Monday, September 30, 2013

In the not-too-distant future...

As I type (9:22 pm, Monday, September 30, 2013), Dow futures are trading down about a hundred points. Of course you know why, right? Yes, buyers are only willing to accommodate sellers at levels noticeably below this afternoon's close. And that's after bidding prices down, to the tune of 128 Dow points, during regular trading. Which came after Friday's 70+ point drop. Wow! In two days and an evening the Dow's given up around 300 points. Truly, anyone who would buy stocks amid a government shutdown has to be either gutsy or downright stupid---or both---right?

Well, think about it. Think about the market selling off like it did, under similar circumstances, in 2011. The major averages sank something like 16% during that fiasco. We're talking 2,400 Dow points, today, should history repeat itself. Well, that's the point exactly! Well, yeah, but those who, by sheer luck, bought at the bottom---provided they've held on ever since---have seen an amazing 4,700 point advance. Even the poor souls who bought at the 2011 peak, provided they held through the storm and beyond, aren't that poor after all---they're ahead by roughly 19% (using the Dow as our proxy), at this point, for the experience.

So if you're at all anxious over the budget battle's near-term impact on the market, think about what tends to happen when the politician folds to the fear of failing his life's ambition (a life in office that is)---when concessions are made and resolutions passed. Of course I can't promise---given the countless variables---that the market will immediately trade back to pre-fiasco levels once this fiasco ends, as history might suggest. I will, however, predict, with confidence, that in the not-too-distant future the market will be trading on entirely different events.

Market Commentary (audio)

Make that the 30th of September...  Click here for today's commentary...

Sunday, September 29, 2013

The market owns them...

Rep Sander Levin D-MI, a week or so ago in a CNBC debate, chided his Republican opponent (can't recall whom) for he and his colleagues taking us to a potential fall-2011ish mess. He kept on and on, in most dire fashion, about the 16% drop in the S&P 500 that occurred during that debt ceiling showdown. And, believe you me, Sandy's fears do not rest merely with Sandy. Both sides of the aisle, as well as the Fed, are deathly (politically speaking) afraid of the stock market.

So then, long-term investor, if you view the present goings on in DC as pure stupidity---that you'd like to see a quick end to---pray for a stock market crash come this Monday and/or Tuesday. I assure you, nothing inspires political resolutions like a good old fashioned hit to Joe Voter's 401(k) account. And, please, hold out no hope that any resolution crafted by the present cast of characters will somehow answer our ongoing challenges. Hamstrung as all politicians are, they are utterly incapable of acting in the best interest of the economy at large. Thank goodness, therefore, that the economy is not all about Washington---that policy in the U.S., as awful as it's been, for decades upon decades, has been unable to uproot the forces of capitalism.

While we may very well experience more policy-induced bubbles and busts going forward, I see nothing that cannot, ultimately, be overcome by good old American ingenuity...

For two additional doses of sanity, read again Our View Going Forward and Stress Less.

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

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

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

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

Asians, Asians, everywhere Asians!

My wife and I spent last week in and around beautiful West Yellowstone, Montana. This is where we go to escape the crowds, take in nature's beauty and fly fish the rivers I dreamed of as a kid.

West Yellowstone is a quaint little assembly of hotels, restaurants, fly fishing outfitters and souvenir shops. We usually reserve our fishing days for outings with our favorite guide Matt Morrill (you may recall my essay God's Greatest Work from 2010), and while we indeed enjoyed Matt's company once again, on this occasion we decided to update my gear at Arrick's Fly Shop and spend a day or two exploring on our own. Should you ever find yourself in West Yellowstone, fishing or not, be sure to visit Arrick's. Located at the corner of Canyon and Madison, this rustic anglers boutique is a veritable tapestry of American fly fishing---a place where a trout-obsessed bloke like me gets lost for hours.

If you enter through the south door, Lilly, a most delightful Llewellin Setter, will greet you with the sweetest handshake, and, if she takes to you like she did Judy, you might even receive a soft kiss on the wrist. Lilly belongs to Fred, the straight-talking, somewhat reserved, fly fishing master who spent a good forty minutes with me in consultation and rod-testing behind the shop. An enriching experience for both of us: I left, ecstatic, with all the essentials of a Yellowstone fly fishing expedition; Fred remained, his reserve intact (at least till we left the store), with all the contents of my wallet.

My new 4-piece rod came elegantly wrapped in a cloth sheath and tucked within a travel-worthy carrying case. I was so eager to get it unwrapped and assembled---upon reaching Yellowstone's Fire Hole River---that I nearly overlooked the tiny white sticker affixed to the thin sheet of plastic covering its cork handle. The three-word disclosure printed on the sticker explained a phenomenon Judy and I couldn't help but notice as we visited the various establishments back in town: A good percentage of the tourists (we saw maybe one vacancy sign, by the way) were from China, the place where my new fly rod was "finished" (remember "I Pencil"?). Of course! I thought to myself upon reading the sticker, That explains why all those Chinese folks are spending all that money in West Yellowstone. It's the result of all the business we do with them. All that money we spend on all that stuff made in China supplies those wonderful tourists with the U.S. dollars they need to travel to our beautiful country and bless our hardworking American-born merchants. International trade is unequivocally the reason West Yellowstone thrives today.

Without trade my friends, I assure you, there'd be fewer establishments, fewer jobs, fewer fly rods (at much higher prices) to choose from, fewer fishing trips, fewer plane tickets, etc., etc., etc., etc., etc., etc., etc., etc., etc., etc.

