Thursday, July 31, 2014

Sweet deprivation...

I honestly can't tell you how many decades it's been since I drank a soda. I do, however, remember oh how much I once loved them, even though I knew they were really bad for me. For the longest time, against my best judgment, I just couldn't give them up. Then those blessed folks in Congress---like good parents delivering tough love to their wayward child---came to my rescue and passed the soda tax, forcing up the price of a bottle of pop. Yep, that extra twenty cents was enough incentive to get me off those sugary killers once and for all. Thank goodness the politicians at the time knew better than I what was in my best interest, and had the power to force me to do what I otherwise hadn't the willpower to accomplish on my own.

Okay, you can stop scratching your head, there was no soda tax passed several decades ago. I stopped drinking sodas because I---all by my naive little self---decided that they just weren't good for me.

But, you know, I do other things that just aren't good for me. I seem to never get enough sleep, for example. And if that keeps up, I presume it'll show up in the form of an extended hospital stay at some point in my future. And I bet I'm not the only bloke out there who abuses himself, and ultimately puts pressure on "our" healthcare system, in such a manner. Maybe Congress will pass a law requiring every American to wear a sleep monitor connected to a government agency charged with monitoring our sleep habits and taxing (at, say, a penny per minute) those of us who don't get a full 8 hours a night. Surely that would force me to take better care of myself.

So, back to sodas: Mark Bittman, NY Times OP-Ed writer, lauds "the brave and beloved 12-term congresswoman from New Haven", Rosa DeLauro, for introducing a bill that would require a national sales tax on sugar-sweetened beverages:
The SWEET Act (as she’s calling it) would amend the I.R.S. code and charge a penny per teaspoon of sugar, high-fructose corn syrup or other caloric sweeteners — “to be paid by the manufacturer, producer or importer of such products.” This would mean roughly a dime per can of soda, closer to 20 cents for a 20-ounce bottle or most medium-size soft drinks at restaurants. (Remember 6.5-ounce Cokes? The 20-ounce standard in part explains the obesity crisis.)

And the tax revenue would go to the Prevention and Public Health Fund established by the Affordable Care Act. Just how it would be used can’t be predicted, but DeLauro suggests a variety of smart measures, including subsidies for fruits and vegetables in schools and for SNAP (food stamp) recipients and anti-soda marketing campaigns.

Beyond the insulting paternalism, beyond the gross infringement on our personal liberties, think about that "Prevention and Public Health Fund". Can you imagine a future where such a scheme actually works and eradicates sugary soft drinks. Do you think then that the Prevention and Public Health Fund---that is, the bureaucrats who run the fund, whose livelihoods depend on the perpetual funding of the fund---would celebrate the loss of revenue resulting from the eradication of sugary-drink addiction? Or do you think there's a chance that someday you and I will be forced to wear a government-issued sleep monitor to bed?

I know, that's crazy. I think I drank too much coffee today. Oh, wait a minute! Coffee!!

--------------------------------------------------------------

P.s. This subject matter tends to inspire direct emails from readers who believe that such intrusion is---for the greater good---a legitimate government function. To them I say no worries. It looks as though those who depend on the Prevention and Public Health Fund are investing (in revenue-raising activities) for the long-term.

From Forbes, May 2013:

Congressional investigators point to documents and federal websites, which detail the spending that critics call “illegal lobbying.” A few of the more than 100 examples cited by critics:
In Washington state, the Prevention Alliance, a coalition of health-focused groups, reported in notes of a June 22, 2012 meeting that the funding for its initial work came from a $3.3 million Obamacare grant to the state Department of Health. It listed a tax on sugar-sweetened beverages (SSB), “tobacco taxes,” and increasing “types of outdoor venues where tobacco use is prohibited” as among “the areas of greatest interest and potential for progress.”

The Sierra Health Foundation, in Sacramento, which received a $500,000 grant. in March 2013, described its plans to “seek local zoning changes to disallow fast food establishments within 1,000 feet of a school and to limit the number of fast food outlets,” along with restrictions on fast food advertising. A $3 million grant to New York City was used to “educate leaders and decision makers about, and promote the effective implementation of. . . a tax to substantially increase the price of beverages containing caloric sweetener.”

A Cook County, Ill. report says that part of a $16 million grant “educated policymakers on link between SSBs [sugar-sweetened beverages] and obesity, economic impact of an SSB tax, and importance of investing revenue into prevention.” More than $12 million in similar grants went to groups in King County, Wash. to push for changes in “zoning policies to locate fast-food retailers farther from . . . schools.” And Jefferson County, Ala., spent part of a $7 million federal grant promoting the passage of a tobacco excise tax by the state legislature.

Why I really like down days. Seriously!

Why, as an adviser, I really like down days:

For one, they always confirm that rebalancing is a good thing: With few exceptions, after each client review meeting for quite some time now we've been reducing exposure to the stock market. Not at all in a market-timing effort, but in remaining consistent with each client's objectives and tolerance for volatility. Plus, we generally have a steady flow of new cash coming into the practice (recent retirees, heirs, property sales, systematic contributions, etc.). I always feel better buying on the down drafts, as opposed to buying when stock prices are on the rise.

So, today's a good day. If tomorrow sees follow-through selling, even better. If this is the beginning of that lately elusive 10%+ correction, perfect! There's no time like the present for the market to take a much-needed, and inevitable, rest.

If this one indeed morphs into that meaningful correction, or an all-out bear market, then we look forward to buying more at cheaper prices when those rebalancing dates come around.

In terms of what today's all about: Well, there are a number of headlines to consider, but I'm thinking the jump in today's reading on the Employment Cost Index has (per my recent commentary) traders a bit nervous. Although the bond market, while off a titch, isn't freaking out on that news (perhaps bond traders are focused on the geopolitical)... ??

I'll keep you posted...

Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a="http://www.betweenthelines.us/wp-content/uploads/7131_.m4a"][/audio]

Wednesday, July 30, 2014

Stocks versus the economy...

As of yesterday, 283 of the companies comprising the S&P 500 have reported 2nd-quarter earnings—67% beat analysts estimates. Add to that the fact that earnings thus far have grown at a rate of 10.5%, with revenue up 5.1%---against consensus estimates of 6.2% and 3% respectively---and you should be feeling pretty good about the present state of corporate America.

As for the economy, here's the first sentence of my note to self (after summarizing recent economic data) day before yesterday: "On balance, I feel strongly that the U.S. economy is on firm footing and will expand at a greater than recent pace into next year." Then yesterday's note: "Today's numbers basically confirm my latest commentary; that things are indeed looking up. In terms of 2nd-half GDP, if the consumer remains as confident, it'll reflect in the consumption metric, which accounts for 70%."

The numbers (in a nutshell) are telling us that business conditions (across the supply chain) are improving and that the consumer is expressing a high (relative to recent surveys) level of optimism about the future.

