Sunday, June 30, 2013

Add one to Krugman's "Always Wrong Club"

Paul Krugman cleverly dubbed the likes of John Taylor, Niall Ferguson and 21 other economists who warned, back in 2010, of potential dire consequences resulting from quantitative easing, the "Always Wrong Club" (the title of his yesterday's blogpost). Well, looks like the club needs to induct one more member, Krugman himself.

Here he is sharing his wisdom on the bond market to New York Times readers back on May 9th:
 Why, then, all the talk of a bond bubble? Partly it reflects the correct observation that interest rates are very low by historical standards. What you need to bear in mind, however, is that the economy is also in especially terrible shape by historical standards — once-in-three-generations terrible. The usual rules about what constitutes a reasonable level of interest rates don’t apply.

There’s also, one has to say, an element of wishful thinking here. For whatever reason, many people in the financial industry have developed a deep hatred for Ben Bernanke, the Fed chairman, and everything he does; they want his easy-money policies ended, and they also want to see those policies fail in some spectacular fashion. As it turns out, however, dislike for bearded Princeton professors is not a good basis for investment strategy.

And one should never forget the example of Japan, where bets against government bonds — justified by more or less the same arguments currently made to justify claims of a U.S. bond bubble — ended in grief so often that the whole trade came to be known as the “widow maker.” At this point, Japan’s debt is well over twice its G.D.P., its budget deficit remains large, and the interest rate on 10-year bonds is 0.6 percent. No, that’s not a misprint.

All in all, the case for significant bubbles in stocks or, especially, bonds is weak. And that conclusion matters for policy as well as investment.

You know, I happen to be in the financial industry and I promise you, I hold no hatred whatsoever for Ben Bernanke. Not even close! I'm sure he believes he's doing the right things; the fact that I disagree in no way suggests that I hate the man. And, please, make no mistake---while there are no doubt a few frustrated shorts out there---the last thing in the world "many people in the financial industry" want is Bernanke's policies to "fail in some spectacular fashion". Talk about cutting off your nose to spite your face!

As for investment strategies and the proclamations of bearded Princeton professors, well, let's see; Bernanke made his "Great Moderation" speech (a promise of economic smoothing attributed largely to sound monetary policy) in February 2004, just shy of four years before the onset of the worst recession since the Great Depression. OOPS! As for the bearded Princeton professor Krugman of May 9th, he would have his readers give nary a thought to a selloff in the bond market. OOPS!

And here's Krugman today suggesting that the other bearded Princeton professor "grossly misunderstood" the nature of the relationship between his statements and market expectations. Yet (big surprise) nowhere will he admit that, per his May 9 article, he grossly misunderstands markets in general:
Bond prices have plunged, and the Fed’s attempts to inform markets that they’ve got it all wrong have only modestly mitigated the impact.

What went wrong? The Fed grossly misunderstood the nature of the relationship between its statements and market expectations. It believed that the market was listening closely to the details of what it said. In fact, the market doesn’t — and probably shouldn’t. Instead, it listens to the tone of Fed statements, and also Fed actions; it’s more a matter of character judgment than mathematics. And what the Fed conveyed with the tapering talk was a sense that its heart really isn’t in this stimulus thing.

Bottom line folks; there are a few things in life that you just don't do. Such as:

Pee into the wind.
Lick a frozen lamp post.
Spit straight up.
Eat prunes when you're hungry.
Stand between a dog and a fire hydrant.
Take investment advice from bearded Princeton professors.

Saturday, June 29, 2013

The Great Distortion...

"To me Ben Bernanke is a great American hero", said once treasury secretary/Bernanke abettor Hank Paulson last week in a CNBC television interview. Like Superman saving the Earth from a rogue asteroid, the mild-mannered leader of the U.S. Central Bank turned man-of-steel in the eleventh hour and rescued us from ..... uh ..... what? The greatest recession since the Great Depression? Nope! That's precisely what occurred. Yet, according to Paulson, our greatest-recession-since-the-Great-Depression-experience was some super-human (or humane) monetary policy achievement. Bernanke, he proclaimed, saved us from the Next Great Depression. I strongly suspect that had we experienced the Next Great Depression, Paulson would herald Bernanke as the great American hero who rescued us from a Depression Greater than the Next Great Depression. Truly, there's no trough that can't be buoyed by a well-articulated counterfactual.

Okay, let's be fair, the greatest recession since the Great Depression indeed bottomed amid mammoth monetary stimulus, as did the stock market (after the major averages plunged some 50%). So did Bernanke save us from, say, a deeper bottom and, say, a 60% plunge in stocks? 70% maybe? Hmm.... I wonder what would've happened without the mammoth stimulus? Surely the economy would've bottomed, but sooner? Later? Deeper? As deeply? Surely the stock market would have bottomed as well, but sooner? Later? Deeper? As deeply? We can counterfactual till the cows come home but we'll never know the dates nor the depths. And we'll never know for sure whether central planners extinguished or exacerbated the Great Recession.