I can't help but think about the mountain folk who own, and work for, those West Yellowstone establishments. We overheard a woman at the WY Airport tell another how the Asian market is "huge right now". She gets it, because she's a direct beneficiary of international trade. Yet I wonder how other Montanans---those not as visibly reaping the benefits of cross-border commerce---view this wonderful phenomenon. Let's say the woman at the airport wasn't directly thriving as a result of the "Asian market". Would she then, in her heart, welcome the international traveler? Or would she make the profoundly foolish suggestion that we're being overrun by foreigners? Would she not understand that the vast abundance of affordable goods at her disposal is indeed the result of the process that brings these foreigners to her mountain community? I fear not. (Oh, and by the way, there's no stereotyping here; I would fear the same---based on personal experience---if we were talking about a Californian).

The truth is, international trade not only opens up a world of material options---creating prosperity in the process---it, best of all, opens the door to peace and true appreciation for other cultures...

Friday, September 27, 2013

Champion of global cronyism...

During a panel discussion at this week's Clinton Global Initiative meeting, Goldman Sachs's Lloyd Blankfein "came out swinging in defense of global capitalism." Upon reading the CNBC article, I recalled a note I had taken---feeling a blogpost coming on---after listening to Blankfein last week on Bloomberg radio. When asked his opinion of the efficacy of present Fed policy, he replied: 
If I were in charge of running the economy I would've done everything I could do.

Such statements always bring to mind that timeless Friedrich Hayek quote:
The curious task of economics is to demonstrate to men how little they know about what they imagine they can design.

Make no mistake folks, the fact that the likes of Blankfein believe the economy is a thing to be "run" is the problem.

While I agree with his comments (this week), with regard to business and poverty, to dub the CEO of Goldman Sachs (the incubator and, ironically, the rest home of government officials) a defender of global capitalism, well, uh, NO! Perpetrator of global cronyism, absolutely!

Thursday, September 26, 2013

The cows will come home...

Being that it sometimes snows in September in Montana, and that a cold snap can turn a trout's stomach, I have a little time this morning to share a little thinking.

As I suggested last week, this week (marketwise) is all about the budget and the debt ceiling. As the week has worn on, I've been thinking what little regard the market has for politicians. While the trend has been lower, on low volume---and fireworks could yet erupt---clearly, to this point anyway, our policymakers are an unthreatening lot. But if sentiment should change by next Monday, please, under no circumstances, sweat it. Ted Cruz can ramble, and Obama can not-negotiate, till the cows come home, but make no mistake, freshman Cruz is desperate to make his sophomore term, and the President, well, let's just say if a government shutdown indeed occurs, the cows will come home in a hurry.

You see, it's not these flamboyant political events that we have to worry about; we know that this time next year---next month even---the government will be borrowing and paying its bills as if nothing ever happened. It's the longer-term effects of the government borrowing to pay its bills that we must concern ourselves with. More on those later...

Stay tuned...

Saturday, September 21, 2013

Oh, what we have in front of us - OR - Same stuff, different day

Maybe it's just me, but it sure seemed like everything market I read or listened to last week, up until Friday that is, was decidedly bullish on stocks. The market had, they say, priced in a $10 billion taper, Syria was off-the-table, earnings were looking decent for 2014, business optimism was picking up globally, yada yada yada. Then came Friday, with a few profit takers in tow, and nary a buyer to be found. Hence, all but a half-a-percent of the week's gains went poof. And oh what a week we have in front of us.

All the focus will be on the disorganized, disoriented, disgraceful political process of funding the U.S. government for another year. No deal by a week from next Monday, and they shut it down (don't sweat it). The Republicans are demanding a complete nonstarter (the defunding of the Affordable Care Act [aka Obamacare]). But hey, when they pass that continuing resolution they can tell their eggers-on that they gave it their best shot, and that they'll be back, very soon, to fight another day. I can understand wanting to undo Obama's ambiguous albatross, but I just don't get the Republicans' strategy. They have literally no shot at a defunding, and run huge risk of getting politically killed by the ricochet. If political gain is their aim---which it absolutely is---they'd be much better served to simply illustrate for the American people the harm it's already dealing to employers/employees. And to go after the fact that Obama, himself, agrees that Obamacare is a mess: as evidenced by some 1,200 waivers handed out to the organizations he holds dearest (unions, etc.). It ought to be a no-brainer!

Back to the market: Here's the thing, we are going to have that 10% (at least) "correction", we are! It may come next week, it may not. It may come during debt-ceiling-October, it may not. It may come with this year's winter weather, it may not. It may hold off till well into next year, it may not. And, on top of that, we will absolutely have a 20%+ bear market, we will! It could come tomorrow, it could come in 2016 or 2026, and several times in between. I don't have a clue as to when, but I promise, it's coming. And thank God it is! Seriously folks, we are talking about an auction. Some folks come to sell, thinking they're getting a good price. Some folks come to buy, thinking they're getting a good price. Each party to a transaction must have some historical reference that inspires him to transact. Plus, there's nothing more effective at correcting imbalances and setting stages than a good old bear market. As counterintuitive as it may be, we long-term, well-diversified, willing-to-rebalance (buy and sell back to our target allocation in the face of bull and bear markets), investors should all welcome---yet never try to time---them.

Here's a little dose of reality I penned last year when we were dancing on the edge of the "fiscal cliff".

Thursday, September 19, 2013

Avoid the uh ohs...

Folks owning gold and/or silver going into yesterday look like geniuses today. Their careful analysis of trends in global currencies, industrial demand (silver), and seasonal factors in countries like India, inspired them to buy those metals and reap some very nice one-day gains. Well, not---in terms of their prowess---exactly. Metals were trading decidedly lower right up to the moment Bernanke stunned the markets with his no-taper-yet announcement. Had the Fed delivered on the widely anticipated $10 billion cut in monthly bond purchases, aka QE3, I suspect we'd have seen metals prices remain near the session's lows. Had they gone deeper than $10 billion, today's geniuses would've surely felt like goats.

Truly, your investment thesis cannot revolve around the vagaries of appointed officials, nor the politicians who appoint them.

