Once upon a time the Supreme Court got it right...

The un-economically-tutored Catherine Rampell chides IKEA and Gap for singing their own praises for paying "average" wages above the minimum.

Katie Little reports on how a booming economy pushes up wages, naturally, and how employers accommodate the increase in labor costs (HT Darren Thomas).

Of course I could default to the usual, and tell you how government intrusion is not only not necessary, but counterproductive, when it comes to the setting of wages. But, for today, we'll simply talk very basic economics.

So let's say I'm an employer who pays his people way above the minimum wage. What's it to me if Washington mandates a higher minimum wage? I mean, I don't pay it. In fact I'd benefit, since some folks would be making a little more money and, therefore, they'd be able to buy more stuff from my company. Or they'd buy more stuff from my customers' businesses and, therefore, allow my customers to buy more stuff from me. Not to mention that my cheaper-pricing competitors who pay minimum wage might have to adjust and make me more competitive. Hell yes! Raise that sucker!!

Am I making sense? Of course. What I just said---save for the last part---was intuitive. But what if I took a minute and began thinking about who supplies me with the supplies I need. Do my suppliers all pay above the minimum wage? And if, in the off chance they do, do their suppliers? Do their suppliers suppliers? Do their suppliers suppliers suppliers? Is there someone somewhere along the chain who'll have to compensate for, say, a 39% hike ($7.25 to $10.10) in the cost of certain labor? Well of course, there has to be. I mean, the promoters of minimum wage say the would-be "beneficiaries" number in the millions.

So now that we've established that someone else's increase in labor costs can indeed impact me, what are we to think? Well, we can hope that, by some magic, politicians know better than do employers how to make their businesses better. You've heard some say that raising the minimum wage will actually make its payers more profitable, as they'll end up with more productive individuals. Again, the far-reaching assumption here is that employers can't, on their own, find the optimum wage for their low-skilled workers---and that politicians can. You struggle with that one too, right?

Ask an intuitive person why raising the minimum wage is a bad idea and there's a good chance she'll say "inflation". Businesses will surely raise prices to offset the higher labor expense. Well, perhaps, but not necessarily, or initially. Some I suspect will lay off a worker or two, then squeeze more out of who's left to avoid, or to delay, having to increase their prices. Some will go ahead and make that investment in automation that they've been pondering the past few years (see Katie Little's article).

And what's the overall impact of such adjustments? That would be less total employment. You know the old adage, "raise the price of something and you get less of it". And less total employment means more pressure on our social safety net (read higher taxes and/or government debt).

Oh, and what about my personal life? Even if, as an employer, I don't immediately register the impact of raising the minimum wage, I'll surely see it in my private affairs. Maybe I like to travel, and maybe I eat out a lot while on vacation. And maybe I like my hotel room cleaned every morning. Lots of the human tasks devoted to the catering to my activities while escaping the grind are provided by minimum wage-paid folks. Will I pay more for R&R? Or will R&R suppliers---in fear of losing a customer---make the necessary cuts to keep their rates reasonable? Will I then notice their reduced capacity to serve?

Jack Loesch makes the inflation case nicely:

Thus in the long run the minimum wage worker is back to where he or she started as far as a standard of living and all that has been accomplished is to jumpstart inflation. A minimum wage increase does not improve their long-term purchasing power. It does however reduce the purchasing power of all those who did not get a pay increase along with the increased minimum wage. When a restaurant is forced to raise its prices because many of their employees just received a government mandated raise, everyone who didn't benefit from the raise but must pay the higher prices is worse off.

As you might imagine, I can proceed in this vein for a very very long-time. There's virtually no end to the hypotheticals that would point to the ills of politicians dictating to businesses the management of their payrolls. So we'll cut to the chase.

I could cite examples like Switzerland and Singapore, places where folks enjoy average incomes exceeding those of American workers, yet have no minimum wage restrictions. But each situation possesses its own unique set of circumstances---other than the lack of a minimum wage---that one can point to to explain away such phenomena. So allow me to make what the proponents of politicians picking numbers and making them law would deem a pithless point, that it's all about freedom. The freedom of low-skilled individuals to compete for work. The freedom of employers and employees to contract with one another, without the dictates of politicians who are utterly clueless as to the conditions that would lead these two parties to the optimum outcome.

Once upon a time the Supreme Court got it right:

Lochner v. New York, 198 U.S. 45 (1905), was a landmark United States Supreme Court case that held that "liberty of contract" was implicit in the Due Process Clause of the Fourteenth Amendment. The case involved a New York law that limited the number of hours that a baker could work each day to ten, and limited the number of hours that a baker could work each week to 60. By a 5–4 vote, the Supreme Court rejected the argument that the law was necessary to protect the health of bakers, deciding it was a labor law attempting to regulate the terms of employment, and calling it an "unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract."

That's it, "the right and liberty of the individual to contract."

Now, if you wish, go ahead and Google the Bakeshop Act. You'll find claims that it was an effort by the Bakers' Union to protect its members against the ills of long hours subject to hazardous working conditions. Dig a little deeper and you'll find the truth: That, like other intrusions on the right-to-contract, such as the Davis Bacon Act, the Bakeshop Act was designed to squash the big bakeshops' non-union competition. By simply adhering to a most basic "American" principle, the 1905 Supreme Court thwarted an all out attack on low-skilled individuals.

Who's going to save them now?

I love high altitudes! And I'm okay with high gas prices...

I love high altitudes. It's where I find wild trout in great abundance. In my younger days, before I began thinking deeply about economics, I viewed the outrageous price I'd pay for a gallon of gas from those tiny stations tucked along those mountain roads as pure highway robbery. Each owner knew that his station was the only game for miles, so they'd stick it to every motorist who'd dare venture into their wilderness. Or so I thought.

The other day, while picking up the dry cleaning, the nice lady, with the colorful vocabulary, who watches my little weekly TV segment says to me "hello Mr. Mazorra, how are you today?" I say "great, how bout yourself?" She replies "oh, I'm a little #*%sed off right now to tell you the truth." "What's the matter?" "My last customer haggled with me over her bill. Everybody wants everything for nothing! Don't they know that prices are going up everywhere. It really #*%ses me off how we get a little ruckus in Iraq and those big oil companies stick it to ya immediately with higher gas prices."

(It's funny how the few folks who work at places I frequent, and watch early-morning TV, often spark up conversations about the economy or the markets by telling me exactly how it is. They're usually generous with their comments about the weekly segment, and how they appreciate my perspective, but I'm thinking if that were true, wouldn't they be asking me how it is [not that I always know], as opposed to telling me?)