The Keynesian-hearted will credit the slightest growth to policy. The free-market-minded blame our historically-slight recovery on policy-induced uncertainty. What both sides should (but won't) agree on is that a great distortion in the pricing of bonds has resulted from Bernanke's (perceived) super-humane efforts. The question now is how will the markets ultimately correct this great distortion? And did last week offer up a sneak preview? Time will tell...

Thursday, June 27, 2013

Stress less...

Dang! We just can't seem to get a good correction going. There were a couple days last week and one this week when sellers took the major averages for what felt like a steep ride lower. But, alas, the shorts (they win when stocks lose value) got cut short. The market has experienced a three-day bounce taking it roughly halfway back to its prior peak. Bummer!

Of course I'm kidding---about the bummerness---right? Well, yeah, and, well, no... Honestly, as bad as it feels, there's never a better time than now for a correction. Consider again the message in that simple stock market conversation we had during that wonderful bear market of 2008:

Investor: My gosh, the Dow was down 250 points today! What happened?
Advisor: Stock prices fell.

Investor: Why?
Advisor: Because shareholders wanted to sell their stocks and no buyers would pay yesterday’s prices.

Investor: Why wouldn’t they pay yesterday’s prices?
Advisor: Because they didn’t see value in yesterday’s prices.

Investor: Why not?
Advisor: Perhaps they felt that yesterday’s prices were based on earnings assumptions that may not materialize this year, due to the slowing economy.

Investor: Will the economy continue to slow – will we have a recession?

Advisor: What do I look like, a fortune teller?

Investor: Uh..... so, my portfolio's been dropping almost daily since the start of the year. Why?
Advisor: Because stocks are falling.

Investor: But why are they falling?
Advisor: Because no one wants to pay last year’s prices.

Investor: I know, you told me that already. But yesterday the Dow was up over 100 points. Why?
Advisor: Because investors wanted to buy and shareholders weren’t willing to sell at day before yesterday’s prices.

Investor: Why wouldn’t they sell at day before yesterday’s prices?
Advisor: Because they saw more value in their stocks than the day before yesterday’s prices represented.

Investor: Why?
Advisor: Maybe they felt that the day before yesterday’s prices didn’t fully reflect the upside earnings potential of the underlying companies.

Investor: How could their attitudes change so much in one day?
Advisor: Now that’s a good question!

Investor: Okay, but what if the market keeps dropping?
Advisor: It will keep dropping, I guarantee it.

Investor: What do you mean?
Advisor: I mean it will always keep dropping and it will also keep going up. It’s inevitable.

Investor: How could it keep dropping and keep going up?
Advisor: What I mean is, the market will always have periods when it drops and periods when it goes up. That we know for sure.

Investor: Okay, I get that, but what about my portfolio?
Advisor: Your portfolio will keep dropping and it will keep going up. If you’re a long-term investor, you’re in luck. The market has always kept going up more than it has kept going down --- over the long-term.

Investor: But I don’t like the uncertainty?
Advisor: How much do you not like it? Are you losing sleep?

Investor: Yes.
Advisor: Then get out of stocks.

Investor: But I’ve been told they’re the best investment long-term?
Advisor: You’ve been told right, the best investment long-term – not always the best investment short-term. But is it worth losing sleep over?

Investor: But if I get out of stocks, what do I do with the money?
Advisor: Buy CDs and save every penny you can. You’ll likely have to save more to reach your long-term goals, but you’ll sleep much better.

Investor: I don’t think I’d sleep well only earning what CDs pay.
Advisor: Then learn how to sleep owning stocks.

Investor: How do I do that?
Advisor: Don’t think about your stocks. Hire a money manager and stick with your program.

Investor: When do you think the market will rise again?
Advisor: After it’s done falling.

Investor: Is there anything I can do in the meantime?
Advisor: Yes. Anything but think about the stock market.

Investor: Will the Fed lower interest rates?
Advisor: Of course.

Investor: When?
Advisor: When they see fit.

Investor: Will they lower interest rates at their next meeting?
Advisor: You’d have to ask them – but I’d guess yes.

Investor: Will that help the market?
Advisor: What do you mean? Help it go up, or help it go down? Both are important.

Investor: What do you mean?
Advisor: You can’t have one without the other. Down trends are essential for the long-term survival of the market. Kind of like taking a rest every now and then. The longer the market stays up without any sleep, the harder the sleep when it finally comes. The good news is the market has always woken up.

Investor: Can’t you be a little more helpful and just give me a forecast for 2008?
Advisor: Trust me, my forecast won't help you. And does it really matter?

Investor: What do you mean, of course it matters?
Advisor: What do you want the market to do – go up or go down?

Investor: Now there’s a brilliant question – I want it to go up, of course!
Advisor: Now or later?

Investor: Huh?
Advisor: Let’s forget about up for a moment and think about down. Since the market is for sure going to go down every now and then. Would you rather it go down now or later? Are you going to need the money you have in stocks now or later?

