Saturday, March 31, 2018

Economic Oceanography

As I look out my window, I see the beautiful Chesapeake Bay, where it enters the Atlantic Ocean.  Even though it normally looks placid and peaceful, I know there are many currents I cannot see.   Millions of gallons of water flow by every day, slipping beneath the surface of the Atlantic Ocean as the water drops into the Norfolk Canyon, falling to greater depths.  I cannot see any of this but know it is happening anyway.

The "market" is the same - there is so much that is not visible.  For the month of march, the S&P 500 index of large companies was down 2.54%, flat for the first quarter, but up 13.99% over the past twelve months.

The S&P index of small companies was up 2.04% in March, flat for the first quarter, and up 12.68% for the past twelve months.

Preferred stocks, yielding an average of 6.51% in dividends, were up 0.52% for March, down 0.55% for the first quarter, but up 3.08% for the past twelve months. 

Utilities were up 3.76% for March, down 3.30% for the first quarter, and up 1.89% over the past twelve months.

Technology stocks were down 3.9% during March, up 3.39% for the first quarter, and up a whopping 27.68% over the past twelve months.

So, what does all this tell you?  It should tell you that you are too focused on investment performance in the short term.  All these currents -- and many more -- change constantly.  I've spent many years looking out the window, and the Chesapeake Bay always looks the same.  Warren Buffett famously said he had no idea where the stock market would be next month, but he knew where it would be in ten years -- UP!

Just because so much detailed data is available, it doesn't mean you should care.

Thursday, March 29, 2018

Buying Happiness

A recent study found that people experienced greater happiness as their income rose, which is not  surprising.  But, it also found that rate of growth in happiness slows down when income reaches about $75,000 annually.  More money increases happiness less and less.

At that point, spending has a greater impact on happiness than income.  But, the type of spending must fit the personality type.  Some people are more materialistic than experientialist, and some are the opposite.  Some people enjoy having nice things, and some people enjoy having good memories.

Happiness continues to increase when a materialistic person continues to acquire goods and when an experientialist contines to have good experiences.  If an experientialist spends his money on nice things, he will not achieve the same happiness as a materialist.  To increase happiness, the spending must match the personality type.

Of course, the vast majority of people are somewhere in the middle.  After all, who does NOT want a good memory?  The role of the financial planner should fit the client's personality.  I have one client who could happily spend the rest of his life aboard cruises.  Since he can afford it, I encourage him to do so.  I have another client who is fascinated by oriental art and has acquired more than she can afford.  Since it makes her happy, I have to stretch her dollars as best I can.

So, is my job as a financial planner measured by dollars in a client's portfolio, or is my job measured in terms of client happiness?

Wednesday, March 28, 2018

Loved To Death

In 1919, Congress passed the 18th Amendment to the Constitution, beginning the Era of Prohibition.  None of the earlier 17 amendments were ever as unpopular with the American people as that one.  Fourteen years later, that amendment was repealed.  Yes, an amendment can be repealed.

Former Supreme Court Justice John Paul Stevens has now opined that the Second Amendment should also be repealed, especially since it is so unpopular with the American people.  That amendment theoretically "protects the rights of gun owners."  It has been zealously guarded by the National Rifle Association (NRA), which loves the Second Amendment . . . too much!  The NRA is lead by a blinded, well-meaning zealot called Wayne LaPierre.  He loves kids, like everybody else, but he is blinded by love.  So is the NRA.

The NRA is loving the Second Amendment to death, eventually killing it.  Already, the vast majority of Americans brand the NRA as just another bunch of corrupt lobbyists or even terrorists, and they are correct.  The NRA tarnishes the noble Second Amendment.  They bring blame and shame to the Second Amendment.  If the NRA continues to oppose the American people, it will disappear along with their beloved Second Amendment.  The NRA is the greatest threat to the Second Amendment!

As a true gun lover and former NRA member myself, I pray Wayne LaPierre will protect my gun rights by immediately dismantling the NRA.  Absent that, I  reluctantly agree that the Second Amendment must be repealed.