So, I take a deep breath, and I ponder how I might help my friend understand that the price of a gallon of gas is not determined by some great price-fixer looking for every opportunity to stick it to the consumer. That gas prices have risen lately due to speculators bidding up oil and gas futures contracts, in anticipation of a supply disruption. And how that activity---its result (higher prices at the pump)---inspires profit-seeking producers from other areas of the world to ramp up production. Virtually assuring that there'll be gas for Fresnans regardless of what occurs in Iraq.

But, alas, I didn't give it a try. I was thinking that she--already being #*%sed off and all---was in no mood for a lecture on how markets work. So I simply said "Ah, don't let em get to ya. Life's too short." She said "I know, in fact my doctor just put me on new blood pressure meds" (confirmation for me that I made the right call). "See what I mean?", I replied...

Oh, almost forgot: The next time you're driving to some remote location, when you stop to fill er up at twice the price you paid back in town, be thankful for "free" markets. Be thankful that no vote-starved politician has lately been able to fix the price of a gallon of gas. For if he had, you can darn well bet that that price would not have covered the extra cost of transporting that gas that far into the wilderness. Meaning, you'd be stuck, big time. For that matter, you could even have trouble filling your tank back in town (remember those long lines back in the 70s, when Nixon was fixin prices).

I'm telling you this because apparently politicians are starting, again, alas, to go there...

The "All Else" Part 10, Retail Sales - And - Next week is likely to be ugly for stocks...

Part 10, retail sales, of my "All Else" series is a no-brainer. Why would I, an investment consultant, concern myself with retail sales, or, let's say, consumer spending habits? It's because consumer spending accounts for two-thirds of gross domestic product (GDP). Tracking the surveys that track consumers goes a long way toward shaping one's expectations with regard to the economy going forward.

You may have caught my more optimistic tone (economically-speaking) these past few weeks. Although my optimism has had more to do with the outlook for business investment than it has the readings on consumption. The latest retail sales numbers (reported by the Census Bureau) showed a roughly 4% year-over-year increase. That's certainly okay, but it's still not a level that screams expansion. I also track the weekly chain store sales report, and this week's showed a nice acceleration as well.

I'm guessing we'll see retail sales pick up some real steam as this year unfolds. Why? Because as businesses finally unleash some of their liquidity and invest in capital goods---i.e., expand---we should see the employment picture improve markedly. And that means better retail numbers going forward. In fact, we're already beginning to see it. Personal real income is on the rise---this week's reading from the Bureau of Economic Analysis (BEA) showed a .4% monthly increase and a 3.5% jump year-over-year (those are good numbers), although that same survey had overall consumption down a bit, hmm. And to top it off, consumer confidence is improving, and weekly first time unemployment claims have run at a relatively low rate the past couple of months. You can see why, all things considered, I remain bullish on economic growth going forward.

So does my new-found optimism about the economy mean I'm crazy-bullish on the stock market this year? Not necessarily. Like I said the other day, since 2013 was such a crazy good year for stocks, amid a very slow expansion, a pickup in growth this year only validates those gains. Not that stocks can't go higher---based on the market sentiment indicators I track, lots of folks are betting on it---it's just that the economy needs to show sustainable growth, leading to increased corporate profits, to bolster the market against the inevitable headwind of higher interest rates as the economy treks into the later stages of expansion.

So what can go wrong? Well, as I just suggested, no sustainable pickup in growth would bode poorly for the stock market. And, if we do get the growth, higher interest rates can be messy. And of course the geopolitical (read Iraq and Ukraine) is always a concern. And those vote-garnering initiatives---while politicians play the envy card---can do a real number on business sentiment. Meaning, the target is on the back of business. The consistently reported (by business owners) drag on business has been uncertainty over regulations and taxes. And no one knows the magnitude of the inevitable unwinding that'll occur when the world assesses the distortions created by the past few years of artificial signals sent by the Fed. Beware of bonds, for sure...

And, lastly, a heads up: I suspect next week is going to be super ugly for stocks. Why? Because I'll be on vacation---it always seems to work out that way. Well, actually, not always. It's just that I have vivid memories of those vacations when the market was tanking. If it does, or if it doesn't, I'll have a connection. Which---good or bad for you---probably means your inbox will receive a message (or two) from me while I'm away...

Rigging to win...

Straight-talking Elizabeth Warren says the economy is "rigged" against average Americans. Right or wrong, she's taking a forever politically-profitable position---she's playing the age-old envy card. You'd think the public would grow tired of being promised the goods supposedly concentrated in the hands of the few, only to come up time and again feeling put upon and rallying for the candidate who promises to steal away their pain. Or to at least exact some pain onto the unworthy rich.

Do big company bigwigs pay for political favor? Well, yeah! Now read that again: Do big company bigwigs pay for political favor? One more time: Do big company bigwigs pay for political favor? Think about it, think about it hard. Think about which party is the culprit (or the primary culprit) in this exchange.

My family and I live under the rules of a homeowners association. Our conspiracy-theorist neighbors believe that our board is lining the pockets of their crony contractors by paying more than market rates for the keeping of the grounds, the repairing of the clubhouse roof, etc. Yet not once have I heard or read anyone calling for the contractors' heads. Nope, it's the board they're after. And rightfully so. I mean, who'd blame the businessperson who happens to have an in with the president of our homeowners association for trying to get ahead? Apparently none of my fellow dues payers.

Do big company bigwigs pay for political favor? Do business owners exploit relationships to win contracts from boards? Again, who's primarily to blame, the private sector actors or the public servants?

Warren is after the bigwigs, when she should be after the recipients of the bribes---the legislators of the favors.

Case in point: In 2012, a senator from Massachusetts---a champion for the Affordable Care Act no less---lobbied for a repeal of a 2.3% tax on an industry slated to be one of the Act's chief beneficiaries, the medical device industry. This particular senator made the case that levying such a tax on certain Massachusetts employers would result in the loss of jobs, etc., in the state. A clearcut case of a politician catering to supporters---cronyism at its worst. Now that's the sort of politician---and the sort of rigging---Warren should be targeting. But wait, she's a politician too. Aren't all politicians that sort of politician? BUT WAIT!! she's THAT Massachusetts politician.

Here's a snippet from her April 2012 op-ed for, yes, MassDevice.com:

When Congress taxes the sale of a specific product through an excise tax, as the Affordable Care Act does with medical devices, it too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential. It also pushes companies of all sizes to cut back on research and development for life-saving products. With an appropriate offset, we can repeal the medical device tax without cutting health care coverage for millions of people or forcing Americans to fight the whole health care battle all over again.

"An appropriate offset" simply means: fear not faithful supporters, we can pass this burden on to other industries in other states.

