Showing posts with label Federal Reserve. Show all posts
Showing posts with label Federal Reserve. Show all posts

Wednesday, March 16, 2016

Be-twitched Bothered Bewildered



I’m still recoiling from Meet the Press last Sunday, in particular Chuck Todd’s brief interview with Ted Cruz.  If Donald Trump is a symptom of a malignancy in American politics, Cruz is part of the disease itself. Here’s a brief except from that interview:

CHUCK TODD:
I want you to react to something here that President Obama said at a fundraiser, responding to the tone of Donald Trump rallies. Here it is, sir.
(BEGIN TAPE)
PRESIDENT OBAMA:
And what's been happening in our politics lately is not an accident. For years, we've been told we should be angry about America and that the economy's a disaster. And that we're weak. And that compromise is weakness. And that you can ignore science and you could ignore facts and say whatever you want about the president. And feed suspicion about immigrants and Muslims and poor people and people who aren't like us.
(END TAPE)
CHUCK TODD:
That's the president essentially saying, "This has been happening for years," before most of his term.
SEN. TED CRUZ:
You know, Chuck, Barack Obama's a world class demagogue. That language there is designed to divide us. No, Mr. President, we're not angry at that. We're angry at politicians in Washington, including you, who ignore the men and women who elected you. Who have been presiding over our jobs going overseas for seven years?
Who have been cutting deals that are enriching the rich and powerful, the special interests and the big corporations, while working men and women are seeing their wages stagnating?  And he talks about immigrants and Muslims. Mr. President, we're mad at a president who wants to bring in Syrian refugees who may be infiltrated by ISIS. And you're unwilling to be commander in chief and keep us safe. So don't engage in attacking the people, like the president did.

Wow, it takes a demagogue to call someone a demagogue.  Psittacisms for the masses, from both Cruz and Trump.


This brought Mr. Cruz into power as a leading Tea Party advocate. His obstructionist voice has been a leading one during his Senate occupancy, effectively shutting down any hope of compromise.   No wonder the President had to resort to his much criticized use of Executive Orders, although his use of such orders has averaged less than George Bush’s.
 
And, yet, there is the whiff of truth in some of what he says, no, not about Obama being the cause, but about a long-building anger, much longer than Mr. Cruz et al would like it to be known.  Bernie Sanders taps into similar angst.  At the heart of that fury is the American socio-economic landscape which has changed over the years, but you could count them in decades.  The last seven years were more of the same for the disenfranchised middle class, watching their earning power and employability decline in relation to better educated, higher income families. Consequently, wage inequality has grown, but this has been going on for thirty five years, well documented by the Economic Policy Institute (EPI)
 
Unfortunately, there is no easy panacea for this other than for our country to come to grips with the reality of today’s world.  The industrial revolution has morphed into a cyber revolution, where geographic borders do not exist.  Workers are being displaced by technology, robotics.  It is not a question of bringing manufacturing jobs home any more; it’s the challenge of educating workers in new skills.  Any politician who holds out the trade war card is delusional, playing a simplistic card to get elected.  We’re a country after a quick fix and it sounds good, make “tough” deals with China, tax their goods sky high.  Wait until the quick fixers see the new prices at Walmart.  None of them will like that either (unless a President Trump makes Walmart reduce their prices! :-)

Many of the recommendations suggested by the EPI for turning the tide of income inequality were also advocated by the Obama administration but have been cut off at the knees by the Party of No, one for example enacting public investments in infrastructure to create jobs.  And there are others.

But nothing rings truer for the disenfranchised than the Trumperian throwaway that in 15 minutes he’d solve the trade deficit.  Our trade agreements have evolved over years of negotiations and it’s not that simple Donald (or Ted).  Admittedly the currency manipulations on the part of governments all over the world throw aspects of trade agreements under the bus, each region fighting for a larger piece of a pie that is growing only oh-so-very-slowly.  We have the “advantage” of having (at least seemingly) the currency of last resort, and this is yet another factor in the strong dollar, but that further contributes to making foreign goods cheaper and our exports more expensive.  It is the inverse of the early 1980’s when the dollar was cheap and interest rates were double digits, inflationary fears running amuck.  Today there is little inflation with whiffs of deflation.

This is all in the wake of the most dangerous economic crisis we have faced since the Great Depression.  In the absence of Congress being able to agree upon fiscal policy the temporary fix was radical monetary policy engineered by the Federal Reserve.  Someone had to act.  But the Fed now is blamed by the Party of No.