And then there's today's first reading on 2nd quarter GDP, which came in at a whopping 4% (inflation adjusted [6% nominal]) annualized. A substantially greater growth rate than the consensus estimate. Underneath that number we had consumer spending up 2.5% (biggest increase in 5 years), business investment up 5.9%, and a 1.7% growth in business inventories. The price index rose a relatively non-threatening (moving higher nonetheless) 2% (if this spells a trend, the Fed will start looking sooner than currently expected at moving short-term interest rates higher).

(CAUTION on the GDP number: This is the first Q2 estimate (not all the data is in). There'll be a revision in August, then the final reading in September. Q1's first reading came in a .1%. Its final reading was -2.9%.)

So, very good earnings results, and, finally, the economy is clearly coming to life. And of course the stock market is rallying big time today on all this wonderful news, right? Well, the Dow did rally to up 70 on the GDP number, however, as I type it's down 84. Hmm...

So what gives? From my summary paragraph on Monday:

"My take (July 28): On balance, I feel strongly that the U.S. economy is on firm footing and will expand at a greater than recent pace well into next year. With regard to stocks, intuitively, a growing economy should bode well for equities, even at current valuations. However, should the economy surprise to the upside (grow yet faster), and should wage pressure begin to mount, the stock market will likely have to contend with a fast pace of rising interest rates/sell-off in bonds. Given how the world's central banks have effectively hijacked the bond market, we just don't know what happens when it finally breaks free."

The stock market is clearly struggling with the prospects for higher interest rates. However, many a pundit has been predicting of late that the market will hold up well against higher rates due to the simple fact that they (rates) will move higher on the back of a growing economy. Makes sense. And there is, per the chart below (click the "S&P 500 vs interest rate" link), some historical support for the notion that higher interest rates don't necessarily have to bring down the stock market. However, as I suggested above---and as recent volatility around fears of Fed tightening indicates---this time, at least at the onset of rising rates, things might not go the way the optimists expect.

Beyond a potential initial hiccup, or belch, or vomit, resulting from a spike in interest rates, continued business expansion and better earnings---barring a zillion potential exogenous events---could indeed bode well for stock prices going forward. 

S&P 500 vs interest rates

As for bonds, I wouldn't touch em right here. Here's a look (click the link below) at why:

bond fund price vs interest rates

Stay tuned...

 

 

 

 

Sunday, July 27, 2014

Can't be too humble...

We live in a data rich world, there's no doubt about it. Google some curiosity of yours and I bet ya someone out there has already compiled the data, tested a hypothesis and published his/her findings.

I constantly search the cyber world over for the clues that would lead me to the best, empirically justified investment recommendations I can possibly make to our clientele. Up until very recently I'd pull from literally dozens of data vendors, some free, some at a stiff price, spending hours on end, week after week, in an effort to derive a plausible explanation of the present condition of the financial markets. I always have an opinion that I effort mightily to back test.

I recently took the plunge and made an over-sized investment in what I believe to be the most robust research tool available today. In case you were wondering why only one written blog post last week (you're welcome by the way), now you know. This new tool has me utterly infatuated.

I can now test virtually any hunch I may have about what happens when something happens in a mere fraction of the time I'm accustomed to burning. Or, I should say, I can test what has happened historically, when something happens. I'm talking sectors, regions, currencies, commodities, every equity and fixed income index on the planet, individual securities, virtually all forms of derivatives (think options and futures), the deepest economic statistics, and analyses, covering the world over, and more from a single hub.

The angles from which I can approach each of the above are virtually endless---that is, I've yet to encounter the all too familiar (to my old system) brick wall.

So now what? Good question! You might think that the quality of our advice is about to improve exponentially. Well, not so fast! While, indeed, the quantity of the data at my finger tips has just exploded, my discoveries thus far have essentially confirmed what I already knew. For one, that finding correlation is one thing, discovering causation is an altogether different proposition. For another, that the greatest research tool on the planet does not a successful market-timer its operator make.

I can see where a given data set had offered up some consistency---some presumably predictive quality---over an extended time period, only to break down when you'd least expect. I've charted price movements (of a broad index, a sector, a commodity, and/or a measure of, say, inflation and/or sentiment) that tell me virtually nothing when checking the annual frequency box. However, check the monthly box and suddenly patterns develop. By the way, you have my solemn promise: never will I make a recommendation based on monthly price movements (although it might inspire a blog post every now and again). And I refuse to check the daily frequency box.

This would be one of the tools used by many a hedge fund manager, who, along with his peers, produced a paltry average return of 7.5% last year (not remotely close to matching the results of the equity portion of your portfolio [assuming you remained diversified and didn't try to time the market), and has grossly underperformed the broad market averages for the past five years running. As for all of those prancing prognosticators with their ever-compelling charts (many generated by my new tool), well, frankly, their misses come far more frequently than do their hits.

So why, if this cornucopia of data only confirms what I already know, did I make the investment? While I realize I just to some degree discounted the efficacy of my industry's most robust research tool, it'll, at a minimum, get me to certain conclusions (such as our current sector targets) in a fraction of the time my research used to take---with a greater source of data to pull from to boot (there's a lot to be said for productivity). As a portfolio analytics tool, among a zillion other things, I can now easily track risk and return attributions by sector, region, market cap, etc., over any chosen time period. Talk about back testing our targets! As an economy-tracking tool I can, for just one example, now, more easily than ever, track the very same data Janet Yellen and company follow to determine interest rate policy. At a minimum that'll help us manage client expectations.

For example: It's common knowledge that Fed chair Janet Yellen's chosen inflation indicator is the Employment Cost Index (ECI). And when I chart that index along side the PCE (personal consumption expenditures) Deflator (the Fed's chosen inflation measure [as opposed to CPI]) I can see the relationship, and I can see why the Fed is pretty comfortable with their present approach to short-term interest rates (no raising in the near-term). However, when I lay on the JOC-ECRI Industrial Price Index I see an even stronger correlation with inflation, and I see a present direction that, if sustained (with a little acceleration), could (maybe) impact PCE to the point (once again!) of rude awakening for the Fed---not to mention for all of those investment gurus who are betting big on low interest rates as far as their myopia-ridden eyes can see.

My point? While, organized and assessed properly, you can't have too much information in my business, you can't---as evidenced by the track records of hedge fund managers, media prognosticators, econ professors and, yes, Fed governors (all phenomenally bright people)---be too humble either...

 

Saturday, July 26, 2014

Taddelech's miracle...

From Bloomberg.com last Tuesday:
“The work is good because I pay my rent and I can look after myself,” she said, wearing an aqua Huajian polo shirt. “It’s transformed my life.” Taddelech said she wants to work for two more years at the plant and become a supervisor. She eventually aspires to build her own house.

Taddelech Teshome is obviously a proud, hardworking and ambitious individual. But without a miracle, she would have surely been relegated to whatever existence a monthly income of far less than $30 affords.

