Wednesday, July 31, 2013

Happy Birthday Milton Friedman...

I had planned to sit down this evening and write a little something in honor of the wonderful Milton Friedman on the 101st anniversary of his birth. But I just read last year's post and realized that, in terms of what this great man means to me, I couldn't express myself any better than I did then (save for adding Frederic Hayek and Don Boudreaux).

Today marks the 101st anniversary of the birth of one of modern history's truly great American citizens, Nobel Laureate Economist Milton Friedman (1912-2006). I believe I have quoted Dr. Friedman more than any other individual since I began blogging almost three years ago. And of all the personalities who have influenced my thinking, when it comes to economics, he is right up there with Frederic Hayek and, more recently, Don Boudreaux. He was indeed a most gifted communicator.

While he was a passionate champion of free markets, limited government and, most of all, personal liberty, I was always struck by the sincere respect he displayed for those who would challenge his ideology. Not that he wasn't direct when necessary, but, in spite of his utter command of every debate, he always expressed his views in gentlemanly fashion.

While there's much to be said about his wisdom, and his talents as an economist; his character, his style and his effectiveness as a communicator is what, to me, made him most unique among the "dismal scientists" of the 20th Century.

Here is Dr. Friedman, a true gentleman and scholar, helping Phil Donahue (who confused, as so many do today, capitalism with cronyism) understand the importance of the free enterprise system:

Yellin for Yellen...

A group of senators, the New York Times editorial board, Paul Krugman, Dean Baker, and lots of other folks who share a common bent are pounding their fists for Janet Yellen to succeed Ben Bernanke.

She’s Yale educated, professor emeritus at the University of California, Berkeley, was on the Fed board in the 1990s, was president of the Federal Reserve Bank of San Francisco from 2004 to 2010, and has been vice chairwoman ever since. But let’s not hold all that against her.

In fact, I think her tenure at the Fed has to be a huge positive: Having served under Greenspan (the architect of mammoth bailouts and the facilitator of the mother of all modern bubbles), then under Bernanke (the, well, the Greenspan on steroids), if anyone has witnessed how not to handle monetary policy it would be Ms. Yellen. Of course the aforementioned "experts" are betting on her living up to her rep as the doviest of doves (ultra easy money advocate). I'm betting that a woman with the intellect and tenacity that her resume displays---having firsthandedly experienced the past 20 years of monetary folly---possesses the courage to renounce the faulty theories she was reared on and put monetary policy on a legitimate track.

I bet I lose my bet...

Today's TV Segment (video)

This morning Jenny and I had a good discussion on the Fed and the market. Click here to view...

Tuesday, July 30, 2013

Voila! GDP (the number that is) is better than we thought...

Concerned about our anemic economic growth rate? How about our debt-to-GDP ratio? Don't sweat it too much, things are about to look a little bit better. Not that the economy is about to get better mind you, it's how we look at (or measure) it that's been adjusted. It's pretty slick actually: Research and distribution (R&D) expenses are, voilĂ !, no longer costs of doing business. From this week forward the GDP calculation will consider R&D to be investment---which is the "I" in the formula:

GDP = C (private consumption) + I (gross investment) + G (government spending) + X-I (exports minus imports).

And to sweeten the number just a bit more, the Bureau of Economic Analysis (BEA) is also adding unfunded pension liabilities and creative works (like creating a TV series) to the economy's bottom line.

All this takes into account what the BEA deems to be 21st Century components---although they're rerunning the numbers all the way back to 1929. Brent Moulton, the manager of national accounts for the BEA, says "we are essentially rewriting history". Beautiful!

So if you're California, the land of creative works and unfunded government pensions, you're about to look a whole lot better on paper. And if you happen to preside over the world's largest economy, post the Great Recession, you're happy---the new calculation will add a few basis points to your recovery. Nice timing!

Conspiracy? The right say "Hell Yes! They're manipulating the numbers to make themselves look good". The left say "No Way! They're just updating the numbers to reflect an evolving economy". Now if the tables were turned (if a Republican were president)---make no mistake---the right would justify it till the cows come home and the left would be screaming bloody murder.

So again, conspiracy? Well, would any politician---presented with intellectual cover---conspire to improve how the economy looks (presuming he's on the side that would benefit) in the absence of an improving economy? Of course he would! Does that undeniable truth, itself, make these revisions a conspiracy of the current administration? Nope. They monkey with the formula every few years. And while we might call the latest a gorilla (compared to prior revisions), the BEA says they "come from a 2008 international agreement that has already been implemented in nations including Canada and Australia."

Stay tuned: I have an idea for a GDP revision that, unlike the latest, would be truly meaningful going forward. I'll crunch a few numbers and get back to you shortly...

Thursday, July 25, 2013

What about those other fellow Americans?

Bet you didn't know that every time you fill your tank you're supporting the makers of big giant boats. But that's okay because you're supporting only American big giant boat makers and the Americans they employ.  There's this 93 year old law that requires any big giant boat that carries goods or commodities in U.S. waters be American made, owned and operated. How's that for patriotism protectionism!

Cool then, you say; we're buying the oil (for example) so it's only right that we have fellow Americans do the transporting. Okay fine, but what about those fellow American entrepreneurs (and the fellow Americans they would've employed) who'd love to capture your would've been discretionary income---and enrich your life with would've been more affordable (they frequent filling stations too) goods and services?

One estimate has you and I paying .30 cents extra per gallon due to a lack of transporting capacity resulting from the invisible, yet all too real, stranglehold Washington---in knowing support of its friends---maintains on our pocketbooks.