Nonetheless we are left with debt; it could have been less with sounder fiscal policy, but that was not to be.  Where would Ted Cruz’s flat tax plan and tying the dollar to the Gold Standard leave us?  And the Trump solution?  “Trust me, I make good deals.”  Whatever that means.

For anyone who has read thus far, I leave the reader with an “out-of-the-box” review on the subject (hat tip to my son, Chris).  It is the most cynical analysis I’ve ever read, authored by “Cognitive Dissonance,” Down the Trump Rabbit Hole - Manufacturing Consent. 

It attempts to explain Trump in light of the “system” which “Cognitive Dissonance” equates to “The Empire,” its purpose to always move forward, to consume. Everyone within the empire serves the Empire, including its individual and corporate ‘citizens’. This especially holds true for its upper level civil ‘servants’, political appointees, elected office holders, state and federal judges, the military at all levels including ‘civilian police officers, the oligarchs and elites. And most importantly, the President of the United States. All are beholden to the Empire and constitute the court of the Empire. While the president may be considered the Chief Executive Officer, the president works for the Empire and is controlled by the Empire’s court. The power of the president flows up from the Empire’s court, not down from the president

So how does this relate to The Donald?  When your credibility is suddenly called into question and people begin to seek alternative ‘authorities’, give the people what they want…though not exactly what they want, just what you have conditioned them to believe they want. Or as is the case with our current situation, since anyone who is presently an authority is not to be trusted, give people the antithesis of the existing authority structure.  The Donald.

“Cognitive Dissonance” goes on to argue that as Clinton is a “child of the court,” she cannot deliver what the Empire’s subjects perceive to be needed for the Empire’s very survival.  Only the anti-establishment holds that power but expect Trump to concoct some mighty reforms which will bleed and permanently weaken the middle class even further. You didn’t expect the elite and court to actually pay for the reforms…did you?

I would like to believe that this cynicism is merely an exaggeration of the truth, that we’re better than that, and reasonable people can come to long term solutions.   Yes, more and more time will be needed as the can is kicked further down the road.  To deal with the national debt we first have to work towards a balanced budget.  A tall order in today’s world, one that will exact pain, particularly for the Plutocracy, but in the end for us all.  We’ve lived long enough by borrowing against the future.  Do we have the fortitude, the patience, and above all the willingness to make compromises? 

If not, “Cognitive Dissonance” might be right on the mark.

On the other hand, “Stonekettle” has hit it out of the ballpark once again.  I’ve mentioned this blog before.  Its views are compelling, brutally honest, no holding back for Jim Wright, the blog's author.  His take on the topic was published in two parts, the latest being his The Latter Days of a Better Nation, Part II.
 
Far too many Americans still think of Trump’s campaign as a joke and they keep waiting for the laugh ... but somehow the punch line never comes.

It never comes because, you see, the joke is on us. All of us, conservatives and liberals, republicans and democrats and the independents.

In effect, to understand Trumpism, look in a mirror.  We’ve given rise to him.  As Wright concludes, if you want a better nation, be better citizens.

I thought I was done with this.  In the process of posting this entry President Obama was delivering an eloquent speech, nominating Merrick Garland to the Supreme Court.  Mitch McConnell now responding in the background, with “let the people decide.”  We did in 2012.  So, the beat goes on….

Wednesday, November 27, 2013

Reflections of a Relic Investor



I used to think I was a fairly knowledgeable individual investor, watching measures such as the money supply (no one even refers to that anymore), interest rates, and comparing those to the earnings yield on stocks (the reciprocal of the Price/Earnings ratio) to partially determine asset allocation.  Alternatively there was also the tried-and-true asset allocation approach, maintaining a fixed relationship between a percentage of bonds vs. stocks in a portfolio.  March 2009 presented an incredible buying opportunity with the S&P reaching its nadir of some 676 (vs. 1,800 plus today).  If you rebalanced every year thereafter, you would have missed out on some equity appreciation, but, nonetheless, participated in the rise of the S&P with less risk. Buying long term bonds today for balancing now implies taking on more risk because of the artificially low interest rates.  The asset classes would be highly correlated in a period of rising interest rates and declining equity values.  

During that same period, the earnings yield on stocks vs. bonds became more and more divergent as the Fed moved from one stage of "quantitative easing" to the next.  The impact on both markets can be seen with clarity if five years ago you decided to commit half of your investments to the iShares 7-10 Year Treasury Bond (IEF) and the other half to the SPDR S&P 500 (SPY) and, then, took a five year trip to Mars, leaving the market behind.  Returning today, you'd find your 50/50 bond/equity allocation now at 35/65, simply because of equity appreciation.  So, what to do if you don't want so much at risk?

