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 !!!

No More Good News, Please

Who doesn't like low gas prices at the pump?  Economists get positively giddy at the increased discretionary income for consumers, when they pay less at the pump.  But, enough already!  At some point, the long term damage exceeds the short term pleasure.  Take a look at this chart:

There has been a decisive breakout to the downside.  In other words, the past offers little or no guidance for the future.  We all know the reasons for this "brave new world."  First, demand increases has slowed due to improved car efficiency.  Second, there have been several major new oil fields, increasing supply.  Third and a big one, fracking in the U.S. has made us the world's greatest oil producer again, stripping OPEC of its power.  There was a time when the mere threat of a war in the Middle East would have driven up the price of oil.  Now, not even a good old-fashioned shooting war will help.  

Last week, OPEC had the opportunity to reduce supply but chose not to do so, because it would reduce their income.  OPEC is now impotent.  Saudi Arabia is no longer the "swing-producer."  The United States is!

But, the point is -- oil prices have become TOO low.  Houston and other cities are getting crushed.  Houston is the only major city in the country with an increasing foreclosure rate.  I know that pompous, blowhard Texans don't get much sympathy, but we will soon see huge write-offs in banks, which decreases their ability to lend to healthy industries.  Master Limited Partnerships (MLPs), which make their income from rent charged to move oil or gas thru their pipelines, have gotten crushed in the stock market, even though their income is unchanged.  Income investors have become overly frightened.  Major oil companies have been safe dividend producers for decades, but there is now legitimate worry that those dividends will be reduced.  The instability of oil prices is spilling over into the banking industry and the stock market.  As the damage spills into increased default rates for the many bonds issued by fracking companies, the "high-yield" bond market will get hurt even worse!

Non-serious oil watchers interpret the fall in oil prices as evidence that worldwide demand is falling, because worldwide economic growth is falling.  I believe the increased supply is far more relevant than any decreasing demand.

This is a time for the federal government to add to the National Petroleum Reserve, while prices are low, with the side benefit of stabilizing the dangerously low price of this important commodity.  Beyond that small, temporary effort, there is little any government can do.

The brokerage firm of Raymond James has a good track record predicting such things, and they just predicted oil prices have hit bottom.  I hope they are right!

There is too little pain at the pump . . . we need more pain!  It will be good for us!!

In A Time of Dudes

Yesterday, about thirty people gathered around a grave site in a remote section of Quantico National Cemetery, south of Washington, D.C.  Each drank one can of Bud Light beer and then scattered back to their individual lives.  It was a wry, fond tribute to an unknown American hero, Gregory Wright.  I suspect he would have liked it that way.

A Marine, a Seal, and a CIA operative - he was cut from the same clothe as Chris Kyle, the not-unknown American hero in the movie Sniper.  Unfortunately, Gregory died alone, lying on the ground in Iraq, protecting his men.  He lived in obscurity and died in obscurity and undoubtedly preferred it that way.

As I looked around the acres of tombstones, perched silently on the gently rolling grounds, I noticed most of the graves held veterans of WWII, of Korea, and of Vietnam.  There were surprisingly few since 9-11.  As wars have become more technological, fewer and fewer Americans actually fight for their country.  While I can see that is a good thing, because fewer American mothers will get that dreaded knock on the door.  I also see it with some sadness.  Americans are increasingly insulated from the horrors of war -- horrors that the rest of the world still feels.  Few families actually know the name of somebody who died in combat since 9-11, and even fewer are related to any of those fallen heroes.  Will that increasing insulation make us more warlike?  Listening to the current clamor for war makes me suspect it might be so.  Why not go to war . . . if you don't have a kid-at-risk?

It is good for the soul to respect and appreciate men like Gregory Wright.  Real men like he and Chris Kyle make America safer for all those "dudes," who have been taught to politely mouth "thank you for your service," albeit with no idea what that really means.

I cannot look at a Bud Light again without smiling and thinking of Gregory.  I know he would smile as well!

Whistling Past The Crime Scene

If it is hard to walk and chew gum at the same time, how difficult must it be to walk, chew gum, and whistle at the same time?