As politicians forever strive to convince you that some (perceived) economic injustice is the result of a failure of free-enterprise---or the conspiracy of the other party---know that the number of intrusions into the marketplace by government are too numerous to count, or fathom. The next time you hear a politician, or an economist, blame some pain on "market failure" know that what we're almost surely experiencing is the market's effort to correct some politically-induced distortion. As we allow, for example, the existence of a thirty-cent times billions upon billions of gallons distortion, know that we leave the market to compensate accordingly, subtly or otherwise...

Market Commentary (audio)

I'll be disconnected tomorrow, so just in case...

Click here for today's commentary...

Wednesday, July 24, 2013

A few market-timing/forecasting thoughts...

A friend of mine just got back from an investment committee meeting where he listened to a mutual fund wholesaler forecast low interest rates well into 2016. I attended a presentation recently by a government pension portfolio manager who all but predicted, among other things, a 9% stock market gain for the second half of the year. I read a Seeking Alpha article yesterday that deftly dispelled any notion that the present bull market is anywhere near long in the tooth. Oh, and my investment committee friend also commented on how the fund wholesaler's company was ranked number one by Barron's for its 10 year results (as a fund family).

Pardon my skepticism, but:

As for low interest rates into 2016: They (the people who pay the young man to address investment committees)---believing it'll be good for stocks their assets under management---so want rates to stay low into 2016. So much so that they see low single-digit economic growth, troubles in emerging markets and a walking-dead bond market for many years (well, at least 3) to come. All the bias confirming data they glom onto notwithstanding, making a 3 year interest rate prediction is a very dangerous game to play with other people's money.

As for a 9% gain for the second half of this year: Bless his heart, the pension portfolio manager is so hopeful, and inexperienced---and wanting to please his audience---that he was willing to parrot what he heard that hedge fund guy say the day before on Bloomberg. God help him if that hedge fund guy is wrong!

As for the Seeking Alpha article: The author makes great points, but at the end of the day he's long stocks and needs to be right.

As for the best fund group over the past 10 years: For this one I'd ask the gentleman; "So were you the highest ranked 10 years ago?" (That would be a no btw.) "Oh, so who was the best?"  (He wouldn't know---but let's say he did.) "Oh, and where did they rank for the past 10?" (Not near number one [I'm speculating from experience] btw.) "Oh, so I guess we better stay away from you guys then." My point: 10 year mutual fund track records are almost worthless. There's absolutely no reason to believe that the number one strategy for 10 years (could've been 3 or 4 phenomenal years which produced the best average over 10) will remain such going forward. The odds of a mere human fund manager possessing the insight, and humility (after having been the best for 10 years), to know when the old strategy's luck has run out---and what to do to remain number one going forward---are, well, you tell me.

Today's TV Segment (video)

This morning Zara and I discussed the curse of the individual investor, and gaining the right long-term perspective... Click here to view...

Monday, July 22, 2013

Mama knows best...

At some point, generally early in the rearing process, parent asks child, "what do you want to be when you grow up?" I recall wanting to be an oceanographer (I had absolutely no clue what that was)---I'm thinking it was a title offered up by my brother Dan who, after deciding he didn't want to be a choo choo train after all, declared his desire to become a marine biologist. My oldest, Nick, was going to be better than Michael Jordan. His little brother, Ryan, was going to be Bob the Builder (he even changed his name to Bob for several days when he was 4).

So why the nudging? Why do parents feel the need to impress the notion of work upon their kids at such impressionable ages? Of course the answer is love. Love for their kids (nothing is more gratifying than to see your child, for his own sake, succeed), and love for themselves (nothing is more grotesque than cleaning up after your 40 year old who never left the nest). We know that survival (by any ideal measure) requires work and prudence. We produce so that we may consume. We know that those who do not produce (or practice prudence) impose a cost onto those who do. We absolutely know this, therefore we pound it into our kids, right?

Well, your 16 year-old lands 30 hours a week bagging at the local grocer. That $960 a month, before taxes, is her ticket to freedom. She blows her first paycheck on a purse her best girlfriend was threatening to buy first. You cringe as she begins her binge. You're about to recite the lecture your mama gave you when something stops you. You've been reading Paul Krugman and trying to better understanding economics. He says; "your spending is my income, my spending is your income, and if we all try to slash spending at the same time the result is a depression." And the last thing you want is your darling daughter to suffer depression. So, since spending good, saving bad---according to a Nobel laureate economist---you zip it up.

Two years pass and your little girl, with her graduate's tassel dangling from the review mirror of the brand new Ford Focus you cosigned for, is on her way to work. In just two years she's gone from bagger to checker at twice the pay. Which is a good thing since her car payment, her cell phone, and the minimum payments on her Visa, Master Card, Macy's and Best Buy accounts leave barely enough to gas her car. You're thinking college, but you're stressing over the cost, and your daughter's thriftlessness.

You're guessing Mr. Krugman would have you bail her out, since, somehow, she got into this mess by no fault of her own. He might blame some unidentifiable market failure that didn't allow her income to keep pace with her spending. And you personally will be no worse off, since, uh, well, umm, what is it again? Oh yeah, "my spending is your income".

Seeing your daughter make a fiscal mess of herself, and thus sensing that your mama had it right after all, you're now rueing the day you started reading Krugman. But then, halfway through your hate letter to the New York Times, you stop typing and recall how you skimmed over the many columns where he stated that there's to be no legitimizing of any comparison of what is considered prudence on behalf of your family to that of your country: He states emphatically that it's "a really bad analogy". Funny thing is, he implies that families shouldn't manage their finances like a country (or I guess vice versa), and then blames the country's woes on the way families manage their finances (remember; "your spending is my income, my spending is your income, and if we all try to slash spending at the same time the result is a depression"). As much as you'd like to---as wonderful as the notion of spending our way to prosperity sounds --- you just don't get it. But then again, you don't have a PhD and a Nobel Prize.

