Thursday, June 30, 2016

Brexit and the Globalization Bubble

The stock market has returned to pre-Brexit levels.  So the crisis is over and everything is fine.  After all, if you're not losing money, what's the problem?  Let's think about what craft beer to try next.

Actually, Brexit is still very much affecting the financial markets.  The British pound is moribund.  The Euro isn't looking pretty.  And the Yen is strong, much to the unhappiness of the Japanese, who want a weak currency that gives them an advantage in exporting.  The bond market continues to show a flood of financial refugees into U.S. Treasury securities.  The crisis isn't over.

The volatility in stocks was more about short term speculation over the outcome of the Brexit vote, than about Brexit itself.  Shortly before the vote, much of the fast money crowd had placed large bets on the UK voting to remain.  When the vote went the other way, the speculators had to unwind their now stinky positions muy pronto.  But this volatility didn't reflect the impact of Brexit itself.  Brexit will take years, and its impact is largely unknowable at this time since we don't yet know the terms of the UK's decampment.

The EU is talking tough about the terms of divorce.  That's perhaps an understandable emotional reaction.  After all, the EU is afraid that the insurgents in other member nations will engineer more exits.  Taking a tough line, it apparently thinks, discourages further desertions. 

But the EU is missing the point.  What impelled a majority of British voters to choose exfiltration was that globalization and the benefits of the EU were oversold.  Britons were promised a glowing future if they cozied up to continental Europeans, who they haven't really trusted since before the Hundred Years War.  EU membership may have boosted British GDP, but there was a problem with most of the boost going to a small number of people who were doing pretty well to begin with.  And there was a perception that the EU's open borders policy allowed immigration that took jobs away from native-born Britons.  All this occurred under a legal regime in which many Britons felt they had no voice.  They apparently felt that, contrary to the principles of democracy, they, although voters, were being ruled instead of ruling. 

By playing tough with the terms of Britain's exit, the EU fails to address the real, legitimate grievances leading to Britain's vote.  The truth is that globalization is an oversold political bubble and the bubble is bursting.  Those with grievances aren't confined to the UK; they can be found throughout the other 27 member nations.  A punitive approach to the terms of Brexit could leave both the UK and the EU poorer, while the forces of insurgency would continue unabated.

The distribution of wealth isn't merely something for social scientists to study.  It really matters--politically and economically.  The elites who have led the way toward globalization must find ways to improve the lives and fortunes of all, or face much bigger problems than Brexit. 

This is true in America as well as across the pond.  Donald Trump hopes to emulate the Leave campaign.  Hillary Clinton has gotten a certain amount of mileage  from running as not-Donald-Trump.  But she is one of the elites who has pushed globalization.  She now purports to have changed her mind, but only after severe pressure exerted by Bernie Sanders.  It's not hard to wonder if she's really changed her stripes.  The widespread perception of her untrustworthiness will hinder her ability to convince the blue collar voters in swing states that she's really on their side.  She doesn't inspire or excite hardly anyone.  If she doesn't acknowledge the overselling of globalization in a clear and convincing way, and offer real relief for the distressed, Trump may yet strut to the tune of Hail to the Chief.

Friday, June 24, 2016

Put Britain at the Front of the Queue

The British electorate has voted to exit the EU.  Whether we agree or disagree with their reasons, or see the wisdom of exiting, the democratic process has spoken.   We in America, the land where modern democracy began, should respect the decision of Britain's voters.  Now is not the time for America, or Americans, to take partisan positions.  Europe is splintering, and potentially weakening.  Continental Europe will probably react badly, and set harsh terms for Britain's exit.  With Continental Europe beset by popular insurgencies, more instability is likely and other nations may leave the EU.    Bad actors, ranging from Russia to Iran to Islamic radicals, will attempt to take advantage of Europe's divisiveness.  America is the one nation in the world that can play the role of honest broker and bridge the gaps that will now emerge.

Britain will need to negotiate a new trade pact with the United States.  President Obama imprudently threatened that, if Britain voted to exit the EU, America would put Britain at the end of the queue for the negotiation of such a pact.  That ill-advised threat should now be disregarded.  Britain is America's staunchest ally in Europe, and America benefits greatly from a stable and prosperous Britain.  British troops have fought side-by-side with American troops in numerous conflicts since World War I, and America and Britain have one of the best intelligence sharing arrangements in the world. Britain is now headed for independence, and America can only lose by being punitive. Put Britain at the front of the queue.