And, speaking of politicians, there's no doubt that many a speculator will speculate a few dollars on the political battle to come. If they believe the Republicans will dig in their heels to the point where traders lose sight of the political risk (which virtually assures an 11th hour kicking of the can [once again]) in doing so, they'll go long metals and short (betting on the fall) stocks. If the parties make nice before the 11th hour, uh oh!!

So what's my point? Same as always: Expect short-term volatility as traders place their bets, and remain long-term---and very diversified---with your equity exposure. Market timing---whether we're talking metals or stocks---is a very dangerous undertaking...

Wednesday, September 18, 2013

More meek than I thought...

In last night's blog post, "meek" is how I characterized the voting members (the majority that is) of today's Fed. Nevertheless, I suggested then, and this morning on television, that they'd taper a modest amount of their monthly treasury bond purchases. As it turned out, they're even meeker (or, more meek?) than I thought---they punted. No taper just yet. As I type, Ben Bernanke is justifying why---in the face of diminishing returns and asset bubble risk---the Fed will, for now, continue unabatedly creating money and buying bonds.

While 150 Dow points (at this moment) might not be the "monster rally" I suggested a punt would spark, it does reflect the acute myopia suffered by today's stock trader. Someday, let's pray, the Fed will muster the courage to risk upsetting the apple cart. Hopefully before they do too much damage to the price of apples...

Today's TV Segment (video)

This morning, Zara and I discussed the anticipated QE taper, Bernanke's presumed successor and, most importantly, the easiest way to buy a pair of basketball shoes. Click here to view...

Tuesday, September 17, 2013

QE taper (round 1) is old news...

The moment Ben Bernanke announces that the first round of QE tapering will begin immediately, with $10 billion, it'll be old news---barring a surprise in terms of the amount and/or the target (I expect they'll mostly, if not entirely, apply the cut to treasury purchases, as opposed to mortgage backed securities). If they present a shocker, and go large, I expect the market will go south. If they hold off, I expect a rally.

The news of import tomorrow will be Bernanke's followup commentary. If he runs true to recent form, he'll promise that they'll tread with great caution going forward, and that QE will be ramped right back up the moment the data disappoint: The last thing in the world this Fed wants to do, alas, is upset the all-intimidating stock market (market here = traders btw). As for the wiser bond market (market here = investors btw), the Fed has to know that it's pretty much out of ammo. While a delay in the taper would likely see a brief rally in bond prices (lower yields), sooner or later bondholders will wake up to the reality of very low upside and huge potential downside, collect their winnings and move on---barring a new recession anytime soon.

So, if the Fed's so beholding to the stock market, why would they do it? If the market wants them to hold off, why wouldn't they simply comply? Well, as meek as the majority of the voting members seem to be, I believe they do see the potential that too much of a good thing---a good thing that, at best, is suffering from the law of diminishing returns---could lead to over-speculation and, thus, the inflation of asset bubbles, if it hasn't already.

Stay tuned...

Monday, September 16, 2013

Unseasonably warm...

Yesterday morning, my wife says to me, "it's going to be a nice week this week. Ninety-four tomorrow, ninety-two Tuesday, ninety-one Wednesday." I say, "it's funny how when we're going from spring to summer ninety degrees feels super hot, but when we're coming off of summer (Fresno is a hot place in the summer) it feels nice and cool."

The forecast for the Fed this week is for the temperature to drop from 85 to 75 (billion dollars a month of bond buying with new money that is). And the street, at the moment, views it as a virtual nonevent. There were moments, however, during the past few months when the slightest hint of even the slightest cooling had stock and, especially, bond traders dawning their winter coats.

I wonder where we'd be had the QE3 number been, say, $65 billion to begin with? Would interest rates be 24% higher and stock prices 24% lower? Would mortgage applications have dried up, like they did last month, due to bondholders' exodus in anticipation of the taper? I'm thinking the $65 billion would've been plenty hot, and whatever impact present QE has had on asset prices and interest rates would have been realized just the same. And today we'd be talking about a taper to maybe $55 billion, a number that---in my view---would've been met by the markets virtually the same as has today's warm-enough $75 billion. Oh, but going to $55 billion now, after having been at $85 billion, would be as shocking as a snowstorm in Fresno. The difference being that while a September snowstorm in Fresno would be a little freaky, it would be viewed, nonetheless, as an act of nature. We'd all layer up accordingly, but nobody would be freaking out (save for raisin farmers that is). But when we're talking the Fed and QE, we're not talking nature, we're talking climate control. Traders seem to have zero confidence in the economy's ability to regulate its own temperature. I think they're wrong, and I think the longer the Fed attempts to control nature, the harsher nature will be when it's time to correct for the unseasonable growth occurring in, well---other than emerging markets' currencies---we'll have to wait, too long, alas, and see...

Sunday, September 15, 2013

The end of Summers rally...

As I type, Dow futures are pointing to a 200 point opening for tomorrow morning. And no, it's not about America agreeing with Russia on what to do about Syria, or some leak from the Fed that they're pushing back the anticipated QE taper. Stock futures were essentially flat until moments after the news that Larry Summers has bowed out of the race for the Fed chair was released. Clearly, traders viewed Summers as a threat to the present pace of money printing. And, apparently, now-shoo-in Janet Yellen (seemingly everybody's favorite) is as dovish as they come.

Cause for celebration? Uh, no! Not that I don't like seeing the market higher (my clients love it) mind you, I'd just prefer that it comes after positive earnings announcements, expansion plans (private-sector that is), free trade agreements and other longer-term meaningful phenomena. Not simply because traders, who can't see past the ends of their noses, will take inflated stock prices any way they can get em.

It's going to be a very interesting market the next few weeks. Look for big swings in both directions as we climb that hump I wrote about the other day in This Predicament.

Stay tuned...

Saturday, September 14, 2013

Trust your senses...