So you chalk it up to experience, leave your daughter to work her way out of her mess (like your mama would you), and hope to God that the experiences of Greece, Italy, Spain, Portugal, Stockton, San Bernardino, Detroit, etc., don't mean Krugman is just flat wrong across the board. I can tell you this, your mama wouldn't have bought his nonsense for a second.

As for the future Michael Jordan, well, he's out of the house :) and working toward that dream. He's the starting shooting guard for a top-ranked city league team that plays every Monday night at the local continuation high school. In case that doesn't lead to a tryout for the Chicago Bulls, plan B is a degree in finance and one day running the family business. As for Bob the Builder, as an incoming high school junior he's still figuring it out (although he's decided that whatever he does it will not involve a yellow hard hat). At the moment it's game design. As long as in the not too distant future I'm sweating my butt off on a treadmill that occupies his old bedroom (and he loves what he does), I'm okay with that :).

"What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom." 

Adam Smith

Sunday, July 21, 2013

Bipartisan renunciation of fiscal discipline...

The work of economist John Maynard Keynes inspires both ridicule and respect. Ridicule, generally, from those who consider themselves "conservative", and respect, generally, from those who call themselves "progressive". As you may have gathered I am no fan (to say the least) of Keynesianism. And, frankly, I find closet Keynesians (those who tout free markets then lobby for intervention) to be a despicable bunch. Therefore, I must say that in this regard it's the (pardon me) "conservative" politician (and pundit) who irks me to no end. At least "progressive" politicians (and pundits)---save for the fact that they call themselves "progressive"---are, generally, true to their platform.

I know that many of you are committed Republicans. And while you may not appreciate this message, it's critical that you get it (although I suspect that many of you already do). At its core---when it comes to economics---there is very little that distinguishes your party from its opponent. In his book The Great Deformation (a fascinating exposé, although not entirely without [in my strong opinion] disputable assertions) David Stockman makes the point beautifully. Here he perfectly nails a fundamental problem with Keynesianism:
Indeed, suffocation of the free market in totally mobilized political struggle is the ultimate evil of the Keynesian predicate. It causes every tick of the unemployment rate and every tenth of the GDP report to trigger waves of political praise, blame, and maneuver. The resulting nonstop partisan sound bites about how “our” plans would make the outcomes better and how “their” policies have made them worse continuously reinforce the presumption in favor of more state action to bolster the economy.

And here he nails today's "conservative" politician:
The GOP renunciation of fiscal discipline is thus Keynesian, not fact based. In order to compete with the Democrats it has gone into the state-sponsored growth business. Republicans now effectively concede that prosperity cannot be left to the comings and goings of producers, consumers, and investors on the free market; it must be constantly dialed up through the machinery of the IRS. So Washington has become thoroughly bipartisan in its relentless pursuit of schemes for the state to fix the private economy—a modus operandi which guarantees the bankruptcy of the former and the failure of the latter.

In that last sentence I think Stockman is being a bit too generous on behalf of the politician and a bit too dire with regard to the future. I'd say it this way: "Washington has virtually forever been managed by actors in pursuit of schemes to fix elections by taking whatever measures they deem necessary to goose the private economy --- a modus operandi which risks bankruptcy of the former, although I'd never count out the latter."

The really big story...

I applaud the New York Times for uncovering a Goldman Sachs subsidiary ordering the shuffling of aluminum between warehouses to somehow afford itself higher storage fees---at the expense of the consumer. The report is short on specifics as to how it comes by the higher fees, but I don't doubt it for a second. I mean, the Goldman company wouldn't pay those men to move all that metal around if it didn't benefit itself in the process.

If only---with this momentum behind it---the Times would put its team to work on the really big story. It too involves aluminum (as well as many other items) and is even more seedy, and far more costly than one tenth of one cent per can of soda to the end consumer: The U.S. Government (with bipartisan support)---in a most disgusting display of cronyism---imposes import tariffs on low cost aluminum for the sole purpose of increasing the profits of select U.S. manufacturers at the expense of the U.S. consumer.

Goldman's problem is that it didn't sell its scheme to Washington. It didn't offer up any campaign support in return for some cockamamy story about how moving aluminum between warehouses preserves X number of jobs for forklift drivers, warehouse managers, Goldman staff, etc. They (Goldman and Washington) could've easily masked the cost to the consumer by touting the job producing benefits of this entirely unproductive exercise. Like the following malarkey reported in the March 8, 2012 issue of Business Week:
Nothing engenders bipartisan harmony like a bill that targets both China and American jobs. With President Barack Obama about to sign into law a measure that lets Washington impose duties on subsidized goods, the question isn’t whether China games the system by supporting key industries—it’s the impact those subsidies have on U.S. jobs.

The law will essentially uphold duties on imports of two dozen “undervalued” products from China and Vietnam, including tires, steel, aluminum, paper, and chemicals. While the $4.7 billion value of those imports is a fraction of the roughly $400 billion of goods the U.S. imported from China last year, the measures against them have apparently saved 80,000 U.S. jobs since 2007, according to proponents of the bill. As Senate Finance Committee Chairman Max Baucus said: “China doesn’t get a free pass to violate the rules at the expense of American jobs.” Frank Vargo of the National Association of Manufacturers, meanwhile, wrote that failing to impose such punitive measures would leave Americans “defenseless against rampant deep pocket Chinese.”

My, the bennies for the cronies (from Glass Magazine's October 31, 2011 edition):
Speaking on condition of anonymity, a representative from a U.S.-based aluminum extruder said the tariffs have already proven beneficial: "We saw the effects of the tariffs almost immediately. Chinese extrusion shipments were coming in at about 40 million pounds a month. When the tariffs took hold, they fell immediately to about 1-2 million pounds a month. Clearly, that achieved its goal. We can also see the effects in our order intake rates. For the first quarter after [the tariffs] had taken hold, orders were up and shipments were up. It was quite a spike."