Taddelech is Ethiopian, and, yes, her salary is $30 per month. And, yes, her job has transformed her life.

Her transformation has nothing whatsoever to do with the good intentions of Western philanthropists. The miracle was wielded by the hands of a most greedy, unabashed Chinese capitalist whose future success hinges upon Taddelech's overall well-being.

That capitalist would be Zhang Huarong, who, armed with three sewing machines, began making shoes from his home in Jiangxi province in 1982. Today, Zhang's company, Huajian Shoes, supplies the likes of Nine West and Guess with shoes and 3,500 Ethiopians with jobs.

As you might imagine, Ethiopian logistics are a hurdle:
Transportation and logistics that cost as much as four times those in China are prompting Huajian to set up its own trucking company.

A trucking company that will aggressively exploit (i.e., strengthen---mentally and physically---to the point where they become productive employees) yet more of the locals.

Here's what's next for Taddelech's community:
A model of a planned new plant at the edge of Addis Ababa is displayed at the factory. The 126-hectare (341-acre) complex, partly financed by more than $300 million from Huajian, will
include apartments for workers, a “forest resort” district and a technical university.

Cheap labor is truly a beautiful thing for the venturesome capitalist (not to mention his customers) who would dare exploit it. Ah, but miraculous are the transformations seen in the lives of the exploited...

Friday, July 25, 2014

Market Commentary (audio)

In this morning's brief commentary, with regard to geopolitical concerns, I make reference only to Russia. Not to discount the turmoil in other parts of the world, but in global economic terms, it's the threat of heightened sanctions (in both directions) that would cause angst among traders. 
However, as you'll hear, this morning's decline in the Dow is more about the forward outlook for one of its components.

Click the play button below for today's commentary:

[audio m4a="http://www.betweenthelines.us/wp-content/uploads/New-Recording-7-25.m4a"][/audio]

Wednesday, July 23, 2014

Goldilocks and the market --- AND --- those storytellers...

The economy is clearly picking up, with inflation virtually nowhere in sight. Seventy percent of companies having reported second quarter earnings have beaten the estimates. Revenue growth is there as well. And to top it all off, the S&P set an all-time high today amid no small degree of geopolitical turmoil.

So, with a Goldilocks economy and improving corporate fundamentals and, forgot to mention, a largely absent to this point (but now beginning to return) retail investor, there's virtually nothing that can derail this market. Believe it or not, I heard just that in the form of a question from a Bloomberg radio interviewer earlier this week, and in the form of a statement from a guest analyst on CNBC this afternoon.

While I'm not here to throw cold water on a growing glowing consensus, I am here to reiterate reality to you whom we counsel directly, and to you readers out there who either do it yourselves, or who work with other advisers. The reason I reference other advisers is because many of those with high profiles (the one's the major media leverages) and some whom I know personally are, in my view, a bit overly sanguine about today's equity markets.

Beyond the legitimately good economic news, and improving earnings, there remains the reality that the stock market cannot, will not, and by all means should not rise from here in perpetuity. Not that any rational individual would doubt that last sentence, but when I hear some of these personalities prognosticate higher highs with reckless abandon, I sometimes wonder. Having been in this business for virtually my entire adult life, I've come to know only one thing for certain, that markets move in both directions and any one of an uncountable array of possibilities can will pop up and redirect stock prices when you least expect.

So are we, as some believe, in the early stages of a multi-year secular bull market? Or are we an interest rate tick away from the next major bear market? Perhaps and perhaps. I believe I could throw enough select data at you to convince you of one or the other, and all I'd be doing is supporting some bias I have become victim to --- not to mention that I'd be stepping far beyond any legitimate right I would have to profess such certainty, as well as exposing an utter, and most dangerous, lack of humility.

So where does that leave you? It leaves you with your personal biases, and your expectations. If you're an optimist by nature, you believe what I've been reporting of late about the economy (it is indeed getting better [for now]), and you're thinking the equity portion of your portfolio has more upside to run. If you're the pessimist, you see the economic indicators as smoke and mirrors --- at the extreme you see the numbers as some grand political conspiracy --- and you just don't understand how the stock market can be so utterly wrong about what's truly going on in the world.

My advice: While I don't suspect you can, or that you even wish to, overcome your biases, I recommend that you suspend your short-term expectations about where the market goes from here---for you truly can't know. Your portfolio would remain balanced to your time frame and temperament, you'd rebalance it twice a year or so, you'd add when you have extra cash that you won't need for a few years (with blinders [to your biases] on) and, within sectors, you'd rotate as valuations mature and the economy expands and contracts.

Lastly, to nail down my point, here's something I wrote back in July 2012 about the world's biggest (by way of assets under management) bond manager and his prediction that the best days for asset-value growth had come and gone. After last year, I bet he wishes he could have that one back.

 BEWARE THE KING(S)


July 31, 2012


The “King of Bonds”, Pimco’s Bill Gross, has given the world a priceless gift. He’s accomplished something other mortals have aspired to, but forever at the expense of their credibility. Thanks to Mr. Gross we finally know precisely what to count on, financially speaking, for the remainder of life as we know it on planet Earth. The guessing’s over. I suppose I should re-think my career path.

Apparently the past century of stock market gains and wealth accumulation was a “freak” anomaly, one to never be repeated. His incomparable (out of 7 billion) brain, has put all the pieces together. He has solved the great riddle; he has determined what he’s dubbed the “new normal”: That is, sub historical-average economic and asset-value growth, in perpetuity.

In essence; he knows precisely how all the world’s individuals will transact their affairs for eons to come.



He foresees advances in consumer technology,



transportation,





and living standards in general.





He can predict the outcomes of political power grabs,



weather patterns,





and natural disasters.



And has gauged the precise impact of each on the global economy.

He has indeed solved nature’s great mysteries.



What forever baffles me is the correlation between the capacity for thinking and the lack thereof for reason. The sad thing (seemingly, but surely not in every case) being: The larger the capacity of the brain (or perhaps the academic achievement, or perhaps the professional accomplishment), the larger the ego. The larger the ego, the lesser the humility. The lesser the humility, the greater the God complex. The greater the God complex, the greater the following. The greater the following, the greater the damage when a black swan (a purely random event) falls from the sky.

 

Monday, July 21, 2014

Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a="http://www.betweenthelines.us/wp-content/uploads/7-21.m4a"][/audio]

Saturday, July 19, 2014

The "All Else" Part 11, Housing...

This one (of the indicators I track) is easy. What's the biggest purchase most people make in their lifetime? What item in their possession demands the most by way of accessories, maintenance and, well, you get it---home sweet home.

The housing market is hugely important as an economic indicator. Consumer spending makes up some two-thirds of GDP and, therefore, the prospects for the market for the largest physical purchase most consumers will ever make is very telling about the state of the economy.

