Why you should like stocks in the short-run. And why you shouldn't...

10 reasons why stocks presently make sense:

1. At 14 times (give or take) next year's earnings, the S&P 500 is, historically speaking, reasonably priced.

2. Half of the S&P has reported Q1 earnings: 81% have met or beat expectations (12% met, 69% beat) .

3. Interest rates are at record lows, allowing, historically speaking, for what analysts call multiple expansion. Meaning the price to earnings ratio (multiple) of your average share of stock tends to run higher during periods of low interest rates---meaning stocks can trade noticeably higher.

4. Balance sheets have been largely scrubbed clean post recession and are bulging with cash.

5. World central banks are in the mood to inject liquidity into every dry hole they can find. The stock market loves accommodation.

6. The economy, albeit tepidly, is trending positive.

7. No core inflation in sight.

8. Residential real estate appears to have finally bottomed.

9. The retail investor (think average bloke with a 401k) is still reluctant to join the party: He/she's usually the last to show.

10. Overall level of skepticism is healthy: "Bull markets grow on skepticism" J. Templeton.

1 reason why you shouldn't act on the above --- or, why you should maintain your long-term allocation and rebalance (only to your equities target) out of upturns and into downturns:

All things economic (and market) being cyclical, every one of my 10 pros will one day experience its inflection point. And, make no mistake, you won't call a single one. In fact, inflection points are only recognized in retrospect, and they're usually cloaked in extreme sentiment with the momentum. Think tech in '99 (euphoria), real estate in mid '07 (euphoria), and the broader stock market in the spring of '03 (terror). Better, therefore, to allocate your assets in a manner consistent with your temperament (less stocks if you're prone to panic) and your time horizon (less stocks if you're getting up there in age). And, again, rebalance (you would have been selling in '99 and '07, and buying in '09) twice per year to your target.

The 1 Percent's Concerns...

Here's a snippet from Paul Krugman's last Thursday column The 1 Percent's solution: 

Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.

Hmm... "a facade of academic rigor". What the top 1% prefers, I suspect, is---like all of us---to thrive. And I suspect as well that they understand that a debt-ridden, deficit-spending nation does not a thriving economy make --- as, ironically, rigorous academic analyses suggest. The most recent being the work of University of Massachusetts Amherst's finest; finding that nations tend to experience measurable slowdowns in economic growth (albeit not to the extent suggested in the study they counter) once they exceed a 90% debt-to-GDP ratio.

A more plausible take would be that the upper 1 percent's concerns over entitlement spending has to do with their awareness of the simple fact that those programs consume better than 50% (and growing) of the Federal budget, and project unfunded liabilities that multiple consecutive years of the most robust rate of economic growth may not compensate for. Not to mention the fact that they understand what it takes to sustain financial success and---right or wrong---can't fathom how a nation, even ours, can spend 40% more than it takes in each year and sustain financial success. Thus, rather than presume, as does Krugman, that successful individuals would---out of self-destructive greed---lobby government to directly harm their customers, we can more easily, and more intelligently, conclude that rich folks, concerned, yes, primarily with their own continued success, see trouble ahead if we don't begin to rein in entitlement spending.

Saying the wrong nay - Or - Don't forget grit...

A friend recently emailed (the subject line reading "Krugman has won") me the following:

I’m not going to buy into the premise that you can spend your way out of trouble. You have to pay it back someday.

With this link to a Henry Blodget blog post titled The Economic Argument is Over -- And Paul Krugman Won.

Here's my reply:

The idea is that government borrowing and spending, resulting in consumption, fuels growth --- yet nothing could be further from the truth. Consumption, by itself, is the opposite of growth: Without producing something first in order to earn the income to fund consumption, consumption is a net destroyer of wealth.