After the latest mass killing, the predictable Democratic response has been to put some control over gun availability.  That, of course, is correct.  The predictable Republican response has been that the hallowed Second Amendment guarantees the right of every American to own as many bazookas as they want, and that we should instead focus the discussion on improving mental health care.  That, of course, is also correct.  Now, mass killings have taken on a stronger third and even-more-complicated dimension - terrorism, either foreign and domestic.

Mass killings have become a Gordian knot, i.e., something so complicated that it cannot be solved by reason and patience.  In mythology, nobody could figure out how to untie the famous knot, until Alexander the Great pulled out his sword and severed it.  Problem solved.

Where is Alexander when we need him?  While he had no use for the niceties of democracy, maybe he could walk, chew gum, and whistle at the same time.

Welcome Back, Mr. Spock

The popular Executive Officer aboard the U.S.S. Enterprise in the classic Star Trek was Mr. Spock.  He was known for his faithful worship of logic - the more pure, the better.  I expect he sold all his stock holdings long ago and got out of the market.  It became too illogical for him in 2008.

There was a time when the stock market behaved logically.  Good economic news made the stock market more bullish, and bad economic news made the stock market more bearish.  Then, there was the Global Financial Crisis of 2008/9, when central banks began directing the economy.  Everything changed.

The market reasoned that the central bank, (the Fed) would decrease its financial support, when good economic news was received.  This increases uncertainty, which the stock market loathes.  So, we got into a pattern of reverse-logic, i.e., good news = less Fed support = more uncertainty = lower stock prices.

Yesterday, something remarkable happened.  The Department of Labor issued its monthly "jobs report," and it was considerably better than anyone expected.  In other words, it was good economic news.  However, instead of going down, futures rose immediately, and the stock market roared all day.

The Reason:  The Fed has been hinting very loudly that it will almost certainly raise interest rates this month, which reduced uncertainty.  The Fed was removed from the equation.  Once again:  good news = higher stock prices.

It is akin to watching a distant nephew who finally "got his act together" and behaved logically, for a change - a refreshing change.  Mr. Spock would be proud!  

Burying Seeds

For most people, the 2008/9 Global Financial Crisis was a bad dream.  For those in the investment business, it was a nightmare.  So many things went wrong.  Modern Portfolio Theory failed.  It was useless, and we were dangerously close to a systemic failure of the financial system, like 1929.

The Fed rose to the occasion by taking both unprecedented and repugnant measures, such as the bailout of Bear Stearns or of AIG.  It put the Fed in the business of deciding winners and losers, which nobody wanted -- least of all, the Fed.  To prevent this from ever happening again, language in the 2010 Dodd-Frank law will only permit loans to a minimum of five firms.  If only four firms are in trouble, they can all go out of business.  It takes five firms to survive.  There are other provisions to limit the powers of the Fed, such as limited collateral types and quality, such a loan term and other constraints.

It is often said that the seeds of the next crisis are buried in the ashes of the last one.

Do we really want to reduce the flexibility of the Fed, our last line of defense against depression and systemic collapse?  Sure, nobody wants the Fed or anybody else picking which companies survive and which that fail.  I applaud the objective . . . but it is not our first objective.

Our first objective during a crisis is to stop it, to prevent it from getting worse, which requires both imagination and flexibility.  Anything that threatens the first objective is nonsensical.  These restrictions on the Fed are nonsensical.  It is like saying the President of the United States cannot commit less than 100,000 troops into any given combat zone.

If we want to get vindictive (and we should), then we should change the law, so we can punish the decision-makers who put us into such a crisis as 2008/9.  We shouldn't execute an entire firm for the misdeeds of a few executives.

Yawning At The Yuan

The International Monetary Fund (IMF) has decided to include the Chinese currency (known as the Yuan) as the world's newest reserve currency.  In the short run, this should have a mild bullish effect on their currency and mild bearish effect on the euro.  In the long run, it has little economic significance.  However, it does have considerable political significance, especially inside China.  The Chinese people feel justifiably proud of their nation's arrival on the world's stage.