We could dig deep into the capital, materials and workers needed to bring a dwelling from the groundbreaking stage to its finale---not to mention all the ancillary activity generated by the furnishing, etc.---and what that means for the economy, but, again, you get it.

So let's briefly explore the immediate state of the housing market. Here I'll cut and paste just the housing-related commentary from the notes to self I've compiled over the past few weeks (YoY = year-over-year. MoM = month-over-month. WoW = week-over-week):
June 25

Existing home sales up 4.89 mill, which was a beat. MoM + 4.9%... a beat
New home sales 504k, a beat. MoM +18.6%, a huge beat...
Mortgage apps WoW -1%, a miss...

The employment numbers are improving, as is overall jobs sentiment as well. That's big.

Housing seems to be all over the place. Previous WoW mortgage apps were up. New home sales, as of last reading, are on the rise. Homebuilder stocks have been doing well of late. However, again, we keep seeing fits and starts with the stats.

Interest rates rising a bunch would be a big headwind for housing, and the overall economy...

June 30

Housing: the May Pending Home Sales Report from Dept. of Realtors (index) spiked up 6.1%. That was huge considering the 1.5% consensus estimate. Yet it was 5% below last May's index, however that was the month the first-time homebuyers tax credit (or when taxpayers paid to get some folks into their first homes) expired and folks rushed to buy. There's no question that the housing numbers, on balance, have improved of late, which is a very bullish indicator for the economy going forward.

July 9

Mortgage apps up 1.9% WoW, versus a -.2% move the prior week. That's very good news for housing, particularly since mortgage rates rose (from 4.28 to 4.32). Refinances are down, new purchases up. Speaks well about present economy.

Comment from CNBC's D. Olick:

"The housing market continues to sputter into recovery, largely on the back of higher net-worth and cash buyers. The latter made up more than one-third of all May home sales. First-time buyers are still largely left out, hampered by tighter mortgage underwriting and high levels of student debt."

The ISMs, Markits, NFIB, housing, materials, boats, autos, employment.... The economy is unquestionable improving. Haven't seen big wage gains however, which is what appears to be keeping the Fed at bay for now.

July 16

Weekly mortgage apps dropped 3.6% vs +1.9% for prior period. Housing stats continue to come in mixed... 8% drop in mortgage apps for purchases... fairly flat for refinances.

Homebuilder Confidence Index at 53... That's a bullish indicator going forward. Future sales expectations up markedly...

July 17

Building permits were surprisingly down 4.2% in June, vs estimate of up 4.2%. Kinda flies in the face of yesterday's positive reading on homebuilder confidence. However, they are up 2.7% YoY...

Breaking it down: single family permits were actually up 2.6% over May... Which means multi-fam tanked.

Housing starts were down 9.3% compared to May, but up 7.5% YoY.
Housing completions were down 12% vs May, but up 3.4% YoY

So, while, on balance, improving, robust would in no way describe the housing market at present. I can't help but wonder if the severity of the 2008 collapse in home values didn't do a number on the psyche of the would-be buyer---making him/her, and the data, unusually skittish. Low inventory, tight lenders and rising prices are playing no small role in the mixed-ness of the data as well, I'm sure.

All that said, the latest homebuilder and consumer confidence surveys spelling increased optimism could (not a prediction) portend good things for housing, as well as the overall economy, in the months to come.

Stay tuned...

 

Where would we be without capitalism and globalization?

I just read a fine article in the New York Times written by professor Tyler Cowen of George Mason University (HT Don Boudreaux). The gist was that while inequality is major in today's political discourse, in reality it's declining when viewed through a global lens. Of the reader comments I skimmed, not a single contributor shared my favorable view of the article.

Here's a relatively tame one that kinda sums up the overall sentiment of the comments:
OK, I think I've got the message. Rather than try to reduce income equality in the US--for example, by ending special tax breaks for billionaires--we should keep in mind that even though the average American worker's real-dollars income is stagnant or falling, the global economy will very gradually improve if we peons just suffer quietly and let billionaires take an ever-larger share of American's income.

I assure you the commenter has not read much any of Cowen's work. Had she, she'd not have presumed he is at all in favor of extending special tax breaks to billionaires.

We can take this one in myriad directions, but in the interest of time this morning allow me to make one very simple, and obvious, point:

I recently found myself in conversation with a bright and delightful 15 year-old who comes from an economically-challenged American family, we'll call her Mary. Mary and her 4 siblings are being raised by Mom and Dad who don't work outside the home. She mentioned that they might move her grandmother in, and if they do her mom would receive an extra $240 per month. When talking about the dynamics of living in such tight quarters---sharing her bedroom with two siblings, and thinking she'll have to squeeze Grandma in there somewhere---she mentioned that her sister is not at all happy right now because her older brother's tablet broke, so he confiscated his little sister's laptop and won't give it back. Mary doesn't understand why her brother is always on her sister's laptop because usually all he wants to do is play on his X-Box. Mary's on her third smart phone this year by the way.

My intent in sharing my conversation with Mary is not at all to complain about incentives---about the technological luxuries afforded to many Americans who receive government assistance. And while it doesn't address the alleged stagnation of the "average American worker's" income, I'd just like to pose one basic question: where would we (on whatever rung of the economic ladder we rest) be without capitalism and globalization?

 

Friday, July 18, 2014

There's no knowing...

Do the implications of any of the following statements make good sense to you?

1. Bears keep calling for a 10% correction in stocks, and they've been wrong time and time again.
2. Bulls keep talking about how cap-ex (businesses investing in capacity) is about to take off, and it just doesn't seem to come.
3. Bond bears, and conservatives, keep calling for higher inflation and falling bond prices, and it just isn't happening.

On #3, here's my favorite NY Times op-ed columnist this morning:
Rick Santelli, one of the network’s stars, is best known for a rant against debt relief that arguably gave birth to the Tea Party. On this occasion, however, he was ranting about another of his favorite subjects, the allegedly inflationary policies of the Federal Reserve. And his colleague Steve Liesman had had enough. “It’s impossible for you to have been more wrong,” Mr. Liesman declared, and he went on to detail the wrong predictions: “The higher interest rates never came, the inability of the U.S. to sell bonds never happened, the dollar never crashed, Rick. There isn’t a single one that’s worked for you.”

You could say the same thing about many people. I’ve had conversations with investors bemused by the failure of the dollar to crash and inflation to soar, because “all the experts” said that was going to happen. And that is indeed what you might have imagined if your notion of expertise was what you saw on CNBC, on The Wall Street Journal’s editorial page, or in Forbes.

And this has been going on for a long time — at least since early 2009. Yet despite being consistently wrong for more than five years, these “experts” never consider the possibility that there might be something amiss with their economic framework, let alone that Ben Bernanke, Janet Yellen or, for that matter, yours truly might have been right to dismiss their warnings.