Tomorrow, millions of middle-income Americans will recline in their climate-controlled living rooms, snack on fresh bags of chips, barbecued hamburgers, potato salad and ice cold beer, and watch their favorite football teams do battle in hi definition. Now that I think about it, millions of lower-income Americans, some on Welfare even, will enjoy the same experience. And more power to them!

Your senses do not deceive you my friends, life in America 2013 is good, very good! Better, in fact, than it's ever been. Yet, articles like the one I commented on this week, and other literary works galore, paint an entirely different picture. "They" propose that the middle-class of 2013 has been sorely compromised relative to the middle-class of, say, 1950, and some carefully-composed statistics prove it.

So, what are we to believe, our senses or "their" propaganda? Yes, propaganda! "They" have to have victims. You see, victims can be the most passionate people. Victims create best-sellers and determine elections. And when victims are insufficient in number, "they"---with a pinch of Piketty and a dash of Saez---will create them, and then exploit them to the fullest.

Regular readers know that I am not at all sympathetic to the whole stagnation story: I have attempted ad nauseam over the years to counter, as best I can, what I believe to be this most pernicious fallacy (here's one, here's another, one more).  If you, however, despite your senses (and my pleas), remain unconvinced that it is pure myth, please read this article in today's Barron's by economist Don Boudreaux. Don's angle on this topic is superb, and should disabuse you of that faulty thinking once and for all. Here's a snippet:
Perhaps the best evidence that today's Americans are better off than Americans in the age of Eisenhower is the fact that life expectancy is now 6.3 years longer. Compared with the average American in the 1950s, today's average American enjoys 9% more time on Earth. The average time that grandparents remain alive to enjoy their grandchildren is now about 25% longer than in the 1950s.

Evidence more mundane than life expectancy casts further doubt on the myth of economic stagnation. That evidence is the shrinking cost—and growing size—of ordinary Americans' consumption.

A superb way of comparing the consumption options open to Americans in the 1950s to those that we enjoy today is to study a Sears catalog from the 1950s. Sears was then the premier retailer for middle America. And because its longtime slogan—"Sears has everything!"—was not much of an exaggeration, Sears catalogs are gold mines of information about middle-class living in the past.

Let's compare a sampling of the offerings from Sears' Fall/Winter 1956 catalog to similar goods on sale today.

Friday, September 13, 2013

Not even scratching the surface...

From the CNBC article Natgas exports become the next step in US energy evolution:
The push to export natural gas will help benefit small to midsized energy companies that are players in U.S. shale development, such as Apache, Anadarko, Plains All American and Chesapeake Energy. Yet Ineson says that halo effect could even extend to construction companies that will help build export terminals.

Yep! But that doesn't even begin to scratch the surface in terms of the beneficiaries of free trade in natural gas, which we're a long, long way from by the way. Here's a bit from my December 2012 blogpost on the topic:


The Earth stores vast supplies of natural gas. And, presuming it can be extracted safely, it can go a very long way toward resolving our present-day issues related to energy. From a purely economic standpoint, when it’s extracted on U.S. soil and sold abroad, natural gas producers will see profits, and we’ll see employment and economic growth. Our foreign customers’ energy costs will decline, which will free up capital with which to invest and spend (domestically and on other imports from around the world, including the U.S.)—in essence creating profits, employment and economic growth in myriad industries within their countries.




If the tables were turned, if the vast reserves were to be found under the soil of say Great Britain—and Great Britain producers were free to sell their commodity on the open market—it would see profit and employment growth concentrated in its energy sector. While the U.S. would benefit from lower cost energy, thus freeing up capital to invest and spend—in essence creating profits, employment and economic growth in myriad U.S industries. And U.S. exporters of other stuff would capture those dollars we spend on foreign-produced stuff. For example: we’d buy gas from Great Britain with U.S. dollars, Great Britain would buy and invest in U.S. stuff—or buy from other nations who want U.S. stuff—with those dollars.


You see folks, in a world of free trade, lines drawn on maps are entirely insignificant.

Thursday, September 12, 2013

A greater "take" for the 1 percent under Obama

Get ready for the garbage you poor voters will have to sift through come the mid-terms in 2014 and the general election two years later. That's what I was thinking after reading a CNBC article titled Richest 1% earn biggest share since Roaring '20s. According to the article, the wealthiest Americans have been taking the biggest share of the country's household income since 1928. Hmm, now that---under President Obama---is indeed fascinating. Could we possibly see the most unexpected shift of positions? Could the Republicans appeal to middle and lower income folks by citing stats suggesting that under Obama the gap between the rich and the poor is growing at the fastest pace in four score and five? That the policies of the Obama administration are tilted in favor of the wealthy at the expense of the masses? Sounds crazy, but we're talking politics, so I'd put nothing past them.

Last night I started to pick apart the article one paragraph at a time, but by the time I was two-thirds through I realized I'd be asking too much of my busy readers. Most of you appreciate brevity, and my essay was going to be anything but brief. Plus, I've said it all before. So I'll just comment on a few of the article's paragraphs, and follow with a couple of earlier essays on the topic:
The gulf between the richest 1 percent and the rest of America is the widest it's been since the Roaring '20s.

In other words: The richest 1 percent have been reporting a lot of income lately.
The very wealthiest Americans earned more than 19 percent of the country's household income last year---the biggest share since 1928, the year before the great stock market crash. And the top 10 percent captured a record 48.2 percent of total earnings last year.

In other words: The very wealthiest Americans earned 19% of the total income reported by U.S. citizens last year. The biggest percentage since 1928. The top 10% earned 48.2 percent of total reported income.

To characterize the total income earned by individuals as "the country's household income"---that is to be "shared" among the people---is wholly fallacious and incites class-warfare. Income is generated by the efforts of individuals, and is to be (ideally) allocated by those who earn it. Not divvied up by bureaucrats.
Berkeley's Emmanuel Saez, said the incomes of the richest Americans surged last year in part because they cashed in stock holdings to avoid higher capital gains taxes that took effect in January.