Jason Zweig addresses that question in this past weekend's Wall Street Journal. Bottom line, "know thyself."  He quotes investment adviser David Salem who said that investors holding large stock portfolios or are considering buying more equities, should be "both willing and able to bear the loss," clarifying that "willingness is behavioral and ability is financial, and you can't know for sure in advance which one is going to trump the other."  As the last bear market quickly eroded 50% plus of equity values, a 65% equity weighting puts one's portfolio at higher risk.  What one did as that last bear market gathered momentum is a good indication of what one might end up doing if this market, too, ends badly.  Of course, it can go higher -- in that regard I'm always reminded of John Maynard Keynes' famous comment “the market can stay irrational longer than you can stay solvent."

Today's investment environment is now as foreign to me as the Mars landscape would be.  Hostile too.  While GDP is hardly growing, and unemployment stubbornly stays above 7%, peak profits are being racked up by major corporations.  How can this be?  Zero interest rates translate into profits, borrowing at nearly nothing to reduce corporate higher-rate debt or financing stock buy-backs.  Corporations have squeezed their workers too, many laid off, a reward to shareholders in the form of increasing dividends.  Labor unions are no longer empowered, a major consequence of labor competition from overseas.  We no longer "make things" here and even intellectual labor can be harvested overseas, at lower cost, thanks to the impact of the Internet. So, by some measures, the "market" is "cheap." It certainly is cheap if you look at earnings yields vs. bond yields, a spread that has widened with every nail in the QE coffin. 

At one time I thought the Fed's actions saved the world from a financial meltdown.  Perhaps it did. But sustaining its monthly $85 billion bond buying program ad infinitum, not to mention maintaining zero interest rates, is creating an asymmetrical investment environment with every passing day (I'm avoiding the word "bubble" as the latter I sort of understand).  It gets worse: recent Fed minutes implied lowering the interest it pays on bank reserves, which has led banks to warn that such an action might force them to charge depositors for holding money in savings and checking accounts (a negative interest rate!). 

Perhaps all of this is being engineered to create a feeling of prosperity from the inflated asset prices of 401Ks, real estate, and equities, hoping that some will trickle down to the middle class via increased spending by the main beneficiaries, the wealthy. (Not surprising, Tiffany & Co. "reported a 50% increase in net earnings in its third quarter..., largely resulting from 7% growth in worldwide net sales and a higher operating margin.")   Or, perhaps, there is something more ominous behind the Fed's actions, a fear of deflation outweighing its concern for (or even desire for) inflation.  Deflation would be an investor's clarion call to buy longer term "secure" bonds, even at these low rates, but, then, we will soon see the next round of the shoot out at the O.K. Corral (a.k.a. Congress), when the debt limit debate comes up again in March.  So, even US Government Bonds may not be rated AAA given the crazy political environment.

No, all the old rules of investment are out the window in this investment environment, as understandable to me as Bitcoins, the price of which surpassed $1,000 today vs. $30 earlier this year, resembling the parabolic price rise of Dutch tulip bulbs in the 17th century.

Ending on a more understandable note, a Happy Thanksgiving to all.

Wednesday, March 6, 2013

Data Points



Driving home today I happened to hear some stock market guru on the radio (there are countless numbers nowadays, and I didn't get his name during my brief time in the car) predicting that the "bull market" will steadily march onwards and upwards and he compared it to 1982 (when the S&P 500 Index was around 140 vs. today's 1,500 plus), pointing out that bull market move began when unemployment rate was more than 9% vs. a little under 8% today.  I didn't quite get the connection to the S&P other than the inference that things looked gloomy then on Main Street as they do today. 

He sounded like a youngish man, probably either unborn in 1982 or in diapers.  He's right about the gloomy part, but he failed to cite other relevant data points in the comparison, such as the Price Earnings Ratio (P/E) that was about 7.5 then vs. today's 17.5.  Also, adjusting the 1982 140 S&P for the CPI, it was really about 340 not 140.  So, half the growth of the S&P since then is explained by the expansion of the P/E multiple.

Here are some other interesting data point comparisons (these are approximates -- not exact averages for the years cited):

                                                           1982                2013
3 month T Bill Rate                       12.49%            0.11%
10  year T Note Rate                    13.86%            1.88%
S&P Dividend Yield                       4.93%             2.13%
S&P Earnings Yield                        9.83%             7.18%

Classic asset allocation models dictate that if the earnings yield is less than the yield on a 10 year Treasury Note, stocks are overvalued and conversely, if the earnings yield is more than the 10 year T Note, they are undervalued.  By that measure, stock markets should indeed continue to rise now, but they should have been flatlining in 1982.