I happened to have witnessed the recent rant Krugman refers to and, indeed, it was quite the rant. And while I generally sympathize with Santelli's thinking, Liesman was spot on. The problem the Santelli's, Stockman's and Schiff's of the world have is their proclivity for fortune telling. Rather than simply proclaiming the long-term adverse potentialities of present-day monetary policy, they predict outcomes with red-faced passion. And, by the way, the redder the face, typically, the wronger---for the time being---its wearer be.

Better to explain that money-printing by itself won't stoke inflation (by its popular definition) unless or until the new money starts moving through the economy (trading excess reserves for treasuries and mortgage backed securities does not by itself create velocity of money). Or until it provokes the outside world to, in a big way, transact outside the dollar. For now, the dollar remains solidly the world's reserve currency.

Now, among other factors that could show up in the price of a potato, or computer, chip are input prices at the manufacturing level (they've been rising), the extent to which factories are using their capacity (it's been hanging around just below its long-term average) and wage growth against slowing productivity (not scary at this point).

I happen to think (as opposed to know) that the risk of rising inflation is greater (but not necessarily great) today than its been at anytime over the past few years---and that the Fed risks falling a bit behind the curve. But that's all you'll get from me---a thought, a concern, but no knowing.

Back to my question: Does it make good sense to imply that what's occurring today, with regard to financial markets or the economy, will continue to occur ad infinitum? In the face of history strongly suggesting no, so many "experts" (of all, Krugman should know better) say yes. I suspect (not predict) Liesman and Krugman will one day be on the other end of 'see, I told you so'...

Thursday, July 17, 2014

Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a="http://www.betweenthelines.us/wp-content/uploads/7-17-1.m4a"][/audio]

Wednesday, July 16, 2014

Can't force patriotism...

So what happens if Walgreen relocates to tax-friendlier Switzerland? Well, it'll obviously save a few bucks in taxes, but not on profits it earns in the U.S. Those profits will yet be exposed to the highest corporate tax rate on the planet. Of course, that said, it'll exploit every opportunity to shift expenses, etc., around in a manner that would take full tax advantage of its new domicile.

The net effect, if Treasury Secretary Jack Lew doesn't get his way (he's pushing for retroactive measures that would put a stop to such venturing), would be less money to the Treasury and more in the coffers of a growing global company that does 70% of its business in the U.S. I.e., more capital to expand---here and abroad---serving customers, expanding economies, creating jobs and growing fortunes.

Lew, in a letter to Dave Camp, the Republican chairman of the tax-writing House Ways and Means Committee, wrote:
Congress should enact legislation immediately . . . to shut down this abuse of our tax system. What we need as a nation is a new sense of economic patriotism, where we all rise and fall together.

I don't suspect that "a new sense of economic patriotism" will be engendered by force. Walgreen, for example, owes its loyalty to its shareholders, whom it serves best by serving best its customers and employees. As for rising and falling: perhaps as more companies pursue rising profits through tax inversion we'll at last see U.S. corporate tax rates begin to fall.

Tuesday, July 15, 2014

Interesting Fed report and commentary from Yellen...

In its monetary policy report released today, the Fed made the first over-valuation call on stocks since a report in 2000 where it made reference to excessive valuation in tech stocks. This time around it was small caps (which we've reduced our target allocation to by the way), social media and biotech stocks that appear to be stretched in the eyes of the Fed. Small cap stocks, relative to the rest of the market, had a rough go of it today.

While I agree that small cap valuations are stretched---and, more importantly, I don't like them cyclically here either---please tell me traders didn't need the Fed to tell them what history already strongly suggests! As for the valuations of social media and biotech, well, let's just say DUH!

As for Ms. Yellen's commentary before the Senate, she stated that if the economy picks up speed, faster than they anticipate, they'll move up the timeline for raising interest rates. The Dow was up around 50 points, then gave up about 90 (to down 40, I think) on that comment. Please tell me traders understand that if the economy picks up some inflationary steam the Fed will indeed begin tightening. 

Today's knee-jerk, yet moderate, moves in stocks indicate how overly-focused the market is on the Fed. That said, going forward from here (for the next few weeks anyway), the focus should shift to earnings. Which are off to a pretty good start...

Monday, July 14, 2014

The WTO stands up for the U.S. consumer! But, alas, not on purpose... And talk about the pot calling the kettle black!

The World Trade Organization (WTO) rules in favor of the U.S. consumer by finding
that the United States had violated global trade rules by imposing import duties on a range of Chinese steel products and solar panels that Washington asserted had government subsidies.

Washington---spurred on by special interests seeking to make their international competitors' wares (steel products and solar panels) more expensive for the U.S. consumer---is receiving some pushback from the WTO.

Unfortunately, it's not about the fact that import duties are precisely what I just described---politicians protecting their supporters at the consumer's expense---it's about the validity of Washington's allegations regarding the Chinese government's buying down of prices.

As a U.S. consumer I say thank you China. That's very generous of you!

If, however, I were a Chinese citizen, I'd be screaming bloody murder. Like I do when the U.S. government subsidizes U.S. businesses (plays favorites and screws with the market process)---as it does (by the $tens of  billions annually)---with yours and my tax dollars.

From the executive summary of Cato's July 2012 paper Corporate Welfare in the Federal Budget:
Policymakers claim that business subsidies are needed to fix alleged market failures or to help American companies better compete in the global economy. However, corporate welfare often subsidizes failing and mismanaged businesses and induces firms to spend more time on lobbying rather than on making better products. Instead of correcting market failures, federal subsidies misallocate resources and introduce government failures into the marketplace.

While corporate welfare may be popular with policymakers who want to aid home-state businesses, it undermines the broader economy and transfers wealth from average taxpaying households to favored firms. Corporate welfare also creates strong ties between politicians and business leaders, and these ties are often the source of corruption scandals in Washington. Americans are sick and tired of “crony capitalism,” and the way to solve the problem is to eliminate business subsidy programs.

Corporate welfare doesn’t aid economic growth and it is an affront to America’s constitutional principles of limited government and equality under the law.

Playing devil's advocate...

As you might suspect, I read lots of other professionals' commentaries on the state of the economy and the financial markets. On occasion I find myself inspired to add my two cents in the comment section. For today's message, I thought I'd simply share my thoughts regarding today's economic/investment environment by sharing my comments on three recent articles:

My comment on an article where the author makes the case that when rates rise from very low levels, history suggests stock prices are likely to rise with them:
Hmm... There's a lot of confidence, or optimism, or wishful thinking, there. Looking at the ISMs, etc., clearly input prices are rising, and the prospects for employment are looking up. Wage growth, while being talked down, has been rising a bit as well (4.9% annualized based on last month's reading), productivity's been flat, at best, and consumer sentiment is up. I'm thinking we should take inflation potential a bit more seriously here.

