Saturday, August 31, 2013

Still not convinced about the harm in raising the minimum wage?

A few years ago I decided to confine our financial planning work, almost exclusively, to our investment clients (they pay us an asset management fee based on a % of their portfolios' value). I thus raised my hourly fee above what our local market would bear. And, guess what, we haven't issued a by-the-hour invoice in years.

When the Fed wants to slow the pace of borrowing, it raises the cost of borrowing (interest rates).

When bureaucrats want to influence your personal choices (or, more accurately, raise tax revenue in publicly palatable fashion), maybe get you to stop smoking, they---through taxation---force the cost of smoking higher.

Exclusive country clubs charge exorbitant dues to maintain their exclusivity.

When your utility provider hikes its rates, you keep the house a little warmer in the summer and a little cooler in the winter.

When gas is $4.50 a gallon, you car pool, you ride your bike to the store.

When movie tickets are $18 a pop, you wait for the DVD.

When politicians want to reduce private sector employment and increase dependency on government, they---by raising the minimum wage---hike the cost of labor.

Okay, so you nodded your head all the way through the above, save for that last line (just seeing if you're paying attention)---unless, that is, you're a rabid hard-right conspiracy theorist: in which case you not only nodded your head to that last line, you pounded your fist in agreement. I do not personally believe that politicians legislate higher labor costs with the intent of hurting the labor market, they---without regard for the consequences---intend instead to help their reelection bids. 

So let's you and I dispense with all the studies---some conclude that a higher minimum wage doesn't hurt the labor market, others conclude that it does---and commit to the most basic commonsense: Raising the cost of labor absolutely reduces its demand. In the case of the minimum wage, raising it absolutely reduces the number of job opportunities for those who desperately need the work experience.

Still not convinced? Here's one more angle (pardon my superfluity): You tell me, in all honesty:

If Marty raises his hourly fee, will he perform more or less hourly work?
If the Fed raises interest rates, will consumers and businesses borrow more or less going forward?
If bureaucrats raise the cigarette tax, will folks smoke more or less going forward?
If the country club raises its dues, will it attract more or fewer members?
If your utility provider raises its rates, will folks use more or less power?
If gas goes to $4.50 a gallon, will folks use more or less gas?
If the price of a movie goes up, will folks see more or fewer movies?
If politicians force up the cost of labor, will employers hire more or fewer workers?

One last one just came to mind: If McDonalds is forced to raise the price of flipping hamburgers to $15 per hour, will it be more or less selective going forward? Will it choose only the most experienced, most qualified folks $15 will buy? As opposed to bearing the risk and the greater training expense involved in hiring the lesser-skilled applicant. I.e., will there be more or fewer opportunities for the least skilled among us to enter the workforce?

Conversation with a client: How to handle Syria in your portfolio...

Here's yesterday's email conversation with a client. By the way, I only share conversations with clients named John Smith.
Hi Marty,

With all that is going on in Syria and other parts of the middle east, and the looming threat of attack by the USA, should I consider liquidating my funds for a period of time until things settle down?

I realize that this goes against all that long term planning stands for, but still I am quite nervous that the market is going to take a huge drop when we attack, and I would hate to lose what gains I have made thus far this year.

My fears are probably unfounded given the reality that we have had threats in the Middle East in the past.

What are your thoughts and/or recommendations for a course of action.

John Smith (the scardy cat)

Hi John,

Well, for starters, I have recommended defensive liquidations for only two clients over the past week. But, honestly, I would have recommended the same in both cases even without the looming Syria situation. In one case the client needs some cash in a few weeks (or months) to finish up a kitchen remodel. In the other, the client has an account that he's liquidating, via monthly distributions, to zero over the course of the next 12 months.

During every client review session I ask if there's any foreseeable need for cash from the portfolio. I generally like to make the cash available right away---particularly when the market's up on the year---so as to avoid the potential for selling into losses in case the market takes a large hit when they actually need the money. Otherwise, we stick to the allocation strategy.

As for Syria; if you look at this week's market action, while the major averages are down, they're down on very low volume (relatively few transactions)---which means there was nothing remotely akin to a panicky selloff. Just a relatively small number of nervous sellers, met by stubborn buyers. Oil prices have actually declined about $3 a barrel over the past two days. Gold is off as well. Meaning the markets are clearly discounting Syria as a non-economic event. Of course anything can happen.

Historically, such situations have tended to inspire selloffs leading up to the event, then, strangely enough, rallies during and after the event itself. Again, however, anything can happen.

In terms of "losing" your year-to-date gains. You haven't in fact made them or lost them until you've sold your positions. I.e., it's all on paper. The other thing to think about is, if we see a major plunge in the market, the question would be, how long will the market remain at those very low levels? If you sell, when do you get back in? If you sell, and the market rallies after the missiles are fired, and you then buy back higher, you will have blown an unrecoverable hole in your portfolio. If you sell now, and are lucky enough to buy back near the bottom, you will be cursed for life :(. Because you'll imagine you can pull it off the next time another event looms---and that's when you'll start doing some real damage to your portfolio.

And lastly, my friend, the real serious events that rattle markets tend to be the ones no one saw coming; the 1987 crash, the tech bubble bursting, 9/11, the real estate bubble bursting, etc. (and no, Harry Dent saw none of this coming). But, as you've noticed, we managed to recover from everything thus far.