America should also work with the EU to reduce, as much as possible, the friction likely to result from Britain's exit.  A wounded and angry EU can be detrimental to the world's economy and international security.  America may be the only nation that can calm things down.

Brexit gives America the opportunity to expand its international role, this time without having to send  troops overseas.  For those who think America is in decline, think again.  As much as ever, America is needed in Europe, and should now step forward and play the role of superpower.

Monday, May 30, 2016

We're All Temporary Workers

According to data collected by the U.S. Bureau of Labor Statistics, middle aged Americans are, on average, likely to have held 11 or 12 jobs by the age of 48.  See http://www.bls.gov/nls/nlsfaqs.htm#anch4.  The same group will have, on average, experienced 5 or 6 periods of unemployment by the age of 48. See http://www.bls.gov/nls/nlsfaqs.htm#anch42.  Only about 10 percent of these workers will have had between 0 and 4 jobs by age 48.  In other words, the long lasting, stable employment that we anticipate for adulthood is mostly a mirage.  Few of us enjoy that kind of certainty.  Indeed, it's fair to say just about all of us are temporary workers.

Of course, there are differences among workers.  Some are considered full time, others part time.  Some are permanent--either full time or part time--and others are temporary--either full time or part time.  But the average American, with about 12 jobs by the age of 50, is realistically a temporary employee, just with better benefits if he or she is considered "permanent" and is working full time.

The impermanence of employment means fewer employees qualify for defined benefit pensions, even in the few jobs that still offer pensions.  It also means that in the real world, workers have trouble building up their 401(k) and IRA accounts, because they're periodically hit with a spell of unemployment or have to rebuild benefits at a new employer.  Many workers draw down their retirement accounts during episodes of joblessness.  When they resume working, they have less time to build up their balances again.  The only ways to counteract the temporariness of employment is to save furiously, or, if you're lucky enough to have a job offering a pension, to somehow stay put long enough to qualify for the pension, no matter how boring the job or overbearing the boss.

The wobbly, and sometimes turbulent, work lives of most people place this year's politics in sharp focus.  The debates over Social Security, health insurance, trade policy, jobs programs and wage stagnation become all the more crucial when we consider that, in the end, we're almost all temporary workers. Proprosals that enhance stability for workers, like protecting and strengthening Social Security and Medicare will be popular.  Measures like free trade agreements are likely to be losers.

But don't count on the government to bail you out.  You're not a major financial institution, so assume that there will be no bailout for you.  Save as much as you can--and then save some more.

Sunday, May 22, 2016

Big Trouble For the Establishment

America's political Establishment is in big trouble.  The Democratic Establishment candidate, Hillary Clinton, is steadily sinking in the polls compared to Donald Trump, and is now barely ahead of him, after many months of double digit leads, (see http://www.cnbc.com/2016/05/22/clintons-lead-over-trump-shrinks-to-3-points-new-nbc-newswsj-poll.html).  Or else, she marginally trails Trump (see http://www.cnn.com/2016/05/22/politics/hillary-clinton-donald-trump-polls/index.html).  At the same time, Bernie Sanders has a clear lead over Trump (see the NBC/WSJ poll).  Because of the Clinton power politics machine, Hillary will almost surely be nominated.  The Democratic Establishment apparently cannot believe that an insurgent like Trump could defeat Hillary.  But an insurgent Democrat did beat her in 2008, and another insurgent Democrat has come darn close in 2016 (and isn't entirely out of the picture yet).  Even worse, polls now indicate the insurgent on the Republican side may defeat her.  If she loses, which seems a possibility, the Democratic Establishment will have undermined itself by supporting her.

The Republican Establishment is faced with a different, but also existential, challenge.  Donald Trump isn't an Establishment guy.  If he wins in November, the Republican Party's power structure will be recreated as he dictates.  Trump skeptics and professional scoffers who have pooh-poohed his candidacy may hear Trump's memorable words, "You're fired."  While many in the Republican power structure are now negotiating with Trump for some kind of entente, there are probably not a small number who won't support The Donald.   

The political Establishment in both parties wins if Clinton wins.  They both lose if Trump wins.  With the polls moving toward a dead heat between Clinton and Trump, one wonders whether some establishment Republicans might not find quiet ways to support Hillary.  With a Republican controlled House (and maybe Senate), she couldn't change things much--and that's what the Establishment wants.  But if Trump wins, a lot of things could change (although many would say not in a good way). 