In other words: A pending increase in taxes inspired wealthy individuals to prematurely sell long-term assets, thus realizing much higher incomes in 2012 than they otherwise would have. And, therefore, the Federal government collected substantially more in tax revenue for 2012 than it otherwise would have.
The richest Americans were hit hard by the financial crisis. Their incomes fell more than 36 percent in the Great Recession of 2007-09 as stock prices plummeted. Incomes for the bottom 99 percent fell just 11.6 percent, according to the analysis.

In other words: Investors' incomes suffer the impact of recessions to a greater extent than does the income of non-investors.
But since the recession officially ended in June 2009, the top 1 percent have enjoyed the benefits of rising corporate profits and stock prices: 95 percent of the income gains reported since 2009 have gone to the top 1 percent.

In other words: Investors realize greater increases in their incomes during expansions (at least initially) than do non-investors. 

So what's the answer? During recessions virtually everyone loses, during expansions everyone gains. Risk-takers take bigger hits on the downside and realize greater gains on the upside. So are we to somehow change the whole risk-reward relationship? And if we somehow lessen the take of the risk-takers, wouldn't, therefore, less risk be taken? Less risk-taking would mean less investment. Less investment would mean fewer job opportunities for the very folks we'd pretend to be helping. Could it in fact be that---due to policy-induced uncertainty---there's less risk-taking (there's record cash on corporate balance sheets) occurring today than there otherwise would be: hence our stubbornly high unemployment rate? Should we really be fretting over the income gains of risk-takers?

 

The Pie 10/27/2011


"The top 1% has doubled its share of national income." So says (citing a Congressional Budget Office report) California congressman Brad Sherman. Our President, in virtually every speech, disses the "wealthy" (or, let's say, disses our system that he claims favors the "wealthy"). Even Presidential hopeful Mitt Romney finds political expediency, albeit treads lightly, in discounting the "wealthy" while promising a better world for the "middle class".

You'd think, per the rhetoric, that "national income" is some number that exists in and of itself. As if it's some already-baked pie to be sliced up and divvied amongst the masses.

Folks, don't let this malarkey infect your thinking. There is no "national income", our nation doesn't produce income---we do. This notion that the upper 1% have somehow sliced a bigger space into the pie pan is utterly ludicrous. If indeed the CBO report is accurate (the vantage point, or angle, if you will, is critical [which we'll explore in a future post]); that, as a percentage of total income produced by the total population, the 1% own a greater percentage than in years past, it simply means that the 1% profitably produced more of whatever they produce at a price the world was willing to pay.

I.e., it simply means that the 1% made the pie larger. Go hard after the 1% and I assure you, we'll be eating less pie in the future.

Who Needs 12 Flavors of Yogurt Anyway? 4/25/11


As the debate rages on over deficits and debt-limits, and due to feedback I've received from recent posts on the subject, let's briefly revisit the popular idea that increasing taxes on the wealthy, particularly (for this essay's sake) the mega-wealthy, might serve a constructive economic end.

note; I have no special affinity for the super-rich (i.e., billionaires), I don't know any, I don't always agree with their politics, and I absolutely believe they should pay their taxes. I will confess however that in the case of a few tech-geniuses who come to mind - as I here type on a feather-light wireless keyboard linked to a paper-thin notebook (all for less than a thousand U.S. bucks) - I so appreciate how they exploited every opportunity to pursue their separate interests...

The case for raising taxes on ten-figure Americans rests in the notion that they're flush with ever-increasing idle cash to the tune of tens, if not hundreds, of millions that should be disgorged from their estates and allocated elsewhere (for the greater good) by the government.

Now contrary to populist opinion, Bill and Melinda, while they can easily afford to pay higher income taxes, are not hoarding rubber-banded stacks of green pieces of paper behind some revolving bookcase or in a wall safe hidden behind a portrait of Great Grandpappy Gates. Nor are the far-stretching digits and commas representing their bank account balance balanced with the inventory of rubber-banded stacks of green pieces of paper locked away in their bank's vault. Nope, their tax-worthy fortune is in fact sitting in plain view.

It's in that new office complex going up on Main Street, it's in your neighbor's house, it's in the dozen frozen yogurt dispensers at the corner Yodigity, it funded your niece's tuition to Stanford and it's stopped at the red light in front of you. I.e., it's been efficiently distributed throughout the economy. Which begs the question; is it truly in our collective best interest for the likes of the Gateses (even if they themselves believe it is) to pay higher taxes?

Now, the wealth-redistribution advocates do not at all appreciate that sentiment. They contend that, on balance, the economy will not take a hit if we simply transfer a few digits and commas from all the top-earners' bank accounts to the U.S. Treasury. That while construction plans would be cancelled, the neighbor's mortgage rate would be higher (or they'd be someone else's neighbor in a less attractive neighborhood), your niece would do just fine at Chico State, and who needs twelve flavors of yogurt anyway, overall consumption will remain stable. It's just that our politicians will handle the resource allocation, as opposed to the private sector.

And, on that, I rest my case....

Wednesday, September 11, 2013

This predicament...

Notwithstanding disappointing jobs numbers and tanking mortgage applications (more on that later), the global economy appears to be picking up a little steam. With that, and with U.S. equities trading at 15 times next year's earnings (an okay valuation [historically speaking]), there's reason to be optimistic going forward. After we get over one heck of a hump that is. A hump consisting of Syria, the Federal budget, the debt ceiling, the QE taper, Germany's election, and any other source of political risk you might think of.

So how is it then, that, with this looming multi-humped hump, the market seems to be poised to test its recent highs? Well, we could say---as I did yesterday---that the humps are all either known-knowns or known-unknowns---in which case (perhaps) anything more than your garden-variety correction isn't likely in the cards. However, not seeing myself as a great prognosticator (which is good news for our clients), I feel I should always expand my explanations as my thinking expands.