"Overall, we believe that the tariffs imposed on aluminum imports will positively benefit Kawneer," Greg McKenna, chief product engineer, Kawneer North America, and Kevin MacDonald, director of procurement, Alcoa Building & Construction Systems, said in an email. "Recently, there have been several Chinese-based system companies that have been shipping basic stock length storefront and curtain wall systems into the U.S. The Commerce Department now is imposing a 137.5 percent subsidy rate on these imports, which will level the playing field with domestic producers. ... The tariffs will help the domestic extruders regain some of the market share that has been lost over recent years to China," they said.

"Early indicators are proving this was very effective and positive for our members, and those dumped aluminum profiles have pretty much disappeared," agreed American Architectural Manufacturers Association President and CEO Rich Walker, in an interview with Glass Magazine earlier this year.

Even, if by accident, for stainless steel manufacturers:
High aluminum costs are also behind the trend toward using stainless steel extrusions rather than aluminum in framed enclosures. Some shower enclosure specialists report they are considering a transition to stainless steel, marketing it as a more contemporary finish.

My, the costs for the rest of us:
"With Brite Dip materials no longer available from China, and not currently produced in any other country, we are forced to purchase domestically at 40 percent to 130 percent greater cost," says Ray Adams, president, Coastal Industries.

"The tariffs have forced manufacturers like us to rethink our manufacturing process. We may not be able to go to market with American-made products as we have in the past," he says. "Before the tariffs, we could mix imported and domestic metals, fabricate shower doors here in America and compete with imported items. With the tariffs on raw goods, we are all faced with having to look at producing doors overseas, tariff-free, in order to compete."

Costs for domestic aluminum shower door products remain high, glass companies report, as North American suppliers try to pass on material price increases. Aluminum prices rose sharply during the last half of 2010 and first part of 2011, increasing more than 50 percent from June 2010 to April 2011. At press time, the cash price for aluminum was on a downward trajectory, sitting at about 8.5 percent below last year, and about 21 percent below aluminum's peak in April.

"On the framed shower door end, the prices all went up," says Jeff Meyer, president, White Bear Glass. "In fact, the gap in price between a custom aluminum framed shower door and heavy frameless glass shower door is pretty much gone. The change in aluminum pricing radically closed that gap," he says. "We used to sell 50 percent framed and 50 percent frameless, but in the last year, that's gone to at least 80/20 towards frameless."

It's one thing, and an easy thing, to see (even [supposedly] count) the jobs that were saved by protecting U.S. producers forcing higher prices onto you and me. It's another thing, and a difficult thing, altogether to understand how those higher costs are distributed throughout the marketplace; hurting the prospects for employment in Lord knows how many industries (as we pay up for the tariffed item, or material, we spend less on other items and services [we save and invest less as well]). I assure you, all things considered, the ultimate cost of protectionism utterly dwarfs the benefits...

Saturday, July 20, 2013

Where true free-trade exists (and videos)

There is a place where true free-trade exists. Where individuals transact across borders as freely as they transact across a city street. We call this place the United States. The Constitution (Art. 1 Sec. 10) forbids protectionism between the states.

Interesting... So the founding fathers were concerned that political boundaries (lines seen only on maps) in the U.S. could somehow be used to erect barriers to trade; that politicians might collude with businesses (and trade unions) to limit their residents' freedom to enjoy the produce of other states. Thank God, with regard to interstate commerce, they were thinking!

"Trade deficits" abound within the U.S.: Alaskans eagerly import all the California fruit, nuts, technology and entertainment they can consume, while Californians have minuscule (by comparison) interest in the stuffs produced in Alaska---and nobody gives it a second thought.

Fascinating! Where the freedom to transact across borders is entirely unfettered no one makes a stink about trade imbalances. Why? Because we know intuitively that to engage such nonsense would (at best) benefit special interest groups at the expense of the everyone else.

So why then do we betray our intuition when it comes to international commerce? Why do we view exchanging the initial result of our productive efforts (U.S. dollars) for the product of (for example) a Chinese company at all differently than we do an Alaskan exchanging with a Californian? Well, "we" either desire protection for our particular industry or we are pawns of the colluders mentioned above.

Here, once again, is how that happens:

Thursday, July 18, 2013

Pretense of commitment to limited government...

Okay, so I was right, dang it! Although, predicting Bernanke's tone before Congress, that is, anticipating dovishness from the ultimate dove, does not a guru make.

As I watched just a bit of yesterday's Q and A, I thought to myself "I should've predicted the line of questioning coming from our distinguished lawmakers." Although, predicting the accolades from the left and the accusations from the right, that is, anticipating partisan BS from a bunch of partisan BSers, is the ultimate no brainer.

What I found most amusing was the manner in which the various actors addressed the good professor. Republican Jeb Hensarling looked down his nose at (and questioned) Bernanke in the most condescending fashion. Although, I must say, after just Googling his voting record, Hensarling---unlike a number of his colleagues on the right---indeed voted nay on the various Keynesian stimulus efforts imposed onto the taxpayer by the Obama administration. Although, he did vote yea on all the Keynesian stimulus efforts imposed onto the taxpayer by the previous (G.W. Bush) administration. As for the Democrats, they lauded Bernanke as the savior (from the next Great Depression) of the free world. Now they would be the Democrats who (without going to the trouble of Googling, so you'll correct me if I'm wrong) voted yea for Keynesianism under Obama and nay for the same under Bush.