Investor: Later.
Advisor: Okay then, since we know the market will always go down, and since you’re not selling your stocks till later – better that the market go down now rather than later, don’t you think?

Investor: Okay I get it. But I still don't like it.
Advisor: I understand. Most people don't. But it's my hope that, with a healthier perspective, you'll stress less going forward.

Wednesday, June 26, 2013

Crazy! Well, crony... (white board lesson)

I just don't get it. The Chinese steal our intellectual property, hack into our military systems, counterfeit our goods and renege on our extradition treaty --- and 230 of our "lawmakers" want to put an end to the one thing they (well, in this specific case Japan) do that purely and directly benefits us. That is, they (allegedly) purposely---through cheapening their currency---make their goods as affordable as possible for you and me.

That (attempting to influence our trading partners' currency policies), as you'll see below, is crazy! Well, crony, actually.

Note: In the following, as in the above, I reference China, rather than Japan, simply because we've been barraged by politicians (think 2012 presidential race), industries, trade unions, etc. on this same issue with regard to China. Plus, it allows for my clever opening paragraph above :). Also, in my attempt at brevity, I mention only the relationship between politicians and exporters, while I should have included---alongside the exporters---local manufacturers, trade unions, etc...

Today's TV Segment (video)

This morning Zara and I discussed housing, the Fed and the market.

Click here to view...

Saturday, June 22, 2013

The two F's - Or - An ever-growing force...

Clearly, the "experts" see two separate forces---the fundamentals and the Fed---presently driving the stock market. Some are entirely committed to one, some tell us it's both. I'll dispense for now with my too-many-moving-parts-to-know lecture and narrow today's commentary down to the two F's.

Few would deny that the Fed, by essentially killing the competition for stocks, has contributed to these record levels in equity prices. Thus, anyone who bought stocks solely owing to the can't-fight-the-Fed mantra, would---considering the recent taper-talk---be a seller. Hence, the sell off to the tune of 600 Dow points (so far). These are the folks whose portfolios live and die on the surface. Their investment decisions are driven by the winds (or whims) of policy. Easy or tight monetary policy, the raising or lowering of taxes, and the spending of governments inspire their actions. Life is a roller coaster for the Fed watcher.

The fundamentals-driven investor, on the other hand, searches beneath the surface. He looks beyond the end of the trading day, week, month and year. He's concerned with earnings, margins, balance sheets, management, macro trends, etc. If the fundamentals are strong he's a buyer, if not, he's not.

(Yes, I'm ignoring [for today] the technicians [the chart watchers]. Those who are guided by volume, heads and shoulders, moving averages, clusters, waves and bands. Not familiar with those terms? Good!)...

We could surmise that, given relatively strong (in my estimation) fundamentals, the present selloff will be limited to the extent it takes to kick the Fed watchers to the curb. Of course the $85 billion (per month) question is, will exiting QE negatively impact the fundamentals?

As for the rest of us, we're simply investors. We don't trade stocks---we own business. Businesses that create the goods and services that cater to 7 billion people---of whom 6 billion live in developing nations. We believe that, as the years unfold---debt, deficits and dumb-headed policies notwithstanding---we'll be forever amazed at how far we've come.

My point; the unwinding of QE will be telling, but only as it relates to the F's debate. Beyond the inevitable pricing distortions born of political intrusion onto the marketplace, beyond P/E ratios and profit margins, capitalism will remain an ever-growing (global) force to be reckoned with.

Wednesday, June 19, 2013

Don't even blink...

Today's market got you shook up? If yes, you need a little perspective. Here goes:

What're you doing tomorrow? This weekend? Next week? This summer? Next Year? The year after that? and after that? and after that?

What were you doing, say, 20 (could say 30, or 10) years ago? Where were you working? Where were you living? What were you driving? What did you do for fun?

What/where were people---in your current age group---working, living, driving, having fun twenty years ago? Would you rather be them then or you now?

Twenty years from now, do you suppose a (your age now)-year old will look back and wish he was you now, or him then?

If you get my drift, you're a rational optimist. If you don't, you can offer up chapter, verse, and all the statistics on how---miracles of technology notwithstanding---awful life is today versus two decades ago, and how present trends will ruin the future. All the while---inevitable corrections, bear markets, bubbles, burstings and recessions to come notwithstanding---the average man of the future will, come hell and high water, be living a more fascinating and fulfilling life than even we are today.

The Dow sank 200 points today because traders, with a twenty minute time horizon, are afraid the Fed will steal away their spiked punch bowl. Oh, and sorry, as I type stock index futures are selling off over (it seems) China's just released (weaker than expected) flash PMI (factory activity). So tomorrow could shake you up a bit as well. That is, unless you believe tomorrow holds the seeds of yet greater advancement of the human condition---notwithstanding all the political garbage blokes like me write about---in which case you won't even blink...