Dang! Reading that excerpt again, I can't help but acknowledge Warren's grasp of basic economics. Her obvious intentions notwithstanding, she's---in terms of the impact on employers---right. Allow me to restate the above and apply her irrefutable logic to raising the minimum wage. Something Warren, hypocritically, is a huge proponent of:

When Congress raises the cost of a specific input, as raising the minimum wage does to employers of low-skilled individuals, it disproportionately impacts the small companies with the narrowest financial margins.

That is an utter no-brainer. But, sadly, it's of no use to the envy-exploiting politician...

Everyday Economics (video)

In this week's EconTalk podcast, host Russ Roberts points out how entrepreneurs made huge investments---taking huge risks---in the hopes of making huge profits through the production of high-priced natural gas. The success of many of them inspired other capitalists to take part and, consequently, the supply

becomes enormous and the price just goes to the floor. And, all of a sudden, all the users of gas now are benefiting from all the investments that these people made---so confident that they were going to make enormous sums of money---and ended up mainly benefiting the people who use the gas.

I got up this morning at the usual early hour, reviewed the morning's economic reports (we get them early here on the West Coast), assessed the market open, recorded and sent out an audio commentary (I do that when the Dow drops a hundred points), reviewed my calendar and notes for the day, ran to the gym with my wife for a quick workout and made it to the office a couple minutes late for my first appointment.

Ten, maybe fifteen, years ago I was getting up at least an hour earlier to get the workout in. My clients would not---as they've now grown accustomed---have heard my assessment of the market, and I would not have spent nearly as much time reviewing the day's economic releases---nor spent the previous afternoon running my valuation screens and compiling my research notes (as I did yesterday)---because back then a client's portfolio analysis took so much time and effort that my then smaller staff couldn't perform their tasks and get it all done without my involvement. Leaving me less time to do the stuff that would make me more valuable to my clients, not to mention my family.

Ah, but today---while I wasn't complaining back then---my world has changed dramatically. The quality of the work we do---the quality of the life I lead---is so much better than it was just a few years ago. Why? Have I worked hard? Well, yeah. But my hard work didn't produce the phenomenal technology that has so enriched---personally and professionally---my life. Nope. For all that I thank the individuals who sought to make themselves filthy rich by making the stuff that would enrich my life. Thank goodness for capitalism!!

This morning I summoned my staff into my office and we watched four short videos produced by Marginal Revolution University, featuring economics professor Don Boudreaux. I've posted the first one below. Here's the link to the series. Please take a few minutes and take them in. And try, just for this brief period, to open your mind and suspend your preconceptions about industry, the roots of progress, trade and immigration. And don't hesitate to share these with the folks around you, they make for great conversation. My staff and I spent a good forty minutes afterward discussing and, yes, debating many of the points Don makes.

If you sometimes find yourself repeating, as if they're gospel, the preachings of your chosen pundit from your favorite cable news channel, syndicated columnist or partisan economist, you owe this to yourself, and to those at whom you preach:

Market Commentary (audio)

Click the play button below for today's commentary...

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A better economy means higher stock prices, last year...

Today's final revision of first quarter GDP came in at a shocking minus 2.9%. We knew the number would be revised lower, but the consensus estimate had it at -1.7%. While I generally hate going with the consensus, I am in the camp that dismisses Q1 GDP as a largely weather-driven (although there was a surprising decline in healthcare spending) anomaly.

I've reported recently that, on balance, key indicators are pointing to an acceleration in economic growth going forward---which the bulls believe will keep the stock market chugging higher, a lot higher, into the foreseeable future. While I am indeed a long-term bull (all long-term investors are long-term bulls btw), I would color today's economy and the stock market a shade differently.

Last year was stellar for stocks, but not for the economy. I listened to an analyst this morning who claims that the correlation between the S&P 500 and GDP is zero. And while I suspect---when you chart year-by-year stock results along side GDP---he's correct (analysts don't throw that stuff out on CNBC without having viewed the data first), his underlying assumption seemed to be that there's no relationship between stock market performance and economic growth. If that was indeed his point (probably wasn't, but that's how he left it), he's dead wrong. You see, financial markets anticipate. And last year, stocks were clearly anticipating a pickup in economic growth. And, yes, we're now beginning to see it. And herein lies my point: this year's (Q1 notwithstanding) pickup in growth merely validates last year's market---which is wonderful. It in no way, however, assures like results going forward.

For this market to continue higher, earnings will have to catch up a bit to share prices. Not that, overall, the market is expensive at this juncture, it's just not nearly cheap like it was in 2013. To become that attractive again, without a bear market, the E in the P/E will have to accelerate faster than the P. And that's the stuff of future commentaries.

Beyond whatever goes on in the near-term, I remain bullish on the human condition, and, yes (and again), the capital markets, in the long-term. You'll understand why after you view the video series I'll be posting soon...

Market Commentary (audio)

Click the play button below for today's commentary...

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Finally leaving the runway??

Last week's release of the Index of Leading Economic Indicators came in positive for the fourth consecutive month. This morning's U.S. Flash PMI (Purchasing Managers Index) report (from Markit) indicates "the strongest upturn in overall business conditions since May 2010". The most recent reads on the Institute for Supply Management's Purchasing Managers Indexes were positive as well. Even this morning's existing home sales report (real estate indicators have trailed the other majors until very recently) beat expectations. While there's yet more, like the NFIB Small Business Optimism Index, suffice it say that most arrows are pointing in a positive direction for the U.S. economy.

What's it all mean for stock prices? Great question. Of course I don't know, but I can speculate, or gauge, somewhat intelligently (I hope).

While the above is indeed good news for earnings growth going forward---and could very well point to a meaningful pickup in employment---faster growth has to bring a new mindset to the market. While I've never joined the this-bull-market-is-all-about-the-Fed camp, I do believe that the Fed's next policy move has the potential to inspire that long-awaited stock market correction (10-20% decline)---and I believe the Fed believes it as well.

As I've been hinting of late, I'm seeing hints of inflation brewing beneath the numbers. Now, a slight pickup in inflation---particularly through the Fed's lens---isn't necessarily a bad thing, that's why their inflation target is 2%, not 0%. Higher trending prices can incite optimism and encourage increased production and, thus, jobs, wages, etc. Too much inflation, and its attendant higher interest rates, however, can kill a party faster than your grumpy next door neighbor.

As I reported last week, the Consumer Price Index (CPI) increased 2.1% over the past 12 months. Uh oh (remember the Fed's 2% target)! However, Personal Consumption Expenditures' (PCE)---the Fed's preferred gauge---last read was 1.5%. I wouldn't be surprised if this Thursday's number comes in a titch closer to that 2% line in the Fed's sand.