So, who cares?  Or, who cares if the Yuan is a reserve currency or not?  I don't!  I'm yawning.

Elevating the Chinese currency is more a reflection of change than a real change.  I'm far more concerned about their financial power and, increasingly, their military power.

It is far more significant that the amount of Chinese reserves of currencies of other nations -- foreign reserves -- is incredibly high.  China holds 31.25% of all foreign reserves held by ALL nations.  China's foreign reserves exceed those of the next five highest countries - combined.  For example, Japan is second at 10.53%.  Saudi Arabia is third at 5.8%.  The Eurozone is fourth at 2.15%, followed by England at 0.9%.  The United States of America, the world's most powerful nation, holds a mere 0.34% - one third of one percent - of the world's total foreign reserves.  The Eurozone, England, Japan, and the U.S. long enjoyed reserve currencies and were simply overwhelmed by the financial liquidity of China.

Another perspective is that, while no nation spends as much money on national defense as the U.S., our spending has increased a mere 0.4% over the last ten years.  China has increased their military spending a whopping 167% over that same time frame.  And, they are still sitting on 31.25% of the world's financial reserves!

It is far more important that China is still ramping up their military spending and have the financial muscle to ramp up their military spending even more . . . much more.  That doesn't change whether the Yuan is a reserve currency or not.

Advising New Advisors

Purportedly, it is an old mafia axiom that you should - keep your friends close and your enemies closer.  If true, doesn't that also mean that - your enemies are closer to you than your friends?

Over the decades, I've had clients who were older and younger than myself, although most have been older.  I've had both male and female clients, although most have been male.  I've had clients who were Republicans, Democrats, Libertarians, Anarchists, and even genuine Independents.  I've had clients who earned their money, that inherited their money, and that married their money.  I've had clients who were atheists, Protestants, Catholics, Jews, Muslims, Hindu, and even one Sikh in McLean.  But, the most difficult clients-of-all are . . . family.

Don't ask me why?  It just is!  Maybe, the better question is why do you keep a family member as a client?

It is never fun to fire a client.  Besides the minor loss in income, there is a real feeling of failure, because you really want to help every client.  While firing any client is difficult, it is even agonizing to fire a client who is also a family-member!  It is also more legally complicated.  A contractual relationship exists between an advisor and a client.  Firing a family-member-client may end the contractual relationship but does not change the family relationship, legally.  They are still in your family, just not in your book-of-business.

A family-member-client is like a tar-baby.  The more you do, the more stuck with them you are.

Hello, young advisors out there -- when asked to take a family member as a client -- RUN!

RUN AS FAST AS YOU CAN -- RUN AS FAR AS YOU CAN -- JUST RUN!

Investor Types

Some investors just want to make a profit and pay little attention to the number or the amount of risks taken.  They want to buy stocks and sell them quickly for a profit.  I call them "gunslingers."

Some investors just want a stable income and pay nominal attention to the value of their portfolio.  They accept a volatile portfolio value but not a volatile amount of income.  I call them "retirees."

Some investors have too much cash for FDIC guaranties and must expose some of the assets to the stock market.  They don't love profits as much as they fear losses.  I call them "depositors."

Some investors want "good" companies and then hold them "forever."  Because they don't sell, they pay little attention to taxes.  I call them "Buffett-babies."

Some investors want their portfolios diversified across various asset classes, which is re-balanced on a periodic basis.  They follow the textbooks.  I call them "theory-lovers."

Some investors want their portfolios diversified across various asset classes.  They believe re-balancing is over-rated and allocate some satellite portion of their portfolios to their strong convictions.  I call them "smart investors."

Some investors want "wholesome" companies that don't sell tobacco, alcohol, sugar, or other products that have hidden costs to society.  Called Socially Responsible Investing (SRI), doing good is as important to them as doing well.  Some advisors call them cry-babies.  I call them "conscientious."