The problem with some hardcore free-market types is that they make the discrediting mistake of predicting things like (per the article) "countries would be beset by hyper-inflation, as bond investors suddenly freaked out and demanded higher interest rates", then look like fools when that doesn't materialize (I reside with the higher interest rates, but not the hyperinflation, fools). Blodget and others of his ilk love to point to Japan's decades of low interest rates, in the midst of massive debt, as evidence that the naysayers got it all wrong. When in reality the naysayers were simply saying the wrong nay: Japan's decades-long moribund economy is evidence enough of the consequences of heavy indebtedness.

As for those who predicted calamity here at home; they clearly, to this point, have under-appreciated the grit of American businessfolk. Which is evidently strong enough to overcome the pernicious effects of ever-growing government.

Today's TV Segment (video)

Love the Counterfactual - And - Laissez-nous faire, á moins que vous proposer subvention...

Here's Robert Samuelson making sense in yesterday's Washington Post:

The International Monetary Fund recently held a conference that should concern most people despite its arcane subject — “Rethinking Macro Policy II.” Macroeconomics is the study of the entire economy, as opposed to the examination of individual markets (“microeconomics”). The question is how much “macro” policies can produce and protect prosperity. Before the 2008-09 financial crisis, there was great confidence that they could. Now, with 38 million unemployed in Europe and the United States — and recoveries that are feeble or nonexistent — macroeconomics is in disarray and disrepute.

Well, Hayek did say, a few decades ago:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Apparently men, despite all the demonstrating, still don't get it.

Here's more from the article:

Perhaps the anti-economist backlash has gone too far, as George Akerlof, a Nobel Prize-winning economist, argued. The world, he said, avoided a second Great Depression. “We economists have not done a good job explaining that our macro policies worked,” he said. Those policies included: the Fed’s support for panic-stricken financial markets; economic “stimulus” packages; the Troubled Assets Relief Program (TARP); the auto bailout; “stress tests” for banks; international cooperation to augment demand.

My how "they" (policymakers and their economists) love to deploy the counterfactual. That is, without their genius, we would have been hurled into "a second Great Depression." But hey, I love counterfactuals too: That is, if they had let markets work, let excesses be purged, let losses occur where capital was misallocated, let resources flow unobstructed to their most productive uses; our economy would (free-market enthusiasts would presume) be growing at a more reasonable (faster) pace, given the depth of the recession and the record of past expansions.

One more:

Since late 2007, the Fed has pumped more than $2 trillion into the U.S. economy by buying bonds. Economist Allan Meltzer asked: “Why is there such a weak response to such an enormous amount of stimulus, especially monetary stimulus?” The answer, he said, is that the obstacles to faster economic growth are not mainly monetary. Instead, they lie mostly with business decisions to invest and hire; these, he argued, are discouraged by the Obama administration’s policies to raise taxes or, through Obamacare’s mandate to buy health insurance for workers, to increase the cost of hiring.

Well, yeah, intentions notwithstanding, injecting uncertainty---and certainly higher costs---into the labor market has to (has to!) mean less, or substantially slower growing, labor. French businessman M. Le Gendre said it perfectly when asked by his country's finance minister (circa 1680) how the state could be of service to merchants and help promote their commerce: He simply replied: "Laissez-nous faire" ("let us do").

Of course, with regard to the Affordable Care Act, or tax reform, or financial (or any other) industry regulation, or, for that matter, all manner of corporate welfare, there's a whole slew of businessmen beneficiaries who might reply to such a question with: "Laissez-nous faire, á moins que vous proposer subvention" ("let us do, unless you offer subsidy").

It's always about freedom...

What would you say if I told you that at anytime, at my discretion---to protect the firm---I could turn down your request to deposit to or withdraw from your personal investment account? Yes, a very stupid question. And my, what a very very stupid, firm-killing, decision on my part that would be!

From this morning's Washington Post:

the IMFC recognized that economies coping with the effects of the major nations’ policies may need to act on their own — by using capital controls, for example, to regulate the flow of foreign money into and out of their nations. That is something the IMF has traditionally resisted, but now considers an appropriate tool for developing nations in some circumstances.