Bottom (stock market) line: If you're the rational optimist (great book btw), you gotta own at least of little bit (more if you're young, less if you're not young) of tomorrow.

Today's TV Segment (video)

Click here to view today's segment...

Market Commentary (audio)

Toward the end of this audio I reference "Paul" Samuelson, when I meant to say "Robert". The former was the author of what turned out to essentially be the Keynesian Text Book. The latter is, in my opinion, a more practical thinker.

Click here to continue...

"The wealth effect isn't what it used to be." Hallelujah!!

The Washington Post's Robert Samuelson, in his June 16th column, wrote:
The “wealth effect” isn’t what it used to be. For those who have forgotten, this refers to households’ tendency to spend some part of their increased real estate and stock market wealth and thereby boost the economy. During the boom years, Americans borrowed lavishly against rapidly appreciating home values. One Federal Reserve study estimated the extra cash at $700 billion annually from 2001 to 2005. Now psychology has changed. Careless optimism has given way to stubborn cautiousness. Wealth gains don’t translate into similar amounts of higher spending.

The gist of what follows is that, having experienced the Great Recession, folks are of the mind that "lavishly" spending their equity leads to, well, great recessions. And that awareness somehow presents a challenging backdrop for the economy, or at least for the Fed, going forward.

His final two paragraphs:
There has been a stunning shift in behavior, notes Zandi. In 2006, at the peak of the housing boom, almost 90 percent of homeowners who were refinancing mortgages increased the size of their loan, according to data from Freddie Mac; they were borrowing against higher housing values. In 2012, 83 percent of refinancing homeowners either didn’t change the mortgage amount or lowered it. They were striving to pay off debt.

So the wealth effect varies by time and circumstances. Now it is a casualty of the financial crisis and Great Recession. We have yet another example of risk aversion dominating the economy. People eager to borrow have faith in the future; people eager to repay debts worry about the future. We are prisoners of psychology, which can change but is hard to manipulate. That is the predicament for policy and politics.

Now think about it; leading up to the recession, folks were cashing in their equity and spending galore, and, somehow, the fact that they're acting in what in their 2013 view they deem responsibly presents a political predicament? Hmm... The consumer, for the moment, apparently understands what policymakers do not; that economic success comes from saving and spending wisely. The fact that real world experience makes for a consumer who is hard for sheltered academics to manipulate should be music to our ears!

Saturday, June 15, 2013

Craftiness into crapiness...

Here's an explanation of how stock market volatility can be caused by factors other than the factors you and I consider when buying stocks for the long-term. And yet another reason to never ever attempt to time the market:

The new Japanese prime minister has vowed to manipulate the yen into the cellar to promote an export-driven economic boom (somehow that's criminal when China allegedly does it, but a-okay when Japan and the U.S. do it). Believing he just might pull it off, let's say you---the ever-crafty trader---decide to exploit an "obvious" opportunity: So you borrow, say, a million yen from a Japanese bank, convert that to ten thousand U.S. dollars (I'm rounding) and buy an S&P 500 index fund.

Here's what you're BETTING on:

For starters, let's say the dividend on the index fund amounts to 2.0%, while the interest rate on the Japanese bank loan is 0.15%---you're thus making nice money right from the get-go. In fact---given that you're investing borrowed money (your cost is just the interest on the loan)---you're making an absolute killing!

And if the U.S. stock market advances while you're in this trade you could be making a killing of a killing.

Example: You hold the trade for a year, the S&P fund nets you a 10% return, your fund is now worth $11,000. You pay back the yen-denominated loan which, in U.S. dollars, amounts to $10,015. That's a cool $985 profit, piece a cake! A huge piece a cake!

Now the real kicker: This is where your craftiness comes in. Remember, the Japanese have vowed to devalue the yen, so let's pretend they succeed to the tune of 20% over the course of a year. Which means that it would no longer take 100 yen to make a dollar, it would take 120. Which means that you only need $8,333 to pay off your million yen loan. Which means there's an extra cool $1,667 added to your $985. Now we're talking an utterly monster rate of return.

Now the BIG BUT! But, if, as has been the case of late, the yen, for whatever reasons (rising interest rates perhaps), defies the central planners and actually appreciates against the U.S. dollar, your craftiness soon turns into utter crapiness. You don't make a killing, you get killed.

Example: You're in the above-referenced trade, the yen spikes, say, 20% against the dollar (to 80/dollar). It now takes $12,500, plus the pittance in interest, to pay off the million yen loan. But you only have $10,000 (or so you thought) in your index fund, which means you're out a (relative to the size of your scheme) big chunk of money. Oh, but it's much worse than you thought; you, alas, weren't the only big-betting-bloke out there. Carry trades are the addiction of hedge fund geniuses, and, I assure you, they carried out that scheme to the tune of billions. And they're much quicker, and much more resourceful, than you. They stormed the gates (out of the dollar [denominated stocks] and back to the yen) when it gained only 5%, which of course exacerbated the rise in the yen, and---UH OH!---a decline in U.S. stocks. Now you're really screwed; your $10,000 is worth $8,000 and you owe $12,500, and you're not Long Term Capital Management and there's no Alan Greenspan to (despicably) come bail you out (which is a whole other discussion on moral hazard): Read Don't Worry My Child, I'll Buy You a New One...

