A Duck By Any Other Name . . .

My Republican friends think I'm a Democrat.  My Democratic friends think I'm a Republican.  They're both wrong!  I'm an Austrian economist.

Both Republicans and Democrats practice deficit spending, but they cloak it with clever phrases.  The Republicans call it "tax reform."  The Democrats call it "social investing."  Both phrases are cute cloaks for deficit spending.

Of course, both insist the deficit spending is merely a short-term result.  Republicans say tax reform (read:  tax cuts) will encourage "job creators" to invest more money and spur the economy.  Democrats say increased social investing will increase consumer spending and spur the economy.  Either way, increased deficits in the short-term will make everything great in the long-term.  Sure!

Austrian economists argue government revenues must equal government spending.  Like families, you don't spend more than you make.  Unfortunately, neither Republicans nor Democrats can think beyond their clever phrases.  Scratch a Republican, he'll say the problem is too much spending on entitlements.  Scratch a Democrat, he'll say the problem is the rich, who won't pay their fair share of taxes.  Mere cloaks!

At what point will we admit that the two-party system is failing us?  

Noblesse Oblige

My Republican friends laugh when I describe Jimmy Carter as our greatest ex-President.  A wealthy man, he has devoted his post-presidential life to helping others.  However, only Trump-Republicans laugh when I describe Barbara Bush as our greatest ex-First Lady.  After all, she was not a Trump-Republican.  But, she worked tirelessly raising money to fight illiteracy, raising close to $200 million dollars for that cause.

Whatever happened to wealthy people who felt the need to help others?  Was philosopher Ayn Rand responsible? She famously decried that anything which supported poor people only encouraged them to produce more poor people - a classic abuse of Austrian economics?  Was it partisan spillover that characterized the mammoth charitable giving of Warren Buffet and Bill Gates (known Democrats) as mere self-glorification?  I don't know, but I miss it.

It was called noblesse oblige, a French expression that translates as "nobility obliges."  It means there is an obligation to do "good" things.  As a client once told me, "now that I've done well, I want to do good."  Yes, he donated money, but he also physically worked to repair old churches and sought no self-glorification.

Barbara Bush was the epitome of noblesse oblige and a grand lady.  There was room for disagreement in her world but no room for rudeness or bad manners.  She is missed!

Good Reasons for Bad News

One of the components of the Index of Leading Economic Indicators is homebuilder confidence, which has dropped again, for the fourth consecutive month.  This is not good news.  However, there are good reasons for it!  There is ample demand for new homes, but there is a shortage of lots to build on and almost none of those are conveniently located for homebuyers.  Plus, our country is having a trade dispute with Canada, which is the biggest exporter of lumber to the U.S.  The cost of that lumber is rising rapidly, increasing the cost of housing and making them less affordable.

So, if you're a homebuilder facing a shortage of lots and rising prices, what do you do?  Build condos?  Oh, did I mention that interest rates are rising?  Maybe, NOW would be a good time to buy a home?

This is just another indication that the economy remains strong, maybe too strong.  Behind this good economic news, we can expect the financial data from homebuilders to suffer.  You see, good economic news can produce bad financial news . . . 

Gaming A Crisis

It was thirteen months ago that I predicted that President Trump would be impeached or resign.  My Democratic friends applauded, while my Republican friends condemned.  It was not a prediction that was made with any joy.  Make no mistake:  Any constitutional crisis is bad for the country, which therefore also makes it bad for the stock market.

When I made the original prediction, my confidence level was about 60% that Trump would be impeached, but that confidence level has now risen to about 90%.  I still think there is no chance he would be convicted by the dysfunctional Senate, even with a Democratic majority.  (It would be the ultimate existential crisis for our Constitution, if he was convicted and refused to vacate the White House.)

I have reviewed the behavior of the stock market during the impeachments of Andrew Johnson, Richard Nixon, and Bill Clinton but found no useful pattern, except this:  Stocks dropped significantly but always recovered nicely.  Clinton's experience was the easiest to understand - stocks dropped when impeached but soared when the Senate trial began.  Nixon's was much more volatile -- stocks swinging wildly on every rumor or press release.  Johnson's experience was not helpful, due to the lack of stock market data 150 years ago.  My assumption is that the market will drop when impeachment becomes obvious but quickly recover when the market realizes the impotence of the Senate.