Right, the Fed's in no hurry to raise interest rates, but of course we know that the bond market doesn't have to play along. A pickup in the economy, and inflation, can scare investors out of that 2.6% (10 year treasury) faster than you can say Alan Greenspan --- then the Fed's forced to play catchup, which is where recessions/bear markets come from.

My comment on an article featuring an interview with a well-known economist who does her darnedest to pour cold water on recent economic data:
The economist is a frequent CNBC TV contributor. Clearly, she has a free-market/libertarian bias (which I'm strongly sympathetic to). However, biases can cloud one's perception. And I think that's the case with Piegza. She has consistently bemoaned QE and other interventions (as have I) and, sadly, has modeled her near-term forecasts after the potential long-term ills of such measures---although, per this article, she doesn't come out and say as such. So that would be my opinion as to why she remains basically glum on the economy going forward.

I'm guessing she's wrong on many fronts. I expect employment will pick up more measurably than she anticipates. I expect overall global growth to accelerate as well --- which is contrary not only to her forecast, but to that of the IMF as well, per this morning's headlines suggesting it is about to lower its global GDP forecast.

Yes, the year has to come in lower than pre-year estimates, but that's due to Q1's terrible number. My concern is the pace of growth going forward, not where the 2014 end number comes in.

This doesn't, however, make me a raging stock market bull. In that I suspect that all this will indeed --- contrary to Piegza's opinion --- move up the time-frame for Fed tightening. Even if it doesn't, I believe there's substantial risk that the bond market will begin selling off as the economy ramps up and inflation begins outpacing expectations.

My comment on an article where the author advises investors to tune out the noise regarding the Fed's timing regarding interest rate increases, and makes the case that Fed tightening cycles (raising interest rates) are actually bullish for stocks.
I'm thinking the author is a little too sanguine on the potential stock market impact of the Fed beginning to tighten. While I cringe when I hear myself utter "it's different this time", I don't believe the Fed has ever become the bond market like it has these past few years. Bonds, in my view, from here, possess minimal upside and substantial downside risk. Just do the math and project what a 2.6% ten year looks like in a 4% environment. Will, then, the great rotation (bond sellers becoming stock buyers) finally occur? Or will the economic headwind of higher interest rates scare everyone to cash? I'm bullish on the economy near-term, therefore, bearish on fixed income, and cautious on stocks (the economy has to grow from here just to validate last year's gains). Long-term, I'm very bullish on equities, but that's a no-brainer...

I hope you can see that this is as much me playing devil's advocate (which I do with myself [my own assertions] all the time) with these authors as it is my concerns over the ultimate effects of the bond market one day reverting to the mean.

I've stated a number of times lately that the economy will need to improve to support last year's run up in stocks, and that earnings are going to have to accelerate from here to keep/bring valuations in line. On the economic front, clearly, the U.S. is improving. The rest of the developed world, not so much. On the earnings front---on balance---so far so good (although we're very early in Q2 earnings reporting season). Hence today's nice move for the major stock averages.

Stay tuned... Or tune out, and think long-term... Saner to do the latter...

Friday, July 11, 2014

Nooooobody politicks like Krugman - AND - If Republicans had the White House - AND - NEWS FLASH: LeBron back to Cleveland...

I read Paul Krugman. He's been such an inspiration to me. I'm sure he's inspired as many of my ramblings as have other Nobel laureates, like Friedrich Hayek and Milton Friedman. The thing is, while I seem to always sympathize with Hayek, and almost always with Friedman, I rarely (there'll be the occasional errant point) side with Krugman. His column this morning is no exception.

I generally can't even get through an entire Krugman op-ed without jumping over to the notes app on my iPad and start flailing away, which is what just occurred. He writes:
But I now think that class interests also operate through a cruder, more direct channel. Quite simply, easy-money policies, while they may help the economy as a whole, are directly detrimental to people who get a lot of their income from bonds and other interest-paying assets — and this mainly means the very wealthy, in particular the top 0.01 percent.

Now, I pay my bills by helping others invest their money. We have lots of retired folks who supplement their social security, and maybe a private pension, with income from their portfolios. In fact, over the past few years, a number of prospective average American clients have wandered into our offices (2 over the past two weeks) hoping we might have an answer to their dilemma: what to do with those few thousand (not million) bucks that used to generate, say, 25% of their retirement income safe and soundly in bank CDs. Again, these are your everyday, not rich, American older folks whose good night's sleep rests on the safety of their money.

One dangerous side effect of today's monetary policy is that it inspires safety-minded retired folks to take more risk in a desperate attempt to preserve their retirement income.

Reading on; Krugman anticipates my objection:
Complaints about low interest rates are usually framed in terms of the harm being done to retired Americans living on the interest from their CDs. But the interest receipts of older Americans go mainly to a small and relatively affluent minority. In 2012, the average older American with interest income received more than $3,000, but half the group received $255 or less. The really big losers from low interest rates are the truly wealthy — not even the 1 percent, but the 0.1 percent or even the 0.01 percent. Back in 2007, before the slump, the average member of the 0.01 percent received $3 million (in 2012 dollars) in interest. By 2011, that had fallen to $1.3 million — a loss equivalent to almost 9 percent of the group’s 2007 income.

Okay, but in 2007, those $3k/year incomes were easily $10k+/year. Notice how he goes back to 2007 for the .01 percent, but sticks with 2012 for "older Americans?" So who do you think feels the pinch more, the .01 percenter who still receives seven figures in interest income---and, by the way (a very big "by the way"), has made an utter killing in the stock market, and who knows to what extent has exploited crazy-low borrowing rates to acquire more assets---or the "older American" trying to get by on a fixed income.

Krugman rails against the politicking of the right (and of course they do politick). But, oh my!, nobody, but NOOOOOBODY, can politick (bend facts, omit details, etc., etc., etc.), like Krugman.

P.s: I do believe that the "conservative" politician is politicking, big time, in his attack on easy monetary policy. But not because he's advocating for his super-rich supporters (whose portfolios have done quite well of late), but because he believes it works. And that---he believes---an abrupt 180 in policy would spook the economy into a slowdown that would improve his party's prospects in the coming two election seasons. The irony is that, his rhetoric (over debt, bubbles, inflation, etc.) is truly the stuff we should concern ourselves with.

In other words, if Republicans had the White House, and if they controlled the Senate, I can assure you, they would be huge fans of the Fed right about now. And of course the Democrats would be on the attack...

NEWS FLASH! Just received a Bloomberg text stating that LeBron (think Bernanke/Yellen) is going back to Cleveland (think Republicans)! Recall that LeBron (Yellen) was utterly reviled in Cleveland (Republicanland) after defecting to the Heat (the left). Now, that very same LeBron (Yellen), same jump shot (same monetary policy), etc., is about to become Cleveland's (Republicanland's) darling once again.

Thursday, July 10, 2014

Direct experience with minimum wage...