Thursday, June 13, 2013

Dancing under a cloudless sky - Or - Gladys's QB - Or - Old habits die hard...

Being a committed rain dancer (rain dances always worked because the natives never stopped dancing till it started raining), I maintain that the Fed's buying up of $85 billion a month of treasury notes and mortgage-backed securities can't be a good thing. And I am increasingly in the minority.

Clearly, to date, the inflation hawks (the "experts" who promised that an expanding Fed balance sheet means ever-growing inflation), had it wrong (operative words being "to date"). The thing about inflation being a monetary phenomenon, a la M. Friedman, is that the money has to be doing something: As I stated in Little Chasing Going On, all that new money continues to do nothing in bank excess reserve accounts.

We can speculate on what the Fed governors are thinking: how it appears as though they're not at all interested in seeing those trillions make their way into the economy---not while they're paying the banks interest on those excess reserves---but that's not my message for today. Today I'm going to take a shot at those who, on one hand, shout for free-markets while, on the other, lobby for more QE. That---to name just two---would be the likes of CNBC's Larry Kudlow and The American Enterprise Institute's James Pethokoukis (I like them both btw), who apparently view the White House-appointed Ben Bernanke's intervention into the marketplace vastly different than they do that of his (re)appointer.

So why fret when free-marketers, like the aforementioned gents, support this Fed intervention? I mean how does the simple exchanging of cash (that'll do nothing in bank excess reserve accounts) for bonds (that [presumably] would've done nothing on bank balance sheets) impose on the "free market"? Well, for starters, we're talking about an "investor" (the Fed) buying up the supply of an asset with no personal profit motive. And while forcing up the price (and down the yield) of bonds, the Fed is forcing those who normally would have invested in said bonds (like retired folks) to look elsewhere for yield (which, by itself, is a QE objective). And, let me be clear, "elsewhere" can be a very risky place.

I'd like to remind those self-proclaimed free-market types that there's a reason we call the bond market the bond "market". That's right, "market"; the place where buyers and sellers come to transact. Where, when we're talking bonds, those seeking capital compete on terms and their credit ratings for the investment business of those seeking a (generally safe) rate of return---and, as well, where the holders of existing bonds sell to willing buyers. When the government (yeah, let's here call the Fed "government"), spending newly "printed", or other people's, money (not being the least bit concerned with return) enters the "market"; whether it be the market for mid-western grown beef, corn, solar power, residential real estate or bonds, pricing---as I suggest above---becomes profoundly, and dangerously, distorted.

The free-market/small-government/big-QE advocates' most glaring contradiction is their railing against the seemingly unbridled growth of government while pushing for yet more QE. Do they not understand how the Fed, by scooping up trillions in treasury notes, and thereby suppressing interest rates, is directly facilitating our policymakers' thriftlessness? With rates this low, why the hell not borrow out the wazoo? My goodness!! Can they not foresee what will happen (as I'll explain below) when God knows how many trillions in debt begins to rollover amid future budget deficits and inevitably higher interest rates? Do they not understand that bigger government begets bigger government---that a growing public sector begets a shrinking private sector?

You gotta love how Bernanke calms the market by proclaiming that they'll unwind their titanic balance sheet without sparking the mother of all bond sell-offs. He says they can choose to simply allow those notes to roll off at maturity. Well, now, let's think about that: Let's say that a hundred billion in treasury notes is maturing, say, tomorrow. That means the Treasury must pony up a hundred billion dollars. Of course it ain't got a hundred billion dollars, so it must, yes, borrow to pay back what it borrowed. Do you think for a microsecond that the Fed (today's Fed anyway), after facilitating the borrowing of trillions at crazy-low interest rates, is going to subject the Treasury to the real world, and, consequently, the taxpayer to higher taxes? Not on your life their careers! They'll subject us to ever-higher inflation instead.

Ever-higher inflation? But the last few years have proven, a la Kudlow, that QE doesn't equate to rising inflation, so am I not thus dancing under a cloudless sky? Well, not ultimately. You see, in my never-ending QE scenario the Fed continues to facilitate utterly wasteful government spending (the notion that government spending [largely] equals waste is something virtually all free-market types agree on), which means that even if banks remain willing to buy from the treasury then sell to the Fed for newly "printed" dollars (that remain idle in excess reserve accounts), resources---through government spending wasting---are declining faster than the money supply: That's inflation.