Now, all that said, your comfort factor is most important. They say that the emotional response to a loss (paper or real) is more impacting on one's psyche than the response to a gain. So if the thought of watching your portfolio decline carries a greater emotional response than selling and possibly missing the next rally, you should sell. Which means, after you sell, if it doesn't turn out to be a good idea, you say to yourself, "oh well, at least I preserved what I made and it would have felt hellish to see it evaporate if the market tanked". If, on the other hand, you decide not to sell, you just go about your business---regardless of what the market does in the near-term---and stick to your long-term plan...

Hope this helps. Let me know if you'd like to discuss further...

Have a great weekend!!

Tuesday, August 27, 2013

How about a zero corporate tax rate? Except for "businesses" we don't like...

Larry Kudlow (in this video), along with the Heritage Foundation's Curtis Dubay, attempts to make a case for taxing non-profit universities. Kudlow suggests that universities that act like businesses should be taxed like businesses. Dubay thinks donations specifically targeted to education should maintain their tax-exempt status, but that their business pursuits---patents, ticketed concerts, restaurants, sporting events, etc.---should be looked at (i.e., taxed) like businesses.

Kudlow levers Milton Friedman's thought that colleges should operate for profit; that they needed a different kind of model---and adds that they should be taxed accordingly. But the thing is Milton Friedman, Kudlow himself (ironically), the Heritage Foundation (ironically), and little old me have all argued for the repeal of the corporate income tax.

While, in this knee-jerk-reaction-of-a-post, I may be missing some logic related to taxing heavily subsidized universities (I welcome your feedback), at first blush I---unlike Kudlow and the Heritage Foundation---can't get behind the taxing of the business pursuits of universities when I've previously argued for the elimination of taxes on businesses altogether.

And if you think I'm overly sympathetic to the pursuits of big universities, read The Fat Can Eat No Lean - Or - Too Much Pain to Pass Up...

Deja vu? Maybe...

After a very nice first half of the year, the stock market is beginning to buckle under the weight of Middle East unrest and, what else, politics here at home---fear over the ending of QE, the budget and the debt ceiling are clearly beginning to do a number on stocks. With all that presently looms, shouldn't we rethink our strategy going forward?

Well, what if I told you that what I just described precisely describes August 27, 2011? That's right. The world was fretting over uprisings across the Middle East and North Africa, QE2 was over (QE3 hadn't been decided yet), and we were running headlong into a most grotesque political spectacle over the budget and the debt. Oh, and add in all the then panic over the European debt crisis. In essence, we're right back where we were 2 years ago, except for the market that is: On this day 2011, the Dow closed exactly 3,491 points lower than it did today---that would be a 31% increase over the past 2 years.

So, does the fact that it would have been a very bad idea to abandon our strategy 2 years ago---amid virtually the same concerns we're experiencing today---mean that things will be hunky-dory 2 years from now? Of course not. The next real bear market may very well be upon us. The thing about investment strategies that involve the stock market, however, is that you have no strategy if your strategy can't withstand the inevitable shocks the world forever delivers.

As for how we approach the business of investing, read again Our View Going Forward from December of last year. Here are the closing paragraphs:
The Bottom Line – investment-wise: The unpredictability of markets, while unnerving to some, forever offers opportunity for the disciplined investor. In fact, long-term investment success is indeed all about discipline. Investment mistakes are typically emotionally-driven. Fear can drive an investor out of equities long before his/her financial plan would have called for. Typically, and ironically, the times of extreme panic have tended to be extreme buying opportunities. Conversely, greed can inspire an investor to overweight—relative to his/her time horizon and tolerance for risk—a given sector, or stocks in general. Typically, and ironically, times of investor euphoria (think tech in the late 90s and real estate in the mid 00s) have tended to be ideal times to rebalance out of equities.

Maintaining an asset allocation/rebalancing strategy keeps one from succumbing to the herd mentality. And, as we’ve discovered, following the herd is generally not your recipe for long-term success—think tech in the late 90s (irrational exuberance), the subsequent market bottom in March 2003 (extreme panic), and real estate in the mid 00s (irrational exuberance), and the subsequent market bottom of March 2009 (extreme panic). I suspect the holders of long-dated bonds have yet to learn that painful lesson.

The Bottom Line – economically, and societally, speaking: While there’s plenty in terms of geo-political risk to concern ourselves with at present, the future holds as much promise today as it has at any time in history. Yes, mistakes, particularly mistakes of policy, will be made. And yes, such mistakes will deliver hurdles and setbacks in the years to come. And yet future generations will witness the advancement of the human condition in ways we can’t even begin to imagine. The ultimate pace of that advancement will be determined by the extent to which we possess the freedom to pursue our individual objectives, and the freedom to conduct business in the global marketplace going forward.

Near-term, I remain cautious. Long-term—bumpy roads notwithstanding—I remain wildly optimistic. That (long-term wild optimism) said, your portfolio must, at all times, reflect your time horizon and your temperament.

Market Commentary (audio)

Click here for today's commentary...

Monday, August 26, 2013

Come On Mr. Orange!