But, what about the timing of this constitutional crisis?  Assuming the Democrats retake the House in November/January, they could not get a bill of impeachment through the House immediately, as a good number of Democrats also abhor impeachment as much as I do.  Plus, many fear the social conservatism of the Vice President more than they fear the President's "unpredictability."

For now, I will not be selling stocks until the November election.  If the Democrats merely retake the House, I will take no action.  If there is a huge "Blue Wave," I will start increasing cash.

Q1 Column

My latest column for Inside Business can be found here:

https://pilotonline.com/inside-business/news/columns/article_b8d95666-3bf4-11e8-8aa6-2fab2a087df4.html 

If your browser cannot accept a hyperlink, go to www.pilotonline.com and enter Flinchum into the search box on the upper right.

I Told You So . . .

I will NOT say . . . I told you so.
I will NOT say . . . I told you so.
I will NOT say . . . I told you so.
I will NOT say . . . I told you so.

That expression is so sanctimonious but seems to mean less as we get older?

Yes, ten years ago, once I understood the business model of Google was to shred privacy, I became paranoid that Americans were giving up a basic right but didn't realize it.  Google's search engine offered too much value to be free.  They had to be making money by selling your data/privacy.  (Since then, I have avoided them like the plague, using BING instead which is only less bad.)

Now, we learn that Facebook is the master-shredder of privacy, likely allowing the Russians to interfere with our elections.  Maybe, I should thank Facebook for proving me right, allowing me to say "I told you so."  The CEO of Facebook faces Congress this week, and I hope he gets crucified.  He is certain to be crucified if he testifies in Europe, where privacy is still appreciated.

First, the Google search engine was wonderful.  Then, Facebook sharing was so human.  Now, the Cloud is so efficient.  What could possibly go wrong with the Cloud?

Yes, there are benefits to sacrificing your privacy, because you get better (more focused) advertisements.  So what?  Who cares?  I don't know how many millennials have told me that privacy is as over-rated as chastity, which is ridiculous.  They don't miss what they never had!

When you see an Amazon Alexa or Google Home device in my home, then you will know that Hell has indeed frozen over and will never thaw.  Then, millennials can tell me "I told you so!"

Finding Emotional Pearls

A bright shiny object attracts the eye, away from other things.  Likewise, the eyes are also a bright shiny object attracting the mind, away from other things.  Some people may not be as observant of bright shiny objects in the outside world, they may be more observant of bright shiny objects of the inside world -- inside their own minds.  Most care more about the outside world, but some care more about the inside world.  Some people rummage through their emotions and find pearls.  Rodriguez is one of those.

Known by his last name, he was a poor first-generation American of Mexican descent born in Detroit in 1942, and he rummaged through his emotions to write song lyrics, which are often compared to that of Bob Dylan.  After two albums won critical acclaim but no sales, he returned to hard physical labor for decades.   Somehow, against all odds, his albums sold heavily in South Africa - outselling both Elvis and the Rolling Stones.  Only, Rodriguez never knew it and became a cult enigma.

Bob Dylan would never do this, but Rodriguez would perform with his back facing the crowd, focused on his inside world, not distracted by his eyes.   Maybe, that is the reason Rodriguez never knew he was a superstar elsewhere.  Maybe, that wasn't interesting enough to him.  But, his lyrics are haunting.  They roll around and germinate in your mind.  I understand "hello only ends in goodbye" but what is a "store bought soul"?  Is that the same as the "authenticity" that existentialists extol endlessly?

Few things are black-or-white, all-or-nothing.  But, what percentage of your thoughts are focused on the outside world instead of the inside world, and how will you know if that is the right percentage for you?

"Strum and Drang"

"Strum and Drang" is a German expression, roughly meaning "Storm and Drive."  It described the eighteenth century anti-enlightenment philosophy embracing emotionalism and rejecting rationalism.  Such is also the presidency of Donald J. Trump, and I pray that it is worth it.