My point? Folks, please don't kid yourselves; Washington is all in on the notion that politicians, through redistribution, can take care of their cronies, contain contractions and seal the next election all at the same time. Thus, given that they believe stimulus works, the party opposing the party in the White House will forever embrace all the arguments against deficit spending and ultra-easy money. I.e., first and foremost, they want to win the next election. Of course, once they've taken over, they're suddenly (and hypocritically) all for any expansion program that promises to boost GDP---while maintaining their pretense of commitment to limited government.

Wednesday, July 17, 2013

Tuesday, July 16, 2013

I hope I'm wrong...

Bernanke tested the water a few weeks ago and found that it was far too cold to go a swimming. Since then he has told the markets what they wanted to hear: That there'll be no diving of bond prices---that is, there'll be no dousing QE into the cold water---just yet.

You see the financial markets literally own a majority in the Fed. We knew that to be the case under Greenspan, and my how we know it under Bernanke---as we witnessed shortly after CNBC'S Jim Cramer's "they know nothing" tirade. The Fed Chairman knows that if at anytime during his next two days of Congressional testimony he lets loose with the merest utterance of taper, that isn't immediately followed by the terms data-dependent and accommodative, the Dow will respond with a 200 point SAY WHAT!?! And the 10 year treasury will chime in with a 2.9% COME AGAIN!?! Which would guarantee placatory followups from every Fed Governor (even the hawks) at every lunch crowd they address for weeks to come.

So rest easy, fair trader, no worries this week (not Fed induced anyway).

As for you, staid investor, while you don't relish triple-digit declines anymore than traders do, the absolute best thing for you (as I've illustrated ad nauseam of late: here's one, here's another, and another) would be for Bernanke and company to step aside and incite another (although unattended) Cramer tantrum and a healthy pullback in asset prices.

But, alas, I don't see that happening this week. I truly hope I'm wrong...

Summers for Fed Chair? Hmm...

Dean Baker is passionately opposed to Larry Summers succeeding Ben Bernanke, as he states in his Huffington Post article The Return of Larry Summers? 

He makes his opinion crystal clear that Summers was instrumental in allowing banks (through deregulation) the freedom to ultimately take down the 2008 U.S. economy. While we can surely debate the merits of deregulation (which becomes meritless when freer banks are not free to fail), for today I'll keep it brief and focus on the following from Baker's rant:
Even more important than his role in pushing financial deregulation is the fact that Summers played a direct role in promoting the imbalances from which the economy continues to suffer. The trade deficit was relatively modest through President Clinton's first term in office, averaging just over 1 percent of GDP.

This changed dramatically in 1997 following the East Asian financial crisis. The basic story was fairly simple. The crisis knocked the fast-growing economies of the region off their feet. South Korea, Thailand, and the other economies of the region saw a massive capital flight as creditors rushed to take their money home.

The IMF, acting under the direction of then-Treasury Secretary Robert Rubin, Federal Reserve Board Chair Alan Greenspan, and Rubin's top assistant Larry Summers, agreed to a bailout, but only with harsh conditions. They required the East Asian countries to pay back their debts in full. In order for this to be possible, the currencies of the region plunged in value against the dollar. This made their goods very cheap and allowed them to hugely increase exports to the United States.

The resulting run-up of the dollar was the cause of the huge trade deficits the United States has seen over the last 15 years. The trade deficit peaked at almost 6 percent of GDP ($960 billion in today's economy) in 2006, as the over-valued dollar made U.S. goods and services less competitive in the world economy.

I've never been a Larry Summers fan, but if he indeed directed the IMF to require countries to pay back their debts, and if paying back debt is a core Summers' principle, I'd be leaning his way over the reportedly ultra-dovish frontrunner Janet Yellen.

Now, I'm a bit lost on how the "harsh" stance requiring borrowers to pay back their debts (the nerve!) plunged those nations' currencies. If memory serves, the term used in '97 was the "Asian Currency Crisis". The IMF loans were in response to conditions that had already caused the plunging. I suspect Baker means that if the IMF had simply handed the troubled nations all the unconditional capital they would ever need, creditors would've rushed back to the unreformed region, promptly propping up its currencies. I'm thinking that's a stretch.

But if he's right, and Summers' actions indeed resulted in you and I gaining the opportunity to enrich our lives by saving money on the stuff we import, and thus fostering the growth of the Samsungs, the Hyundais, and the Kias---and the innovation and the all-important competition they bring to the world---I may become a Larry Summers fan after all. 

Monday, July 15, 2013

The Butterfly Effect... (video)

My business requires me to stay in tune with the financial market narrative du jour: If only to help our clients---through my written commentary as well as during face-to-face meetings---see through the media haze and maintain what I view to be a healthy long-term perspective. As personality after personality offer up their predictions (and, thus, their portfolios' positions) through the financial networks, I find myself asking the TV; "How the heck can you possibly know that? By what magic can you know at what level the S&P will close out the year? Aren't there way too many variables?" Of course, were I actually addressing those self-anointed gurus, my questions would be purely rhetorical: I absolutely know that they absolutely cannot know. For me to believe otherwise would be detrimental to the investors who rely on our services.

With that in mind, I have re-posted below an article I wrote exactly a year ago today titled The Butterfly Effect. If you at all listen to the prognosticators, I  suspect that you can't help but wonder if maybe, just maybe, the one who claims to have forecast that we'd be precisely where we currently be has it all figured out. If so, please read the following in its entirety. I found the video to be particularly interesting:



I have expressed here in numerous articles my belief, I should say “the empirical truth”, that the near-term directions of economies and markets are impossible to predict. There are infinite and ever-changing variables at play. Think of a feather drifting in the breeze; the slightest invisible current can alter its direction without warning. A butterfly in India can flap its wings and set off a chain of events that will one day destroy a neighborhood in Midwestern United States. Think of seven billion individual human beings, each pursuing his and her own separate interests, each setting off chain reactions affected by invisible currents too numerous to count and too ephemeral to follow.