Now, former Vice President Al Gore, of all people (?) is popularizing "sustainable investing."  It is different from the standard SRI.  He argues that the value of the stock must reflect the sustainable value of the product.  For example, sugar is instrumental to worldwide obesity.  At some points, governments will overcome the sugar-lobby and start taxing the product to pay for increased healthcare costs, thus driving down the value of sugar companies.  It is just a matter-of-time, they say.  Another example would be oil companies, who carry vast oil reserves on their books at market prices.  However, since that amount of oil will never actually be pumped out and sold, when fossil-fuels are obsolete, the value on the books is too high.  Normally, I would call all this "pollyanna-ish."

But, give the Nobel Peace Prize winner credit for this -- his investment firm has placed #2 in the U.S. over the last ten years!  I call that "impressive, very impressive, indeed!"

Life Imitating Ayn?

While the Bible remains the best-selling book in history, the second best-selling book has long been Atlas Shrugged by the late Ayn Rand, the iconoclastic mother of Libertarians.  The premise of her classic is that America's business leaders keep disappearing.  Conspiracy-lovers suspect the government is kidnapping them, swooping them away in black helicopters.  As it turns out, however, they have all fled to a secret hiding place, because they can no longer tolerate governmental control of every minute detail in their lives, especially in their businesses.

As much as I enjoyed the book when I read it some 50 years ago, I found the premise implausible, because the "government" is not competent enough to accomplish much of anything and certainly not anything as complicated and far-flung as a mass kidnapping.

However, something is happening in China!  Many of their top business leaders have recently disappeared.  Some have reappeared but without explanation.  Some may have disappeared forever.  Li Hejun was chairman of energy giant Hanergy who unexpectedly failed to show up at the annual meeting in May, causing the stock to drop a stunning 47% in one hour.  The CEO of China Aircraft has also disappeared.  There is some speculation that CEOs are disappearing due to the government's anti-corruption drive.  Maybe . . .

But, many of the disappearances have been among bankers and brokers.  For example, the CEOs of both the China Minsheng Bank and Guotai Junan International have also disappeared.  There is some speculation that the central government is seeking to punish anybody who may have contributed to the Shanghai market crash in August.  Maybe . . .

The Chinese do not hesitate when executing "wrong-doers."  But, there have been no reports of CEOs being executed, just disappearing.  At least, not yet . . .

Would you like to be the CEO of a Chinese company?

Thankful For . . .

I am thankful that jobless claims fell by 12,000.

I am thankful that durable goods production rose 3%.

I am thankful that worker pay rose 0.4%.

I am thankful that worker spending rose 0.1%.

I am thankful that the savings rate rose to 5.6%.

I am thankful I don't have to merely guess about the economy.

I am thankful for the numbers that guide my forecasts.

I am thankful for all the geeks who produce those numbers.

I am thankful for the freedom of information, so I can have numbers.

I am thankful my parents gave birth to me in America.

I am both thankful and proud to be an American!

Waiting For Janet Godot

Sixty-six years ago, Samuel Beckett wrote the great existential play Waiting For Godot.  In that play, several travelers are waiting for a very long time for the arrival of Godot.  The story focuses on the interrelationships while they wait . . . and wait.  Things get increasingly testy between them as they wait . . . and wait.

Waiting for the Fed to raise interest rates has become like Waiting for Godot.  To be clear, there is no economic reason for the Fed to raise interest rates.  Their dual mandates are to control both inflation and unemployment.  Guess what:  Neither is a problem, and neither needs to be controlled!  Neither inflation nor unemployment provides an excuse to raise interest rates.

However, the cry to "normalize" interest rates has become deafening, by both conservatives and investors.  The conservatives argue that the Fed has taken extraordinary steps to make a Democratic president look good.  I believe, however, that the Fed has taken extraordinary steps in monetary policy to prop up the economy while fiscal policy remains impotent, and I believe they would have done the same if a Republican was president.  Regardless, this complaint has become increasingly shrill.

Investors also want interest rates to rise because they are tired of living under the guillotine.  If the Fed raises rates rapidly, the stock market is clearly over-valued.  If the Fed raises rates slowly, the stock market is probably fairly-valued.  This uncertainty is a serious worry for investors.  After the Fed declined to raise rates in September, the stock market fell, because the market was expecting the level of uncertainty to decrease, but that didn't happen.  If the Fed doesn't raise rates during its meeting next month, I expect stocks to fall again.