As I continue to ponder this predicament we find ourselves in (a market that won't contract when logic says it should), another thought occurs to me. I'm thinking that if the general investor/trader sentiment around the recent highs could be characterized as euphoric, or highly optimistic even, we'd very likely be in the throes of a "painful" correction (at a minimum) right about now. That if everybody had been jubilant and, thus, in the market, these known-knowns, etc.---as they approach---would inspire substantially more than the few single-digit pullbacks we've seen so far this year. But that (jubilation) hasn't been the case: I continue to hear the pundits term this the "most hated rally in history". In fact, for those high-flying hedge fund managers, the 2013 bull market has been an utter disaster. Through July, the average hedge fund was up something like 4% on the year. Why? Because their managers figured the known-knowns would lead to something very different than what's actually transpired for stock prices. Plus, they say the retail investor (Joe Shmoe)---remaining the victim of post traumatic stress after the 2008 bear market---has, by and large, stayed away as well. So what do we get? Professionals (desperate to keep their jobs) aggressively buying the dips, and/or, sadly, having to cover their shortsand individual investors---looking at the recent results for the 401(k) options they no longer own---finally succumbing to that affliction so common among individual investors: chasing returns. I.e., they tend to buy the most recent best performing funds (which, of late, would be U.S. stock funds).

So then, with hedge funds and individuals playing catch up, we should expect the coming dips to be bought up just like the last several, right? Wrong! All I've offered here is one possible explanation as to why the market hasn't taken the kinds of hits recent headlines might otherwise inspire. Now, that said, I can predict with 100% confidence that every future dip will indeed be bought, I just can't tell at what level---some will inspire buyers at 3%, some (fewer I suspect) at 30%.

Now, in case you're thinking about it, trying to time the dips is the most foolish of games to play:

For example: Let's say you sell at 3%, expecting 30%, and the market rebounds---you've just blown what could turn out to be an unfillable hole in your portfolio.

Or, let's say you sell at 3%, expecting 30%, and you get 30%, then buy back at 30%, and the market rebounds from there. While you'll feel like a genius, you'll be utterly doomed for life. For you'll believe you got it (that "it" no one I've observed in my 29 years as an investment consultant has ever got), and you'll attempt it again, and again, and again. Blowing hole after hole after hole in your portfolio. So don't do it...

Today's TV Segment (video)

This morning Zara and I talked about self-driving cars, Syria, the lately-resilient stock market, the global economy, headwinds the market presently faces, who's missed out on this rally, and the shuffling of the Dow Jones not-so-Industrial Average --- all in 4 minutes, 24 seconds. You won't want to miss it!

Click here to view...

Monday, September 9, 2013

What you know can't hurt you (maybe)...

Hmm... Pretty good day for stocks (Dow up 140) on decent volume (i.e., a little more than merely a stubborn-seller phenomenon). The headlines had good data out of Japan and China, plus a potential out on the Syria situation (surrender your chemical weapons and maybe you won't get bombed), fueling today's rally. So, we're back to good news is good news, right? Right---for the moment anyway. So what's next?

Well, of course Syria is not nearly off the table as of yet, the Fed may taper back on QE next week, and the Kick-the-Can Superbowl (budget and debt ceiling) is scheduled for next month. Looking at the knowns, one would think the market ought to be taking its annual 10% snooze---at least!---right about now. But, strangely, that's not nearly what's happening (the Dow going from 15,600 to 14,700 is barely a catnap). Why? Because, as I've preached for years, it's generally not the knowns, or even the known-unknowns (we know that the Fed's going to taper, and we know that we don't know exactly when or by how much) that send the market reeling into double-digit declines. It's generally the unknown-unknowns (the 1987 Crash, Lehman, etc.) that inspire huge panicky selloffs create those real buying opportunities.

So relax, enjoy the coming fall (weather that is) and know that what you know (likely) won't hurt you give you that wonderful opportunity to rebalance your portfolio at much lower levels. But who knows (nobody of course)? Perhaps there is an unknown-unknown lurking around the ben(d). If so, let's pray it indeed involves Ben Bernanke, as opposed to missiles and loss of life.

Saturday, September 7, 2013

Eager students need not apply...

So I get this email a while back from John (I only share emails from folks named John [or Jane]), the young finance major who grew up in my neighborhood. He said he was looking for an opportunity to learn, and wondering if I might allow him to hang out at my office a few days a week, do some "work", and observe how an investment firm is run. "Best of all" he said "you don't have to pay me."

How generous of young John. He was offering to distract me, and my staff, from our duties at hand while we show him how things are done around here. Of course John wasn't thinking that at all---he was thinking he could perform some function that, at a minimum, would make the experience a win-win.

But the thing is, we don't need additional staff to make copies, stuff envelopes or take out the trash (with the advent of amazing technology, the need for copying and stuffing---and our volume of trash---has diminished markedly over the past few years). And tasks that require more skill cannot be entrusted to an untrained intern. "Selfish" you say? Perhaps. But, you see, we take our responsibilities to our clients very seriously. We cannot afford to spend the time and resources required to train an intern whom we have no intent whatsoever in hiring. I guess I could charge him our hourly rate and allow him, therefore, to interrupt operations for a few hours a day, but John doesn't have a job, and I'm sure John Sr. (his dad, and my neighbor)---having never imagined such a thing---would be unwilling to foot our bill.

Just so you don't think too ill of me, know that I have, on several occasions, happily taken personal time to share my insights into our industry with my friend John. He knows (and appreciates) that I'm always available (except, that is, during work hours) to answer questions, offer advice, etc. That way I can give him my undivided attention and not concern myself with the workflow at the office. And, that way, I run no risk of being sued for not paying an "intern" to take out the trash. I kid you not! Here's the Labor Department's Nancy Leppink on the subject:
If you’re a for-profit employer or you want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law.