Economists and gurus of all stripes will (virtually) never cop to their (of course it’s everybody’s) cluelessness. For economists, it’s forever the counterfactual. The champions of fiscal stimulus told us that without the $800+ billion spending package unemployment would go north of 8%. Well, with the package, the jobless rate went north of 10%, and remains north of 8% today. Of course, to them, this only proves that we needed the stimulus even more desperately than they originally forecast. They now claim, in arrogant I-told-you-so fashion, that without it, unemployment would've gone into the teens. Shame on us for ever doubting them.

But the market gurus take the cake. They’ll make 200 guesses over 10 years, get lucky on 81, then feature one or more of those 81 in every article and ad selling their newsletter subscription, newest book or, worse (and scariest) yet, their money management services. The sad thing is, a few of these guys and gals have some decent insights to offer.  But they forever kill it with me the moment they claim to have foretold (for example) back in the early 2000s just how the last ten years would play out—as yet another (my 81 out of 200 example—who has 1.5 million subscribers to his newsletter) tried recently. I have yet to Google even one of these prognosticators  (there are newsletters that record and track their every prediction) without finding him or her to be sorely misleading (by professing predictive prowess) his or her readers. Not that the claim in question isn't valid, it’s just that for every one lucky guess I’ll discover three others where he or she entirely missed the mark. I mean think about it; if they indeed could accurately forecast anything, why the hell would they forecast it for you and me? They’d be trillionaires. And they’d confine their predictions to their own trading accounts (for their strategies wouldn't work if everyone followed them), while on their yachts sipping Dom Perignon and/or curing world hunger.

So what are we, as investors, to do? In my too-humble-to-forecast opinion we default to the cyclical nature of all things, to fundamental fiscal values and to fundamental valuations. Cyclicality, in economic terms, would be the movement between expansion and contraction—intensified or muted in both directions by man’s (our elected and appointed officials’) efforts to control nature, and, at times, by Mother Nature herself (see video). In financial markets that would be your bull and bear markets—intensified in both directions by man’s greed (tech in the 90s, real estate in the mid 00s) and by his fear (tech in the early 00s, real estate in the late 00s). Fundamental fiscal values—the values of fiscally sound families, companies and countries—come into play when we’re talking public policy: Policymakers simply can’t borrow beyond their countries’ means, centrally plan their economies and subsidize the efforts of their cronies without ultimately exacting great suffering onto those who naively voted them into office (think today’s Europe). Fundamental valuations for stocks would be the price of shares relative to earnings, earnings growth, book value, free cash flow, dividends, liquidity and interest rates. For bonds it would be simply where yields sit (historically speaking) relative to maturities and credit quality.

Today’s snapshot:

The global economy recently suffered what’s been dubbed the “Greatest Recession Since the Great Depression”. Current pace notwithstanding, I don’t suspect man has yet entirely circumvented the economic cycle. Egregiously poor public policy is playing out in Europe (shame on us here in America if we can’t recognize where they went wrong and keep from making the same mistakes). Stocks have rebounded measurably from their 2009 lows, yet valuations remain relatively (historically speaking) compelling while bond prices are trading at valuations I never imagined (prices extremely high, yields extremely low).

All that said and you’re still desperate to know: When will stock prices trade where earnings (by historical norms) would put them?  And when’s the bond bubble going to burst?

Okay you win. Against my better judgment I’ll offer my forecast, but I’ll need a little time to formulate, then get back to you. And while I’m at it I’ll figure out precisely when the next hurricane will hit the Midwest, and how the world economy will fare as seven billion personalities allocate their diverse resources in the weeks and months to come.

Friday, July 12, 2013

Induced by immediate benefits...

One of history's greatest quotes (in my humble opinion) came from one of history's greatest economists, Frederich Hayek:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

In one of my recent monetary policy rants, I picked on two self-proclaimed champions of freedom. I was reminded of them, and so many others, upon reading the last sentence of the following from Hayek's The Constitution of Liberty, which I found in Sudha R. Shenoy's collection of Hayek excerpts, A Tiger By The Tail:
It is no accident that inflationary policies are generally advocated by those who want more government control—though, unfortunately, not by them alone. The increased dependence of the individual upon government which inflation produces and the demand for more government action to which this leads may for the socialist be an argument in its favour. Those who wish to preserve freedom should recognise, however, that inflation is probably the most important single factor in that vicious circle wherein one kind of government action makes more and more government control necessary. For this reason all those who wish to stop the drift toward increasing government control should concentrate their efforts on monetary policy. There is perhaps nothing more disheartening than the fact that there are still so many intelligent and informed people who in most other respects will defend freedom and yet are induced by the immediate benefits of an expansionist policy to support what, in the long run, must destroy the foundations of a free society.

Thursday, July 11, 2013

The Counterintuitive Counterfactual...

Paul Krugman, in his July 8 article, Urp Versus Derp writes:

Jared Bernstein writes from Europe about the complete unwillingness of European policy makers to learn from their mistakes; call it Euroderp. And it is indeed a remarkable thing: despite overwhelming evidence that austerity doesn’t work as advertised, there has been essentially no relaxation of the orthodoxy, and no admission of error.

I'm not sure what the "advertised" work of austerity was, but this whole notion that austerity is some form of economic strategy continues to bewilder me.

If your teenager discovers drugs, you---desperate to save him from a life of hell---impose austere measures. While you'll forever wish your son happiness, the only thing you can guarantee, if you're diligent, is that while he resides under your roof he'll be sober. Not happy and sober, just sober. Of course you know that if you don't impose austerity, and your son becomes an addict, guaranteed, he will be miserable and addicted. The insane notion that enabling his addiction would somehow lead to his sobriety never enters your mind.