Washington D.C.'s city council recently passed a "living wage" measure and, in the process, may have cost 4,000 folks a job. That is if Wal-Mart, as it threatens, cancels its plan to build 3 new stores. Make that 8,000 folks if it decides to forgo opening 3 other stores currently under construction.

Letter to a Washington D.C. city councilman:

Councilmember Vincent Orange
1350 Pennsylvania Avenue NW
Suite 107
Washington, D.C. 20004

Dear Mr. Orange,

You were recently quoted in the New York Times---with regard to Wal-Mart's net income and pay scale---as follows:

“Their net income was $17 billion,” said Vincent Orange, a city councilman who voted for the ordinance. “You don’t want to share a little bit with the citizens? Come on.”

Come on Mr. Orange, this is not rocket science. Wal-Mart's net income was $17 billion precisely because it is bringing great value to the citizens. How about we let the citizens of your great city decide whether Wal-Mart is generous enough: Let's see just how many folks apply for those jobs at the wage Wal-Mart offers, and how many shoppers take advantage of those low-priced goods.

Make no mistake sir, should Wal-Mart choose to place a store under a $12.50 per hour wage regime, it'll take whatever measures necessary to maintain its profit margin (at the expense of the customer and, yes, the employee)---a margin that had once inspired it to consider opening 6 new stores in your area.

Marty Mazorra
Private Wealth Advisors
7447 N. First Street
Suite 202
Fresno, Ca 93720

Saturday, August 24, 2013

That's not how it works (or how it's been)...

Your sales are off, you're concerned that you may not see a pickup anytime soon, and you've, therefore, lowered next year's earnings forecast. I have an idea; give all of your employees a big fat raise!


Well, not according to the Washington Post's Harold Meyerson. He attempts to convince his readers in For retailers, low wages aren't working out that Wal-Mart would post better results if it paid higher wages. That paying what Wal-Mart and its employees agree fairly compensates for their production (not nearly enough according to Meyerson) is the reason Wal-Mart's sales declined by 0.3%, and it's the reason it had to lower its earnings forecast.

Now it would seem to me (and you, reader, if you'll admit it) that if you raise the price of your labor (in the absence of an accompanying increase in productivity), you'll hurt your bottom line. Although I do appreciate Meyerson looking under the surface, that's what good economists (not that he [or me] is an economist) do; they look for the unseen. He's thinking that if Walmart were to raise its wages that folks would live better, happier lives and thus become more active economic agents---ultimately boosting the retailer's bottom line as a result. Sounds nice, but that's not how it works. I think even Meyerson might agree that if only Wal-Mart were to increase its wages, Wal-Mart would recoup only to the extent that its own two-million employees spend their raises at Walmart. And, you know, the net profit on a dollar of sales doesn't come close to the net cost of a dollar of wages. I.e., even if every employee spent every dollar of his/her wage increase at Wal-Mart, Wal-Mart would lose a ton of money due to the pay raise. Ah, but Meyerson is really lobbying for a hike in the wages for the world---for Wal-Mart's other 243 million customers as well. As if such an across-the-board hike in wages---occurring for its own sake, as opposed to the result of increased productivity---will, by some magic, result in something other than higher across-the-board prices and less employment. Can't happen.

He plays the New Deal card---proposing that correlation is causation; that the amazing evolution of the American condition during the 20th century was the result of government intervention as opposed to entrepreneurialism, competition, tenacity, innovation and personal liberty:
In the ’20s, Edward Filene, whose family owned both its eponymous chain and the Federated Department stores, called for the establishment of a minimum wage, unemployment insurance, a five-day workweek, legalized unions and cooperatives where people could do their banking. (He helped establish some of the first banking co-ops himself.) The Straus family, which owned Macy’s, and shoe-magnate Milton Florsheim endorsed similar measures and were among the more prominent business leaders who supported Franklin Roosevelt’s New Deal. They were well compensated for their clear understanding of how to make an economy thrive: During the 30 years of broadly shared prosperity that the New Deal reforms made possible, department stores catering to the vast middle class were a smashing success.

There Meyerson fails to look below the surface: You would have been hard-pressed in the '20's to find smaller retailers endorsing a minimum wage, unemployment insurance, unions, etc. Not because they didn't care about their employees, but because they---as Filene surely knew---couldn't compete with the likes of Filene under the weight of such increases in labor costs. The Straus family, Florsheim and Filene were indeed "well compensated", not, however, for "their clear understanding of how to make an economy thrive", but for their understanding of how to harness the power of government.

And, lastly, here's Meyerson entirely misunderstanding (if not misrepresenting) the amazing evolution of the American condition since the mid-20th century:
Today’s economy, alas, has increasingly more in common with the pre-New Deal era than with the more robust and egalitarian mid-20th century.

So, hmm, the 1950s were more robust and egalitarian? Really? Here's economist Don Boudreaux once again helping us see below the surface:
But the Gasoline Back then Did Contain Lead

Here’s a letter to Washington, DC – based WTOP radio:

You report that “A new Economist poll finds that a majority of Americans yearn for the bubble gum days of the 1950s” (“Which era do you prefer? Poll finds Americans long for the 1950s“).

It’s hard to believe that these poll results reveal people’s informed preferences. Rather, these results likely reflect nostalgia mixed with misinformation spread by a barrage of news ‘reports’ on the allegedly stagnant – or even deteriorating – economic fortunes of middle-class Americans.