Here's the analogy I used in Leaving Liberty? (forgive the shameless plug):
If you and five others are stranded on a desert island and you have a granola bar for sale, what’s it worth? If your famished fellow castaways have one dollar among them, it’s worth a dollar. If they have ten, it’s worth ten. Now, you tell me, when we print trillions, what ultimately happens to the prices of gas and granola? As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” But what if the castaways have ten dollars and you happen to have two granola bars? Well then, they’re worth five each. Then, if a chimp steals and eats one, the remaining one, experiencing 100 percent inflation, is worth ten. Now wouldn’t that be a supply disruption, as opposed to a monetary phenomenon? Yes, that would be a supply disruption, and a monetary phenomenon. In that the supply of money did indeed increase—on a per-unit basis.

Gladys's QB

Gladys, my assistant, stepped into my office yesterday morning and asked how I control my sugar intake. I said "what's up?", she said "my doctor says I have to cut down on sugar, but I don't put sugar on anything!" So I pulled up a website featuring the glycemic index and explained how certain foods, once in the body, will spike a person's blood sugar. Gladys was none too happy to discover that she needed to give up, among other things, bananas (for a moment I thought she was going to cry). Now Gladys is the picture of 65 year-old health. In fact clients are forever shocked to find out she's medicare eligible. So, from the outside, there's absolutely no evidence that her QB (quantity of bananas) is doing her any harm whatsoever. And, besides, she loves them and justifies extending QB because she thinks she needs more potassium. My advice was to stop the QB cold turkey, find a healthier potassium source, suffer through her cravings, and get her body back to its normal insulin production.

(Note: I just asked Gladys for permission to include the above and all she could talk about was how much she loves bananas. She was, again, on the verge of tears.)

My advice to the Fed is to stop QE cold turkey, allow the economy to suffer withdrawals and adjust accordingly (which it will), and find its way to healthy free-market productivity. Yes, I know, the distinguished Kudlows and Pethokoukises would tell me I'm crazy; that the markets would freak and we'd be right back in recession. And they could very well be correct. But I say, whatever it takes, and the sooner the better! We do not want to be sitting here years hence with a trashed dollar and a huge deficit, while bonds are maturing left and right. But don't hold your breath, for---as Gladys will attest---old habits are very hard to break.

"Free-market capitalism is the best path to prosperity" Lawrence Kudlow

Monday, June 10, 2013

I like dem earnings...

During a portfolio review meeting this morning, my client told of a financial program he recently watched that featured a concerned analyst describing how the quality of corporate earnings are currently suspect --- given that they have largely been achieved through cost-cutting. In the analyst's view, companies are just doing business down the same old channels, while hoarding huge cash positions, and that doesn't bode well for the stock market going forward.

Now let me ask you, at what point would you rather commit your hard-earned money to stocks; when companies are in the throes of expansion, allocating capital, adding to labor, reaching into other markets, etc., or at a point where they've survived the worst recession since the Great Depression, purged their excesses, paid down their debt and have, consequently, experienced impressive growth in their margins --- that is, when they're cash-rich and poised to intelligently exploit future opportunities? In other words, would you prefer to enter during an expansion, not knowing at what stage it's in, or before one gets started (one, that is, greater than the sub-2% rate we're currently experiencing)?

Personally, I'd choose the latter, which, I caution, is not to suggest that I believe the next great expansion---or, for that matter, the next great contraction---awaits around the next calendar quarter. I make no predictions. My point is simply that, while I only advocate long-term thinking when it comes to stocks, I like what I'm presently hearing with regard to prudence among CEOs. However, I don't like what I'm presently seeing with regard to imprudence among policymakers, which---healthy balance sheets notwithstanding---could do a real number on stock prices.

Stay tuned...

Saturday, June 8, 2013

Let's not waste our time on the impossible...

Fareed Zakaria closes last Wednesday's column titled China is not the World's Other Superpower with the following:
The United States should seek good and deep relations with China. They would mean a more stable, prosperous and peaceful world. Further integrating China into an open global system would help maintain that system and the open world economy that rests on it. But this can happen only if China recognizes and respects that system and operates from the perspective of a global power and not that of a “narrow-minded” state seeking only to maximize its interests.

Yeah, okay, but to suggest that China should not act solely in its self interest is not only unrealistic, it's impossible. Every governing body, as does every individual, acts in its own self interest. It's all about what "it" believes its self interest to be. As our "leaders", for example, impose their values onto other nations---while they profess they're acting in the interest of humanity---they are indeed acting in what they believe to be our their self interest: There are many pockets remaining in the world that are utterly rife with all manner of human rights violations, but, as you've noticed, our "leaders" are very selective in terms of at whom they direct their influence.

Rather than encourage the impossible, we would be far better served by leading by example. And the very best way---counterintuitive as it may seem---would be to adopt an entirely unilateral free trade policy. That is, tell the world that we welcome into our market absolutely anything and everything it can produce --- no restrictions whatsoever. And if nations such as China wish to maintain barriers between our products and their citizens---if they want to limit their people's access to the world market---that's entirely their business.