In its desperation, and unmindfulness of the utter impossibility that humans can effectively bend the global economy to their liking, today's IMF is endorsing measures that any non-economist with a modicum of commonsense would view as utter lunacy. An emerging, and, at times, capital-hungry nation, using capital controls (restricting investor freedom)---whether its short-run aim is to defend or debase its currency---is the definition of not looking beyond the tip of its nose.

Of course it's never that simple; there are volumes of literature making statistically-supported cases for capital controls, as you'd gather by reading Wikipedia's page on capital control. My personal litmus test is always about freedom.

Insufferable notions...

The insufferable Paul Krugman is having a field day with a new batch of research that allegedly refutes the claim---that a 90+% debt to GDP ratio makes for a slow economy---made by Harvard economists Carmen Reinhardt and Ken Rogoff in their paper Growth in a Time of Debt and their popular book This Time It's Different. I happened to have read the book, and while I found it to be an interesting read, I wasn't all that taken by the data. Not that I doubted it, but simply because, whether we're talking 90%, 120% or 200+% (Japan) debt to GDP, the fact that a government having to borrow to meet its obligations will, while not necessarily now (the act of borrowing at record low interest rates does not itself a recession make), one day suffer the economic consequences of having to take from future generations (the act of paying it back) to pay for its excesses. I mean duh! Who needs the data?

Well, alas, genius economists need the data. For they seem to believe that commonsense won't get ya (save for the likes of F.A. Hayek) a Nobel Prize. That said, while I never looked at the work that won my protagonist his, I did hear one legitimate (meaning un-politically-captive) economist suggest that Krugman's work on international trade patterns was indeed respectable. Why, by the way, haven't I read his work? Because, for me (should be for you as well), the phenomenal benefits of international trade are the ultimate no-brainer.

The problem with applying economic commonsense is that---along with keeping economists off the map---it offers little opportunity for political exploitation. I mean what are your odds of getting elected if you confess your commonsense belief that corporate subsidies---the taking from taxpayers and the giving to  campaign sponsors---are economically destructive misallocations of resources? Or that as the gap between government assistance payments and a working wage narrows so goes the incentive to work? Or that by forcing up the cost of labor, as with any other commodity, you sell less labor? Or that when you extend the length of government assistance payments you extend the period of high unemployment? Well, you'd have a devil of a time raising funds, or votes, while you cater to no special interests, thus, your odds of political success would be very slim indeed.

As for Krugman's charge that austerity brings economic pain; sure, cutting government spending brings economic pain, in the short-run, to the recipient of that largess. But as Henry Hazlitt pointed out perfectly in Economics in One Lesson:

It is often complained that demagogues can be more plausible in putting forward economic nonsense from the platform than the honest men who try to show what is wrong with it. But the basic reason for this ought not to be mysterious. The reason is that the demagogues and bad economists are presenting half-truths. They are speaking only of the immediate effect of a proposed policy or its effect upon a single group. As far as they go they may often be right. In these cases the answer consists in showing that the proposed policy would also have longer and less desirable effects, or that it could benefit one group only at the expense of all other groups.

My point being that the "showing" need only be the applying of commonsense: of course the policy that would target government spending toward one group comes at the expense of all other groups (and future generations). Can you refute that? Well, if you're Krugman, you'll try. He would have us believe that government can, by some miracle, allocate other people's resources more productively than they can themselves. Please tell me I don't have to try and convince you what an utterly nonsensical notion that is!

When bad news is good news...

When is bad news for the market really good news for the consumer? When the headline reads "Stocks Sell Off More Than 1% as Commodities Slump." Consumers look to be catching a break on food and energy prices. Apparently the supply/demand (or anticipated demand) scale presently weighs heavier on the supply side. And this is where markets work their magic. As it relates to oil, for example, prices trade lower to compensate for shrinking demand; inspiring the consumer to reschedule the once-cancelled road trip, to take advantage of cheaper air fare or cruise tickets. Or simply saving a few bucks on gas that can be invested for the future or used in some other life-enhancing pursuit.