I challenge you and other Americans to do what I did and lay your hands on a Sears catalog from the 1950s. My catalog – bought recently on eBay (a company founded in 1995) – is from 1956. Peruse the catalog. What do you see? You see, for example, Sears’s cheapest TV (black’n'white, of course), priced so that a typical full-time manufacturing worker in 1956 had to toil 61 hours to earn enough money to buy that TV. Today, the typical American worker can buy an infinitely superior TV with only ten hours of work. And this lower cost in term of work-time is true for nearly everything else that Sears sells: clothing, kitchen appliances, automobile parts, office furniture, sporting goods, children’s toys. The list is long.*

An even longer list can be made of what you don’t see in that catalog or in any other record of the economy’s offerings to Americans in the 1950s: no digital cameras; no lightweight waterproof sportswear; no microwave ovens; no CDs, DVDs, or MP3 players; no personal computers; no cellphones; no GPS devices; no indexed mutual funds; no soft contact lenses; no statins; no measles or meningitis vaccines; no portable defibrillators; no oral contraception; no MRI machines. Commercial jet travel did arrive in 1958 – but at fares well beyond the reach of most Americans.

While today is far from perfect, I’ll bet my defined-contribution pension that any American – even any white, male, Christian, heterosexual American – transported from today into the 1950s would struggle to get back to the future with a fervor that would embarrass the 1985 movie character Marty McFly.

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

Thursday, August 22, 2013

Yesterday's TV Segment (video)

Yesterday morning Zara and I discussed what may be troubling the stock market and how 401(k) participants (and the  rest of us for that matter) should be viewing their bond exposure. With that in mind, here's a little something I wrote, but hadn't yet posted, after watching Kudlow and Company the other day:

"Why not buy a 2.8% ten year treasury?" asked Larry Kudlow this afternoon on the television show that bears his name---after he predicted virtually no pickup in growth the 2nd half of the year. Well, Larry, it's because 2.8% ain't worth the risk. If bondholders decide---due to growth, QE taper, or simply coming to their senses---to bail, you'll know in a hurry why you don't buy the 2.8% U.S. treasury. In other words a 2.8% yield (and any pickup in price if rates recede) is not nearly enough compensation for the downside potential in today's bond market (regardless of the likelihood, or lack thereof, of a selloff this year)  .

(Correction: In the video, where I say the 10 year treasury bottomed at 1%, I meant 1.5%)

Click here to view the latest TV segment...

Tuesday, August 20, 2013

A smidge or not at all...

I've listened to several commentators the past few days make the optimistic case that interest rates are rising because the economy's gaining, or is about to gain, some real traction. Thus we should be feeling very good about things.

Well, not so fast: Dare I utter those four most dangerous words? Yes, I dare; This Time Is Different. When money has been flowing into bonds for years to the don't-fight-the-Fed (four more dangerous words) tune, we face a situation where the Fed, not the economy, is the bond investor's primary focus---as evidenced by a near doubling (off the bottom) of the 10 year treasury yield in the absence of any semblance of robust growth. I.e., in my view it's more likely taper talk, as opposed to economic prospects, pushing interest rates higher.

Now you'd think the Fed wouldn't cut QE without economic incentive. So with growth estimates having been recently ratcheted down, why then all the taper talk? Well, it could be that the economic incentive this time around isn't growth as much as it is the lack thereof. The Fed may very well be fearing that if they keep pumping they run the risk of inflating the kinds of speculative bubbles that blindside economies when they burst. And, ironically, the bubble they fear this go-round may very well be in the bond market.

But my oh my how they've boxed themselves in. There is no question (in my mind) that---while they'd like to see an orderly unwinding of the bond trade---the Fed is utterly intimidated by the stock market. And the stock market is screaming "don't you dare".

So here's my guess: The Fed either doesn't taper in September, or does so just a smidge---maybe $10 billion---followed immediately by some soothing commentary: "let's see how this goes. If the economy picks up steam we'll taper more---a bit at a time---in the coming months. If it's flat or slows---or if intense political wrangling (it's about to begin) threatens economic growth upsets the stock market---we'll either stand pat at $75 billion or ramp it right back to $85 until things look better." Meaning, for the moment, alas, the Fed's fear of short-term market volatility trumps its fear of growing the next asset bubble.

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

Moved by political wind...

In a recent New York Times OpED, Paul Krugman derides what he sees as conservative policymakers' successful attempts to mislead the public into thinking the budget deficit has been growing while in fact it has been, in his word, "plunging".

He cites consumer polls (one 2013 [Obama emphasis], one 1996 [Clinton emphasis]) that suggest a "plurality of voters (in both polls) and the majority of Republicans (the 1996 poll) believe it has gone up." What Krugman surely must know is that many, if not most, voters will confuse the deficit with the debt. And if a Republican occupied the Oval Office (and yes folks, if a Republican occupied the Oval Office we'd still be talking huge debt and a huge deficit), the majority of Democrats would likely be (rightfully so) bemoaning the debt and deficit, as was Krugman in 2003 (Bush emphasis).
Last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

Fascinating how one's positions can be so moved by political wind...

Sunday, August 18, 2013

Are stocks reasonably priced or not?