Sunday, March 25, 2018

Reverse Income Averaging

Many novice investors think investing is easy.  All you have to do is stay invested in stocks when the market is rising, but move to cash when the market is falling.  Simple, right?  The stock market is predictable, right?

Numerous studies have found that "market timing" should be left to the hedge fund techies, not the average retail investor.  Those studies have concluded the average retail investor should "buy and hold,"  which means they should not sell their investments just because the market is going down.  One primary reason is that they invariably don't put their cash back into the market at the right time, when the market bounces.  I have long argued this "buy and hold" approach is appropriate for a garden-variety recession, but not for a financial crisis, which happens quicker, goes deeper, and has a longer recovery than recessions.  However, both approaches are based on economic data and financial data.

I'm seeing an interesting new approach, i.e., one that is based on political conclusions.  Some investors have concluded that the Trump Administration will end badly, taking the stock market deep into bear territory.  Unfortunately, they don't know when to get out of the stock market.  They recognize that selling everything now could cause them to miss a good deal of upside, if the bull returns.  If not now, when?

Income averaging is the standard practice of putting the same amount of money into stocks every month.  Reverse income averaging is selling stocks and increasing cash by the same amount each month or quarter.  This can be done by percentage or by dollar amounts.  The downside is that reverse income averaging means you are selling more shares as they get cheaper.  That is the cost of reducing stock exposure over time, while retaining some protection from a major bull market.

I don't know any financial advisors who advocate making investment decisions based on political assumptions, and the alternative is to advise clients they cannot act on their own political beliefs. Reverse income averaging may have come-of-age. 

Friday, March 23, 2018

Good Wars ?

Most people fear trade wars, because they know a trade war can easily become a real-killing-people kind of war.  Most economists fear trade wars, because it destroys the principle of comparative advantage, reducing the standard of living on all sides.  Fortunately, on March 1st of this year, the President assured us that "trade wars are good, and easy to win."  Let us pray . . .

History shows us that "winners" in trade wars only win in the short-run, and everybody loses in the long-run.  But, there is something different this time.  It will be the first time there has been a trade war in a globalized world!  It is not uncommon for a finished good to require parts from a dozen different countries.  The problem of unintended consequences has never been greater.

Some economists believe that policy makers on all sides will retreat from their trade war, once they realize the problem of unknown consequences.  I'm afraid they never heard of machismo.

Some Republicans believe all this is just a negotiating ploy, so that China will do whatever is necessary to resolve the North Korea problem, to avoid the economic damage of a trade war with us.  Others think putting a match to lighter fluid is a better negotiating ploy.  After all, what was the point of announcing a steel and aluminum tariff just before renegotiating NAFTA, only to exempt Canada and Mexico almost immediately?

It is hard for me to see the words "wars are good" actually being said, without feeling intellectually, morally, and emotionally appalled.


For years, I have worried about the impact of too much news-watching.  It can drain a person emotionally and suck them into a "group-think."  It can also make a person very boring.  So, I have practiced a "news-celibacy" day -- voluntarily not watching any news for 24 hours.  In my case, it was Saturday.

Then, I got interested in Michael Smerconish, who is a lifelong Republican that has resisted the far-right pull over the last few years.  He has a one-hour show on Saturday mornings, that I find refreshingly moderate.  So, I have broken my vow of news-celibacy and started backsliding.  After all, watching news is addictive and hard to give up.

Therefore, with all due respect to Mr. Smerconish, I will redouble my efforts to remain news-free on Saturdays.  One day is NOT too much time to take away from political arrogance, the trade war, the never-ending brutality of the mid-east, impeachment, etc.  It will also make you more interesting!

Sorry, Michael!

Tuesday, March 20, 2018

Selling My Vote ?

Imagine . . . a loved one has gone missing, when you hear a rumor they may still be alive.  Imagine that surge of hope and gratitude that floods your heart.  I'm feeling that way!  There is a rumor that Americans are suddenly indignant about their loss of privacy.  Is that too good to be true?

