down the rest of the world?  Theoretically yes -- but not as a practical matter.  China would torpedo the rest of the world to keep a billion people from rioting in the street.  If necessary, they will simply "print" enough yuan to bail out their banks.  Of course, this would cause the value of their currency to tank mightily -- not good, but far better than crashing the banking system.

The third crisis haunting us is a possible currency crisis, possibly precipitated by a massive yuan devaluation, albeit unlikely.  Even without China doing something stupid, there is already currency-friction between the dollar and other currencies, as the Fed's tightening posture is inconsistent with the ECB and Bank of Japan.  The Fed will have to soften their position or risk setting off a currency war.  They will soften their position.

None of this means we will not have a recession, however.  There is no case of our country experiencing a second financial crisis without first experiencing a recession during the interim, and we have not had a recession since the 2008/9 financial crisis.  The bear attack that the stock market has suffered so far this year is more likely a predictor of another recession than another financial crisis, which is fine.  (The economic data does not suggest another recession, even if the stock market does.)  Recessions come and go.  They are good for capitalistic economies in the long run.  But, I'm not nearly as worried about another financial crisis as I was a month ago.

Financial Crisis 101

Everybody knows about recessions, as we normally have one every 4-8 years and are due for another.  The conventional definition is that GDP must drop two consecutive quarters, usually at an annualized rate of about 3%.  Despite the fact that investors invariably over-react to the first hint of a recession, the really scary thing out there is not a recession . . . but a financial crisis.

Because the financial system is the cardio system for the economy, a financial crisis is a heart attack for the economy.  They happen relatively suddenly and do far greater damage than recessions.

Normally, it happens because banks have made too many loans that go bad.  Bank accounting rules require that loans be written off to their market value.  The amount of that write-off is subtracted from earnings.  If earnings have already been wiped out, that amount must be subtracted from net worth or stockholders equity.  If that is decreased, banking regulations reduce the amount of loans that the bank may make or hold.  (This restricts lending when the economy needs it the most!)

A clear example in the recent past was the Savings & Loan debacle in Texas in the late 1980's.  The savings institutions made too many bad real estate loans and were subsequently forced to carry the loans on their books at market value, necessitating huge write-offs.  Fortunately, while it was certainly a financial crisis in Texas and Oklahoma, it was localized enough not to threaten a national problem.

But, banks and savings institutions were no longer the sole avenue of a financial crisis after the capital markets were developed, because that allowed development of what Warren Buffet described as "financial weapons of mass destruction," i.e., derivatives in general and credit default swaps in particular.  It was a mere thirteen years ago that he made that statement.

To explain a credit default swap, let's assume I loan you one million dollars.  Later, I don't feel comfortable with that much exposure to your credit or your ability to repay me.  So, I pay somebody else to guarantee your debt, called the guarantor A.  Let's say I pay them $50 thousand.  I paid that amount to have the certainty that I will receive a net of $950 thousand back.  But, the creditworthiness of guarantor A has then declined, because he has a liability to repay me, if you don't.  Guarantor A has a huge exposure to you, and he doesn't want that much exposure either.  So, he might pay $25 thousand to guarantor B to guarantee $500 thousand of your debt and so on . . .

In 2008, nobody knew who was holding whose swaps nor how much.  In other words, I'm sleeping well at night, knowing that guarantor A will repay me if you don't.  Suddenly, I find out you may not be able to repay me after all.  Even worse, I don't know anything at all about the current financial condition of guarantor A.  Am I going to get repaid or not?  (This was a major concern during the Greek bailout in 2011.)

In a financial crisis, everything freezes.  Stores won't accept personal checks.  Banks won't make loans.  Indeed, in 2008, Bank of America wouldn't accept deposits by personal checks totaling more $3,000 each day.  Many customers had to make daily deposits, because they could not deposit more than $3,000 each time.  The financial system was frozen.

I don't advocate increasing cash in the face of recessions, only in the face of a financial crisis.

Enough Cash?

The novice investor tries to buy a stock when it hits a low and sells it when it hits a high.  What could be wrong with that?  After all, doesn't everybody say "buy low and sell high?"

As wonderful as that sounds, numerous studies have shown that "market timing" seldom works in the short-term term and never works in the long-term.  As Warren Buffett has told us repeatedly - buy stocks you like and hold them as long as you like them, preferably forever.

So, why do investment managers sometimes increase their level of cash?  Is it to have "dry powder" for when stocks get really low?  Isn't this inconsistent with Buffett's advice.  Yes, it is inconsistent with that advice, but Buffett's advice refers to normal market volatility related to the business cycle, i.e., to a normal recession . . . not a financial crisis.