But last week Janet Yellen said the latest inflation numbers are "noisy", and, for the most part, dismissed the notion that inflation is a worry at this juncture. I presume, therefore, that if PCE comes in near, or north of, 2%, that a new line will be drawn. And the market will love that---the new line---to death. For it'll mean that the Fed is not nearly ready to take away the punchbowl. I, for one, however, wish they would. I'd much rather see the Fed sober us up here and allow the marketplace to respond to real world signals, to allocate resources to their most productive use, as opposed to where artificially low interest rates, etc., direct.

While he'd never admit it, I would bet ya that if Alan Greenspan could do it all over again, he'd not nearly accommodate the real estate market and the financial sector to the extent he (and his committee) did. The Fed essentially stimulated its way (so it would seem) out of the bursting tech bubble only to inflate its way into the great real estate bubble. Of course that's not the whole story, and it's not the story Greenspan tells.

The good news, for the moment, is that we're not pushing against the classic extremes that suggest things are overheating. Not hardly. In fact, it appears as though the economy's engines are just warming up enough to finally allow it to leave the runway. The question, alas, that nobody can answer is: how long before it reaches the altitude where it'll have to deal with the headwinds created by a bond market (interest rates) adjusting to reality? Many "experts" think (they can't know) it'll be awhile...

In summary: All that you just read should make you feel pretty good about the market's prospects for the foreseeable future. But never forget, even while in the economic sweet spot, and amid reasonable valuations for much of the market, an exogenous event, or no apparent event whatsoever, can send the market tumbling when you least expect. In fact, that---the periodic tumbling---is the one thing I can always predict with 100% confidence. I just can't predict when. Which is why I only work with patient, long-term investors.

"Meaningful" government sector engaging...

In Tuesday's New York Times, the Editorial Board offered up its expert commentary on the Fed. Here's a snippet of that insightful commentary:

In a normal business cycle, low interest rates are usually enough to generate sufficient demand to boost economic growth to its historical average of roughly 3 percent. But there is nothing normal about the present cycle. The Fed has extracted about all the juice it can from low rates and continues to squeeze. It could also spur investment by tolerating higher inflation than its 2 percent target. But the basic problem --- spurring demand on the part of consumers and borrowers --- is outside its purview.

Only Congress can provide the extra dollars for that, but lawmakers have been unwilling or unable to take action, even just to provide basics like federal unemployment benefits or highway and bridge repair.

Given that failure to act, it is a wonder the economy has managed to grow at 2 percent. To assume that it will continue to do so or that it will fully recover without the government sector engaging in a meaningful way is to hope against evidence.

Oh my! What is "insightful" about that commentary is the insight it gives into the utter dearth of basic economic knowledge existing among the members of the NYT Editorial Board. 


I'll keep this very brief and simply pluck out what I pray exploded out as obvious malarkey to the majority of my readers. This notion that "only Congress" has the wherewithal to get the economy humming at historically-average speed---and that the government sector has not engaged---is the definition of ignorance, if not pure political pander, if not, well, malarkey.

Reality: Only "lawmakers" engaging with the private-sector can provide the uncertainty that would restrain capital investment while corporate balance sheets are flush with cash and interest rates are at record lows. The fact that the economy has managed to grow at 2 percent amid such government sector meddling is a wonder.

Here's a list, compiled back in August 2012 by Cato's Thomas Firey, of 15 government sector engagements ($2.4 trillion worth) that have occurred since 2008. Allow me to add TARP, The Affordable Care Act and, in terms of Fed-meddling, the trillions of dollars printed under the QE programs. Oh, and regarding "basics like federal unemployment benefits", count the number of unemployment benefits-related acts below:   

#	Name	Stimulus (Billions)	Became Law	Public Law	Note
1.0	Economic Stimulus Act of 2008	$167	2/13/2008	110-185	A ”timely,” “targeted,” and “temporary” fiscal stimulus.
1.0.1	Unemployment Compensation Extension Act of 2008	$5.7	11/21/2008	110-449	Extends unemployment insurance, using borrowed funds so as to provide stimulus.
2.0	American Recovery and Reinvestment Act of 2009	$819	2/17/2009	111-16	This package of public works projects, tax breaks, unemployment insurance extension, and other spending would keep unemployment below 8%.
2.0.1	Cash for Clunkers Extension	$2	8/7/2009	111-47	Continues the subsidy for new car purchases that was first enacted as part of ARRA.
2.1	Worker, Homeownership and Business Assistance Act of 2009	$44.7	11/6/2009	111-92	Extends and expands the homebuyer tax credit program.
2.2	Temporary Extension Act of 2010	$8.1	3/2/2010	111-144	Extends unemployment insurance, using borrowed funds so as to provide stimulus.
2.3	Hiring Incentives to Restore Employment Act	$17.6	3/18/2010	111-147	AKA the “Jobs for Main Street Act,” this “jobs bill” would ”spur job growth and strengthen the private sector.”
2.4	Continuing Extension Act of 2010	$18.1	4/15/2010	111-157	Extends unemployment insurance, using borrowed funds so as to provide stimulus.
2.5	Homebuyer Assistance and Improvement Act of 2010	$145	7/2/2010	111-198	Extends the deadline for submitting paperwork for homebuyer credit.
2.6	Unemployment Compensation Extension Act of 2010	$33.9	7/22/2010	111-205	Extends unemployment insurance, using borrowed funds so as to provide stimulus.
2.6.1	United States Manufacturing Enhancement Act of 2010	$3	8/11/2010	111-227	Reduces or suspends various import duties.
2.7	Small Business Jobs Act of 2010	$85.4	9/27/2010	111-240	Expands SBA loan programs and provides other small business assistance.
3.0	Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010	$916.8	12/17/2010	111-312	A package of tax breaks, including a cut in the Social Security payroll tax, an extension of the Bush income tax rates, and an extension of unemployment insurance.
3.1	Temporary Payroll Tax Cut Continuation Act of 2011	N/A	12/23/2011	112-78	Extends the Social Security payroll tax cut, extends unemployment insurance, and other provisions.
4.0	Middle Class Tax Relief and Job Creation Act of 2012	$167.6	2/22/2012	112-96	Extends the Social Security payroll tax cut, among other provisions.
SUM:		$2,433.9

A little perspective for the nervous Nellie...

All-time highs can make one nervous about the stock market. I know this from conversations with clients. I find myself during times like these offering more than the usual insight into my regular routine of calculating the valuations among the various sectors, and places in the world, we invest in. As I've stressed here several times of late, stocks, in the aggregate, don't look cheap to me like they did in early 2013 --- by historical norms they, in the aggregate, look (to me) reasonable. Of course some sectors look more attractive, both valuationally and cyclically, than others.