The latest instance is threatening a trade war, particularly with the world's second largest economy, China.  Despite the predictable over-reaction of stock markets worldwide, it is a battle the U.S. is likely to win.  Remember:  Nineteen percent of China's exports goes to the U.S. while only two percent of our exports go to China, plus China's economy is export-based and needs exports more than the service-based U.S. economy.  They need us far more than we need them!

There is considerable fear that we are dependent on China's continued purchasing of U.S. Treasury Bonds to finance our ballooning deficit, especially since the Republican tax cut.  In truth, the Chinese have not been significant purchasers in years, maintaining a relatively stable portfolio.  But remember, we don't need foreigners to buy our Treasury bonds.  The Fed spent four years buying our bonds, to finance the monetary stimulus known as quantitative easing.  If the Chinese dump our bonds, the Treasury will not redeem them -- the Fed will buy them on the open market, thus stabilizing interest rates.  A very unsatisfactory alternative in the long term but works in the short term.

"Strum and Drang" may be the right approach to negotiating with China, but is it therefore the right approach with Mexico, China, Korea, et al.?  Or, is it merely the only approach?

Please let there be method to the madness, as there is certainly an ocean of madness . . . and embarrassment . . . and anger too!

A Thousand Words

Almost Showtime ??

While there is always an economic recession in front of us, a recession is not necessary for the stock market to sustain a 10% correction or even a 20% bear market.  Likewise, a stock market slump does not reliably predict a recession.

The current stock market slump started with the January Jobs Report, which indicated inflation was back, due to a 2.9% year-over-year increase in average worker earnings.  That meant interest rates would come faster than expected, to cool down inflation.  Then, it was revealed that two wildly successful tech giants were mere privacy-pirates, putting their continued business model in doubt.  Then, the president began brow-beating another tech giant.  Small wonder that this market slump is tech-lead.

Behind it all, I see growing anxiety about a possible trade war.  While it may be little more than a trade slap than a trade war at this point, the downside is huge.  The system of international trade that was painstakingly built over the last century has been turned upside-down with uncertainty.  Maybe, that is not all-bad?  That system was not well-suited to evolve in a world with an ever-increasing rate of change.

It was a China Shop, and Trump was the bull.  The system was Humpty-Dumpty, and I hope somebody can put it back together again.  The removal of any small amount of uncertainty would cause the stock market to rally strongly.  We need to see The Art of the Deal, not some "short-fingered vulgarian" as described in Vanity Fair. 

Two Things To Remember

People disagree on which TV commercial by Apple is the best one.  Most think it was the iconic "1984" commercial.  My vote goes to the "Lemmings" commercial, which was aimed at IBM users.  You can see it here:

https://www.youtube.com/watch?v=V-SJQdREDKM 

Attending a local church service, where it is customary for the congregation to stand up occasionally, primarily to sing, I watched an older gentleman stand up at the wrong time.  Thinking the gentleman knew something nobody else knew, the entire congregation slowly also stood up with him.  Jointly realizing their shared error, the congregation sat down, while softly laughing at themselves.

Last week, a respected politician predicted, without any satisfaction or joy, that there will be a major constitutional crisis in 8-9 months, emphasizing how important it will be for Americans to think for themselves, without regard to the news source they normally watch.  How do you tell a lemming to change their behavior?  Can we survive a major constitutional crisis, if we cannot laugh at ourselves? 

There are two things to remember:

1.)  Young people may not remember the Watergate constitutional crisis, but there were no winners!

2.)   We will survive the next constitutional crisis!

Economic Oceanography

As I look out my window, I see the beautiful Chesapeake Bay, where it enters the Atlantic Ocean.  Even though it normally looks placid and peaceful, I know there are many currents I cannot see.   Millions of gallons of water flow by every day, slipping beneath the surface of the Atlantic Ocean as the water drops into the Norfolk Canyon, falling to greater depths.  I cannot see any of this but know it is happening anyway.

The "market" is the same - there is so much that is not visible.  For the month of march, the S&P 500 index of large companies was down 2.54%, flat for the first quarter, but up 13.99% over the past twelve months.

The S&P index of small companies was up 2.04% in March, flat for the first quarter, and up 12.68% for the past twelve months.