The level of cash should reflect some expectation about a financial crisis.  If you think a normal recession is approaching, you might shift more into consumer staple stocks but otherwise remain largely invested.  If you think a financial crisis is approaching, you might sell banking and other credit-sensitive stocks but hold the cash without reinvestment.  That's the science of it.  How much cash you hold . . . well, that is the art of it.

Limits of Logic

Some of us are expected to be mind-readers at best or soothsayers at worst.  Because of that, we are usually more forgiving when others in our profession are proven wrong . . . unless it is the legendary Goldman Sachs, of course.

On January 28th, Russia called for talks with other oil-producing nations to limit production in order to raise the price of oil.  Goldman Sachs promptly announced it would never happen, because Saudi Arabia will never forgive Russia for lying and cheating on similar agreements in 2001 and 2008.  Russia argues truthfully that it cannot cut production in a frigid Siberian environment as easily as oil wells in hot deserts can be closed, but hides behind that fact to cheat.  Plus, it is not in Saudi's best long-term interest to get oil prices higher yet -- not until they have driven U.S. shale-oil producers out of business.

Their logic was completely valid, but guess what was announced this morning?  Saudi Arabia will indeed enter into talks with Russia and other oil producers to freeze production at January levels.  Sorry, Goldman!  Good logic, bad call.

But, do these talks mean anything?  No!  One reason is that January levels of production would be frozen, which is still way too high - the oil stored in tanks would continue to increase, which holds oil prices down.  Another reason is that U.S. producers would not enter into the agreement, which would increase our market share, albeit at low prices.  The most important reason, of course, is that Iran would not agree, as their oil production has been held off the market for many years and they need to increase production as rapidly as possible.  Lastly, it is not known if there are any honest, reliable members of OPEC or the non-OPEC producers that would not cheat.

Tardy 2016 Resolution

At first, I felt guilt . . . then quite quickly, I felt relief . . . great relief.

I had forgotten to watch the presidential debates at 9PM on Saturday night.  I wasn't surprised by the guilt, as I've always tried to be an analytic, dispassionate voter and do try to watch such events.  But, I was surprised at the sense of relief.  It was oddly strong . . . and good!  As I often do, I remembered someone who had passed through my life.

When I moved to Texas in the last century, I was fortunate to work with an older lady, named Audrey, who was quite attractive.  As she was the most svelte member of our department, I asked her what was her secret to staying so slim.  She told me that she fasted for one day each week, normally on Fridays.  No food, water only!  Self-discipline is just another muscle that needs to be exercised, she said.  And, exercising self-discipline that one day improved her self-discipline the rest of the week.  While I greatly respected that self-discipline, I hoped to find an alternative, like running an extra mile or anything except being hungry.

My suspicion is this:  while I love economics and foreign affairs, I am being polluted by partisan politics.  Missing the partisan debate actually made me feel better.  Maybe, I need to go on a fasting diet -- a weekly detox program -- to be free of partisan foolishness -- for one day each week.

Therefore:  Be it resolved I will not watch any TV news on Saturdays for the rest of 2016!

Wish me luck -- I know Audrey would!

Emotional Symmetry

Excess emotions produce bad decisions.

Did you feel bad when the Dow lost 300 points on Thursday?  How bad?
Did you feel good when the Dow rose 300 points yesterday?  How good?

I'll bet the strength of your bad feelings on Thursday was greater than the strength of your good feelings on Friday.  That's because the pain of loss far exceeds the joy of gain.

You might have considered taking your money out of the stock market on Thursday, but I'll bet you didn't consider adding more money on Friday.  That's because the pain of loss far exceeds the joy of gain.

Psychologists tell us that one of our most powerful emotions is "fight or flight."  When facing a large sudden loss, it is our natural instinct to flee the stock market, since we cannot fight back.  It is also the worst time to make a reasoned decision.

Mr. Spock of Star Trek  fame would tell you there is no room for emotions in making investment decisions, because . . . the pain of loss far exceeds the joy of gain.

The emotions surrounding gain and loss are not symmetrical.  Don't trust in your ability to make rational decisions when the market is down - your more powerful asymmetric emotion to flee will trick you . . . and cost you!

An Economic Stent

Readers know I have no fear of recessions nor bear markets.  We have experienced many of both and know they always end.  There is no "sky is falling" concern to recessions or bear markets.  However, I have been very worried about a financial crisis, which is like a heart attack.  It comes suddenly, and recovery is slow.