The reason the usual asset allocation rules may not apply to either scenario is that both 1982 and 2012 represent extraordinary economic times, almost the mirror images of one another, but with one thing in common: the Federal Reserve is in the pilot's seat.  Remember during the Ford administration we were brandishing "WIN" (Whip Inflation Now) buttons?  The oil embargo of 1973 had ratcheted up crude prices from 1972's $3.60 to more than $30.00 by 1982.  Consumer prices followed and wage demands took off.  Paul Volker's Federal Reserve slammed the breaks on the economy raising interest rates to unheard of levels. 

Today, we have the flip side of the coin.  The economy nearly collapsed five years ago into a depression and the Fed became the purchaser of last resort of mortgage-backed securities and is still buying 90% of new US Treasury securities, creating a scarcity of Treasury debt and ratcheting down rates to unheard of levels, this time to "Whip Deflation Now."

What does it all mean for investing?  I can't imagine it means a "new bull market," but who knows as we've never been in this situation before (and throw a calcified government into the mix). One thing I do know, in extraordinary times markets can behave illogically -- unremittingly postponing a normal reversion to the mean --  or as John Maynard Keynes said, “the market can stay irrational longer than you can stay solvent.”

Saturday, February 9, 2013

Reprise



He made me do it
He made me do it
But we only have
Ourselves
To blame
Reprise...
He made me do it
He made me do it
But we only have
Ourselves
To blame

Investors could easily sing these bastardized lyrics from Chicago's "Cell Block Tango."  The "he" is Federal Reserve's Ben Bernanke (a.k.a. Uncle Ben) and the "it" is, well, investment allocation and spending decisions which, probably, in retrospect, we will "only have ourselves to blame."  Poor Ben.  He was dealt an impossible hand, an economy teetering on the brink of depression, investment bankers gone wild in a regulatory free-for-all, and a calcified Federal government.  In the absence of long-term prudent fiscal policy, monetary policy became a surrogate.  While the inexorable march towards zero interest rates seemed to be the right Keynesian tonic to drag the economy back from the brink, it has gone on long, too long perhaps, and it is leading to investment consequences of unknown dimensions. 

Just a glance at the blogosphere and financial publications demonstrates completely divergent opinions, ranging from new highs, and not merely marginal ones, for the S&P 500, to apocalyptic prognostications.  The problem is the ' rear view mirror' is less useful than in the past.  Into uncharted waters we have sailed, not knowing whether this economic world is really round.

John Hussman, who has been coined a "perma-bear" is nonetheless an astute economist.  He has accused Bernanke of creating an investment bubble of historic proportions, making people feel wealthier and thus more willing to spend, spend, spend, on "stuff" and on more speculative investments.  Whether that was Bernanke's objective, or whether it is merely a side-effect of righting the sinking ship is anyone's guess.

Hussman's most recent column, A Reluctant Bear's Guide to the Universe provides a lengthy, well reasoned, and highly statistically supported view, concluding with his own prediction:
...market conditions remained characterized by an overvalued, overbought, overbullish, rising-yields condition, the extremes of which have been observed only 6 other times in history: 1929, 1972, 1987, 2000, 2007, and 2011 (the last being reasonably forgettable, but still followed by a near-20% market decline). I doubt that the present instance will end any better, but that resolution may not be immediate, and I am quite aware how quickly each marginal new high in the market can erode both patience and prudence.

But, if that doesn't grab one's attention, there is Bill Gross' latest missive Credit Supernova!

As Gross is known as the "Bond King" managing more debt securities than anyone on the planet (other than Uncle Ben perhaps), one has to sit up and take notice when he forebodes possible economic disaster.  He cites the work of the economist Hyman Minsky on what he called "Ponzi finance:"

First, he claimed the system would borrow in low amounts and be relatively self-sustaining – what he termed “Hedge” finance. Then the system would gain courage, lever more into a “Speculative” finance mode which required more credit to pay back previous borrowings at maturity. Finally, the end phase of “Ponzi” finance would appear when additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result.

Minsky’s concept, developed nearly a half century ago shortly after the explosive decoupling of the dollar from gold in 1971, was primarily a cyclically contained model which acknowledged recession and then rejuvenation once the system’s leverage had been reduced. That was then. He perhaps could not have imagined the hyperbolic, as opposed to linear, secular rise in U.S. credit creation that has occurred since....While there has been cyclical delevering, it has always been mild – even during the Volcker era of 1979-81. When Minsky formulated his theory in the early 70s, credit outstanding in the U.S. totaled $3 trillion....Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy. This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year: 2% real growth now instead of an historical 3.5% over the past 50 years; likely even less as the future unfolds.