Preferred stocks, yielding an average of 6.51% in dividends, were up 0.52% for March, down 0.55% for the first quarter, but up 3.08% for the past twelve months. 

Utilities were up 3.76% for March, down 3.30% for the first quarter, and up 1.89% over the past twelve months.

Technology stocks were down 3.9% during March, up 3.39% for the first quarter, and up a whopping 27.68% over the past twelve months.

So, what does all this tell you?  It should tell you that you are too focused on investment performance in the short term.  All these currents -- and many more -- change constantly.  I've spent many years looking out the window, and the Chesapeake Bay always looks the same.  Warren Buffett famously said he had no idea where the stock market would be next month, but he knew where it would be in ten years -- UP!

Just because so much detailed data is available, it doesn't mean you should care.

Buying Happiness

A recent study found that people experienced greater happiness as their income rose, which is not  surprising.  But, it also found that rate of growth in happiness slows down when income reaches about $75,000 annually.  More money increases happiness less and less.

At that point, spending has a greater impact on happiness than income.  But, the type of spending must fit the personality type.  Some people are more materialistic than experientialist, and some are the opposite.  Some people enjoy having nice things, and some people enjoy having good memories.

Happiness continues to increase when a materialistic person continues to acquire goods and when an experientialist contines to have good experiences.  If an experientialist spends his money on nice things, he will not achieve the same happiness as a materialist.  To increase happiness, the spending must match the personality type.

Of course, the vast majority of people are somewhere in the middle.  After all, who does NOT want a good memory?  The role of the financial planner should fit the client's personality.  I have one client who could happily spend the rest of his life aboard cruises.  Since he can afford it, I encourage him to do so.  I have another client who is fascinated by oriental art and has acquired more than she can afford.  Since it makes her happy, I have to stretch her dollars as best I can.

So, is my job as a financial planner measured by dollars in a client's portfolio, or is my job measured in terms of client happiness?

Loved To Death

In 1919, Congress passed the 18th Amendment to the Constitution, beginning the Era of Prohibition.  None of the earlier 17 amendments were ever as unpopular with the American people as that one.  Fourteen years later, that amendment was repealed.  Yes, an amendment can be repealed.

Former Supreme Court Justice John Paul Stevens has now opined that the Second Amendment should also be repealed, especially since it is so unpopular with the American people.  That amendment theoretically "protects the rights of gun owners."  It has been zealously guarded by the National Rifle Association (NRA), which loves the Second Amendment . . . too much!  The NRA is lead by a blinded, well-meaning zealot called Wayne LaPierre.  He loves kids, like everybody else, but he is blinded by love.  So is the NRA.

The NRA is loving the Second Amendment to death, eventually killing it.  Already, the vast majority of Americans brand the NRA as just another bunch of corrupt lobbyists or even terrorists, and they are correct.  The NRA tarnishes the noble Second Amendment.  They bring blame and shame to the Second Amendment.  If the NRA continues to oppose the American people, it will disappear along with their beloved Second Amendment.  The NRA is the greatest threat to the Second Amendment!

As a true gun lover and former NRA member myself, I pray Wayne LaPierre will protect my gun rights by immediately dismantling the NRA.  Absent that, I  reluctantly agree that the Second Amendment must be repealed.

Reverse Income Averaging

Many novice investors think investing is easy.  All you have to do is stay invested in stocks when the market is rising, but move to cash when the market is falling.  Simple, right?  The stock market is predictable, right?

Numerous studies have found that "market timing" should be left to the hedge fund techies, not the average retail investor.  Those studies have concluded the average retail investor should "buy and hold,"  which means they should not sell their investments just because the market is going down.  One primary reason is that they invariably don't put their cash back into the market at the right time, when the market bounces.  I have long argued this "buy and hold" approach is appropriate for a garden-variety recession, but not for a financial crisis, which happens quicker, goes deeper, and has a longer recovery than recessions.  However, both approaches are based on economic data and financial data.

I'm seeing an interesting new approach, i.e., one that is based on political conclusions.  Some investors have concluded that the Trump Administration will end badly, taking the stock market deep into bear territory.  Unfortunately, they don't know when to get out of the stock market.  They recognize that selling everything now could cause them to miss a good deal of upside, if the bull returns.  If not now, when?