Madam Chair, please raise our interest rates once and then go away!

The Market That Didn't Bark

Just as Sherlock Holmes attached significance to a dog that didn't bark, the stock market is usually telling us something when it doesn't over-react.

Most pundits expected the stock market would be down sharply on Monday morning following the Friday terrorist attacks in Paris.  However, by Sunday night, the futures market has actually turned slightly positive.

When the market opened on Monday morning, it started sinking, not badly but sinking.  About eleven o'clock, there were rumors that the French air attack on Syria had destroyed oil facilities, and the price of oil started rising.  This focused the market's attention that reducing the oil glut would be good for most every economy.  Stocks began to soar.

So, why didn't the stock market tank?  First, it would have been more likely to tank, if the terrorist attack had occurred on U.S. soil, instead of foreign soil.  Second, since the attack was on Friday, investors had a two-day weekend to adjust.  Third, and I hate to say it, we have become more sanguine about terrorism.  There have been attacks, and the economy labored on.  There will be more terrorist attacks, and the economy will continue to labor on.  The economic cost of terrorist attacks is not as great as the emotional costs.

20/20 Hindsight

Was Saddam Hussein a bad man?  Absolutely!  Did he deserve to die?  Absolutely, as slowly and painfully as possible!  Is the world a better place without such a monster in it?  I'm not so sure anymore.

But, how could the world not be a better place without such a sick, degenerate monster in it?  If his presence in this world kept other even-worse monsters out of it, the world would be better off with Saddam in it.

Iraq sits on the great fault line between Sunni Muslims and Shiite Muslims.  Although a Sunni, Saddam didn't care about the tribal warfare inside his religion.  He executed both with equal indifference.  Iraq existed as a terrible police-state, where the people had no rights and lived in constant fear of the authorities.

Was Iraq a bad place to live?  Absolutely!  But, isn't it even a worse place now, with open warfare between the Sunni ISIS and everybody else?  Saddam shot lots of people.  But at least, he didn't behead them.  The Iraqi people have suffered greatly, since the execution of Saddam

His death opened the gates of Hell for all the demons of Islam to escape.

I keep remembering General Colin Powell's mention of the "Bed, Bath & Beyond" rule:  If you break it, you own it.  Last night, France made another payment on that purchase.  I am so sorry for them!

Peeking Into 2016

While I cannot recall ever hearing anybody say that the legendary investment bank of Goldman Sachs was kind or charitable or even decent, I have often heard people say respectful things about the research department of Goldman Sachs.  Therefore, I try to follow their research closely.  Here are some of their latest expectations:

1.  World GDP growth will pickup from 3.2% this year to 3.6% next year.  GDP growth in the U.S. will slow slightly from 2.4% this year to 2.3% next year.  China will continue to slow from 6.9% this year to 6.4% next year.  The Euro-zone will increase from 1.6% to 1.8%, while England will increase from 2.7% to a respectable 3.0%.

2,  The S&P 500 will be flat over the next twelve months, while European stocks will rise 6.7% and Japan could rise a whopping 12.3%.

3.  Interest rates (10-year) will rise 80 basis points (0.8%) over the next twelve months in both the U.S. and Europe.  (I don't believe this.)

4.  The dollar will continue to rise, compared to the euro or pound.  They expect the euro to breach parity and "break the dollar."  Specifically, they expect the euro to drop another 13.6% to only 95 cents.  The pound could drop another 5.2%.

5.  Commodities will continue to get crushed by the lack of global growth.  Gold will drop another 8.1% over the next twelve months.  (Don't you know Goldman hates to say avoid gold?)  Copper is sometimes called "Dr. Copper" because of its track record in predicting the global economy, and it is expected to drop another 12.4% over the same period.

Interestingly, Goldman believes now is a good time for Buy-Write funds, which are mutual funds that own stocks for growth but also sell call options against those stocks for income.  All I can add is -- Amen!