The fact that the number of unpaid internships had "mushroomed" from 2008-2010 (per the Leppink article) speaks to the fact that companies had been as willing as ever to offer a youngster a learning experience, but less willing---or able---to lose money in the process.

The present campaign against unpaid internships will no doubt succeed in forcing the creation of a few new minimum wage positions. Yet, sadly, it will also result in far fewer opportunities for eager students to trade a few hours of work each week for experiences that would ultimately help them land high-paying jobs.

Friday, September 6, 2013

We should praise Wal-Mart!!

Here's Don Boudreaux making perfect sense. His opening paragraph:
Why protest only against Wal-Mart?  The fact that many people choose to work for that company at wages that protestors consider to be too low means that every other company in the world also refuses to offer these workers (with their current skills) higher-paying jobs.  Indeed, Wal-Mart clearly bests these other companies – and bests also non-profit employers such as government – at making attractive offers to its workers.

Market Commentary (audio)

Click here for today's commentary...

Wednesday, September 4, 2013

Crony columnists...

I sat down this morning to the usual NY Times and Washington Post opinion pages and, as usual, my pulse quickened as I read the words of those who would have their readers believe such things as: there's a certain class of politician who has no respect for working people, that emerging market problems are all about deregulation, and that McDonald's can easily maintain its present labor force---and, presumably, its hiring pace---while doubling the cost of its labor. I.e., same old stuff, different day.

While each of these probably deserves its own essay---not that I haven't essayed on these topics already---for today I'll simply condense my thoughts to a single paragraph for each:

Republican politicians care little for people who work for a living: If I were to rank all of the ridiculous pieces of propaganda I might expose myself to in the course of this day, this one I suspect would take the top spot---I mean working people vote, right? Not that Republican politicians---via all manner of subsidies for their cronies---don't do real harm to the working class (they indeed do), but proffering the notion that they literally set out to do so, however, is just dirty politicking---particularly when their accuser doesn't call out the other side as well. Seriously, one could just as easily point the accusing finger at the left: One could---with equal ridiculousness---say that Democratic politicians who lobby for a hike in the minimum wage despise workers. For---as studies commonsense suggests---a hike in low-skilled labor costs will destroy job opportunities for low-skilled laborers. Oh, and I have to add that Democrats push every bit as hard for subsidies to their cronies as do Republicans.

Emerging markets' present pain is primarily the result of financial deregulation: Huh?? The economist who makes this claim (same one who made the above claim btw) has been an outspoken critic of those who predicted that the present Fed's policies would lead to asset bubbles and generally high inflation. I think he's desperately trying to get in front of the fact that while inflation (excluding certain items) in the developed world has remained low, recipients of mass inflows of QE-spawned liquidity have indeed seen inflation rise (a 4-year high for Indonesia). Might we say that the U.S. hasn't seen the inflation many thought QE would spark because a lot of money migrated---as money does---to where it could yield better returns? Might we say, therefore, that we have exported the inflation to other parts of the world? Yes, indeed, we might. And now, with tapering on the horizon, all that money is fleeing those emerging nations in droves. Which is, therefore, doing a real number on their currencies and markets. The fact that Krugman won't even entertain this logic (that emerging markets are suffering withdrawals from a QE high)---for it entirely contradicts his position---while predictable, is, nonetheless, disgusting.

Investor note: The fact that emerging nations were the destinations of the developed world's liquidity speaks to the potential of those economies going forward (potential that---in my view---patient, long-term, strong-stomached, individual investors should exploit). The fact that there had been more flow to those nations than they could presently utilize efficiently---which led to an exodus at the first hint of taper---speaks more to the inherent risk of rampant money creation than it does to the prospects for developing economies.

McDonalds can afford to double its labor cost while conducting business as usual: Some assertions simply aren't worthy of a response.

I guess I shouldn't complain, this stuff is my material. But you know, in all honesty, there's nothing I'd love more than to have nothing of the above nature to write about. It is downright discouraging to read the stuff of presumably intelligent columnists with huge audiences when it's replete with half-truths and utter political sophistry. It has to be pure cronyism. A guy like Paul Krugman can make himself the world's most quoted happy hour economist by picking a side. His condemnation of Republican policymakers for their political calculations while defending the equally dirty left makes for robust book sales and lucrative speaking engagements---yet it makes the man himself, well, dirty. Same goes for the popular pundits personalities on the right---the Limbaughs and the Hannitys. I know, I just touched a few nerves, but you gotta work with me here folks. If you truly believe your side in Washington is virtuous, if you truly believe that their every move isn't first and foremost politically measured, well, I'm afraid you're fooling yourself. If you owe your allegiance to a political party, it would surely be better served if you would focus your attention on its transgressions---if you would call your own party out when you find its leaders catering to their supporters (which always, in myriad forms, occurs at the expense of the taxpayer), if you would hold the men and women you vote for to a higher standard...

 

Today's TV Segment (video)

This morning Zara and I discussed the very sad subject of Syria, as well as the usual (QE, budget, debt ceiling).

Click here to view...

Tuesday, September 3, 2013

Is good news good news again?

Hey, good news was good news today! Well, it was for a few minutes anyway. Early on the Dow was ahead 120+ points. Why? My pat answer is always the most accurate possible: That, for their own reasons, folks came to market with cash, and shareholders, for their own reasons, weren't interested in selling at last Friday's prices. But of course that sort of bottom line won't sell squat. What does sell would be the following: Over the weekend there were no explosions in Syria, China reported surprising growth in manufacturing, the same for Europe, and---as of this morning's report---the same for the U.S.

In terms of the good news/bad news debate: The global manufacturing picture clearly provides some cover for the Fed to begin tapering QE later this month, which, to this point---according to the media---has been the main catalyst for the recent decline in stock prices. The fact that, this morning, (relatively) good economic news may have sparked a rally suggests that the market may have at last resigned itself to the inevitable taper. The fact that the Dow gave up a hundred points upon the report that John Boehner agrees with the President on military action in Syria supports that notion as well---in that a Syrian conflict, should it go weeks or months (rather than days), injects uncertainty that could keep the QE taper on hold until things settle down.