So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.

Gross' recommendations: (1) Position for eventual inflation.....(2) Get used to slower real growth....(3) Invest in global equities with stable cash flows...(4) Transition from financial to real assets if possible at the margin: buy something you can sink your teeth into – gold, other commodities, anything that can’t be reproduced as fast as credit....(5) Be cognizant of property rights and confiscatory policies in all governments....(6) Appreciate the supernova characterization of our current credit system. At some point it will transition to something else.

Wow, this is a bond guy arguing for hard assets and even intimating government confiscation.

One only has to look at the stock market, real estate, and even collectibles to see the results of a prolonged zero interest rate environment.  How far and how long is the question.  Meanwhile, investors and savers are left with a conundrum, a sense of cognitive dissonance in a world in which an inflationary or disinflationary outcome can be argued simultaneously.  No doubt though, the longer the asset bubble lasts, the more comfortable people become with it as a representation of reality and they spend and invest accordingly, until we reach either the implosion of the supernova Gross mentions, or, in the best of worlds, a governmental devised glide path, over time, to reduce the deficit, setting down the economy in the halcyon fields of a balanced budget. If the latter can be engineered, then, perhaps, the market is discounting the same.  Otherwise, watch out below!

As a retiree I have chosen to self manage my investment portfolio.  These last couple of years have been exasperating; old asset allocation rules seem to no longer apply, with many categories now highly correlated. Bonds mature and reinvesting in the same at today's interest rates seems insane.  This is exactly what the Fed wants, so either one goes out further on the risk curve, (in fact, much further) or sits with cash earning no return, or spend it (the other option the Fed would like one to do).

I've resisted the latter until now.  We went to the Art Palm Beach Exhibit at the West Palm Convention Center as we did last year. Talk about collectibles and at astronomical prices. But if we have the inflationary engine that some predict, these might be bargains. 

One such painting I liked was Pham Luan's Boats at Sam Son Beach at $9,200, but I've always been a sucker for boat and sea scenes.

Or the whimsical Vextrola by Jerry Meyer (note some of the "hits" such as those by the band I'm Through with Love entitled "Carl's Got the Clap" and on the flip side "Herpes Forever" and the more appropriate -- for us -- the band Senescence Singers' top hits, "Did I Take My Pills?" and "I Forgot What I Forgot").  Alas, no price was listed, but that was one I'd be interested in. 

For a mere $595k one could buy the star of the show, Marc Chagall's Le Paysan à la Hache, and who knows, that might be a steal if central banks induce an inflationary binge. Our check book was short a few bucks.

If I had money to invest in art at the show, no doubt I would have just stopped at the exhibit of Lino Tagliapietra's beautiful glass work.  Lovely to see, and he was honored as the recipient of the Visionary Award.

I also liked a piece that seemed to capture the essence of today's merriment on Wall Street, the one of the three dancing sheep. Unfortunately, I failed to note the artist's name, so apologies to him/her.

Returning from the exhibit, we decided to buy another kind of "work of art" -- this one is guaranteed to depreciate, no matter what the economy does.  Nice to have some certainty for a change!   Returning to the beginning theme, a reprise if you will, "he made me do it!"  As the Federal Reserve is encouraging either risky investments or just plain old vanilla consumer spending, we chose the latter and bought a new boat, not just any boat, but one we think is beautiful and one that will indubitably be the last boat of my life.  It is a small boat, and although Grady-White gives it the moniker of the "209 Fisherman," I am outfitting it for cruising, not long range of course, but something Ann and I can take out on a lovely day, perhaps to Peanut or Munyon Island, or down to West Palm Beach, or even an occasional overnight to Ft. Lauderdale or Stuart, staying at a marina/hotel.  It even has a head so that makes a full day on the boat practical. 

We are naming it 'Reprise' and with the magic of Photoshop we've been able to get an idea of how the name will look on the hull, using Grady's stock photograph (the younger version of me and my two sons do not go with the boat). The name of course comes from our love of music, and Wikipedia describes it best: "In musical theatre, reprises are any repetition of an earlier song or theme, usually with changed lyrics to reflect the development of the story."  And at our stage in life, the developmental section is definitely a thing of the past, and this represents a true "reprise" as we started with a 20' boat more than thirty years ago.  And, so, our boating life will ultimately conclude with the same size boat, one that is being made to our specifications. Most would consider it a folly, but to us it will lovely to look at sitting on our boat lift and a joy to run with its quiet four-stroke Yamaha while listening to some of our favorite jazz pieces on its stereo. Thanks for the suggestion, Uncle Ben!