Thursday, February 28, 2013

The most popular dude in town...

As I suggested yesterday, Fed chair Ben Bernanke was blessed to be appointed when he was. Yes, occupying the chairman's seat during the greatest recession since the Great Depression is a dream come true for any economist who aspires to the public spotlight. Creating facilities for distributing newly created currency is, to such a person, like being the chef of the only restaurant in town experimenting with new recipes on hungry patrons---one doesn't worry about nutritional content when one's really hungry. And for sure the chef is the most popular dude in town.

Of course, as Bernanke knows, there'll come a day when the Fed has to lighten tighten up, when they'll have to close the kitchen and let nature take its course. The problem is nature---when we're talking the bond market---has been asleep (lulled by the Fed) since 2008, and if they don't nudge it with just the right pressure, at just the right time, in just the right spots, they could have a real mess on their hands: Bond yields could spike as investors flee en masse, sending lending rates through the roof and doing all kinds of strange and not so wonderful things to asset prices.

Now, to be fair, Mr. Bernanke says he's got it all under control. That the Fed can and will ease off the easy-money pedal at just the right time and at just the right pace. So let's hope he knows what he's talking about---and has the political will to pull it off. The problem for a Fed chair concerned with his reputation is, as James Buchanan and Richard Wagner pointed out in Democracy in Deficit:

The monetary decision maker may realize full well that there are "social" gains to be secured from adopting and holding firm against demand-increasing inflation-generating policies. But these general gains will not be translated into personal rewards that can be enjoyed by the decision maker as a consequence of his policy stance. "Easy money" is also "easy" for the monetary manager; "tight money" is extremely unpleasant for him.

Wednesday, February 27, 2013

Still plenty to worry about. Thank goodness!

With "devastating" (if you believe either side) budget cuts less than 48 hours away, the Dow gains 170 points. You know how I feel about the so-called sequester---well, apparently, traders agree. Or if they don't agree with me that, when we're running a trillion dollar annual deficit, any cut's a good cut, they apparently don't seem to see the sequester as a rally-ending event. The "smart" money---at least the smart-sounding blokes CNBC parades across the screen throughout the day---say it's all about the Fed. I say it's all about buyers (be they institutions or individuals) believing that the companies they're buying can sustain, if not increase, their present rate of earnings, and that present share prices don't accurately reflect that belief. Although I suspect today's big run up had a lot to do with panic-stricken short-sellers (those who make bets that a stock's going down)---who thought sequestration might bring capitulation---covering their positions. I.e., the short-sellers, if only for the moment, are beginning to buy the buy-side story.

Now, as you've noticed, sentiment can turn on a dime: remember Monday? The Dow dropped 200 points. And beyond sequestration, there's of course plenty to worry about. I could list a dozen concerns, beginning with the looming debt ceiling, but, frankly, it doesn't matter---there's forever plenty to worry about. And, believe me, that's a very good thing; for bull markets need liquidity, and every bleary-eyed buyer needs a willing seller.

Tuesday, February 26, 2013

Little chasing going on...

Today, in front of a Senate committee, Ben Bernanke defended, lauded even, his track record as Fed chairman. In response to being labeled the biggest dove since WWII, Bernanke fired back with "my inflation record is the best of any Federal Reserve chairman in the post war period---or at least one of the best."

Well, he has a point there. Who would have thought that the Fed could bloat its balance sheet from a few hundred to a few thousand billion over the course of 5 years without sparking one whale of an inflation rate? Not I! So how can that be? More than once I've borrowed Milton Friedman's great line "inflation is always and everywhere a monetary phenomenon". I mean the rapid creation of new money chasing the not-rapid creation of goods and services has to result in higher prices, no? Well, the operative word there would be "chasing". You see, while the Fed has bloated its balance sheet by buying fixed income assets from banks, banks have turned around and placed that newly created money on deposit back at the Fed, where they earn .25%.

Now why would banks deposit that money back at the Fed at .25% (never mind why the Fed pays it), when surely they could lend it to the private sector at higher rates? Well, I suspect it's a combination of lack of demand for loans from the private sector and stringent lending standards on the part of the banks---and, well, I guess .25% (risk free) on a few trillion adds up. So, in essence, there's relatively little chasing of goods and services (economists call it velocity of money) going on. Now if the economy gains some traction, and the pendulum swings toward greater certainty in the private sector---and less scrutiny in the banking sector---watch out, inflation may be a coming.