So, for the moment, good news is good news and bad news is bad news. The next test of that opinion will come with this Friday's employment number, and over the next few weeks as Washington wrestles over the budget and the debt ceiling.

Now, all that said, I'll bring it home by repeating the point I made over the weekend



As for you, if you’re truly a long-term investor employing strategic asset allocation, all of the above is utterly meaningless. If overconfidence meets with surprise and a bear market ensues, you’ll rebalance your way into cheaper stocks. If there’s no earth-shattering event(s) and the market continues its ascent, you’ll rebalance your way out at higher levels. Either way you have a plan. How wonderful it is to have a plan!

Sunday, September 1, 2013

The Poverty Industry

“Our ideas are sticky. And we tend to stick to our theories. Good idea then to delay one's theories, for once they’re made they’re very difficult to let go of.” Nasim Taleb


A few years ago a dear friend, who happens to be a passionate "progressive", told me of an interview with an African economist who had made a compelling case for the halting of aid to the continent. The argument that the donation of "mountains of clothes" has virtually destroyed Nigeria's textile industry, that the countries that have received the most aid are in the worst shape, and that huge bureaucracies teach Africans "to be beggars, and not to be independent"---resonated with my friend.

I thought to myself at last an opening! She just stepped herself right into the real-world logic that when one is handed life's "necessities", one's odds of elevating oneself much above "subsistence" are surely compromised. So I say (words to the effect [it was a few years ago]) "my friend, for once you and I are on the same page. Now, please---keeping what you just shared in mind---think about the impact of aid right here at home. Think about our huge welfare industry. Wouldn't that same logic apply here? Won't you now agree that our ever-growing "safety net" has become a snare, trapping the unwitting prey of the vote-seeking American politician? That our intense aversion to pain---ours to human suffering (and I am in no way advocating for an abrupt ending of aid to individuals [I would, however, advocate for an abrupt ending of aid to institutions] in need), our politician's to losing an election---is what keeps us mired in a slow-growing economy (add corporate welfare), keeps us subservient to a fast-growing government, and, worst of all, perpetuates poverty?"

Well, alas, my eloquent plea did not resonate---not in the least---with my dear friend. Her reply; "Hmm... I'm finally beginning to understand why you people think the way you do." Oh well, I tried.

While reflecting upon the above conversation, I thought I'd try to locate the interview in question. I believe I did, and it is indeed telling. Please read it in its entirety, and, just for the moment, see if you can't suspend your preconceptions with regard to international aid, and consider how the Kenyan economist's logic might---in some dimension---apply to the "aid" industry here at home. Here are a couple of snippets:
Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. In addition, development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa's problems.

Why do we get these mountains of clothes? No one is freezing here. Instead, our tailors lose their livlihoods. They're in the same position as our farmers. No one in the low-wage world of Africa can be cost-efficient enough to keep pace with donated products. In 1997, 137,000 workers were employed in Nigeria's textile industry. By 2003, the figure had dropped to 57,000. The results are the same in all other areas where overwhelming helpfulness and fragile African markets collide.

And, lastly, here's a post from May 2012 where I ask you to consider Who Has Skin in the Poverty Game?

Short-term worriers should be worried - OR - How wonderful it is to have a plan...

The U.S. government runs out of money the end of this month if Congress doesn't act (it will). We'll conk our heads on the debt ceiling by Halloween if Congress doesn't act (it will). Emerging market currencies are taking the kinds of hits we haven't seen since the '90s. Syria---who knows? And to top it all off it's September---the historically worst month for stocks.

So shouldn't we be very short-term nervous? Well, before I answer, I have to say that if you're truly a long-term investor, you should never be short-term nervous---but of course we have to live in the real world, the world where self-proclaimed long-term investors often become short-term nervous. Okay, so if one is short-term nervous, does one have cause? Unequivocally yes, but not for the reasons cited above: short-term worriers should be worried because there doesn't seem to be that much short-term worry out there (I'll explain in a minute).

Sure, the Dow's off 5% from its recent peak, but that's nothing in the historical scheme of things. The major indices have taken 10% hits on average once every 12 months. Therefore, given that---historically speaking---we're way overdue, wouldn't you think that all of the above would easily send the market into double-digit-down territory?

The thing is, when it comes to Congress, everyone "knows" it will kick the can. When it comes to emerging markets, everyone "knows" the pain is close to running its course. When it comes to Syria, everyone "knows" that no one wants this to turn into another Iraq. And when it comes to September, everyone who played the "worst month" card (sold in late August) in 2012, 2010, 2009, 2007 (I'll stop there) got burned as history's worst month delivered nice gains for the long-term investors who didn't succumb to short-term worries.

So why should we be worried about a lack of worry? Because, my friends, worry---other people's that is---is very healthy for the market. Worry keeps people very liquid, while a lack of worry keeps them fully invested. And if Congress doesn't, and the emerging market pain isn't, and if Syria escalates, those short-termers who entered the month sanguine can turn hysterical in a heartbeat.

All that said, the data suggest that, despite the apparent sanguineness, cash levels remain quite healthy. It'll be interesting to see how all that money that fled the bond market recently (stock funds have posted net outflows recently as well) treats the next correction in stock prices---lots of folks (and hedge funds) have missed out on the latest bull market (it's been dubbed history's most hated). The question is, will they view the next sizable selloff as their signal to jump in in hopes of catching up?

As for you, if you're truly a long-term investor employing strategic asset allocation, all of the above is utterly meaningless. If overconfidence meets with surprise and a bear market ensues, you'll rebalance your way into cheaper stocks. If there's no earth-shattering event(s) and the market continues its ascent, you'll rebalance your way out at higher levels. Either way you have a plan. How wonderful it is to have a plan!