If Bernie Sanders improbably gets the Democratic nomination, he might well defeat Trump and the Democratic Party would have to change.  But that would be in ways that he's already begun forcing it to change.  Bernie, however, isn't an Establishment guy, and the Democratic power brokers have moved to repel his assault on their ramparts.  We have an odd election cycle--the Democrats indulge in machine politics, where might makes right.  The Republicans, much to their consternation, have become democratic, with voters imposing their will on the power structure.  The establishments of both parties should be reflecting on their shortcomings.  But don't expect them to instigate change on their own.  That will have to be forced on them by the electorate.

Tuesday, May 3, 2016

In Choosing Clinton, Will the Democrats Take the Harder Road?

With Ted Cruz dropping out of the Republican primaries after losing in Indiana, it really does matter whether the Democrats nominate Hillary Clinton or Bernie Sanders.  A recent Reuters poll shows Clinton leading Trump by almost 9%:  http://polling.reuters.com/#!poll/TM651Y15_13.  However, in another Reuters poll, Sanders leads Trump by 16%:  http://polling.reuters.com/#!poll/TM651Y15_14. Polls taken two months ago show that Sanders was comparably stronger against Trump than Clinton:  http://blogger.uncleleosden.com/2016/03/bernie-sanders-is-most-electable.html.

Donald Trump will now surely be the Republican nominee.  He has displayed remarkable political talent, and has blasted his way through a vast field of experienced, well-funded and strongly supported career Republican politicians.  Hillary Clinton's negatives and baggage offer Trump big, fat, juicy targets.  With his skill at handling the media, he may well close the 8-9% gap between himself and Clinton and force her into an extremely tight race.  Bernie Sanders, by contrast, with his humble background, modest finances, and rumpled clothes, presents a harder target to hit.  There aren't that many cheap shots Trump could take at him.  Trump would have to attack Sanders' policy proposals and platform--and that's exactly where Sanders would like the debate to be.  By relentlessly pushing his ideas, Sanders closed an enormous gap between himself and Clinton.  He's won with his ideas and his victory today in Indiana shows his continued appeal to voters.

Contrary to what many self-satisfied Democratic insiders believed this morning, the Republicans will not tear their party apart.  Trump has the rest of the Spring and the Summer to stitch together a united Republican front.  Sanders, having just won Indiana and likely to win more upcoming primaries, isn't stepping out of the race.  The Democrats face a dilemma:  whether to nominate Clinton, the candidate with the most power within the party, or nominate Sanders, the candidate most likely to beat Trump.  Power politics will probably prevail.  But in choosing Clinton, the Democrats may be taking the harder road to the White House.

Thursday, April 14, 2016

A Generation of Stagnation; Retirement Walks the Plank

We are now looking at a generation of stagnation.  The recovery from the 2008 financial crisis still wobbles like a drunk.  Even though we now have full employment, wages barely keep up with inflation (if at all).  And recent statistics indicate that inflation is growing as fast as a parched lawn.

Regardless of what this Federal Reserve official or that says, the central bank will raise rates as often as humans walk on Mars.  If you're wondering when rates will return to historical norms, the answer is never.  At least, this is the only rational assumption you can make.  With Asia's growth slowing, Europe's growth nonexistent, South America in free fall, Russia going negative in numerous ways, and the Middle East becoming more unstable with each passing day, and no drivers of growth in America except the Fed money printing presses running 24/7, the only future forecast that seems sensible is to expect stagnation for--well, the rest of your life.

With stagnation instead of brisk economic growth, the government's ability to support retirees will be limited.  While Social Security and Medicare won't disappear, they will likely be parsimonious.  If you drop your porridge bowl, they won't refill it.  And pension fund and personal investment returns are being decimated by low interest rates on bonds and bank accounts.  Your retirement is starting to walk the plank.  What to do, then, about your future?

Spend less, save more.  This is a no brainer.  It's not what the Fed wants, because hesitant consumer demand constrains economic growth.  But the Fed be damned.  Your long term well-being requires the thriftiness of Ben Franklin, and if that results in lower economic growth that makes the Fed look bad, well who cares?  (Or, you can substitute more lively terminology if you wish).  With interest rates so low, you can't use the financial magic of compounding to build much of a retirement (see http://blogger.uncleleosden.com/2009/09/if-you-love-compounding-compounding.html). You have to set aside more principal, and hope that the few crumbs of interest income you get will elevate your retirement diet above dog food.