As for Mr. Bernanke; if he indeed wishes to go down as one of the great inflation fighters among history's Fed chairmen, he couldn't have been appointed at a better time. But he may want to go ahead and bow out, as his friends suggest he will, when his term is up in 2014.

Here's a velocity of MZM (money zero maturity) money chart from the Federal Reserve Bank of St. Louis---notice the 1980 peak. Remember the inflation rate in 1980? It averaged 13.6%...

money velocity

Saturday, February 23, 2013

Too many toys? -- And -- It's all about the party...

Here's Paul Krugman catching a politician, Louisiana Governor Bobby Jindal, playing politician:
Mr. Jindal posed the problem in a way that would, I believe, have been unthinkable for a leading Republican even a year ago. “We must not,” he declared, “be the party that simply protects the well off so they can keep their toys. We have to be the party that shows all Americans how they can thrive.”

But Mr. Jindal didn’t offer any suggestions about how Republicans might demonstrate that they aren’t just about letting the rich keep their toys, other than claiming even more loudly that their policies are good for everyone.

Of course Krugman we get. But Jindal? Hmm... "protecting the well off so they can keep their toys." I guess we could consider allowing folks to keep what they earn a government spending program in and of itself. Meaning, the more the rich have toys, the bigger the federal deficit. If the government wasn't "letting the rich keep their toys" we wouldn't be in this budget mess, right? That sort of language ('letting keep') should make everyone at every income rung very nervous.

The "problem" Krugman refers to is the perception that the Republican Party is out of touch with the non-well off. And apparently Jindal agrees. Trust me, whether we're talking Republicans or Democrats, it's all about the party...


More minimum wage commonsense...

In his State of the Union address the President made a passionate case for increasing the federal minimum wage by 24% to $9 per hour. He then taught us a little economics; he said, "For businesses across the country, it would mean customers with more money in their pockets." suggesting that government (as opposed to the market) forcing up businesses labor costs will somehow benefit businesses. Please tell me you're skeptical!

Here's Don Boudreaux, on the best econ blog out there, offering a few links. He's written volumes on the topic of late (his open letter to the President is featured below)---type "minimum wage" in the search bar for more. And here's one of my simple-minded contributions.

17 February 2013

Mr. Barack Obama, President
Executive Branch
United States Government
1600 Pennsylvania Ave., NW
Washington, DC

Dear Mr. Obama:

In this year’s State of the Union Show you called for the hourly minimum-wage to be raised from $7.25 to $9.00.  That’s an increase of more than 24 percent.  Because you trumpet this proposal as one to assist low-paid workers, you, presumably, deny that such a hike in the cost of hiring low-paid workers will prompt employers to hire fewer such workers.

In last year’s State of the Union Show you bragged of your administration’s increase in the tariff rate on Chinese-made automobile tires.  This tariff increase, which averages 30 percent over three years, is explicitly designed to dissuade Americans from buying Chinese-made tires – an effect that you recognize and applaud.

Question: If a government policy that artificially raises the price of Chinese-made tires reduces the quantities of such tires that are bought, why does a government policy that artificially raises the price of low-skilled labor not reduce the quantities of such labor that are hired?

I’m told that you’re a man of science.  I await your response.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030



Friday, February 22, 2013

The income inequality issue is finally resolved! And it's great news!!

Finally we can put the whole income inequality issue to rest. According to today's Washington Post, a study by Thomas Hungerford of the non-partisan Congressional Research Service (though the study is not a CRS product) found that the rise of income inequality in this country over the past 15 years has to do simply with "runaway income from capital gains and dividends". Whew! What a relief!!

So if you've been losing sleep over this one---that is, if you've been blind to the advancement in living standards at all income levels over the past 15 years (in spite of the growing wage gap)---you can move on to another worry. The culprit, according to Hungerford, is something utterly wonderful for lower-incomers; investment. And when we're talking businesses, we're talking capital investment. Capital investment spawns innovation, invention (affordable life accoutrements for consumers and greater efficiencies for businesses and consumers), and economic growth (job opportunities at every rung of the economic ladder).