Personal data Goliath AKA Facebook just disclosed (involuntarily) that the personal information on as many as 50 MILLION of the users was taken by a subcontractor to target the users for political purposes.  An example, "they" would know where you live and would send you a series of emails whenever there is a political rally or demonstration in your area.  From reading your comments, "they" would slap a label on you, as a Democrat or Republican.  If "they" think you're a racist, then you will receive emails reinforcing that emotion.  Although not yet certain, it is thought this was the channel that Russia used to influence our last election.

But wait -- why would Americans be more infuriated about this, than the Equifax breach, when the personal data of 150 MILLION people was hacked?  We know anybody can be hacked, but we don't expect to be betrayed.

People using social media think they are clients.  Instead, they are the product.  Their personal information is sold to advertisers, who identify potential clients or buyers.

It has almost been fifty years ago since Joe McGinniss wrote his iconic The Selling of the President 1968, explaining that getting a person's vote is no different than selling a box of laundry detergent.  There is a seller with a product, and there is a buyer.  The object of advertising is getting them together.  We expect our political candidates to solicit our vote.  We don't expect Russians to solicit our vote for their candidate!

If the Russians will pay money to ask for my vote, what is the difference with them directly paying me $100 for my vote?  Can I walk down the street, holding a sign saying "vote for sale?"

The first step to maintaining any tiny piece of privacy is to get off social media.  Good luck with finding a second step!

I pray that I am not the last American who cares about privacy, but I do get lonely . . .

Saturday, March 17, 2018

Stockbrokers Win, Americans Lose

Historically, stockbrokers have been mere salesmen, pushing high commission or hidden commission products onto their unsuspecting clients.  Out of that swamp, Registered Investment Advisors emerged.  They embraced the Fiduciary Standard, which requires no hidden fees and full disclosure of any conflicts of interest.  Stockbrokers were held to a mere "suitability standard" which is virtually no standard at all.

Congress instructed the Securities and Exchange Commission (SEC) to develop a Fiduciary Standard for all investment advisors.  After a massive, years-long lobbying effort by stockbrokers, the SEC booted the project over to the Department of Labor, who finally produced such a standard, for application only to retirement accounts, mostly IRAs.

Then, along came the Trump Administration, who postponed implementation.  Now, the Fifth Circuit Court of Appeals has struck down the Fiduciary Standard.  Only the Supreme Court can save the Standard now.  Stockbrokers/salesmen are celebrating nationwide.

They are celebrating because their clients will not know the true cost of their accounts and because they can push products in their best interest, instead of their clients' best interest.  They still don't have to tell their clients about any conflicts of interest.

Sorry, America -- you lost!  You're sinking back into the swamp . . . 

Friday, March 16, 2018

Ten Year Facelift ?

It is hard to believe it has been ten years since the stock market began crashing into the worst recession since the Great Depression.  The key event was the collapse of Bear Stearns, a well-respected investment house.  In the aftermath, amidst cries of "Never Again," a well-intentioned Congress produced the Dodd-Frank legislation.

Like any complex legislation, it had bugs to work out.  Like any complex legislation, it needs to change with the times.  There is now a movement in Congress to update or curb some of the excesses.  They are right that the reporting requirements are too onerous.  Congressmen may be too zealous of raising the limit to $250 billion assets for firms to avoid excess supervision, instead of $100 billion. 

I would remind Congress that the primary tool to prevent another financial crisis is more capital.  The Republican House wants to increase the amount of leverage or debt that a bank may issue.  This is a mistake!  Reduce regulation, not capital.

Second, the Dodd-Frank Act was born before cyber-crime and desperately needs updating.

Third, for all its faults, the Federal government saved the economy in 2008/9.  Well, actually it was the Fed and regulators who saved us.  Except for TARP, Congress was useless.  In the vein of shooting the survivors, the Dodd-Frank legislation reduced the flexibility of the Fed and regulators to ever save us again.  No matter the problem, the Dodd-Frank legislation has already pre-determined the response.  If we experience another financial crisis, the Fed and the regulators don't have the flexibility to be innovative. 