A couple "bad" weeks for stocks and calls for the near-term end of the bull market are coming out of the woodwork in droves. As I've stressed in the last few audio commentaries, in my view we're overdue for a healthy pullback in stock prices---or, more specifically---that a pullback would be healthy at this juncture. While I make my position---that no one can time the market (least of all me)---abundantly clear, I forever look at the valuations of the stocks of companies that occupy the various sectors of the global economy and consider how the market looks (sector by sector) historically speaking, and make allocation recommendations accordingly. Now if I told you that from a simple price-to-earnings (p/e) standpoint, stocks (using the Dow Jones Industrial Average because that's what everyone's familiar with)---at 14ish times next year's projected earnings---are in no way historically expensive (particularly when inflation and interest rates are low*), would you view that as an excuse to load up, or, at a minimum, not profit-take if your strategy called for it? I sincerely hope not.

(*Note: During periods of low inflation (we can debate some other time whether inflation is as low as the reported data suggest), real returns are higher and thus investors tend to accept higher p/e ratios (that is, they're willing to pay up for stocks). Conversely, when inflation is higher, and real returns are lower, investors require higher gross returns and thus lower p/e ratios (cheaper stocks). Looking at it simply in the context of interest rates: low interest rates make fixed-income investments less competitive, thus supporting higher p/e multiples for stocks. Of course, as we've witnessed of late, the interest rate environment can change in a hurry.)

You see, stocks can appear reasonably valued (or not) by any number of metrics, all of which involve at least two main components. In the case of the p/e ratio, we have the price of a stock and the per share earnings of the company. I suggested that 14 is okay, 24, however, may not be---historically speaking. And of course it's a long way from 14 to 24. At 14 I could be bullish. At 24, 20 even, I might be bearish. So let's say that according to some historical chart pattern, the typical topping-out number---keeping it simple (not accounting for interest rates or earnings estimates), and purely hypothetical---is 20. In that case we'd still have monster upside, right? I mean going from a p/e of 14 all the way to 20 would take the Dow above 21,000. Well, yeah, but that assumes we'd get to 20 by way of rising share prices. We could also go from 14 to 20 via a 30% decline in earnings. In which case---to get back to a reasonably-priced level, say a 15 p/e---the Dow would need to drop to the mid 11,000s, or 25%. Uh oh!

So then---with the next year or so in view---are stocks presently cheap, reasonably priced, or expensive? I, alas, can't say. All I can say is that stocks are priced precisely where the world's shareholders determined they should be as of 4pm Eastern time last Friday. The question going forward is can companies, in the aggregate, continue to grow their earnings? As of 4pm Eastern time last Friday---as the Dow remained above 15,000---the world thought yes. The mere fact, however, that bear markets happen means that earnings don't always meet the world's expectations. And anyone who believes he can line up all the variables that would impact the world economy, and tell us what to expect, profoundly (and dangerously) overestimates his own talent---as I illustrated in Beware the King(s)

Now, if you're at all beginning to spin out over recent volatility and what the doomsayers are promising going forward, please read Stress Less...

Friday, August 16, 2013


Monday I posted an essay titled Beware the Lucky Guesser, where I paraphrased a recent conversation between a young trader and a seasoned money manager. Well, the latter---who advised viewers to "buy high" because stocks are "going higher"---was on CNBC a few minutes ago, and guess what; since just the other day he decided to dig into the thirty stocks comprising the Dow Jones Industrial Average and, as a result, has determined that the Dow is likely to take a 15% dive over the next two months, then bounce back sometime in October to finish the year at an all-time high. Although he's only telling his clients to do a little profit taking---as opposed to sell everything now and buy back in 8 weeks.

He's a careful genius this one. If he's wrong and the market sells off and doesn't rebound by year-end, he was right about the selloff. He can simply say his analysis was perfect in terms of predicting a decline, it's just that the market's taking a bit longer to gather itself before ascending to new heights. Or, if he's wrong and stocks continue to rally from here, he was right about the reaching of record levels by year-end, it's just that the world agreed with his bullish call sooner than he expected and therefore didn't allow the big selloff to occur first. Beautiful!

In all my years in the investment business I have discovered only one guru who consistently got it right, Sir John Templeton. He made the following uncanny prediction:

"There will always be bull markets followed by bear markets followed by bull markets."

Thursday, August 15, 2013

The tiniest scratch below the surface will uncover the sheer beauty of free trade (and a video)...

A friend forwarded me the following email yesterday:

John Smith started the day early having set his alarm clock
(MADE IN JAPAN ) for 6 am .

While his coffeepot (MADE IN CHINA ) was perking,

he shaved with his electric razor (MADE IN HONG KONG )

He put on a dress shirt (MADE IN SRI LANKA),

designer jeans (MADE IN SINGAPORE)

and tennis shoes (MADE IN KOREA)

After cooking his breakfast in his new electric skillet (MADE IN INDIA)

he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today.

After setting his watch (MADE IN TAIWAN )

to the radio (MADE IN INDIA )

he got in his car (MADE IN GERMANY )

filled it with GAS (from Saudi Arabia )

and continued his search for a good paying AMERICAN JOB.