Income averaging is the standard practice of putting the same amount of money into stocks every month.  Reverse income averaging is selling stocks and increasing cash by the same amount each month or quarter.  This can be done by percentage or by dollar amounts.  The downside is that reverse income averaging means you are selling more shares as they get cheaper.  That is the cost of reducing stock exposure over time, while retaining some protection from a major bull market.

I don't know any financial advisors who advocate making investment decisions based on political assumptions, and the alternative is to advise clients they cannot act on their own political beliefs. Reverse income averaging may have come-of-age. 

Good Wars ?

Most people fear trade wars, because they know a trade war can easily become a real-killing-people kind of war.  Most economists fear trade wars, because it destroys the principle of comparative advantage, reducing the standard of living on all sides.  Fortunately, on March 1st of this year, the President assured us that "trade wars are good, and easy to win."  Let us pray . . .

History shows us that "winners" in trade wars only win in the short-run, and everybody loses in the long-run.  But, there is something different this time.  It will be the first time there has been a trade war in a globalized world!  It is not uncommon for a finished good to require parts from a dozen different countries.  The problem of unintended consequences has never been greater.

Some economists believe that policy makers on all sides will retreat from their trade war, once they realize the problem of unknown consequences.  I'm afraid they never heard of machismo.

Some Republicans believe all this is just a negotiating ploy, so that China will do whatever is necessary to resolve the North Korea problem, to avoid the economic damage of a trade war with us.  Others think putting a match to lighter fluid is a better negotiating ploy.  After all, what was the point of announcing a steel and aluminum tariff just before renegotiating NAFTA, only to exempt Canada and Mexico almost immediately?

It is hard for me to see the words "wars are good" actually being said, without feeling intellectually, morally, and emotionally appalled.

Backsliding

For years, I have worried about the impact of too much news-watching.  It can drain a person emotionally and suck them into a "group-think."  It can also make a person very boring.  So, I have practiced a "news-celibacy" day -- voluntarily not watching any news for 24 hours.  In my case, it was Saturday.

Then, I got interested in Michael Smerconish, who is a lifelong Republican that has resisted the far-right pull over the last few years.  He has a one-hour show on Saturday mornings, that I find refreshingly moderate.  So, I have broken my vow of news-celibacy and started backsliding.  After all, watching news is addictive and hard to give up.

Therefore, with all due respect to Mr. Smerconish, I will redouble my efforts to remain news-free on Saturdays.  One day is NOT too much time to take away from political arrogance, the trade war, the never-ending brutality of the mid-east, impeachment, etc.  It will also make you more interesting!

Sorry, Michael!

Selling My Vote ?

Imagine . . . a loved one has gone missing, when you hear a rumor they may still be alive.  Imagine that surge of hope and gratitude that floods your heart.  I'm feeling that way!  There is a rumor that Americans are suddenly indignant about their loss of privacy.  Is that too good to be true?

Personal data Goliath AKA Facebook just disclosed (involuntarily) that the personal information on as many as 50 MILLION of the users was taken by a subcontractor to target the users for political purposes.  An example, "they" would know where you live and would send you a series of emails whenever there is a political rally or demonstration in your area.  From reading your comments, "they" would slap a label on you, as a Democrat or Republican.  If "they" think you're a racist, then you will receive emails reinforcing that emotion.  Although not yet certain, it is thought this was the channel that Russia used to influence our last election.

But wait -- why would Americans be more infuriated about this, than the Equifax breach, when the personal data of 150 MILLION people was hacked?  We know anybody can be hacked, but we don't expect to be betrayed.

People using social media think they are clients.  Instead, they are the product.  Their personal information is sold to advertisers, who identify potential clients or buyers.

It has almost been fifty years ago since Joe McGinniss wrote his iconic The Selling of the President 1968, explaining that getting a person's vote is no different than selling a box of laundry detergent.  There is a seller with a product, and there is a buyer.  The object of advertising is getting them together.  We expect our political candidates to solicit our vote.  We don't expect Russians to solicit our vote for their candidate!