When Bear Stearns crashed ten years ago, the commercial bank of JPMorgan bought Bear Stearns with assistance from the Fed.  That was a crucial move and a smart move.  But, Dodd-Frank makes that impossible now.  That makes us less safe!

Thursday, March 15, 2018

Bravo, Mr. President

Yesterday, the President announced the appointment of his old friend, Larry Kudlow, as his new chief economic advisor.  I applaud this appointment!

Larry is not a traditional economist, lacking any graduate degrees in the subject.  But, he has been a serious student, especially of Supply-side economics and even worked for Arthur Laffer, the father of Supply-side economics.  Consequently, I doubt he has ever seen a tax cut that he didn't like, accepting increased national debt, certainly in the short run.  As a free-trader or globalist in a protectionist or nationalist White House, Larry will likely be quite lonely there. 

But, he brings non-academic qualities that are badly needed in the White House.  He has a remarkable ability to disagree without being disagreeable.  I have disagreed with his slavish devotion to any one particular school of economic thought, but I have always enjoyed listening to him.  He is a good, decent, and classy guy.  I expect he will be an excellent economic advisor for this particular President.

Congrats, Larry!

Wednesday, March 14, 2018


In 2011, Putin was running for "re-election" in Russia, when the American Secretary of State Hillary Clinton sparked mass demonstrations of Russians by her rhetoric against the phony election.  Putin was furious with Hillary for her interference in Russian elections.

In 2016, he returned the favor by interfering with American elections -- employing technology as never before.  While he undoubtedly favored Trump over Clinton, he was more interested in simply hurting Clinton.  He would probably have supported the Libertarian candidate, Gary Johnson, merely because he was a non-Clinton.  Revenge is sweet . . . and addictive.

Long before the evidence was examined, Republicans concluded there was no collusion between Russian interference and the Trump campaign.  Long before the evidence was examined, Democrats concluded there absolutely WAS collusion.  Neither of their conclusions matter!

Collusion is a smokescreen hiding the real problem!  Putin's interference in our election last year was successful beyond his wildest dreams.  Why would he stop?

But, what are we doing to stop him?

Trump understandably sees the Russian interference as a tarnish on his beautiful election.  So, just blame it all on Hilary, who started it, according to Putin.  Then, prevent it from happening again!  Please!

Tuesday, March 13, 2018

Shifting Gears

The stock market has moods.  Sometime, it is in a bad mood and frets excessively about everything, especially political antics.  Sometimes, it is in a good mood and ignores political antics.  I think the market is in a good mood.  It dropped temporarily last week when Gary Cohn resigned but barely moved today when Rex Tillerson was fired.  It was buoyant this morning when the National Federation of Independent Businesses released its report on Small Business Optimism.  It was very optimistic, indeed, posting the second highest in history, amid broad-based growth.  Their biggest problem is no longer taxes nor regulation but is finding employees.  This is all good!

So, we have good economic data, increasing corporate earnings, increasing business confidence, and less sensitivity to political drama . . . . What, me worry?

Remember what Warren Buffett said - be greedy when others are frightened, and be frightened when others are greedy.  It is fine to relax in the current market but not to sleep.  It will not change tomorrow, but it will change.  In the meantime, enjoy the ride!

Saturday, March 10, 2018

Same News, Different Reactions

The February "Jobs Report" showed the the U.S. economy produced more jobs than expected, and the stock market tanked.  Yesterday, the March report again showed the U.S. economy produced more jobs than expected, and the stock market soared.  Why the different reactions to the same report?

The February report showed that average hourly earnings were up 2.9% over the same month last year.  This suggested inflation was breaking out, which inevitably leads the Fed to increase interest rates more quickly.  The March report reported that figure was only up 2.6% year-over-year, reducing the pressure on the Fed to increase interest rates.

Another question is how did we produce 313 thousand new jobs last month without the rate of unemployment changing from 4.1%.  You would expect that rate to drop, wouldn't you?  The good news is that almost 800 thousand people returned to the workforce.  That is really good news! 