At the end of yet another discouraging and fruitless day checking his
Computer (made in MALAYSIA),

John decided to relax for a while. He put on his sandals (MADE IN BRAZIL ),

poured himself a glass of wine (MADE IN FRANCE )

and turned on his TV (MADE IN INDONESIA ),

and then wondered why he can't find a good paying job in AMERICA

I'd normally pass on this one (presuming that most regular readers don't need me to state the obvious), but just for fun I read the above to the newest member of our staff---one who is supposedly reading this blog---and she replied "that is so true". Our delightful American staff member thus inspired my little (tiniest possible in fact) scratch below the surface of the start of John Smith's day (I'll take only a minute and shoot from the hip). The benefits of global trade are literally too numerous to count---as illustrated at the bottom in the Competitive Enterprise Institute's beautiful adaptation of Leonard Read's essay I, Pencil:

John Smith started the day early having set his alarm clock (MADE IN JAPAN)---that he purchased at American company Target (that leases its spot from an American landowner) from a delightful young American checker---for 6 am. He meandered his way to the kitchen where he poured himself a bowl of Corn Flakes produced by American company Kellogg that was shipped by American company UPS to American grocer Vons where he bought his cereal from a delightful young American checker. Oh, and Kellogg bought the corn from American producers who also sell tons of corn to the Japanese who have U.S. dollars with which to buy the corn because they sold alarm clocks to blokes like John. Producers who, like John, wake early every morning having set their alarm clocks (MADE IN JAPAN)---that they purchased at American retailers (that lease their spots from American landowners) from delightful American checkers---for 6 am. And who, like John, eat stuff produced by American stuff growers that gets shipped by American companies to American grocers where they're sold by delightful young American checkers. Oh, and American stuff growers sell tons of their stuff to foreigners who have U.S. dollars to spend because they sold their stuff to folks like them.

Market Commentary (audio)

Click here for today's commentary...

Sunday, August 11, 2013

Beware the Lucky Guesser...

Last weekend I posted a brief note on the week to come. Which---being a long-term thinker and wanting clients to be the same---is not an exercise I perform often. But since I was going to be out of town, and less connected, I thought I'd offer up my thoughts on what might inspire a little downward action during the coming week. And while three intraday triple-digit Dow declines (what actually happened) is no disaster, it's action we hadn't seen for a couple of months. I mentioned that I wasn't as certain that the Fed would begin the dreaded (by traders) QE taper in September as I had been a few weeks earlier. But now---based on last week's public comments by a few Fed officials (which seems to have sparked the volatility)---it looks like the September taper is back on. And that's a good thing in my estimation.

I know, we all love to make money (on paper) in the stock market. Those monthly statements can be heavenly as we reach certain milestones ("I'll relax when we hit a million [or three, or a half]"). Folks tend to think they've arrived when their portfolios arrive at some number (which often results in a new what-if-it-drops-back-below-the-number? sort of anxiety). My greatest challenge of the past 29 years has been to get my clients thinking differently than your average investor. To help them understand that the market is like nature. That bear markets and recessions are as essential to our economy as winter is to our planet.

As much as any other advisor with an ego I enjoy sounding smart as I discuss stocks, bonds, silver, gold and the Fed with clients. Sure, I need to make intelligent asset class and sector recommendations (therefore much of my time is spent pondering prospects and weighing risk/reward scenarios), but at the end of the day---smart asset allocation notwithstanding---I know that intermittent bear markets will forever ride in on the tailwinds of black swans (unpredictable happenings) and wreak havoc onto the lives of all but a few enlightened long-term investors. I know that the short-term can make mockeries out of sound long-term strategies, but that short-term investors have shorter lifespans. Well, I actually don't know the latter---I just know that short-term investors are a nervous bunch, and that calm (a long-term investor trait) people tend to live longer, happier lives.

Licked-fingered forecasters are foolishly gauging market winds, then selling their prognostications on CNBC. "The market's toppy" says the Fast Money show trader to a famed moneyman some thirty years his senior. "Come on fella", says the arrogant elder analyst, "I've been in this game too long. You simply don't understand what we've been through the past five years. Buy high, the market's going higher. A lot higher!" Me? I sit alone at my desk, smile, scratch my head and think you gotta love it. The market will offer up enough over the balance of the year to allow both these blokes to spin their respective I-told-you-sos. Well, actually, I should direct that last line at just the older gent---I've been listening to him since he was the youngster, thus I know he won't take being wrong lying down. As for the young fella---the foolish forecaster he is---I get a good vibe. If the market continues its climb from here, I expect he'll concede to the faux-sage who remembers placing trades at Dow 1,100 in the summer of the year I began my career (1984). But wisdom will elude him if he believes the old man---who, in December 2007, predicted a stock market rally for the second half of 2008 (the market declined 40% that year)---is anything more than a lucky guesser.

Saturday, August 10, 2013

More Keynesian than Keynes

Paul Krugman's 2012 book End this Depression Now accomplished one of its stated objectives; I found it to be very accessible---anyone looking to understand Keynesianism (although there's really not all that much to it) will find it to be an enlightening read. And I totally share his suspicion (times a hundred) of politicians. Although he seems to believe that the right is disproportionately more (if not exclusively) prone to pander. Of course there he's dead (and dangerously) wrong---the qualities inherent in those who seek national office are universal---and, among pundits, only the most partisan would suggest otherwise. Oh, and I remain unconvinced that a nation can borrow and spend its way to prosperity.