As for businesses, this kind of bad news isn't all that bad either. While the majority have been reporting expectation-beating earnings of late, helping push the major averages to all-time highs, stock market cynics---the poor blokes who stayed with their cash---love to point out how these earnings are largely the result of cutting expenses, as opposed to a pick up in business. And that is indeed a big part of the story. I'm, however, in the camp that says earnings resulting from cost-cutting are earnings nonetheless. The fact that companies, by and large, have managed their affairs and their balance sheets very well coming out the last recession is a reason to be longer-term optimistic. Of course lower energy costs (who knows for how long?) only complement that story...

Bottom line; while 15% of the S&P 500 Index is represented by energy-sector companies---whose stocks will waver when energy prices wane (potentially taking other sectors with them)---lower energy costs are ultimately a net positive for the economy and the overall market.

If you're longer-term bullish on energy, as I am, I wouldn't be rattled by recent volatility. The price and production of oil, for example, can be influenced by a number of factors, including; energy consumption, production, inventories, spare production capacity and geopolitical concerns. Even shorter-term, trading activity in futures and equity markets can move the price measurably. Longer-term, when we consider the emerging markets, productivity gains through enhanced technologies, etc., we can conclude that the energy sector will remain an important component of a well-diversified portfolio...

Q and A on a few basics...

Here's our pretend duo, Q and A (inspired by my conversations with clients), discussing liquidity, the market, basic economics, international trade and government intervention:

Q: You like to talk about cash on the sidelines, and on corporate balance sheets, as if something wonderful is going to happen when that cash gets put to use. But, as it relates to the stock market, if I buy a thousand dollars worth of stock from Joe, I now own the stock, and Joe has the thousand dollars. Nothing changes except for who owns what. There's still the stock and there's still the thousand dollars. No cash off the sidelines.

A: Well, forgetting taxes, that's true if Joe's aim is to hold onto the cash and later buy more stock with it. If instead, for example, he turns it over to Apple in exchange for an iPad, and if Apple's management isn't going to buy a stock with it, there'll be, for the moment anyway, a thousand less dollars on the sidelines.

Q: But even if he buys an iPad the thousand dollars is still out there, "sidelines" or not. And the stock is still out there, so what's the difference?

A: Well, the thousand dollars is still out there, as is the stock, but a new iPad is now in play. And when Joe shows his pals his new iPad they'll want iPads too, as will their pals and their pals pals and their pals pals pals. The rush of new demand will put pressure on Apple's production capacity and---along with investing (that thousand, plus some of the other hundred and forty billion it holds in cash) to increase capacity---could inspire its management to increase the price per iPad. Folks wanting iPads, if they want them bad enough (they will), will work harder and/or smarter, to produce other stuff (maybe stepping it up at work---increasing production---and earning a raise) or skimp on something that, in their view (the only view that counts), brings less value to their lives than a new iPad would. Samsung's management notices all the money Apple's making and gets busy working on a comparably, or lower, priced wiz bang gadget of their own---creating jobs in the process.

Q: Yeah, jobs in South Korea!

A: Well, now, think about it. No American has to set foot in South Korea to buy a Samsung tablet. The bringing of the Samsung product to the U.S. market---the transporting across the country, the selling and servicing, etc.---creates demand for U.S. labor. But even if that weren't the case---if Samsung products in America didn't produce a single American job---Americans having the freedom to transact in a competitive global market, getting the biggest bang for their buck, will free up resources that will create employment for other Americans in numerous industries.

Q: Yeah but that's a huge hit to Apple.

A: It's a huge incentive to Apple. For Apple, worried about Samsung, will have to get busy investing some of those profits in the development of its next wiz bang, life-enhancing, gadget---creating jobs in the process.

Q: Yeah, but the fact that Samsung is taking U.S. marketshare away from a U.S. company can't, on balance, be a good thing.