Republicans focus on the Labor Force Participation Rate (LFPR), which measures the percentage of the population that either has a job or is looking for a job.  It has risen to 63%, which is the highest since the global financial crisis of 2008/9, and Wall Street is heavily Republican.

Let's see -- fewer interest rate increases to dampen profits, plus a booming economy, plus rising corporate earnings, plus a highly stimulative fiscal policy, plus "peace talks" breaking out -- why wouldn't the stock market soar? 

Friday, March 9, 2018


For honest intellectual inquiry or for mere debate, it is vital that discussion be framed correctly.  I recently wrote about the problem of thinking about gun violence with a rifle approach instead of a shotgun approach.  In other words, there is no one action or "silver bullet" that will solve such a difficult problem like gun violence.  Just because one suggestion will not solve all problems, it can still be part of a package of solutions.  Discussion of gun violence needs a wide frame.

For a discussion of tariffs, we need a more narrow frame. Most every economist will cite the principal of comparative advantage and oppose tariffs.  That does not mean individual trade abuses cannot be addressed.  Clearly, China has cheated on certain trade agreements.  That should not be ignored and should be confronted.  But conflating that discussion with a NAFTA renegotiation is misleading and counter-productive.  They need to stand apart and to be discussed apart from each other.  Discussion of tariffs needs a more narrow frame.

For a discussion of North Korea, a narrow, rifle frame of the "they must de-nuclearize" is a waste of time.  An honest discussion must include how the Kim family stays in power, support for their huge but poor population, and how to verify everything they say.  The areas of disagreement are obvious.  Widening the frame of discussion could reveal more areas of agreement.

Thursday, March 8, 2018

Ready, Fire, Aim!

President Trump has been understandably concerned about our international trade deficit, which rose from $53.9 billion in December to $56.6 billion in January - the highest in almost ten years.  Indeed, it has been getting worse since Trump's election.

But, it is easy to attach too much significance to this.  The U.S. both imports and exports different types of oil.  In January, our imports rose more than expected, while our exports rose less than expected.  Big swings make this data point unreliable on a monthly basis.

Amid much disagreement, the Administration argues that tariffs will increase the costs of certain  imports, which will drive down demand for those imports, decreasing the deficit.  Of course, this conveniently ignores the impact of retaliatory actions by other nations.  Uncertainty is growing, which makes it difficult for multi-nationals to plan.

Meanwhile, two other things are working to reduce that trade deficit.  First, ignoring oil, demand for our exports is increasing as GDP growth increases worldwide.  As foreigners get more wealthy, they want more American goods.  Second, the dollar has been falling, which makes our exports cheaper for foreigners.  Unless the Fed gets more aggressive with increasing our interest rates, I don't expect much strength in the dollar in the near future, meaning our exports should rise at a faster rate.

The point is this:  There is more than one way to reduce the trade deficit than starting a trade war!

Sorry, Mom !

Teddy Roosevelt was the 29th President, serving from 1901 to 1909.  A Republican, he is widely regarded as one of the five best presidents in our history.  He was a war hero, as leader of the "Rough Riders" during the Spanish-American war in 1898,  He began construction of the Panama Canal.  He was a nature-lover and a conservative conservationist.  He was the first real "trust-buster" to end certain abusive corporate practices.  I think he was indeed one of our best presidents!

But, I think he was the only Republican president that my late mother didn't like.  To her, style and grace and manners actually mattered, but President Theodore Roosevelt was an egocentric egomaniac instead.  Indeed, his daughter wrote of him that "My father always wanted to be the corpse at every funeral, the bride at every wedding, and the baby at every christening."  (Ivanka could not have said it better.)  Some people think egocentric egomaniacs are funny.  My mother found them in bad taste, which was worse than illegal.

If an egocentric egomaniac like Teddy Roosevelt can be a great president, then there is hope for Donald Trump to be great also.  But, my beloved mother was wrong:  style and grace and manners actually don't matter!  Apparently!