Krugman is an avowed Keynesian, I get that, although I'd say he's of the modern variety. The more I study Keynes, the more I wonder if Keynes himself would be nearly as Keynesian as today's Keynesian. His friend Frederic Hayek had his doubts (from Hayek's Personal Recollections of Keynes [from Sudha R. Shenoy's 1972 collection A Tiger by the Tail]):
I had asked him whether he was not getting alarmed about the use to which some of his disciples were putting his theories. His reply was that these theories had been greatly needed in the 1930s, but if these theories should ever become harmful, I could be assured that he would quickly bring about a change in public opinion. What I blame him for is that he had called such a tract for the times the General Theory.

The fact that Keynes was at all open to the possibility that his theories might become harmful made him less of a Keynesian than Krugman.

The thing about Keynes is that economics was not really his thing. Not that he wasn't a student---clearly, the writings of Thomas Malthus influenced him greatly---it's just that Keynes, per Hayek, had many things on his mind:
He was so many-sided that for his estimate as a man it seemed almost irrelevant that one thought his economics to be both false and dangerous. If one considers how small a share of his time and energy he gave to economics, his influence on economics and the fact that he will be remembered chiefly as an economist is both miraculous and tragic. He would be remembered as a great man by all who knew him even if he had never written on economics.

The thing about Krugman is that economics really is his thing. But, sadly, he holds a deep passion for politics. I mean he named his blog The Conscience of a Liberal. He's kinda like the left's Rush Limbaugh. How sad it is that the independent and the nonpartisan can must dismiss as partisan hackery so much of what this Nobel laureate has to say.

One place however where Krugman does go bipartisan is, alas, a most pernicious place; protectionism. In chapter 12 he echoes, among many others in both camps, Mitt Romney:
There are other fronts on which policy could and should move, notably foreign trade: it's long past time to take a tougher line on China and other currency manipulators, and sanction them as necessary.

So the champion of the American downtrodden would impose sanctions onto those countries that allegedly go to great lengths to provide low-income U.S. consumers with affordable goods? Apparently so. In fact he'd attack from both ends: Just a few pages earlier he endorses a list of aggressive measures Princeton professor Ben Bernanke advised Japan to undertake back in 2000---measures he'd like Chairman Ben Bernanke to pursue today---including the following:
Intervening in the foreign exchange market to push the value of your currency down, strengthening the export sector.

So, we should crack down on currency manipulators (hitting the U.S. consumer) while manipulating our own currency lower (ditto)---insert multiple ?'s here.

Any resort to protectionism exposes either a profound ignorance of basic economics or an egregious attempt to win the approval of a select group. Maybe both for Romney, but when we're talking about a polished political pundit (an economist no less), we have to assume the latter.

All that criticism aside, if you're looking for an easy, at times entertaining, read on how today's Keynesian views the world, pick up a copy of End This Depression Now. Then please read one of the very best (truly nonpartisan) books of the 20th century on basic economics, Henry Hazlitt's Economics in One Lesson. Or if all you're after are honest economic insights, just skip to the latter.

Sunday, August 4, 2013

The coming week...

The coming week should be relatively quiet on the financial news front. But, given that the media never rests, there'll be plenty to pique your interest. This week's stories and interviews will be all about the what ifs: What if the Fed tapers in September? What if the children in Washington don't play nice as they bump their heads against the debt ceiling? What happens to stocks if when bond yields begin to rise?

While there's lots more we could cover (we can go Japan, China and Europe all day long), to keep it brief---and pertinent to what I suspect you'll be hearing (mostly) during the week---I'll address just the above three:

What if the Fed tapers back on its bond purchases (quantitative easing) this September? A few weeks ago I thought there was a pretty strong chance that they'd begin backing off in the fall. Now I'm not so sure. More recent Fed commentary (its timing and content) suggests that they are, in my view, way too concerned with the price of the average share of stock. And while there's little evidence (save for all the counterfactuals) that QE is measurably improving the economy, it doesn't appear---with stocks trading at 14 times next year's earnings (not historically expensive) and housing still far from its price peak---that they feel the need (or possess the political will) to upset the financial markets at the moment. But the "what if" question was what if they do cut QE this September. I'd guess that traders would greet it coldly with a bigger than average---across the board---selloff in both bonds and stocks. If however, in the aftermath, the economy appears to be gaining a little traction, I'd guess stocks would recover relatively quickly (barring some other exogenous shock stemming from a few zillion possibilities) leaving bonds in the dust. OPERATIVE WORDS BEING "I'D GUESS". THIS IS NO PREDICTION AND IN NO WAY ACTIONABLE AS IT RELATES TO YOUR LONG-TERM PORTFOLIO!

What if the politicians don't play nice in the sandbox? The fact that congress's low approval rating makes the President, with his low approval rating, look like a rockstar (meaning all the children are in timeout), come debt ceiling time they'll join forces---the usual brinkmanship notwithstanding---and play their favorite game, kick the can...

What happens to stocks when bond yields rise? Of course that depends on the reason(s) for the rise. And, as you may know, I DON'T MAKE SHORT-TERM PREDICTIONS! :)

P.s. If the coming week blesses us with some downward volatility (we could use it btw), I'll be a bit slow in the usual followup commentary. I'll be away from the office all week, but won't be entirely disconnected.