The usual channel for a financial crisis is the banking sector, which includes the investment banks.  In particular, I have been very afraid of a blow-up in derivatives, such as credit default swaps.  They are dangerous, because there is no assurance that the counter-parties can make good on their promises to make the swaps-buyer whole, in the event of default.  The main reason for this lack of assurance is that nobody knows who they are, nor what their financial strength is.

Because the vast majority of derivatives are written in the U.S. and Europe, it would be useless for the U.S. to improve regulation of derivatives, because the business would just move to Europe.  Naturally, the trade group, the International Swaps & Derivatives Association, was opposed to any additional regulation.  Negotiations have been ongoing for five years.  Frankly, I was just hoping to live long enough to see any meaningful regulation of derivatives.

Buried deep in yesterday's Wall Street Journal was the news that a deal had been reached!  While I don't know the details yet (such as the effective date), I am just excited that, apparently, all derivatives have to be traded through a clearinghouse, which captures enough data for us to measure who is holding how much risk.  This would be a huge step forward!

While it is almost unfashionable to be happy about anything right now, especially when the bears are running down Wall Street, it is the same emotion that a heart attack victim has when he wakes up to find the doctor inserted the stent that will save his life.

Bring on your recession, bring on your bear market -- we'll be just fine!

In fact, I'm already feeling better.

In The Fresh Produce Section

What's the difference between a doctor and a financial advisor?  The obvious difference is that the doctor is worried about your physical health, while the financial advisor is worried about your fiscal health.

Another difference is that doctors are frequently asked for free advice at cocktail parties and other places.  Financial advisors are also frequently asked for free advice.  The difference is that there is no cyclical trend in doctors being asked for advice.  It is relatively constant.  Their advice is always wanted.

There is a strong cyclical trend in financial advisors being asked for advice.  When the stock market is up, investors tend to be overly-confident and are more likely to tell the financial advisor what to do, rather than ask for the advisor's advice.  When times are good, people think they don't need financial advice.

At the grocery store yesterday, I ran into two people I know, who almost immediately asked me about the stock market.  When the stock market is down, over-confidence is also down, and people suddenly want advice from financial advisors.

I could be rudely dismissive to them.  Or, I could smother them with "buzz-words" they wouldn't understand.  I could even give them a learned opinion.  But, they are human beings -- human beings dealing with fear, who are really just asking if they need to be afraid.

That is an easy response:  The world is not ending.  There may be a mild recession, but that will not the first one nor the last one.  We're still the greatest nation . . . both on Earth and in history.  Then, I paraphrase Warren Buffett by reminding them I don't know where the stock market will be next week, but I do know where it will be in five years -- UP!

Thank You, Republicans!

An  old rule of thumb on Wall Street is that corrections (down 10%) can end with a roar, while bear markets (down 20%) end with a whimper.  In other words, there has to be capitulation or surrender by the investors, when they can no longer take the pain.  Getting to capitulation sooner rather than later means the pain ends sooner rather than later.  Bring it on!

The stock market is bearing the uncertainty of (1) China's slowing economy, (2) the possibility of several currency wars simultaneously, (3) the rippling effects of the oil crash, (4) the Ultimate Whack-Job of North Korea launching a satellite or worse, (5) a worsening refugee problem in Europe, creating instability, (6) rising interest rates in the U.S. while interest rates are falling elsewhere, making the dollar too strong, (7) the increasing possibility of tenacious deflation, and (8) other problems almost too numerous to mention.  All of that is enough to cause pain for investors.  Now, we need to cause capitulation . . .

Watching the Republican debate on ABC, I almost forgot that we are the "prettiest horse in the glue factory."  We have a relatively stable GDP growth rate and the best job growth in the world.  The economy is still doing better than the stock market.  Even if the economy suffers a recession, which generally means two consecutive quarters of negative GDP growth, nobody expects anything worse than the 6% GDP drop we got in 2008/9.  That doesn't explain a 10% or 20% drop in the stock market.

While the "PollyAnna" Democrats maintain the economy is very good, the Republicans are scathing in their criticism.  Keep it up, Republicans!  We want everybody to get scared . . .  and capitulate!  