Sound crazy? Now think about it; a country cannot engage with such a healthy-thinking trading partner without, to a great degree, emulating it. You see, we buy with U.S. dollars, which are, in the end, claims against U.S. goods, services and assets. When, for example, the Chinese exchange stuff they make for U.S. dollars, they must ultimately buy from, or invest in, the U.S --- or they'll buy from, or invest in, another country whose citizens desire to buy from, or invest in, the U.S. All the while the American economy benefits greatly: As we buy the stuff we desire at world prices, we are left with greater resources with which to expand (and invent) areas where we enjoy a comparative advantage. The fact that the rest of the world yet so thirsts for U.S. dollars tells us that such areas presently exist. To keep it so, we must adamantly resist any policies that would limit our access to world markets. Same goes for policies that would hinder our producers capacity for production: I.e., when we legislate greater costs onto U.S. industry, make no mistake, we jeopardize the economic future (less production, less global demand for the U.S. dollar, higher prices of goods and services, fewer job opportunities) of the very people voters the crafters of those policies pretend to help.

Friday, June 7, 2013

Q and A on today's stock market...

Our friends Q (the queriful consumer) and A (the adviser) are back. Today they're talking stocks:

Q: What a crazy week for the stock market!
A: Yep

Q: What does the 170,000 non-farm jobs number tell us?
A: That there were 170,000 non-farm jobs added last month.

Q: I mean what does that say about the stock market? Does today's 200 point rally make sense?
A: Sure, why not?

Q: Well, it seems all I'm hearing is that the market is being held up by Fed intervention.
A: Perhaps it is.

Q: So you agree?
A: No.

Q: But you said "perhaps it is".
A: That's right. Perhaps it is possible that every buyer who has bought stocks lately did so based on what the Fed's up to, it's just highly improbable.

Q: So you'll continue to hold stocks when the Fed pulls back?
A: Of course.

Q: But what if the experts are right and stocks sell off?
A: That would be beautiful!

Q: Huh, why?
A: Because I've no reason to sell, and I'll be rebalancing soon.

Q: So what would make you sell?
A: Oh, maybe I've done really well in, say, consumer staples stocks and want to take some profit and buy, say, energy stocks.

Q: But what would make you sell and stay out of stocks altogether?
A: Well, I'd sell some, but not all, to rebalance back to my target.

Q: So you're telling me there's nothing that would inspire you to get entirely out of stocks.
A: Well, maybe if the price to earnings ratio for the S&P 500 Index gets to 1999 levels once again, then I might add a little defense and put in some stop loss orders, or I could buy put options. But I wouldn't outright sell even based on that metric.

Q: But I watch a lot of CNBC, and the experts are always talking about whether to buy or sell.
A: Yeah, I watch that too. Most of the time with the sound off until someone comes on who I think might say something I can write about. As for the prognosticators, well, I have no use for them. They can't help me.

Q: Can't help you? You think you're smarter than they are?
A: Um, well, depends on how you measure "smart". I'll bet 99% of them are far better at math than I am. I'll bet the vast majority are more versed in technical stock patterns than I am. And that they're more up to speed on Apple's EBITDA. So if all that equals smarts, they're way smarter than me.

But, thank goodness for my clients, there is one area where I hold a distinct advantage, humility. I know enough to know that the economy and the markets are too complex for any human, or machine---as history has proven over and over and over again---to accurately predict with any semblance of consistency whatsoever.

Q: So what do you base your investment recommendations on?
A: A number of factors; first and foremost the client's age, objectives and personality. My experience with regard to the various sectors of the economy and how to diversify within, and rotate among, those sectors is important as well --- along with my understanding of fixed income investments and the associated interest rate and credit risk. And of course my comfort with allocating to non-U.S. securities is critical to our asset allocation process as well.

But when it comes to predicting the near-term direction of the markets, I'll have none of it. Our clients are all long-term investors.

Q: So you think, long-term, the market's going up.
A: I think, long-term, some publicly traded companies will profitably produce goods and services, and I want to receive their dividends. Some will trade at higher stock prices over time, some won't. I'll stay very diversified and expect to own more of the former.

And that's pretty much the long and the short of it.

Q: You sure make it a lot less complicated than they do on CNBC.
A: That's the nicest thing you've ever said to me!

Wednesday, June 5, 2013

Unwavering ignorance...

Well, shoot! Harold Meyerson didn't read my January e-letter --- as evidenced by yesterday's column he titled Go Easy on Free Trade. While trade is indeed my favorite topic, I couldn't address Meyerson's unwavering ignorance nearly as well as does Don Boudreaux. Please take a minute and read Don's letter to the Washington Post.

Here's a snippet:
Let’s make a deal. Government will agree to protect only those American workers and small-business owners who in return agree to stop buying foreign-made products.