That said, whether a bloke like me thinks stocks are dirt-cheap or reasonably-priced, stuff happens that can send stock prices into a tizzy when you least expect. Which is why I forever preach the virtues of long-term investing and making sure one's allocation to the market is consistent with one's temperament --- none of this is worth losing sleep over.

In this morning's column, USA Today's John Wagner does a nice job putting record stock prices into perspective for the long-term investor. Here's a snippet (be sure to read the entire article): 

New highs are the hallmark of a mature bull market, says Sam Stovall, managing director of U.S. equity strategy at S&P Capital IQ. It's the nature of bull markets to make new all-time highs — otherwise, the S&P 500 would never have gotten past 13.55 in June 1949, its first bull market high after the index started at 10.

The average bull market spends about 7% of its life at all-time highs, according to Stovall. This bull market has been at all-time highs about 5% of its life. In long-term, secular bull markets, such as those in the 1980s and 1990s, the market spends between 12% and 13% of its life at all-time highs.

A new high, in and of itself, is probably a bad reason to sell. And there are lots of other bad reasons to sell, including:

• Politics. If you bought stocks because you thought George W. Bush would be a business-friendly conservative president, you were half right. He is a business-friendly conservative. But that doesn't mean stocks will fare well. From the day Bush was inaugurated to the day he left office, the S&P 500 lost 40%. Conversely, if you sold stocks because you thought Barack Obama was a kitten-eating Communist, you've missed a 143% gain so far.

• Pundits. Anyone who tells you to sell all your stocks isn't credible, even if he was lucky once.

• Friends. Your friend may, indeed, know that the financial system is going to collapse. Your friend may also know that he can get 537 cable channels from the fillings in his teeth. You just never know about people.

Being reluctant to sell, however, is never the same as never selling. And there are some very good reasons to sell stocks from time to time. Start with the basics:

• You've reached your goal. Let's say that your goal was to have $500,000 in your retirement account by age 65. Woo hoo! You're 60, and you have that now. If you were 70% in stocks, you can dial back. There's no need to take more risk than you need. Your main goal now will be to beat inflation — currently 2%.

Mum shoulda been the word...

The stock market liked what it heard from a tactically improved Janet Yellen during today's post Fed meeting press conference. This time there was no market-shaking "6 months" answer to any "when do you think you'll raise interest rates?" question. The newbie Fed Chair basically reaffirmed the status quo amid some evidence that the job market and the rate of inflation might be crossing the Fed's lines in the sand sooner than the second half of 2015. Which, I suspect---as we've already seen on the unemployment number---would simply result in the kicking of sand over the old lines and the drawing of new ones further down the unemployment rate and up the inflation rate charts.

I imagine Ms. Yellen is feeling quite good about the Dow's 100 point response to today's media event. Because, clearly---while supporting some stated level of stock prices is not to be found in the Fed's mandate---they fret over the stock market. Where, ironically, Ms. Yellen may end up regretting one of her responses was her assessment of present valuations. When asked if the stock market is trading outside historical norms, she replied: "I still don't see that for equity prices broadly."

Now, I happen to agree, "broadly", but I can say that. I can also say that I think stock valuations are broadly expensive when I believe such. As for Ms. Yellen, on the other hand, can you imagine some future press conference---the whole world with a 401(k) watching---where she says she thinks stocks are broadly expensive? Me neither. In fact, in my view, while I understand the Fed considering equity valuations in their overall analysis, the fact that they know their comments can move markets ought to be incentive enough to simply plead the fifth when someone asks about valuations---unless, that is, they're willing to disappoint as well. Besides, given the Fed's poor track record as an economic forecaster, and fundamental analyst, (yes, I'm alluding to the Greenspan Fed's mismanagement of monetary policy leading to the credit bubble, and I might add Ben Bernanke's Great Moderation speech of 2004)---let alone a financial market forecaster---you'd think they'd stay way out of that fray. The honest response would be "we're just not very good at asset valuation, or forecasting markets".

Ah, but now that she's gone and done it---come a day when the S&P's trading at 25 times earnings and she's asked what she thinks about valuations---she'll have to choose her words very carefully. While I don't believe that the Fed---the doves anyway---minds in the least receiving credit for the present bull market, make no mistake, they'll be desperate to elude the blame for the next bear.

 

I'm guessing they skipped Econ 101

I don't know much about Christine Lagarde, the current managing director of the International Monetary Fund. I presume----to have ascended to the top position within the organization charged with promoting "international monetary cooperation and exchange rate stability", facilitating "the balanced growth of international trade", and providing "resources to help members in balance of payments difficulties or to assist with poverty reduction"---that she boasts quite the array of academic accolades.

Yesterday morning, from her position on high, she gave the IMF's updated estimate of global economic growth. The U.S., the IMF predicts, will contribute somewhat less than what it had originally forecast for 2014. While I suspect (I only caught the highlights) she offered up some detail of their in-depth analysis, truly---after recording a negative GDP number for Q1---one doesn't have to be an economic rocket scientist to downgrade one's entire year forecast. She did announce that they're keeping their 2015 forecast for the U.S. economy at 3%---a nice, safe number.

While the IMF, their collective brainpower notwithstanding, doesn't (to say the least) sport the best forecasting record (which means they've been very unlucky guessers), my guess is that directionally-speaking they're making a rational guess---given the latest trends of the economic indicators I pay attention to.

I say "directionally-speaking" because I'm simply guessing that the economy grows through next year, as opposed to falling into recession between now and then. I'm not assigning a growth rate, and, quite frankly, current trends notwithstanding, I'm not betting big on being right. I'm simply recommending that our clients tilt their equity allocations to sectors that, historically-speaking, tend to perform relatively well as an economic expansion accelerates into its mid to later phases. It doesn't take an investment adviser rocket scientist to recommend a shift (at the margin) to mid/later-phase sectors when we're five years into the slowest expansion on record.

Lagarde also suggested that the Fed will be able to maintain its zero interest rate policy longer than the market presently anticipates. I'm guessing she's wrong---I'm guessing the economy will gain enough traction/threaten enough inflation to force the Fed's hand sooner than they're guessing . Operative word---for all of the above---being "guessing".

That said, she did make a strong recommendation to the U.S. that, if implemented, could in fact cause me to give pause with regard to the economy's wherewithal to accelerate into your typical later expansion phase. A recommendation that, if implemented, could keep the Fed very much engaged ("accommodative") longer than the market may be presently discounting: The IMF believes that U.S. politicians, who, like her (I'm assuming), have little or no experience in managing a payroll, should mandate to those who do how much to pay their least-productive workers. This, at a time when no small percentage of American CEO's and small business owners have stated emphatically that the reasons they've been so hesitant to invest in capital---and, thus, create jobs---is burdensome regulations and tax uncertainty. Those IMF elites, by some miracle utter nonsense, suggest that such a move would actually help the U.S. economy. Were they such bright youngsters that they got to skip Econ 101? Perhaps we shouldn't be surprised by their abysmal forecasting record...