A Disturbing Lecture

I attended a disturbing lecture on Saturday.  About 30 minutes into the lecture, the speaker stopped abruptly, producing an awkward silence.  His facial expression became trance-like.  Finally, he said "I've been diagnosed with stage 4 cancer."  There was an audible gasp among the hundred or so attendees.  He went on to say that, while he recently learned the cancer is in-remission, his doctor also told him the cancer will certainly return.  He has to be tested every three months.  His lease on life is quarterly.  The dread leading up to the test had been producing a euphoria after he got a good result.  But he is tired of the uncertainty, and the euphoria is decreasing each time.  Claiming he has never been a patient person, he is becoming inpatient to get the inevitable over with.  Then, there was another awkward silence.  The expression on his face returned to normal, when he said "Anyway" and continued with his lecture.  I don't think I heard another word he said.  I was too rattled by what I just heard.

My guess is that his own mortality was more important than his lecture, which is certainly understandable.  That thought of his own death swept through his mind, shutting down any other thought.  Maybe, he just wanted to share his emotional pain or to connect with other people, but I don't think so.

I think he is contemplating suicide and consumed by that process.  I don't blame him.  He cannot save himself.  We cannot save him from his fate.  What is there left to do but "get it over with?"  Besides, how many times can you say good-bye to loved ones?

A Lost Art ?

Tucker Carson is an industrial-strength Republican, and Paul Begala is an industrial-strength Democrat.  While I hold no great respect for partisans of either flavor, I did attend a debate between them recently and actually enjoyed the experience.

There was the obligatory hyperbola, of course.  Carlson predicted Trump would never win the nomination, because he is "emotionally incontinent," meaning his ego will eventually overwhelm  political good-sense.  Begala predicted the Republican Party was doomed, because the Democratic Party is hunting for converts, while the Republican Party is hunting for heretics, meaning purity tests such as abortion, immigration, and gun control.

What made this debate enjoyable is that I was watching two friends disagreeing on almost everything political.  They were disagreeing without being disagreeable.  If anything, their disagreement with each other gave them respect for each other.  They did not suggest that the other was either stupid or evil.

That is the America that I both love and miss!  It was an America before talk radio and the corrupting commercialization of campaigns by turning them into mindless reality TV shows.

Lucky To Listen

There are lots of geopolitical "experts."  Ian Bremmer is one of them -- the one who created The Eurasia Group, a highly regarded consulting firm,  However, he specializes in that intersection between geopolitical events and stock markets, worldwide.  I had the pleasure of attending a lecture by him today.  In no particular order, here are some of the things I learned about the Mideast:

1.  ISIS is the best funded and most effective recruiter of any terrorist group in history.
2.  Most of the land controlled by ISIS is wasteland.
3.  Saudi Arabia is more unstable than most analysts realize.
4.  The 30-year-old defense minister is likely to be ousted by the 15,000 member royal family.
5.  ISIS may take control of central Saudi Arabia, which is also a wasteland.

Not every geopolitical crisis matters . . . but some do.  If we read about North Korea putting up a satellite, which South Korea promptly shoots down, stock markets in South Korea and Japan will tank dramatically.  That would be a great buying opportunity, courtesy of a geopolitical crisis.  Then, they are other geopolitical events, such as a collapse of Saudi Arabia or Russia, for example, which have long-term consequences, including a possible redistribution of power.

He seemed particularly worried about a pending refugee crisis in Europe.  If Germany does as badly integrating the Syrian refugees into European life as the French failed to integrate the Algerian refugees, then Europe could become the new Mideast.  Integration will be expensive and will retard economic growth in Europe until a peaceful integration becomes apparent.  Europe does need more labor, but it is not clear the new refugees will fill that need, at least in the short run.

He also fretted that the same fate that caused the Putin-made oligarch of oil-giant Yukos to disappear could await the similarly-outspoken Jack Ma of Alibaba in China.  I hope not!

My takeaway is that the international component of investment portfolios should be relatively minimal for now.

Moment of Truth . . . Not Yet

The "wild and crazy" stock market is testing some critical support limits.  Take a look at this chart:

From a technical viewpoint, if it pierces the green line, it will go much lower.  My expectation is that it will pierce the line and go lower, almost entirely because we pay too little for gas at the pump.

The oil industry is huge and hurting.  More importantly, the banks that lend to that industry now have loans of less value and will have to take write-offs.  Does that sound like the banks in 2008 that held mortgage-backed securities, which are actually nothing more than exotic loans?  A financial crisis comes through the banks, and we may be facing one.

Here's what I don't know:  (1) how does the proportion of energy loans today compare to the level of mortgage-backed securities in 2008, and (2) will this financial crisis cascade more slowly because it is more apparent that the last one?  Stay tuned . . .

Not Breathless

Now that the Iowa caucus is over, I have only one question -- is it November 8th yet??

It would be refreshing to see news coverage again, without such breathless coverage of The Election!