Thursday, February 21, 2013

Apparent "Needs"...

In their 1977 book, Democracy in Deficit, James Buchanan and Richard Wagner explained, perfectly, why the proponents of big government might, in words, relent to the need to cut spending, but when it comes right down to it there's virtually nothing these masters of diversion are willing to sacrifice:
The government bureaucracy, at least indirectly supported by the biased, if well-intentioned, notions of Keynesian origin, comes to have a momentum and a power of its own. Keynesian norms may suggest, rightly or wrongly, an expansion in aggregate public spending. But aggregates are made up of component parts; an expansion in overall budget size is reflected in increases in particular spending programs, each one of which will quickly come to develop its own beneficiary constituency, within both the bureaucracy itself and the clientele groups being served. To justify its continued existence, the particular bureaucracy of each spending program must increase the apparent "needs" for the services it supplies.

And of the consequences:
Too often these activities by bureaucrats take the form of increasingly costly intrusions into the lives of ordinary citizens, and especially their capacities as business decision makers.

Monday, February 18, 2013

Masters of diversion...

Last Friday's New York Times editorial, The Real Cost of Shrinking Government, is a tough one to compete with. Its author succinctly and painfully outlines where sequestration would hit the lives of everyday Americans. The exposé stops just short of actually naming the individuals who are presumably about to lose their jobs. But what is typical of such reports is that they seldom recognize the fact that the resources government brings to bear on its myriad departments are resources extracted from the private sector (i.e., they make no mention of the individuals who suffer from an ever-growing government's negative impact on private sector employment).

The thing is, while the proponents of big government might, in words, relent to the need to cut spending, when it comes right down to it there's virtually nothing these masters of diversion are willing to sacrifice.

Sunday, February 17, 2013

My, the greed of government!

It's been merely a matter of weeks since a tax deal was struck---increasing the government's take of the ordinary and investment income of families earning above $450,000 per year. And yet there's a call for additional revenue raising by hitting high-earners' tax returns, yet again---by limiting their incentives to expand their businesses, mortgage their homes, etc. (by the way, I am in favor of curtailing government's influence over the private sector by eliminating tax deductions and credits---as part of an overhaul of the tax code).

My, the unbridled greed of government! "Greed?" you cry "Are you kidding me? How can you call taxing fat cats to pay for programs that provide for the needy and repair our crumbling infrastructure, while putting people back to work, greedy?" Well, honestly, I can with confidence. You, sadly, suffer extreme naiveté if you believe that whatever additional revenue the politician might squeeze from high-earners won't be distributed in the most politically-expedient (greedy) manner.

Now let's---only for conversation's sake---agree that individuals who enjoy the spoils of their profit-seeking efforts are greedy as well. The global question then is whose greed ultimately delivers the most harm to society? Successful individuals spending their own money on luxurious homes and lavish vacations (supporting an awful lot of wage-earners), investing in their businesses and their portfolios ("), or thriftless politicians spending other people's money to make good on the promises they made to win office (and, in that, I'm talking both sides of the aisle)?

Tell me that's a no-brainer!

Thursday, February 14, 2013

Ah, globalization...

Are you in that camp that believes claims the U.S. is somehow compromised when its citizens exercise the freedom to do business without regard to lines drawn on maps? Well, you'd have a tough time convincing H.J. Heinz's shareholders. Berkshire Hathaway (aka Warren Buffet) and 3G Capital Management (aka Jorge Lemann, Brazil's richest man) are paying $72.50 per share (20% above yesterday's closing price) for the company.

A once U.S.-centric enterprise, Heinz---now with 2/3rds of its business coming from non-U.S. markets (30% of its revenue from emerging nations)---has morphed into a global powerhouse that has succeeded to the point of garnering the affections of an international partnership consisting of two of the world's wealthiest profit-seekers.

Now where would Heinz, its shareholders, its employees---and don't forget U.S. tomato farmers---be were it not for international trade? Think about it!

Here's one of my more popular posts on the topic...

Monday, February 11, 2013

You're good either way...