The "All Else" Part 9, Emerging Markets

What if I told you there were places in the world where, combined, 85% of the population lives and where those 6 billion folks have yet to build the infrastructure or, therefore, to enjoy the modernity to be found where the remaining 15% live? And what if I asked you where, therefore, you'd expect the greatest economic growth---the greatest advancement of the human condition---to occur in the years to come?

I read an article the other day about Google's desire to launch 180 satellites with the goal of providing internet access to the two-thirds of the world's population who've yet to log on. Do you think such an accomplishment would help speed up the progress in those emerging countries? I do.

The average Indian worker is 26 years of age. The average American worker is 37. Who do you suppose has more energy? Who do you suppose has more to gain from deploying his/her energy? Whose condition do you suppose has more room for improvement in the years ahead?

Yes, there's much to be said about the investment opportunities that exist in the emerging markets. There's also much to be said about the risk. We know that the chief reason emerging market development lags the developed markets is politics. And we know that the politically powerful are never too eager to relinquish their hold. But we are seeing some change for the better: India's recent election of a supposedly market-friendly party and China's "rebalancing" to a consumer-driven economy are two encouraging signs that the powers that be are coming to realize that the future will not be kind to the oppressor.

I have devoted much time here on the blog to the prospects for emerging markets. Last year I explained how the Fed's QE program did a real number on emerging currencies and, thus, their stock markets. And how, in reaction, India's government instituted some very ill-conceived capital controls. These sorts of things, along with various other forms of miscalculation, and conflict, will no doubt---to some extent---continue to color the emerging market landscape for years to come. Nonetheless, I'll be very surprised if we're not looking back years hence and marveling at the advancement of much of the emerging world --- and how well that portion of our portfolios devoted there has performed.

If I've yet to convince you that---roller coaster-like volatility notwithstanding---emerging market stocks should occupy a modest position in your portfolio, consider where some of the world's smartest businesses are investing their resources.

Here are the top 10 constituents in the MSCI World With EM Exposure Index. An index comprised of the world's top companies with the highest portion of their revenues derived from emerging markets. 

Apple
Qualcom
Nestle
Procter and Gamble
Phillip Morris
Banco Santander
HSBC Holdings
British American Tobacco
BHT Billiton
Citigroup

Yeah, I'm thinking we'd be wise to invest where Apple invests...

 

 

Do you truly believe what you believe you believe?

I have a number of friends and colleagues, and readers as well, who believe they believe in free markets---some who espouse their believed belief with great passion---who yet reject the arguments for a free market for labor. This was confirmed for me yesterday in a conversation with a friend, and a little pushback from readers of yesterday's blog post.

Before proceeding, I have to say that I make myself cringe every time I use that cold market term, "labor", in this context. I am in fact talking about fellow human beings who---seeking only to better their conditions (as was my Spanish Grandfather, and some heroic figure(s) on your family tree)---would cross untold miles of land or sea to offer all their minds and bodies can muster to willing employers. 

The thing is, folks, you're either against government intrusion into the marketplace or you're not. That is, you're either for free markets or you're not. And since "labor" is such a huge component of the market, if you believe you believe in free markets, and yet resist the importation of "labor", well, let's just say you don't truly believe what you believe you believe.

So I ask you---if you happen to sympathize with my aforementioned friends, colleagues and readers---to please rethink how you think about freedom and free markets. The good news is, if your concerns are economic, freer immigration---as counterintuitive as this is for you and so many others---could do absolute wonders for "our" economy. Here's a snippet from the December 2013 Adam Smith Institute article titled Immigration controls are the New Corn Laws. Why don’t more free marketeers care?:

In 2011 Michael Clemens looked at the economic estimates of the global GDP growth that would come if every country in the world abolished restrictions on the movement of goods, capital and labour across national borders. According to the papers Clemens looked at, removing all barriers to trade would increase global GDP by between 0.3% and 4.1%; removing all barriers to capital flows by between 0.1% and 1.7%. Those are big gains that would make the world a substantially richer place.

Completely removing barriers to migration, though, could increase global GDP by between 67% and 147.3%. Think about that: simply letting anyone work anywhere could more than double global GDP. And that would be a long-term boost to economic growth, not a one-off. Even the bottom end of that, 67%, is an astonishingly huge figure.

It’s not as far-fetched as it might sound. As Clemens points out, workers can often create wildly different amounts of value by doing the same thing in different places (or doing them with different people). A taxi driver who might expect to make $1,500/year in a city in (say) Benin might be able to make $31,000/year in New York City by doing exactly the same thing. That shouldn’t be a surprise: bringing someone like Sergey Brin to work quickly, saving him an hour, is much more valuable in terms of his opportunity cost than, say, saving me an hour.

Phelippe Legrain, in his enlightening 2007 book Immigrants: Your Country Needs Them wrote:

Sober-minded economists reckon that the potential gains from freer global migration are huge, and greatly exceed the benefits from freer world trade. As I explained in my first book, Open World: The Truth about Globalisation, the freeing up of global trade in manufactured goods in the second half of the twentieth century led to a quintupling of the world economy and an unprecedented rise in living standards in both rich countries and poor. So just think how opening our borders to migrants could transform our world for the better in the twenty-first century.

Historical experience certainly suggests it would do a lot of good: the United States' stunning economic growth between 1870 and 1920 coincided with the migration of tens of millions of Europeans to America. A study of fifteen European countries finds that a 1 percent increase in the population through migration is associated with a boost to the economy of between 1.25 percent and 1.5 percent. The World Bank reckons that if rich countries allowed their workforce to swell by a mere 3 percent by letting in an extra 14 million workers from developing countries between 2001 and 2025, the world would be $356 billion a year better off, with the new immigrants themselves gaining $162 billion a year, people who remain in poor countries $143 billion, and natives in rich countries $139 billion. And those figures grossly underestimate the likely economic gains from the added diversity and dynamism immigrants bring.

And, to my main point, here's Steve Landsburg (be sure to read his entire article, it's excellent [HT Don Boudreaux]):

I see my preference for freedom as an end in itself as being similar to my preference for well done meat — you either share that preference or you don’t, and if you don’t, we’ll just have to agree to disagree — there’s no right or wrong here. One exception: If your preferences strike me as inconsistent — if, that is, you seem to make a lot of choices that indicate a strong preference for freedom while denying that freedom is terribly important to you — then I’m apt to point to that inconsistency and suggest that you might want to think a little harder about what your true preferences really are. That was the thrust of what I once tried to do in a book called Fair Play, where I suggested that the choices we make as parents often reveal values contrary to those we express in the voting booth — and that by reflecting on those choices, we might become more thoughtful voters.