A: Oh but it so can, especially "on balance". You see when a U.S. citizen spends a U.S. dollar on a South Korean product---being that U.S. dollars are claims against U.S. stuff---he is doing wonders for U.S. exporters (and the U.S. jobs market) as South Koreans spend those U.S. dollars. You see imports always lead to exports, and vice versa.

Q: Alright, so tell me, why then isn't the economy booming? Why is unemployment still so high?

A: Of course that's the mystery. Ask ten economists and you'll get twenty different answers. Although too many would tell you it's all about consumption; that Washington and the Fed need to boost consumption by injecting more stimulus "into the economy"---that is, spend and print more money. I'm with the few who think they're wrong: Consumer spending recently hit its all-time high, and here we sit, atop the slowest recovery in recorded history. I say, therefore, that it's more about production. Corporate producers (not knowing what, in terms of taxes and regulations, awaits) remain idle atop record cash balances, and, alas, more folks are presently living on government assistance (not producing) than ever before. I.e., Uncle Sam can come up with any number of new stimulus schemes, and the Fed can print dollars into oblivion, but until policymakers either get out of the way (that's a fantasy), or at least come to terms on tax policy, etc., that'll last beyond the next election cycle, we won't (likely) see the kind of capital investment needed to really get this economy humming.

Q: So all that wonderful stuff going on with Apple, Samsung, etc., isn't happening like you just described?

A: Oh it is, but not at the pace it could, or should, be?

Q: So you're saying government is the problem?

A: Yep!

Today's TV Segment (video)

Market Commentary (audio)

In today's audio I reference John Templeton's famous quote "bull markets grow on skepticism", and while skepticism indeed characterizes much of the sentiment around today's stock market, I must remind you that bear markets are inevitable, essential (no reward without risk) and unpredictable. The secret to sanity is asset (equity and income) allocation, diversification (within asset classes) and discipline (sticking with your long-term plan through market cycles)...

Click here for today's commentary...

Market Commentary (audio)

Click here to continue...

Thatcher style not for 2013... Really??

Here's Fareed Zakaria in last Wednesday's Washington Post on why Margaret Thatcher style reforms wouldn't work in 2013:

Consider the world in 1979, when Thatcher came to power. The average Briton’s life was a series of interactions with government: Telephone, gas, electricity and water service, ports, trains and airlines were all owned and run by the state, as were steel companies and even Jaguar and Rolls-Royce. In almost all cases, this led to inefficiency and sclerosis.

Today’s world is completely different. Thirty years of privatization and deregulation have swept through industries as varied as telecommunications, airlines and finance. In most sectors, it is hard to find a major state-owned company in the Western world.

Thatcher’s ideas resonated because they were an effective antidote to the problems of the times. In the 1970s, the Western world staggered under the weight of oil shocks, rising wages, rocketing inflation, slowing productivity and growth, labor unrest, high taxesand sclerotic state-owned companies. These are not the problems we face now.

Today, American and European workers struggle to keep up their wages as technology and globalization push them down. Western economies face global competition, with other countries building impressive infrastructure and expanding education and worker training. They face a two-track economy where capital does well but labor does not, where college graduates thrive but those without strong skills fall behind and where inequality is rising not just in outcomes but also in opportunities.

Against this backdrop, would a further round of deregulation do much? Would cutting taxes from around 40 percent unleash growth, especially when it would mean even larger deficits?

Margaret Thatcher was, in her own words, a “conviction politician,” but she was successful because her convictions addressed the central problems of her time. The ideas that work now will be those that solve our problems, not those of the 1970s.

While Mr. Zakaria doesn't elucidate the "ideas" that will "work now", he presumes that Thatcher-esque policies won't. Therefore, today's ideas must, in his view, embrace something other than merely private sector solutions. He legitimately (rhetorically) questions: "would a further round of deregulation do much?" Would cutting taxes unleash growth?" And I'm happy to concede those two points. But he's missing something very important, he's making no effort to go beyond talking points---he's not asking the right question. For if he did, assuming he's not politically captive, he'd be less likely to discount a Thatcherian approach to today's problems. The right question being:

If government were smaller (it's expanded markedly of late), less influential, less promiscuous when courted by industry, and less overbearing when pursuing industry---were government not a the primary consideration in the planning processes of all the industries he mentions---might businesses (having to fend for themselves in a freer, more competitive market) have already unleashed trillions in capital, propelling the economy to a growth rate consistent with, if not exceeding, past expansions?