If the Russians will pay money to ask for my vote, what is the difference with them directly paying me $100 for my vote?  Can I walk down the street, holding a sign saying "vote for sale?"

The first step to maintaining any tiny piece of privacy is to get off social media.  Good luck with finding a second step!

I pray that I am not the last American who cares about privacy, but I do get lonely . . .

Stockbrokers Win, Americans Lose

Historically, stockbrokers have been mere salesmen, pushing high commission or hidden commission products onto their unsuspecting clients.  Out of that swamp, Registered Investment Advisors emerged.  They embraced the Fiduciary Standard, which requires no hidden fees and full disclosure of any conflicts of interest.  Stockbrokers were held to a mere "suitability standard" which is virtually no standard at all.

Congress instructed the Securities and Exchange Commission (SEC) to develop a Fiduciary Standard for all investment advisors.  After a massive, years-long lobbying effort by stockbrokers, the SEC booted the project over to the Department of Labor, who finally produced such a standard, for application only to retirement accounts, mostly IRAs.

Then, along came the Trump Administration, who postponed implementation.  Now, the Fifth Circuit Court of Appeals has struck down the Fiduciary Standard.  Only the Supreme Court can save the Standard now.  Stockbrokers/salesmen are celebrating nationwide.

They are celebrating because their clients will not know the true cost of their accounts and because they can push products in their best interest, instead of their clients' best interest.  They still don't have to tell their clients about any conflicts of interest.

Sorry, America -- you lost!  You're sinking back into the swamp . . . 

Ten Year Facelift ?

It is hard to believe it has been ten years since the stock market began crashing into the worst recession since the Great Depression.  The key event was the collapse of Bear Stearns, a well-respected investment house.  In the aftermath, amidst cries of "Never Again," a well-intentioned Congress produced the Dodd-Frank legislation.

Like any complex legislation, it had bugs to work out.  Like any complex legislation, it needs to change with the times.  There is now a movement in Congress to update or curb some of the excesses.  They are right that the reporting requirements are too onerous.  Congressmen may be too zealous of raising the limit to $250 billion assets for firms to avoid excess supervision, instead of $100 billion. 

I would remind Congress that the primary tool to prevent another financial crisis is more capital.  The Republican House wants to increase the amount of leverage or debt that a bank may issue.  This is a mistake!  Reduce regulation, not capital.

Second, the Dodd-Frank Act was born before cyber-crime and desperately needs updating.

Third, for all its faults, the Federal government saved the economy in 2008/9.  Well, actually it was the Fed and regulators who saved us.  Except for TARP, Congress was useless.  In the vein of shooting the survivors, the Dodd-Frank legislation reduced the flexibility of the Fed and regulators to ever save us again.  No matter the problem, the Dodd-Frank legislation has already pre-determined the response.  If we experience another financial crisis, the Fed and the regulators don't have the flexibility to be innovative. 

When Bear Stearns crashed ten years ago, the commercial bank of JPMorgan bought Bear Stearns with assistance from the Fed.  That was a crucial move and a smart move.  But, Dodd-Frank makes that impossible now.  That makes us less safe!

Bravo, Mr. President

Yesterday, the President announced the appointment of his old friend, Larry Kudlow, as his new chief economic advisor.  I applaud this appointment!

Larry is not a traditional economist, lacking any graduate degrees in the subject.  But, he has been a serious student, especially of Supply-side economics and even worked for Arthur Laffer, the father of Supply-side economics.  Consequently, I doubt he has ever seen a tax cut that he didn't like, accepting increased national debt, certainly in the short run.  As a free-trader or globalist in a protectionist or nationalist White House, Larry will likely be quite lonely there. 

But, he brings non-academic qualities that are badly needed in the White House.  He has a remarkable ability to disagree without being disagreeable.  I have disagreed with his slavish devotion to any one particular school of economic thought, but I have always enjoyed listening to him.  He is a good, decent, and classy guy.  I expect he will be an excellent economic advisor for this particular President.

Congrats, Larry!

Smokescreen!

In 2011, Putin was running for "re-election" in Russia, when the American Secretary of State Hillary Clinton sparked mass demonstrations of Russians by her rhetoric against the phony election.  Putin was furious with Hillary for her interference in Russian elections.