On the other hand, if you doubt that freedom is an effective means toward prosperity, then I’m pretty sure you’re just wrong, and that if you thought about it harder you’d change your mind. A lot of my other writing has tried to explain how to think about it harder, and to demonstrate that this is a subject where hard thinking can be fun.

Now I’m not sure in which sense our congressional candidate considers himself a free marketeer, but surely if you’re a free marketeer in either sense, you’ll tend to endorse statements like these:

I, and not the government, should get to decide who will be a guest in my home.

I, and not the government, should get to decide who I’ll hire to mow my lawn.

I, and not the government, should get to decide who I’ll go running with this evening.

I, and not the government, should get to decide whose businesses I’ll patronize, who I’ll serve as customers in my own business, and who I can sell my house to.

And, lastly, here's Jason Riley, followed by Bryan Caplan, making perfect sense:

Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a="http://www.betweenthelines.us/wp-content/uploads/6-12-14.m4a"][/audio]

Faux Free Marketeer

Today's big news is last night's upset in Virginia. David Brat, a Tea Party econ professor, stunningly defeated House Majority Leader Eric Cantor in the Virginia primary. Congrats to Mr. Brat!

Other than touching on it in this morning's audio commentary, I doubt that I would have devoted much time here on the blog to this particular topic. That was, however, until I listened to Mr. Brat this morning in a CNBC interview.

I swear, the man said "free markets" at least a dozen times. He even quoted Adam Smith once or twice. He lambasted cronyism on Capitol Hill. I say Great!, Great!, and Great!. He then, however, and alas, began humming the Tea Party tune on immigration. Dang! I have to tell you, almost nothing frustrates me more than politicians and political organizations (or anyone else for that matter) who claim allegiance to free markets, then turn around and entirely exclude labor (to put it in market terms) as a component.

Please! Don't tell me you believe that folks should be free to transact their affairs unhindered by government, then tell me that government should hinder the movement of foreign workers into our "free" marketplace. 

Speaking of Adam Smith, here's an excerpt from the December 2013 Adam Smith Institute article titled Immigration controls are the New Corn Laws. Why don't more free marketeers care?:

What puzzles me is that my fellow free marketeers are often very indifferent (if not openly hostile) to policies that make it easier for foreign people to work in Britain. They cannot believe the economic claims that immigrants 'steal jobs' in an overall harmful way unless they also think that free trade does. There are many keyhole solutions to prevent immigrants from sponging off the welfare state. The cultural arguments, if they can be classed as such, are worth considering but certainly not so powerful that they invalidate the economic arguments. And free marketeers are usually pretty happy to let society adjust itself rather than try to engineer it to become or remain the way they like it.

And here's one from a Friesian School article titled Smith's Law, Free Trade, and Free Immigration:

Another hot public and political issue, not just in the United States but elsewhere, as in France, is immigration. Apart from a simple xenophobic dislike of foreigners, hostility of immigrants is often based on economic ideas that immigrants, like "cheap" foreign labor, drive down wages and take jobs away from natives. Again, however, workers qua workers are producers and labor costs are production costs. Driving down labor costs drives down production costs, which will benefit consumers, either by the reduction of prices in a competitive market or by an increase in profits which will attract competition that will also drive down prices.

I'm thinking Mr. Bratt, being an admirer of Adam Smith, should---as have the members of the above referenced organizations---study a bit more of the great Scottish philosopher before rambling on further about free markets!

On complacency, sentiment and inflation...

In last Thursday's Wall Street Journal, Dan Greenhaus listed 26 things investors are worried about and chided the pundits who believe complacency has gripped the stock market.

A snippet:

“We get that there are no shortage of indicators to which pundits may point as evidence investors are missing their warnings/concerns,” Mr. Greenhaus said. “However, from our vantage point, there is one indicator to rule them all; our client conversations. And our client conversations clearly suggest there are no shortage of worries.”

Another:

“To say investors are ‘complacent’ is, in our minds, utter and total nonsense,” Mr. Greenhaus said. “There is much to worry about as there was in 2010, 2011, 2012 and 2013. And worry everyone did.

But let’s be honest; saying others are ‘complacent’ is a shorter way of saying ‘I’ve been concerned about X and thought Y would happen as a result..and it didn’t, so everyone else must be complacent,’” he added. “Because an outcome someone thought might happen didn’t happen, doesn’t mean others are complacent. It means they were correct.”

Greenhaus's tune should be music to the ears of those who worry that the market is on the precipice of at least a decent correction. I've stated numerous times that if I were a market timer, which I ain't, investor sentiment would be the indicator with the highest influence on my trading activity.

And while I don't doubt for a second that Greenhaus's firm's clients are voicing their concerns, the data isn't suggesting that they're putting their money where their fears are. When I look at the AAII (individual investors) Sentiment Survey showing rising bullishness (from 28% to 45% over the past month), the current Consensus Index (professionals) at 62% bullish (a high reading), the volume of puts running at about half the volume of calls, short interest for the S&P 500 at a 52 week low,  and a very tight junk bond spread, I'm thinking investors are feeling scary-bullish. And that should worry anyone who worries over the potential for near-term downward volatility. I.e., market corrections are often preceded by high levels of optimism.

Now, being a long-term investor/advisor who knows he doesn't know (nor, honestly, care all that much about) what the market's about to deliver in the short-run, I look at lots of other stuff too.

Such as, all the economic data my brain can digest, which, on balance, could be signaling continued growth---maybe even an acceleration into the back half of this year. Some of the highlights come from places such as the recent ISM Manufacturing and Non-Manufacturing Indexes, the NFIB Small Business Optimism Index and this Year's CEO Roundtable survey, all of which point to a pick up in capital investment and hiring going forward. Not blowout numbers mind you, but maybe enough to move the needle a bit on the economy. (Notice all the "maybes" and "could bes". The economy, like the market, is difficult (if not impossible) to predict)...

As for market valuations, while there are areas that we're paring back due to high relative valuations, in an overall sense I can't say the market looks expensive or cheap. So, "fairly valued" sounds fair to me. My sentiment there will change if earnings begin to accelerate faster than share prices (cheaper), or if multiples expand (expensive), or if interest rates rise a bunch (expensive).