As for globalization and technology holding back the worker, my how he exposes himself there---clearly he's been very selective in his research. Rather than pointing him to the empirical evidence (which is overwhelming by the way), I'd simply ask him to imagine life in these United States---imagine the state of today's worker---without globalization and gains in technology.

Today's TV Segment (video)

Little League Egos

Yesterday, I read the minutes from last month's Federal Open Market Committee meeting: And I am excited to report that I have discovered the one key ingredient our Fed officials are missing. If they'd add this one thing to the mix, if, in fact, they'd make this the single main ingredient, I'm certain we'd see things improve at a much healthier pace. The ingredient; humility.

Here are three excerpts, each followed by my commentary:

Many participants noted that in the current low-interest rate environment, investors in some financial markets were taking on additional risk—either credit risk or interest rate risk—in an effort to boost returns. As a result, vigilance on the part of policymakers and regulators was warranted, especially in light of episodic strains in European markets.

The Fed has succeeded in destroying any real return from high quality fixed income investments. Thus, in an attempt to generate yield without depleting their principal, investors are taking on risk they otherwise wouldn't---risks that many do not understand. Policymakers, therefore, fearing their actions could culminate in substantial losses to unsuspecting investors, must keep a watchful eye over financial markets and stand ready to step in (make no mistake, they will bailout "systemically important" institutions in a heartbeat), and up the stimulus, if need be.

Pointing to academic and Federal Reserve staff research, most participants saw asset purchases as having a meaningful effect in easing financial conditions and so supporting economic growth.

Pointing to research performed by Keynesian-biased academics, and the Fed's own researchers, "most participants" have zero faith that the economy can heal itself---that markets could resume functioning after a crisis without intervention. Like the Native American rain dancers, who knew that their particular routine always brought the needed rain---who, that is, never stopped dancing until it started raining---they'll remain oblivious to the fact that their elaborate choreography is doing little more than weakening the ground beneath their our feet. If the economy does not recover (if it cannot withstand all the engineering), all they'll know is that they didn't dance hard, or fast, enough.

Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.

Voting against this action: Esther L. George. Ms. George dissented because she continued to view monetary policy as too accommodative and therefore as posing risks to the achievement of the Committee’s economic objectives in the long run. In particular, the current stance of policy could lead to financial imbalances, a mispricing of risk, and, over time, higher long-term inflation expectations. In her view, the Committee’s asset purchases were providing relatively small benefits, and, given the risks that they posed as well as the improvement in the outlook for the labor market, she thought they should be wound down.

When my boys were little I helped coach their Little League teams, mostly because I had little faith in some of the other dads' "coaching" abilities. Not that I was some baseball expert (I wasn't!). I volunteered so as to mitigate the potential damage done by over-zealous dreamers who cared more about their Peewee League win/loss record, or their own sons' future MLB prospects, than they did about creating an environment where kids could learn team work, could take risks, take lumps, learn how to win, and, most importantly, learn how to leverage losing experiences to become better players and ultimately better people. Perhaps Ms. George---the one member making some sense (to me)---joined the FOMC to bring a little humility to the process. I suspect she's a bit frustrated...

Margaret Thatcher on inequality and the Euro... (video)

Margaret Thatcher, Great Britain's one and only woman prime minister, passed away yesterday at the age of 87. I can't, with confidence (I wasn't paying enough attention back then), speak to her as a politician, but my how I enjoyed (and sympathize with) the following. Her answer to the yet, alas, unremitting income inequality argument was beautifully thorough, precise and masterfully illustrated. As for her concerns regarding a single European currency, well, perhaps she was onto something:

Firing into the abyss...