Have a great week!

Saturday, August 3, 2013

The Number

Late the other night I blurted out a blogpost on the revised GDP formula. I closed with a promise that I would go crunch some numbers and bring you a meaningful idea for revising how we measure the economy.

While I closed with tongue-in-cheek, I did intend to at least entertain you with an idea that would never fly, but that you free-market thinkers would appreciate nonetheless.

It was going to go something like this:

Since government spends only what it takes from the private sector---where resources are allocated, jobs are created, and the economy expands and contracts as natural forces dictate---here's a method for including government spending reductions, as a positive, in the GDP formula.

Of course, being that GDP is intended to represent the market value of all final goods and services produced in a country over a given period, and that a reduction in government purchases would directly reduce the number, we can't go there.

What we can bring to light, however, is how the GDP formula, itself, in no way tells us what actually grows the economy. And how our intense focus on the number inspires all sorts of bad thinking and very bad policy.

For example: If government wants to give a short-term boost to GDP, all it has to do is borrow (not hitting the private sector initially [although it would incentivize certain acts and impact the credit market]) and boost government spending. All else being equal, add a trillion dollars to the budget and you grow GDP by 6%. Of course that trillion plus interest will have to one-day be paid back. Which simply means that what deficit spending adds today it subtracts (plus interest) tomorrow. Now those who advocate such measures tell us that government spending sparks all manner of countable economic activity which would generate the revenue sufficient to make future debt payments without raising taxes or devaluing the dollar. Well, we'll see...

Another way misguided, misinformed, myopic politicians might conspire to help the number would be to tighten restrictions on imported goods. Do more of what, for example, Bush did with Japanese steel and Obama with Chinese tires; impose stiff tariffs that in effect make U.S. producers more competitive. That would might (for a moment) reduce the trade deficit and help the number (provided it wouldn't be offset entirely by retaliation from our trading partners and by the hit to consumption due to the higher prices). While, in reality, such moves amount to income redistribution (from the populace to the politician's pet producers)---thus stealing business from the politically-disconnected U.S. firms that vie for the income we save when buying cheaper foreign goods, and those that vie for the business of the foreign firms that capture the U.S. dollars we send their way. Make no mistake, any illusion of protection-spawned economic growth would evaporate all too quickly. But, alas, it's doable if politicians believe it'll last through the next election cycle and if the exercise would garner support from the protected producers...

And, lastly, the notion that boosting private consumption somehow leads to real growth---intuitive as it may seem (being that it's 70% of the number)---is every bit as wrong-headed as the above. Think about it: if boosting aggregate demand is all it takes, why then doesn't Uncle Sam simply man the printing press, then a helicopter, and drop dollar bills onto America (I know, "helicopter Ben")---in return for nothing other than the expectation that their grabbers would find some product to exchange them for? Let's hope it's because that even the ardent Keynesian---while he may propose that paying a person to dig worthless holes is a worthy pursuit---at some level possesses the commonsense (although there's reason to doubt) to know that doling out dollars for the sole purpose of promoting consumption, as opposed to in return for some productive activity, results in little more than the net destruction of resources. Talk about the definition of inflation!

I can hear a reader asking "but wouldn't all that government stimulus-induced consumer spending lead to greater production, investment, job and GDP growth?" Now ask yourself reader, would producers---under the above scenario---be willing to make long-term capital, and labor, investments, or would they simply ramp up the pressure on existing facilities and staff (maybe enlist some temporary help) until the helicopter runs out of gas? Did the auto industry take on permanent help when sales spiked due to "Cash for Clunkers"? Did the housing industry hire when sales spiked due to the first-time homebuyer's tax credit? Nope and nope. They of course knew that sales would tank (and they did) the minute those programs expired. And what are we seeing presently in the residential market? Inflation-induced elation (record price increases). Elation, that is, for everyone except the buyer. To see real job growth in real estate we'll need to see a pick up in investment on the part of builders. As long as they believe that current demand is the result of government stimulus and artificially low interest rates, the experienced producers will not be making big long-term commitments. They'll produce, and hire, thinly---with the near-term in mind---and raise prices (to the cheers of Washington and Wall Street) until the liquidity pump stops pumping. Only when sufficient demand exists in a normal interest rate environment will they make serious, long-term, job producing investments.

Bottom Line: Our remaining component, investment, is what truly drives the economy. Yet our understanding is forever prone to the dazzlement---with their select stats and compelling counterfactuals---of the politician and the Keynesian economist. Their arguments, however, pale rather quickly when exposed to the following light:

When private sector actors allocate their resources on their own behalf, quality (inspired by competition) and thrift (inspired by commonsense) are paramount. Resulting in the best possible allocation of resources for society at large and a healthy (forever cyclical) economy.

When politicians extract resources from the private sector on behalf of those they deem worthy---while at times there may be a smidgen of virtue in their intent (I could be reaching)---the graft is inspired by competition (special interests looking to legislation for a competitive edge) while thrift is thrown out the window. Resulting in the best possible (short-term) allocation of resources for the politician and special interests, the worst for the rest of us, and a hamstrung (often sickly) economy.