Speaking of interest rates, that's the one signal that might suggest there remains substantial pessimism out there. I mean, if everyone's so bullish about the stock market, shouldn't they be selling bonds (pushing up interest rates) and buying stocks? Of course, as I suggested recently, low bond yields could mean other things as well.

Lastly, I can't speak of interest rates without speaking of inflation, since inflation is the one thing that will surely force interest rates higher. By standard measures such as the Consumer Price Index (CPI), the Personal Consumption Expenditures (PCE) Deflator and the TIPS spread (the yield spread between treasury inflation protected bonds and regular treasury bonds), inflation---and expectations for inflation---remains tame. However, as I look at things such as the ISM's reported rising costs of commodity inputs, rising employment costs in some sectors, and the inching higher of capacity utilization, I'm seeing the potential for a pick up in inflation going forward.

That said, what I'm not seeing is what today's commentators all too often fail to mention: that you really can't have true inflation---by today's definition (all things rising in price)---without an increase in the money supply. Think about it, if the increase in California's minimum wage means you have to pay more at your favorite restaurant, if you don't have more money than you did before the wage hike---and you insist on eating out---you'll sacrifice something else. As that happens en masse the lower demand for all those something elses will force their prices lower---offsetting the higher price of a meal out. Only when there's an increase in the amount of money in circulation can we have true inflation. And, contrary to what I know you're thinking, there has been very little increase in the supply of money circulating. Most of that money the Fed's been "printing" sits in bank excess reserve accounts at the Fed. Now, should that money start moving, should we see a pick up in "velocity" (the measure of money turnover in the economy)---which I suspect, at some point, we will---then we'll have something to talk about.

As you can gather from the St. Louis Fed's Velocity of M2 Money Stock chart below---if inflation is caused by a growing amount of money chasing goods and services at a pace exceeding their production---inflation has remained tame due to a general lack of chasing:



Bottom line:

Presently high bullish sentiment substantially increases the odds of a near-term correction. Take heed if you're a short-term trader. Take a deep breath if you're a long-term, risk tolerant investor, and stay your course---after perhaps hedging a bit for future inflation.

Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a="http://www.betweenthelines.us/wp-content/uploads/6-11-14.m4a"][/audio]

Herd mentality

Couldn't resist.

Herd mentality (HT Barry Ritholtz):

(Click to enlarge)



 

 

The "All Else" Part 8, China...

For part 8 of my "All Else" series I will consolidate the next several items on the list of things I pay constant attention to. They would be: the UK, the Bank of England, China, the Bank of China, Japan, and the Bank of Japan. My reasoning for fast-forwarding here is obvious. We're talking major economies and the central banks that manage their respective monetary policies. Therefore, my previous exposés on the Fed, the Eurozone and the ECB go a long way toward explaining why the UK, etc., are important to monitor.

Of course China, being home to the world's largest population, the world's second largest economy and, to no small extent, the world's manufacturing labor force, is a special case. "China" is that five-letter word (preceded by "made in") that occupies the stickers that occupy the bottoms of several, if not all, of the physical items within your arms' reach at this very moment. Imagine if China wasn't the China we think it to be---the low-cost producer (or assembler) of low-cost goods to the world. Well, let's just say things wouldn't be so "low-cost", which means other things wouldn't happen (i.e., you'd have less money to spend on other things). 

Also, imagine if China wasn't the China you probably don't imagine it to be, yet is. I mean, imagine if China wasn't such a massive purchaser of global goods and services. Last year alone Chinese consumers bought up $120 billion worth of U.S. goods and services. Just last fall I told the story of my wife's and my trip to West Yellowstone, Montana, and how the place was bulging with Chinese tourists. 

Make no mistake, while China is huge to us buyers of low-cost stuff, it is equally huge to U.S. suppliers of goods and services. U.S. exports to China grew 7% last year alone, while imports from China grew by only 3.3%. While some herald that as a great success, I'm entirely agnostic. The simple fact that China remains inspired to sell us low-cost stuff, means there's plenty of global demand for U.S. dollars. I.e., they take our U.S. dollars and buy from, or invest in, the U.S.,---or they buy from, or invest in, other countries who desire those dollars to buy from, or invest in, the U.S. Plus, if China's leaders mean what they say in terms of their "rebalancing" to a more consumer, as opposed to export, driven economy, those of you who are concerned about "trade deficits" (I'm not) should celebrate---as that should further narrow the gap (as the Chinese people become bigger consumers of globally produced goods and services).

Bottom line: China's economy is very important to pay attention to...

I embrace inequality!

I have to tell you, I am not winning my fair share of basketball games these days. And I work pretty hard at it. Well, let's just say I play pretty hard at basketball once or twice a week. There's this guy named Nick who I've been playing against for over twenty years. I used to beat him one-on-one all the time. In fact, in the beginning it was so lopsided in my favor that I'd often let him win just to keep him interested. He and I, early on, were the definition of inequality---of have and have-not. I owned every advantage.

Funny thing is, today, inequality remains, however there's been movement between the classes. Yes, the man who once occupied the top tier has been replaced by a harder-working and substantially more talented player. Not to mention, today, Nick enjoys a three-inch height, a thirty-pound weight, and a nearly twenty-seven year advantage over me.

Now, I guess I could get all worked up over this glaring inequality, this extreme unfairness. I could try and conjure up some new set of rules that would tilt the court in my favor. Maybe threaten some sanction onto Nick if he doesn't agree to tie one hand behind his back each time we play. After all, he's my son, and he works for the firm. Although, while he'd remain my son, I'm sure he'd quit the firm and refuse to ever play basketball with me again if I threatened his livelihood in an effort to reduce him to my level.

The fact of the matter is, Nick, by nature of his age, physique, talent and work-ethic is simply better than me at basketball. I could attempt to manufacture myself some advantage, however, were I to succeed (and were he to stay in the game) I would in no way become more productive myself---I would simply make Nick less productive and, therefore, lower the quality of our basketball. Come to think of it, I'd surely become less productive as well. Having to compete with his talent has made me a far better player than I otherwise would've been. Yes---while, by comparison, being a "have-not"---allowing, embracing even, inequality has made me better.

Some time ago, I listened to Bill Gates---in an interview with Charlie Rose---describe his feelings of guilt during high school math classes. While his classmates would struggle with the chalkboard equations, he would get them instantly. It just didn't seem fair that what came so easily to him was so difficult for others. Gates was born with a brain that made school a breeze and---like other mega-achievers in his field---would ultimately create a great divide between his and the average thinker's lifestyle. Oh, but what that brain---free to exploit its every advantage---has created for us average thinkers in the process.

I truly celebrate inequality: The mental, physical and material advantages so many others have over me. They---in what they have created for, and/or inspired in me---have, without exception, enriched my life.