In 2016, he returned the favor by interfering with American elections -- employing technology as never before.  While he undoubtedly favored Trump over Clinton, he was more interested in simply hurting Clinton.  He would probably have supported the Libertarian candidate, Gary Johnson, merely because he was a non-Clinton.  Revenge is sweet . . . and addictive.

Long before the evidence was examined, Republicans concluded there was no collusion between Russian interference and the Trump campaign.  Long before the evidence was examined, Democrats concluded there absolutely WAS collusion.  Neither of their conclusions matter!

Collusion is a smokescreen hiding the real problem!  Putin's interference in our election last year was successful beyond his wildest dreams.  Why would he stop?

But, what are we doing to stop him?

Trump understandably sees the Russian interference as a tarnish on his beautiful election.  So, just blame it all on Hilary, who started it, according to Putin.  Then, prevent it from happening again!  Please!

Shifting Gears

The stock market has moods.  Sometime, it is in a bad mood and frets excessively about everything, especially political antics.  Sometimes, it is in a good mood and ignores political antics.  I think the market is in a good mood.  It dropped temporarily last week when Gary Cohn resigned but barely moved today when Rex Tillerson was fired.  It was buoyant this morning when the National Federation of Independent Businesses released its report on Small Business Optimism.  It was very optimistic, indeed, posting the second highest in history, amid broad-based growth.  Their biggest problem is no longer taxes nor regulation but is finding employees.  This is all good!

So, we have good economic data, increasing corporate earnings, increasing business confidence, and less sensitivity to political drama . . . . What, me worry?

Remember what Warren Buffett said - be greedy when others are frightened, and be frightened when others are greedy.  It is fine to relax in the current market but not to sleep.  It will not change tomorrow, but it will change.  In the meantime, enjoy the ride!

Same News, Different Reactions

The February "Jobs Report" showed the the U.S. economy produced more jobs than expected, and the stock market tanked.  Yesterday, the March report again showed the U.S. economy produced more jobs than expected, and the stock market soared.  Why the different reactions to the same report?

The February report showed that average hourly earnings were up 2.9% over the same month last year.  This suggested inflation was breaking out, which inevitably leads the Fed to increase interest rates more quickly.  The March report reported that figure was only up 2.6% year-over-year, reducing the pressure on the Fed to increase interest rates.

Another question is how did we produce 313 thousand new jobs last month without the rate of unemployment changing from 4.1%.  You would expect that rate to drop, wouldn't you?  The good news is that almost 800 thousand people returned to the workforce.  That is really good news! 

Republicans focus on the Labor Force Participation Rate (LFPR), which measures the percentage of the population that either has a job or is looking for a job.  It has risen to 63%, which is the highest since the global financial crisis of 2008/9, and Wall Street is heavily Republican.

Let's see -- fewer interest rate increases to dampen profits, plus a booming economy, plus rising corporate earnings, plus a highly stimulative fiscal policy, plus "peace talks" breaking out -- why wouldn't the stock market soar? 

Framing

For honest intellectual inquiry or for mere debate, it is vital that discussion be framed correctly.  I recently wrote about the problem of thinking about gun violence with a rifle approach instead of a shotgun approach.  In other words, there is no one action or "silver bullet" that will solve such a difficult problem like gun violence.  Just because one suggestion will not solve all problems, it can still be part of a package of solutions.  Discussion of gun violence needs a wide frame.

For a discussion of tariffs, we need a more narrow frame. Most every economist will cite the principal of comparative advantage and oppose tariffs.  That does not mean individual trade abuses cannot be addressed.  Clearly, China has cheated on certain trade agreements.  That should not be ignored and should be confronted.  But conflating that discussion with a NAFTA renegotiation is misleading and counter-productive.  They need to stand apart and to be discussed apart from each other.  Discussion of tariffs needs a more narrow frame.

For a discussion of North Korea, a narrow, rifle frame of the "they must de-nuclearize" is a waste of time.  An honest discussion must include how the Kim family stays in power, support for their huge but poor population, and how to verify everything they say.  The areas of disagreement are obvious.  Widening the frame of discussion could reveal more areas of agreement.