Sunday, March 4, 2018

The Joy of Inflation

Remember inflation during the 1970's?  It was a scary time, with prices rising so much faster than income.  The Fed had to intentionally throw us into a nasty recession in 1980, before taming inflation with record high interest rates.  If you can remember that, your hair is now gray.  Yet, inflation teaches a lesson to be remembered.  Inflation can be crushed.

There are many ways to measure inflation:  the Consumer Price Index, the Producer Price Index, Personal Consumption Expenditures, "Median CPI" by the Cleveland Fed, "Sticky CPI" by the Atlanta Fed, and the Underlying Inflation Gauge" by the New York Fed, etc.  The differences mean little now, because all of them are indicating a pick-up in inflation -- not runaway inflation yet, but definitely something to watch.

Inflation is not all bad.  One good thing about inflation is that it is not deflation, which is much more difficult to control than inflation.  We know a good old-fashioned recession will fix inflation, while deflation is much more pernicious.  It was only five years ago that the Fed was genuinely worried about deflation, despite the most stimulative monetary policy in history.  Fortunately, the Fed kept prices from falling or deflating.  While it may sound like empty rhetoric, it is important that inflation is better than deflation.

Another benefit of inflation is managing our dangerous level of national debt.  Ignoring myriad underwriting details, the amount of mortgage debt you can handle is a direct function of your income.  For example, if your income is $100 thousand, your mortgage payment should not exceed 30% or $30 thousand annually.  However, if your income doubles, your debt service drops to a healthy 15%.  The same math works for the economy.

Most economists of the Austrian school believe there is a downward economic spiral that begins when national debt passes 100% of national income or GDP.  That ratio was 105.4% last year but is rising more rapidly now, due to the stimulative tax cut.  That is not the highest debt-to-GDP ratio in history - 118% - following World War II.  The joy of inflation is that GDP normally rises faster than the level of national debt.  This is known as "inflating the debt away."  The amount of debt doesn't go down, the income or GDP goes up.

Given the inability of our Congress to make painful decisions, our only solution to manage our national debt is to bring back inflation.  While it is a double-sided sword, it is the only sword we have.  We need inflation!  Interest rates are certainly going up but not enough to stop something we need so badly . . . Inflation!

Friday, March 2, 2018


President Trump's regulatory policy is that two regulations must be scraped anytime a Federal agency wants to issue one new regulation, and that is a great policy.  The benefits will slowly seep into the economy for a long time.  I applaud him!

However, he announced his policy yesterday on tariffs, particularly on imported steel and aluminum.  The stock of steel companies rose $2.2 billion, while the stock market fell over $350 billion.  That policy is bone-headed at best and border-line stupid at worst.  There are so many arguments against this decision.

The economic argument is that this violates the principle of comparative advantage and encourages nations to produce those goods that they produce inefficiently.  While there is always cheating to any trade policy, there are better, more targeted ways to deal with cheating than starting a trade war.  As they say . . . brain surgery with a meat ax.

The investment argument is that the market doesn't like to be surprised  or blind-sided.  Yesterday's 420 point in the Dow proves that!  How was this terrible decision made?  Why was it made now?  What is the problem it solved?  There are better ways to make a bad decision.

The sociological argument is that his base, as so well-described in Hillbilly Elegy, will not benefit from this action.  Globalization has hurt these people but only because politicians did not provide for the job training programs that were long predicted.  We received the benefits of globalization without paying for it.  Plus, this policy is inflationary, because products using imported steel or aluminum will cost more, which hurts his "base."

The historical argument is that the Smoot-Hawley bill raised tariffs in 1930 and was designed to save the American economy from foreign competition, but it instead pushed it from a bad recession into the worst depression in modern history.  President Bush tried the same thing in 2002, costing over 200 thousand jobs.

The moral argument is that I find myself in agreement with Goldman Sachs, which I am loath to do.

President Trump tweeted . . . "Trade wars are good!"

The President is wrong, wrong, wrong!!