Some academics, and some politicians, are working overtime to convince us that raising the minimum wage will not hurt---will help actually---the minimum wage earner. I believe I've made (or repeated) every case against raising the minimum wage that I'm capable of from my vantage point.

I do have employees, but their productivity---and the competition from other employers in my industry---demands that I pay them wages much higher than the minimum. So I can't speak from direct experience. However, Andy Puzder, CKE Restaurants' CEO, can (be sure to read the entire piece and/or watch the interview:
When there’s a demand for labor, the cost of labor goes up. When there’s no demand for labor, it goes down and you can’t solve that problem by having the government artificially mandate a wage increase when there’s no economic growth to support that,” says Puzder. “What businesses do is they increase their prices and they move to automation so you have less jobs.

Wednesday, July 9, 2014

Yes, PLEASE, let's explore the economic contribution of regulation...

In Tuesday's New York Times, Demos's Lew Daly pleads his case that public services are not fairly accounted for in how we measure the economy. Early on in his piece, Our Mismeasured Economy, he makes an astonishing statement:
The problem is that most government goods and services are provided free, so they do not have market prices like, say, mouthwash or financial planning. 

So, government services are "provided free"? I don't suspect many TAXpayers would agree.

Beyond that, he points out that much of what we believe to be the domain of the private sector has in reality been funded by the public sector. And that our obliviousness---our lack of giving credit where credit's due---leaves us ignorant of the value of public investment in our economy, and
"unable to craft effective policies for a better economic future. If we ignore the economic contribution of regulation, we are less likely to want more of it, exposing our children to greater social risks and costs."

If you're at all sympathetic to Mr. Daly's position, I'd like to remind you that there is no free lunch. There are no free government programs. They are all, one way or another, funded by taxpayers. To suggest that we should somehow include some new measure of government-provided "benefits" in the GDP calculation, without counterfactualizing, without somehow estimating the gains that might have occurred had all those resources been left in the private sector to begin with---left in the hands of those who have the greatest stake in the efficacy of their allocation---is ludicrous. Think of a government program, any program: Is it efficiently run? Is it profitable? Is it paid for? Could it survive in the real world?

I do agree with Mr. Daly that we should not ignore the economic impact of regulation, in fact I wish we would aggressively explore it. Performed objectively, I strongly suspect---I'd bet my life on it in fact---that such exploration, were its findings honestly presented to the American public, would make us far less likely to want more of it.

Fortunately, there are organizations who are objectively exploring it. Here's the opening to the Mercatus Center's excellent piece The Unintended Consequences of Federal Regulatory Accumulation:
Federal regulators often have good intentions when proposing new rules, such as increasing worker safety or protecting the environment. However, policymakers typically view each regulation on its own, paying little attention to the rapid buildup of rules—many of them outdated and ineffective—and how that regulatory accumulation hurts economic growth.

The continuous accumulation of rules over the last several decades has not only slowed economic growth but has also reduced employment opportunities and disproportionately harmed low-income households. Unless Congress and agencies address this growing backlog, it will continue to stifle innovation and entrepreneurship.


 

Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a="http://www.betweenthelines.us/wp-content/uploads/7-10-14.m4a"][/audio]

The economy and the market, July 2014

Without putting you to sleep with the volumes of economy-related notes I've taken over the past few weeks---which amount to summaries of the data, and my thoughts on various leading indicators---suffice it say that last week's jobs number confirmed what I'm reading in the employment-related stats. And that housing, general retail, manufacturing, services, even pianos (anecdotal), fishing guides (anecdotal), boats, and more small business owners taking one week vacations than they have since before the recession tells me that the economy is indeed doing better than it has for quite some time.

I just completed my bi-weekly assessment of market valuations, and, as has been the case of late, I see value in some areas and froth in others. Going forward, near-term, it'll be about earnings and interest rates. As I've said all along (well, all along of late), inflation/higher interest rates would be the obvious potential catalyst for the next correction, or bear market. Not that some black swan won't swoop in in the meantime.

All the pundit prognostications can make your head spin. I've heard everything from we're merely 5 years into a 15 year secular bull market, to, we're within days, or weeks, of the next great bear market. No kidding!

Some say higher interest rates will indeed send the stock market reeling, while others say rising rates will be welcome confirmation that things are finally improving, and that that will show up in corporate earnings sufficient to offset the potentially negative effects of higher rates on stock prices.

I'll say this; stocks will not do well against higher interest rates unless we indeed see substantial growth in earnings. Even with better earnings, however, I would still expect stocks to struggle at the first sign that rates are indeed on their way to normalcy.

But hey, let's not put the cart before the proverbial horse. The Fed (the majority on the board anyway) just doesn't seem overly worried about inflation and, therefore, stands pat on short-term rates for now.

The wildcard remains the bond market --- the longer end of the curve that is. Bondholders don't have to be prompted by the Fed; if they indeed see inflation coming, particularly while they're holding such tiny upside potential in their bond portfolios, they will sell, forcing up longer-term rates and---if they turn out to be right on inflation---leaving the Fed to play catch up. And that's where recessions/bear markets tend to come from. Time will tell...

Bottom line for me:

Short-term: I'd love the Fed to step up the timeline and start raising short-term rates, and let the stock market deal with it. Much better to be ahead of the inflation curve in my estimation.

Long-term: I'm bullish on innovation and growth, globally, and I want to own the companies that will deliver it in the years to come. And am willing to ride through (while adjusting at the margin, and rebalancing periodically) the inevitable volatility to come.

So why not try and time the market?

Well, frankly---my opinions regarding the economy, inflation and stock prices notwithstanding---one would have to possess a gargantuan ego, while being profoundly foolish (I guess they go hand in hand), to even begin to think that he/she can anticipate the actions of thousands of individuals, and institutions, taking opposite sides (it takes two to transact) on millions of shares of stocks.

Lastly, back to the Fed: As you watch the brief clip linked here, notice how some members of the panel, along with the Fed, have yet to grasp that curious task of economics. Per Friederich Hayek:

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

Tuesday, July 8, 2014

Market Commentary (audio)

This one's a little long, and a little wonky, sorry... But go ahead and listen anyway.

Click the play button for today's commentary:

[audio m4a="http://www.betweenthelines.us/wp-content/uploads/7-8.m4a"][/audio]

Monday, July 7, 2014

What kind of squirrel are you? - OR - So now what?

Whether we're talking jobs, housing, manufacturing, services, consumer or business owner sentiment, the economy is looking up. As I've expressed recently, I view this as necessary phenomena if last year's stock market gains were legit (given that prices ran away a bit from the economy, and corporate earnings). In other words, at this juncture, it looks as though the 2013 stock market may have got it right, while the bond market (prices remaining high)---as an economic forecaster (high bond prices denote pessimism [although other factors were/are in play])---got it wrong.

As an investment counselor, times like these (long-running trend in either direction) are without question the most challenging. For this is when some individual investors begin to get squirrelly.