Dow May Struggle to Outdo Itself as Caution Takes Hold

After ‘Jack-Rabbit’ Start to 2013 Stocks May Struggle

US Citizens Braced for Austerity Impact

Even Brief Spending Cuts Could Hit US Economy Hard

Europe's Economy Still Weak

Expect Long-Term Damage in Spain

Consumers Taking Financial Hit From Rising Fuel Prices

I know, assuming you own equities, you want to feel good about the stock market. You want this rally to show sustainability. You've done the math in your head; if your portfolio earns X%, you'll be worth $X by year-end. But you're worried; you fester over the sequester, you're reeling over the debt ceiling. You recall the fall of 2011---when the Dow tumbled as politicians rumbled. And the epic bear market of late '07 to early '09---that took stocks down over 50%---seems like only yesterday.

My observation, having worked with individual investors for nearly three decades, is that the sensations one experiences during bull markets pale in comparison to the trauma of a 20+% decline (official bear market). When I mention the 40% collapse of 2008, clients nod like bobble-head dolls. When I mention the Dow's 110% increase from March 2009, wrinkles emerge betwixt their eyebrows as they reply "really?"

I pulled the opening seven headlines off the internet Sunday evening in the span of a minute of two. And while they don't engender the comfort you seek, for me, nothing could be finer---for they tell of skepticism. I understand that your wish  (sustainability)---while I make no prediction---is more likely to come true amid a din of denials. You see,  bull markets require liquidity, and, make no mistake, anxiety and liquidity are positively correlated. So when a consensus converges and denounces Dow 14,000, and you're feeling fretful, take heart; for as one of history's great investors, the late Sir John Templeton, taught:
Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

That said, for you---the patient, long-term, well-diversified, able to transcend your fears, investor---whether this rally persists (with the occasional correction of course) throughout the year, or hits the skids and finds you rebalancing into the next (inevitable, yet un-time-able) bear market, you're good either way.

Friday, February 8, 2013

The single best thing we can do for the economy!

Reuters says "Running trade deficits means the country bleeds dollars, so trade is still a drag on the U.S. economy." Utter hogwash!

Running "trade deficits" means the rest of the world loves the goods, services and investment opportunities the U.S. produces so much that they'll go to extremes to deliver us the stuff we want in exchange for the U.S. dollars they need to buy (and invest in) the U.S. stuff they want. I'll even go so far as to say that the single best thing we can do for "our" economy would be to disregard borders altogether.

Here are two of my attempts at making this case:

Wednesday, February 6, 2013

Today's TV Segment (video)

Sequester Shmequester

$85 billion--a very large number--is 2013's share of the dreaded sequestration (automatic spending cuts), should it become a reality.

Now I'm no genius by any stretch, but $85 billion seems to me, alas, to be a very small number when we're talking cutting government spending. In terms of what the federal government is spending in excess of its income (about $1 trillion this year), we're talking a mere 8.5%. In terms of total spending ($3.8 trillion this year), we're talking 2.25%.

So $85 billion is no big deal, right? Well, right, and, well, wrong. Right, in that the predictions of economic doom and gloom should policymakers not (yet again) kick the sequester can down the road are grossly unfounded. Wrong, in that the fact that $85 billion, against $3.8 trillion in annual spending, is a small number inspires shoulder-shrugging so-what-ness when it comes to proposed tax and spending increases. I.e., give them a billion and they'll, in "small" increments, turn it into a trillion. I.e., when we're talking spending increases, $85 billion---to the politician---is no big deal. But when we're talking spending cuts, suddenly, it's an economy-killing number. Utter nonsense!

And as for the would-be, were it not for the military, deficit hawks; they seem to understand that bureaucrats are egregious spenders. Yet, while screaming for abstinence, they stop cold when it comes to the military cuts included in the sequester. So how is it that our elected officials can be so inept in the allocation of 75% of expenditures, and yet be so adept when it comes to the 25% spent on military? Answer, they can't!

So please, don't sweat the sequester...

Friday, February 1, 2013

A bazillion things...

"Hey Marty, what's happening with the market? I can't believe it. Is it Obama? Is it the Republicans? I can't believe what I'm seeing on the television. So at a free moment you can refresh my memory. When I see all the pluses, that's quite a feat! You gotta have an answer for this."