Open letter to:

Charles Evans
Federal Reserve Bank of Chicago

Dear Mr. Evans,

In last week's public debate with your colleague Jeffrey Lacker you stressed that the Fed was still "missing tremendously" on the employment side of its dual mandate. You stated: "Our credibility will be judged by how we do on both sides of the mandate."

I'm sorry Mr. Evans, but the Fed's credibility suffers not (so much) from lack of efficacy, but from its colossal collective ego. What you all are "missing tremendously" is the humility (and the memory) to understand that, at best, the appointments you and your cohorts have accepted position you as marksmen/women shooting into pitch darkness at sounds coming at you from every angle. You'd have us believe that your aim is calculated, that you've assessed the prevailing winds, adjusted accordingly and have your target firmly in your crosshairs. Truth be told, having hit nothing your guns are now positioned at your hips, you've set them to auto and you're burning rounds by the billions as you blindfire into the abyss.

Economist Frederic Hayek's admonishment of your profession (in his 1974 Nobel address) was, sadly, prophetic: 

the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.

Will you not confess that without the extreme monetary accommodation (on behalf of Washington, Wall Street, Main Street and their egos) of your predecessors (Alan Greenspan's Fed), the real estate/mortgage bubble could not have materialized? Was it not "brought about by policies which the majority of economists recommended"? Are you not, at this stage, devouring the hair of the mammoth that crushed you?

Sincerely,
Martin L. Mazorra

The illogic of the minimum wage...

Every now and again a reader will share with me how one of my essays, or series of essays, has helped clear up a particular misconception he or she had held for years---often having to do with international trade. Otherwise, the feedback I receive either comes in rousing sympathy or damning condemnation. While like-minded folks seem to appreciate articles with titles featuring adjectives such as clueless and idiotic, and phrases like heads up their a**es, readers who are not predisposed to what I believe to be a free-market way of thinking (they, btw, particularly when it comes to trade, hail from both sides of the political fence), or lack appreciation for the occasional sarcasm, can find such articles offensive.

Now of course those who are not only not predisposed to free-market thinking, but rather are committed to what they like to call "progressivism" wouldn't drink this Kool Aid (be it spiked with sarcasm or utmost respect) if their lives depended on it. But then there's the tweener, the uncommitted, if you will. The individual who goes about his business, who makes his way in the world without strong political bias, without giving much concern to the goings on in Washington. Who either resigns to a lack of understanding (I hear that often), or is the ultimate cynic when it comes to all things political, or, worst of all, tends to accept the predominant message proffered by the media. At first blush, for example, it sort of makes sense that if Washington sets a higher minimum wage, more people---as the President suggests---will have more money to spend, bringing greater revenues to our businesses and thus growing the economy. But at second blush, it sort of makes sense that if they raise the minimum wage (the cost of labor), directly-exposed businesses will suffer declining profits, and, therefore---as directly-exposed business owners suggest---will cut their employees' hours and/or their employees themselves. Funny how some execs of some very large (politically influential) companies that don't pay minimum wage are proponents of raising it. Do they presume that they'll somehow stand to gain at the expense of minimum wage-paying businesses? Could it be that, in their naïveté, they believe they'll see more business as some folks see higher paychecks, or more business from an endeared ("hey, Costco lobbied to raise my paycheck so I'm shopping there"), yet uninformed, consumer, or less competition as smaller companies suffer under the weight of higher labor costs? Could it be that the push for raising the minimum wage is all about vote-garnering ("hey, he voted to raise my paycheck so I'm voting for him") and crony capitalism?

So much of what passes the media's muster as good economics at the hands of politicians, or their appointees, or, alas, their crony economists, when exposed to the light of everyday commonsense is easily debunked. The ambitious goal of this blog (in addition to making sense of the financial markets), and my new book (this isn't the shameless plug, that's coming soon :)), is to reach the uncommitted and bring them to a free-market way of thinking.

For more on the illogic of the minimum wage, here's an excellent piece by Russ Roberts.