It wouldn't be nearly as challenging if all of our anxious clients were of the same variety, say, like (at the extremes) tree squirrels, or ground squirrels. But of course they're not. Some folks, the tree dwellers---amid an epically strong, and long, stock market run---see nothing but higher heights to climb. The only anxiety these folks are experiencing is over their exposure to fixed income assets (presently cash and/or short-term CDs in our clients' case)---they utterly hate seeing that money sit idle while their equity allocation is growing virtually unabated. While the burrowers fear---amid this epic run---that the trees have grown too tall too fast and that the slightest wind will bring them crashing down in 2008 fashion.

The former (well, one or two of them) are pressing me to endorse an increase in their target equity exposure. The latter ( " ) are asking if, at a minimum, we shouldn't rotate (sell some stocks) now, even though we may be months away from their next scheduled rebalancing date.

From a market-timing perspective, both have legitimate concerns. The tree squirrels see the economy improving and believe that spells yet higher stock prices to come. The ground squirrels agree with me with respect to an economic acceleration merely justifying the past few years of gains. And they (not necessarily me) see a wide margin for error in the pricing of stocks on a go-forward basis.

Well, actually, it's simpler than all that: The tree squirrels suffer from recency bias (believe what's happening today will continue ad infinitum), while the ground squirrels are victims of post traumatic stress disorder (from the 2008 experience). The previous paragraph's logic is what I use in conversation to let each know that their concerns are not without empirical justification, and yet there's an opposing scenario to consider---as, surely, history (save for "ad infinitum") supports both sentiments.

So, here's the thing; yes, history supports both scenarios: The market could easily have more hay to make. Or---improving economy notwithstanding---we may be on the precipice of, at least, a good-sized correction. While I may have a bias (a guess) of my own, I'll be fair and assign 50/50 odds to each.

So now what?

Now nothing. Nothing, that is, unless we can justify a rethinking of either's allocation based on factors pertaining to their personal circumstances, as opposed to their, or some pundits', guess about tomorrow's market. Of the two, it would be the ground squirrel's circumstances that, in my view, justifies a serious rethinking. For I can't think of a circumstance more important than one's emotional circumstance. Clearly, one who is fretting over the inevitable (the market's gonna "correct" someday)---by nature of his fretting---has to either adopt a new perspective on, or reduce his exposure to, the stock market.

As for the tree squirrel---the exuberant optimist he is---assuming his asset targets fit his time horizon and the temperament he confessed to when we originally met, in my view, there's no legitimate rethinking---in terms of overall stock/fixed income allocation---to be done. We could, however, rotate among sectors to a mix that may better reflect his unbridled optimism. Although that would be contrary to his advisor's recommendation to begin tilting toward sectors that tend to produce better relative mid to late cycle results, and presently possess more compelling valuations.

Saturday, July 5, 2014

Essential idleness - AND - Footnotes...

Paul Krugman says the root of our economic difficulties
is almost absurdly simple: We had an immense housing bubble, and, when the bubble burst, it left a huge hole in spending. Everything else is footnotes.

And that the solution
was simple, too: Fill that hole in demand. In particular, the aftermath of the bursting bubble was (and still is) a very good time to invest in infrastructure. In prosperous times, public spending on roads, bridges and so on competes with the private sector for resources. Since 2008, however, our economy has been awash in unemployed workers (especially construction workers) and capital with no place to go (which is why government borrowing costs are at historic lows). Putting those idle resources to work building useful stuff should have been a no-brainer.

My wife and I spent the past two days drifting down Montana's beautiful Madison River. While that may sound like a relaxing experience, really, it's not. It's amazing, don't get me wrong, but when you're fly casting from morning till late afternoon, on your feet, balancing through often choppy waters, you're spent, really spent, by the end of the day. Today, our fishing gear (our capital) is idle. In fact, save for me jumping out of the car a time or three over the next couple of days to fish a small stretch of some Yellowstone stream, it'll remain so for a while.

My point: all things are cyclical, and periodic idleness is unavoidable. Unavoidable and, in fact, essential: Idle times are when we regroup, reassess, think about/plan where we might go next (which---that assessing/planning---is an all-important use of human capital). And sometimes, even during the fishing season, rough weather can dampen our spirits and idle our physical capital longer than usual.

Were we, in our dampness, to lose patience and go fishing when nature says no, really bad things might happen. So we don't, and our capital sits idle. And if some anxious and inexperienced angler asks to rent our idled gear, well, no. We'd fear he'd miscalculate the risks and ultimately damage, if not ruin, our capital---costing us far more than the rent we received.

So, the "footnotes": The fishing---in the housing market---seemed really good for a really long time. We learned, after the fact, that something in the water---some concoction brewed up by Wall Street, Washington, and the Fed---over-stimulated production to the point where the market bore little resemblance to reality. Capital was essentially pushed way beyond its naturally-productive capacity and, naturally, the resulting damage had kept folks out of the water and capital idle for an unusually long time.

But the thing about such things is that, in the real world, they're lessons. Some capital sits idle while we process through what just occurred and wait for the weather to clear a bit before we begin putting it back to work.

The likes of Krugman, on the other hand, will have none of that. Weather, instincts, experience---not to mention budget deficits---be damned! If the private sector isn't ready to get that capital back to work, let's have the politician (that anxious, inexperienced angler) grab it and do something, anything (hey! holes in our roads need filling) with it.

And pray we can get it back intact and put it to productive use when we're ready. Although he may wrestle us for---or attempt to influence our use of---it, as he may be looking to dodge his way around whatever next mess/miss (as in misallocation of capital) he gets us into...

Footnote: The going forward prospects for capital investment have improved markedly of late, and it's beginning to show up in the numbers. Meaning, the private sector looks to be getting back to work and investing where it sees legitimate opportunities. I understand there's some truth in Krugman's concerns with regard to infrastructure, and if the economy is indeed, at last, gaining some traction, I suspect the appetite for infrastructure spending will improve as well. Although addressing those needs would be better left to the private sector, but we'll save that story for some other time. 

Wednesday, July 2, 2014

A quick note on jobs, stocks, and bonds...

Stock futures are a little higher and bond prices are tanking (interest rates are rising) this morning in response to the Bureau of Labor Statistics (BLS) surprising (to the consensus) jobs number (+288k) for June. Being a little pressed for time at the moment (out of the office this week), I'll reiterate my thinking on the market with this from the other day's "All Else Part 10" article:
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.

And from "Finally Leaving the Runway?":
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.

In terms of the Fed, for now, the doves on the board are clearly not inclined to move the needle on short-term rates before next year. My guess is that they (the doves [the hawks are calling for sooner action]) will acknowledge the upward trends but focus on the present lack of wage inflation and lack of growth in hours worked. 

That said, the bond market (this morning at least) is not nearly as patient...

Be back with more soon...