The above was the voicemail message I received this morning from a good friend/client.

Now Tom is not your everyday consumer. He stays very much abreast of the world's goings on and has a healthy perspective on the whats and whys of markets and of the economy. Meaning, he knows that no one can truly know the whats and whys behind the actions of billions of individuals pursuing their individual objectives on any given day. His "Is it Obama? Is it the Republicans?" questions would thus be rhetorical. But for most, I'm afraid, that would too-accurately reflect their instincts. It has to be policy---public policy has to be responsible for the recent positive tone in stock prices. And make no mistake, both sides of the political aisle are drafting their official acceptance speeches as they assign grossly-undeserved credit to themselves.

If you watch Maria Bartiromo on CNBC, she and virtually every analyst she interviews assigns credit to the Fed. Stocks love easy money, or so it seems. And as long as the Fed continues to buy down interest rates, stocks have very little competition. The economy shrank last quarter and the market barely blinked. Why? Because that means QE (the Fed printing money and buying treasuries and mortgage-backed securities) ain't going nowhere. The consensus has it, for the moment, that sequestration (mandated spending cuts) will happen. Economists predict that'll take three-fourths of a percent from GDP in 2013. Therefore, again, QE ain't going nowhere!

I predicted back in '08 that the incoming president would be a shoe-in two-termer. I was, naively, anticipating that the economy---then in the dumper---would, by 2012, be cycling back in robust fashion, regardless of who occupied the Oval Office. Incumbents don't lose when the economy's humming along. And while I was right on the two-term part, I was way wrong in terms of the reason---"robust" would not describe this economy. But you know why Native American rain dances worked 100% of the time, don't you? Because they never stopped dancing until it started raining. Or as Brian Tracy once said "If you want to be known as a great economist in America, predict growth. If you predict growth you'll be right 70% of the time. And if you're wrong temporarily, you'll be right pretty soon."

Yes, I believe America will experience robust growth at some point in the future. Now whether we're at the cusp of a great expansion, or teetering on a cliff---or somewhere in between---remains to be seen. As for why stock prices have been on the rise of late, I say nay to those who credit either party, or the Fed. Higher taxes, tighter regs, an opaque national health care plan and money-printing do not a sustainable bull market make. Simply put, stock prices are up because buy orders have been placed and sellers, for whatever reasons, don't think yesterday's prices accurately reflect the value of the stocks they own(ed).

Yeah, I know, that last sentence is an utter copout for an experienced investment advisor. So here's what I'm telling Tom when I call him back:

Stock prices, by conventional valuation metrics, are, historically-speaking, attractive. For five years equity mutual funds have seen net-redemptions while bond funds have ballooned. Once-panicky 401(k) account holders forever chase returns, and they're quarterly statements are telling them that they're missing the boat---so they're jumping aboard. Hedge fund managers have been abysmal investors of late, and they have to catch up if they hope to catch new assets. Consumer confidence is on the rise, the housing market's showing some life, durable goods orders are up, retail sales are up and 75% of companies have reported earnings better than expected. China looks stabler and European yields have settled down. Corporations are sitting on $3 trillion in cash, and so on.

Now it would be utterly irresponsible for an experienced investment advisor not to add the following:

BUT then there's the debt ceiling, the sequester, the looming credit downgrade, and the threat of yet another tax hike. There's the Middle East, Europe's still deep in the woods and who can trust China's numbers? The consumer's fickle, hedge funds can turn on a dime, housing could stall if interest rates spike and inflation could rear its head. Then there's earthquakes, inclement weather and a bazillion other things I can think of---and a bazillion other things I can't.

The bottom line; there's an incalculable number of things that impact the global economy---and the markets. The one thing you can count on, however, is cyclicality. Although, ironically, the thing the mainstream media loves to credit for the present trend---ultra-easy monetary policy---can indeed mute or exacerbate movements within the cycle, as can fiscal policy.

So how does the long-term investor succeed in a world influenced by bazillions of unknowns? That, believe it or not, I can narrow down to what we may call the three keys to successful long-term investing; diversification, diversification and diversification...