Market Commentary (audio)

Click here for today's commentary...

Why You Eat Bugs and Own Stocks...

So I heard somewhere that it's been over 500 days since the U.S. stock market has experienced a 10% correction, and that they (10% corrections) have occurred, on average, once per year. I heard last week, then repeated on television, that 5% corrections have occurred, on average, 3 times per year. Although yesterday I heard that they (5% corrections) have occurred, on average, 5 times per year (oops!). Perhaps I should do my own study instead of relying on what I hear. I mean me knowing what the overall market has done in the past is essential to the investment recommendations I offer in the now, right? Uh, well, "essential"? Uh, no.

I used to think that the stock market indeed "corrects" 10+% once each year. Why, again, because I heard it somewhere (and, yeah, that seems about right based on my 29 year experience in the investment business). But when I stop and think about it, I think what an absurd statement! The fact that fluctuations in the stock market---the auction where millions of people (for their own purposes) buy and sell thousands of companies---are utterly unpredictable makes a statement that it in fact does some particular thing (as opposed to having averaged some particular thing) once per annum utter nonsense. So no! Dividing the total number of stock market years by the number of say 10% corrections to determine an average is about as useful as knowing that the average chocolate bar has eight insect legs in it (Google it). That little fact (or factoid) in no way means that the Snickers in your cupboard camouflages eight cricket appendages: it may have none at all, it may have come in a case of 50 bars with one containing 400 legs. Yours could be one of the leg-free 49, or it could be the one with the 400 legs, you'll never know (that little extra crunch could be a sliver off a peanut or a you-know-what). Or perhaps going forward no bug leg will ever make it into another chocolate bar. In any event, as long as you don't pay too close attention, as long as you don't drive yourself insane by taking a microscope to every bump in your candy bar in an attempt to avoid the occasional added protein, and accept that over your lifetime, you---and every other candy bar-eater on Earth---will ingest a few insect legs, you'll do just fine. You get the market analogy, right?

I know, you want more on stocks. You're a little nervous, being here at Dow 14,600, and I do understand. But that's like forgetting why you love candy bars and stressing over bug legs. You own stocks for literally hundreds of reasons. You own stocks because you own cars, you buy gas, you own cell phones, you own computers, you wear tennis shoes, you travel, you golf, you surf the web, you eat, you read, you sleep on a bed, you live under a roof, you use soap, you get headaches (then take a pill), you bank, you buy insurance, you go to the movies, you watch TV, you drink coffee, you on and on and on and on, and you want to own some of the companies (in amounts consistent with your objectives and risk tolerance) that you and the rest of us humans will be buying stuff from for the rest of your life. And you understand that your portfolio will ingest, and digest, a few unpredictable bear markets along the way.

 What I want to know is what happens to the rest of the bug?

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Concerned scientists probably should stick to their specialties...

Below is my comment to Don Boudreaux regarding his letter-to-the-editor of the Wall Street Journal. Please read first the brief article, then Don’s brief letter. As Don states, “it’s impossible in one letter-to-the-editor to do more than scratch the surface of the mountain of errors in Mr. Friedman’s reasoning.”

So, the Union of Concerned Scientists, or one of its members, finds economic justification for politicians subsidizing their pet projects by extracting resources (subsidies = taxpayer money) from those who literally stand to lose should they miscalculate---who know their investors will look elsewhere should their enterprises not yield substantial profits (as opposed to substantial political gains)---oh my! 

Comparing simply the survival rate of venture capital-funded firms with government subsidized firms is like comparing two groups of organisms: one existing in nature, left to brave the elements (thus, the survivors growing stronger with each successive challenge to their existence), to a group that exists in a lab receiving a steady flow of synthetic nutrients. No doubt, over time, the mortality rate would be higher for the organisms exposed to the elements. But imagine what would happen should the lab-raised organisms be released into nature. No doubt the study would abruptly turn on its head.

"The curious task of economics is to illustrate to men how little they really know about what they imagine they can design." Friedrich August von Hayek