For example, American steel workers will get protection from steel imports only if they, in exchange, agree to stop buying the likes of Toyota cars, Samsung televisions, Ryobi hand tools, Ikea furniture, Shell gasoline, Amstel beer, vacations to Cancun, and musical recordings by foreign artists such as the Beatles, Elton John, and k.d. Lang. They must also promise to stop buying the likes of bananas, cinnamon, and vanilla and, indeed, even American-made food items if these are shipped to their favorite restaurants and supermarkets in foreign-made trucks – or in trucks equipped with tires made by Michelin, Bridgestone, or some other job-destroying foreign company. These workers would be permitted to drink only Hawaiian coffee; they must quit drinking the Colombian, Guatemalan, and Ethiopian coffees that they’ve become accustomed to drink. Oh, and absolutely no diamond jewelry, as those gems come from Africa. (Sorry, ladies.)


Market Commentary (audio)

Click here for today's commentary...

Tuesday, June 4, 2013

It'll take DNA - And (BTW) - Don't hold your breath on tax reform...

If you're a hardcore "progressive", you're with Washington Post's Dana Milbank who, in his column yesterday, chastised Republicans for accusing first---with regard to the IRS scandal---and asking questions later. 

If you're a hardcore "conservative", you're with the Wall Street Journal's Kimberley Strassel who, in her column yesterday, proves (in her mind) that the IRS scandal started at the top: being that President Obama has, for years, publicly accused conservative political groups of engaging in nefarious activities. Thus, if not directly calling the IRS hotline, he was calling all departments from the podium.

If you're neither---or either, but strive for intellectual honesty---perhaps you agree with me that the IRS's misdeeds could have been inspired simply by the survival instincts of those who survive by the grace of big government. 

Sure, Milbank makes a legitimate point. But he's way premature in his condemnation of the Republican's tactics. If they indeed prove that the President directed the assault on conservative groups---although nothing short of eye witnesses, pics, videos and DNA would convince him---Milbank will look the fool.

Strassel is by far the craftier of the two. Whether or not the IRS caught the alleged wink-wink from the President, her point sticks. And conservatives can go there if their leaders can't produce the DNA.

Here's another thought: what if the ultimate culprit here is the tax code---that 73,954-page cornucopia of opportunities for politicians and special interests---itself? Imagine turning the whole thing upside down --- no deductions, credits or loopholes, and no tax-exempt organizations whatsoever. Imagine cutting it by 73,953 pages to one spelling out---in language a first grader could interpret---a 20% flat tax. Of course there'd be no IRS as we know it today, and there'd be no tax-gimmics to be exploited by politicians and special interests. Which means, alas, there'll be no major simplifying of the tax code.

Market Commentary (audio)

Click here for today's commentary...

Radio Interview

I had the honor this morning of being a guest on WTAD's Morning Meeting with Bryan Nichols and Sean Secrease. You can click here for their home page and scroll down to this morning's link, or click here to go directly to the podcast (it's the first 20 minutes).

Where I make the statement that we're the best house in an ugly neighborhood, I was referring to our currency --- as evidenced by how the world yet rushes to the dollar when things get scary. Sean makes the point that when you look at simply doing business we're not even close. And I agree, partly because --- as I stated re; Cisco --- that's what CEO's are telling us, and partly because other countries are where 96% of the world's customers live.

In Leaving Liberty? I close with the notion that this country's entrepreneurial foundation will withstand the political process. Whether we wise up soon, or (in the short-run) another economic miracle saves our bacon, or we experience Europe-style pain, I stick by that conclusion: that, when the dust settles, the scale tilts in favor of free-market capitalism. In a more pronounced fashion, ironically, if we go the pain route...

Saturday, June 1, 2013

Crossing borders is a beautiful thing...

Worried about the dollar? Worried about jobs? Worried about national security? Well then, you should feel very very good about a Chinese company buying Smithfield foods. Counterintuitive? Perhaps for some, but I'm hoping not so for my regular readers.

Here's a little refresher course:

The dollar: China goes to great lengths to compete for our business---making us wealthier in the process (we enjoy more of life's amenities as the world competes on price for our business)---because they love U.S. dollars. They love U.S. dollars because we apparently yet produce goods (like hogs) and services they deem valuable. The Smithfield Foods acquisition proves it. Thank goodness we have more than just federal debt to offer the world.

Jobs: Trust me, Chinese management and workers are not about to descend upon tiny Smithfield, Virginia. Shaunghui bought Smithfield Foods to exploit, and export (or import), its business model (along with its hogs). But we're not talking merely the preservation of Smithfield jobs, we're talking $4.7 billion U.S. dollars (a few of them you sent to China to buy the monitor, tablet, or cell phone you're staring at right now*) flowing back to the U.S. You think Smithfield's largest shareholders might be looking to grow other successful enterprises with their proceeds --- creating jobs in the process? Yyyyep!

*So the next time you cringe before buying an item made in China, remember all those U.S. jobs you helped create when Shaunghui bought Smithfield Foods.

Worried about national security? This one's the easiest: Nobody ever shoots their customer (or supplier). Or, as an intuitive individual (most often ascribed to Frederic Bastiat) once said:

"If goods don't cross borders, soldiers will."