If you're a European policy maker and Greece (for example) has spent, entitled and cronied itself a disaster, do you fund its deficit, subsidize its debt and expect that, by some miracle, it will find its way to fiscal sobriety? Are you, thus, insane? Of course no one would be "happy" while Greece's economy---left to the markets---convulses, sweats, and becomes depressed.

The Keynesian notion that by increasing government spending Greece would somehow grow its way out of trouble is as nonsensical as the notion that saving an addict from the pain of withdrawal, by supporting his addiction, would somehow put him on a path to a productive life.

Of course the Krugmans and the Bernsteins of the world would blow my simple analogy out of the water with their Keynesian multipliers. That would be their politically convenient theory that survives, by my estimation, on little more than counterfactual reasoning. For example, applying their multipliers to the U.S.'s $800 billion stimulus special interests' dream package told Keynesian economists (J. Bernstein in fact), who told the President, who told us, that a 7% unemployment rate would be achieved by the end of 2010. Without the "stimulus", according to their formula, unemployment would shoot to a shocking 9%. Well, we got the "stimulus", and, lo and behold, the unemployment rate promptly shot up to a horrific 10% before the end of 2010. Now did that deter the Keynesians? Was there an "admission of error" by the Krugmans and the Bernsteins? Uh, nope. In fact, it emboldened them---as the counterfactuals began to fly. You see, they were right in concept, just wrong in quantity, or so they claim. They just didn't know how bad things actually were and, therefore, things would've been much worse without the "stimulus"---which means the $800 billion wasn't nearly enough.

Only proud Keynesians, special interests (which, btw, grow in number as the budget grows) and an unsuspecting public could buy such a counterintuitive (and dangerous [in terms of what it inspires]) counterfactual.



Huge selling going on today!

Wow! Investors are dumping stocks today big time! "Say what?" you say, "the Dow's up 170 points! Looks like investors are buying stocks big time!" Well, yeah, but they gotta buy from somebody, right? Meaning, somebody has to sell them their stocks. And why would somebody sell their stocks? Well, because, for whatever reason(s), they believe it's time to sell. And who knows? Maybe they're right.

So why would I rain sprinkle on your parade? Why would I inject doubt reality amid such optimism? Because I want you living in the real world: Where short-term market fluctuations are impossible to predict and potentially disastrous to time. I want you never forgetting that investing is a long-term proposition that requires patience and discipline, and that short-term volatility can never be the inspiration for long-term investment decisions...

Read again Stress Less...

Tuesday, July 9, 2013

What causes recessions - Or - Goods buy goods...

Here's a link to my contribution to last Saturday's edition of the US Daily Review. And here's a snippet:
So then, under whose command of resources should we expect the greatest likelihood of producing the right assortment of goods and services; self-serving producers of goods and services, or self-serving politicians? Certainly the market, all on its own, can produce the wrong assortment of goods or services. However, left to its own devices, and to natural consequences, the market will—painfully for some—adjust accordingly. Politicians, on the other hand, have a professional interest in circumventing the suffering of their supporters, and are therefore adept at neutralizing the natural consequences for the producers of the wrong goods by spreading the loss among the entire population. And, alas, they in effect compromise the redeployment of capital from areas where there is too little demand into areas where there will be demand for the goods produced: hence, a very slow recovery.

Friday, July 5, 2013

The cleanest energy on Earth...

I climbed out of bed at around 7 this morning (the office is closed today)---after checking futures from my smart phone two or three times from midnight on. Not that I wake up in the wee hours to check index futures mind you, it's just that, for some reason (it's not age damn it!), well, let's just say I must be drinking too much water---and I figure I may as well check the futures action while I'm at it.

Just read an article on global warming and got to thinking:

Last night my wife and I listened to our favorite music which is, by some marvel of technology, stored on my iPhone and piped all throughout the house --- I will never again buy a music CD or a machine that plays them. My overnight checking of futures involved a simple tapping on the screen of my phone --- I will never again fire up a computer just to see what's happening in the world. This morning I "wrote" a commentary on the bond market and distributed it to literally hundreds of people without using a dot of ink, a smear of graphite, a single piece of paper, an envelope or a postage stamp. I also performed a variety of functions related to client portfolios from the comfort of my home office. At one point my connection to our office system was off line, so I text (or texted?) our in-house tech guy Nick (on his day off), and he, from the comfort of his home, somehow logged on and had me up and running in minutes. My wife just walked in and, after I told her what I'm up to, said she remembers in the old days having to fire up the TV and wait for a weather report before deciding what to wear each day. Now she just goes to the weather app on her smart phone.

Trust me, I could ramble on all day with examples of how profit-seeking innovators are cleaning up the planet, but since Don Boudreaux does it so beautifully I'll simply link to his blog here (type "cleaned by capitalism" in the search bar).

The bottom line: I have had a very productive morning without touching a single energy-gulping machine that requires plugging in (save for the nifty coffee maker that so energy-efficiently makes one cup at a time, and the thirty minutes or so that I charged my smart phone [which will now go for hours without plugging back in]) or, therefore, consuming more than an immeasurably small quantity of natural resources or polluting the atmosphere. Not to mention that I was essentially at the office without having to get dressed up (in clothes that require dry cleaning), hop in my car and burn fossil fuel, tax the battery, or wear down its tires to get there.

As for the whole global warming phenomenon, I'm not sure what to think. Some "conservatives" would have us believe it's all a hoax. "Progressives" tell us we're on the verge of being torn to shreds by tornadoes and/or swept away by tidal waves. I've read accounts claiming that global temperatures have remained steady over the past 16 years and that air quality has actually improved over the past 40. I've also read where, over some Hawaiian mountain peak, heat trapping gasses have reached record proportions. Listen to a hardcore "environmentalist" and you'd think a recent heat wave in Alaska to be proof positive that hell is upon us. Since I don't own any of the instruments that would measure such things, and have an innate distrust for what I view as politically-inspired information, I don't give either camp much credence. What I do know to be indisputable, however, is that if Mother Earth, in sheer self-defense, is contemplating wiping herself clean of humanity, our best chance of turning the tide (so to speak) is to focus our attention on the business environment. Allow capitalists to breathe freely, as unrestrained as possible by self-serving politicians (who would pretend to protect the citizen through regulations, subsidies, etc., while in reality picking "winners" [think Solyndra and Tesla] and stifling their competition), and we'll continue to gain efficiencies while, albeit unwittingly, cleansing our atmosphere in the process. Should we, however, go the other direction (if we're not there already) and stifle industry innovation, we'll indeed have hell to pay.

"Kids today simply can't appreciate how technology has improved our lives" says my wife. I add, "and 'environmentalists', for whatever bizarre reasons, simply can't appreciate how capitalism is far and away the cleanest energy on earth."

I'd love to say I told you so about bonds....

Of course I'd love to say I told you so about bonds (getting hammered as I type), but being dead wrong on my bearish call for 3 years does not afford me the hubris to pretend I can time markets. Those of you who pay me to handle your stuff know that I have been, nonetheless, unapologetic in my subjecting your fixed-income allocation to subpar relative (to what we're used to) results. The thing is, the risk/reward relationship has been grossly out of whack when it comes to the bond market. I.e., the upside is minimal (below 2% until recently on 10 year money) while the downside has been monstrous (imagine what a sub-2% bond is worth when interest rates are rising). In other words, when interest rates are at history-of-mankind-lows there's very little room for price appreciation---and huge room for price depreciation---in an investment-grade (or otherwise) bond portfolio.

Of course if this (rising yields and falling prices) keeps up, there'll be opportunities to once again bring some yield into your fixed income allocation that we will want to carefully (remember bonds are supposed to be a stable part of your portfolio) exploit.

Stay tuned...

Wednesday, July 3, 2013

Made For America...

The "Made in America" segment of last night's CNBC's Kudlow and Company featured the CEO (Mitch Cahn) of Unionwear and New Balance's Director of Public Affairs (Matt LeBretton). Both companies proudly promote their U.S.-based manufacturing operations.

In the case of Unionwear (launched in 1992), its 115 employees produce 100% of its sportswear out of its Newark, NJ factory. More power to em!!

As for New Balance, well, it does manufacture 25% of its shoes here in the U.S., however, back in the '90s, that number was 70%. Larry (Kudlow), after citing the decline, asked "what's been the problem?" Mr. LeBretton replied with the obvious; "If we made all our shoes here in the U.S. we simply couldn't compete." However, interestingly, he added:
But I think a more important number than the percentage of shoes we make here is the amount of people we're employing in the U.S. We have over 1,300 people making shoes, which is today more than we've ever had making shoes in the United States. Our overall growth as a brand has grown as has our domestic capacity and our domestic production.

Hmm... So, over the past 20 years New Balance has off-shored the majority of its manufacturing and, yet, employs more Americans than ever. Amazing what can happen when smart-run companies are free to exploit every opportunity to compete on the global stage.

Of course there are those stories where entire manufacturing operations have emigrated to other shores. To them---on behalf of the U.S. consumer and business owner---I say "thank you!" Read on to see why...

Larry segued to Unionwear's Mr. Cahn: "Mitch Cahn, you're one hundred percent, tell me about that? That is the golden ring, one hundred percent made in America!" After confirming that they are indeed all U.S., Cahn explained:
For the last twenty years we've really been focusing on markets that would be willing to pay a premium for made in USA. That includes the U.S. military, the federal government, political campaigns, labor unions, and for the last two years we've seen a surge in business from corporations, from nonprofits, and from the garment industry.

Larry chimed in with "Are you unionized? You mentioned the garment industry. Garment workers really destroyed that industry at one point in time. Are you unionized?" After declaring "We are a union shop", Cahn explained how, through what he called "lean manufacturing", they can indeed compete with non-union shops in right-to-work states. Larry finished up by asking how they can beat the manufacturing operations out of China and Bangladesh? He answered "Well, we don't have to beat them because there are a lot of people who will pay twenty to twenty-five percent more for a domestic product."

Of course there's nothing wrong with exploiting those markets so enamored by your brand that they don't mind paying up---while thus limiting their patronage to the local companies that vie for their discretionary income, as well as limiting the capital they provide (through their savings and investment) for other growing enterprises to expand and create jobs right here at home (hence my "thank you" to the off-shorers who, while competing on price, indirectly support local enterprises). Although I have to admit, the fact that Unionwear owes a great deal of its success to "markets" that house society's most egregiously inefficient/irresponsible characters---those who spend other people's (taxpayers') money on other people---irks me to no end!

Thank goodness---on behalf of those 1,300 New Balance U.S. workers, and who knows how many New Balance U.S. customers, and who knows how many U.S. employees of who knows how many other U.S. businesses who vie for the discretionary income of those New Balance U.S. (and non-U.S.) customers---New Balance didn't go the all U.S. route! In other words, New Balance's lack of some captive market to exploit resulted in an utter flowering of economic activity, for America...

Today's TV Segment (video)

This morning Zara and I had a very good discussion on the happenings in Egypt, jobs numbers, the Fed, and the proper perspective for us everyday investors...

Click here to view...