Put some money in stocks.  The inequality of wealth in America has increased because the Fed's easy money policies tend to inflate asset values.  Since the rich own most assets, their wealth  has increased disproportionately from central bank policies.  Realistically, with stagnant wages and a Republican controlled Congress, you can't expect the inequality of wealth to diminish.  (Maybe things would be different if Bernie Sanders is elected President, but both the Democratic and Republican establishments are using all their smoke-filled back room influence and power to prevent that.)  So you might as well join 'em if you can't beat 'em.  Owning stocks can be gut wrenching in times of market turmoil.  But so is a retirement spent eating dog food.  Learn to live with the market's turbulence, and collect the rates of return that the 1% are getting from equities.

Work longer.  This increases your lifetime earnings, which allows you to save more and build up your Social Security benefits.  If you're lucky enough to have a pension, it will likely increase your pension benefits.  Okay, so working longer means a shorter retirement.  But, like we said, retirement is walking the plank.  Just try to avoid having to live in a cardboard box on the sidewalk with a couple of cans of cat food in your raggedy backpack.

Avoid debt.  You can't go bankrupt if you don't borrow.  If you do borrow, some of your future income will go to banks and other lenders in the form of interest payments, instead of enhancing your future lifestyle.  Granted, you may need to borrow for big ticket items like college, cars and a house.  But otherwise, avoid debt.  And pay down the debt you have as you approach retirement.  Especially, lose the mortgage.  Financial advisers may tell you it's okay to have a mortgage in retirement.  But guess what?  If you have a mortgage, that means you may have more financial assets to invest in ways that pay fees and commissions to the financial advisers.  Meanwhile, you have to pay interest on the mortgage debt.  Who's better off?

For more on ways to yank your retirement back off the plank, read http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.htmlhttp://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html, and http://blogger.uncleleosden.com/2011/01/hope-for-financially-lost.html.  Good luck.

Sunday, April 10, 2016

Will the GOP Set Up Ted Cruz?

With his victories in Wisconsin and Colorado, Ted Cruz is now well-positioned to prevent Donald Trump from getting a majority of delegates for the Republican Convention.  The Republican Establishment can't stand Cruz, but they can't stand Trump even more.  The Establishment could give Cruz enough support to block Trump for two rounds of voting at the convention.  After two rounds of inconclusive voting, nearly all the delegates would be free to vote for whatever candidate they choose.  The Establishment could then propose a compromise candidate (think Paul Ryan; sorry, John Kasich but you simply aren't a heavy enough hitter), and lean on delegates to support the candidate anointed by the Establishment.  In order to break the deadlock and get on with the general election, a majority of delegates might be willing to abandon Trump and Cruz, and go with the inside favorite.  Cruz would be left in a ditch by the road, but then again the Republican Establishment can't stand him.

Friday, March 18, 2016

How the Federal Reserve Destabilizes the Markets and Influences Politics

The Fed is being hoisted on its own petard.  Since 2008, it has suppressed interest rates, keeping them exceptionally low and forcing investors to put savings into risk assets such as stocks and high-yield bonds.  While there were good reasons for taking extraordinary action in 2008 and 2009, the Fed left rates so low for so long that investors, corporate America and borrowers have come to expect that really easy money is the norm, the default.  This dependency has made it virtually impossible for the Fed to normalize interest rates.  If the Fed raises rates, risk assets fall in value (as they did in recent months when faced with the specter of short term rates reaching a ghastly 1% to 1.25% by the end of this year).  The markets simply won't stand for interest rate increases, and the Fed sees itself as having no choice but to do the markets' bidding.  However, as the Fed continues to suppress interest rates, it only increases the markets' dependency, making future rate increases even more difficult. 

The Fed claims its interest rate policy is data dependent, and that it will raise rates as warranted by the data.  The U.S. economy is now at full employment and growing moderately.  Although last month's inflation data show stable prices, the recent rise in oil and gasoline prices will push up inflation numbers for March.  Yet, when it comes to the decision whether or not to increase rates, there is only one data point that matters.  That is the willingness of the financial markets to accept an increase.  With the markets' long term addiction to low rates deeply embedded, and their turbulent hissy fits every time the Fed hints at rate normalization, there is no foreseeable time when interest rates will return to historical norms. 

The Fed is undermining deeply rooted foundations of our society.  Highly rated long term bonds are essential to the stable retirements for which Americans and many other peoples hope.  Shorter term interest rates provide important supplemental income to savers, and promote financial stability and responsibility that mitigate the impact of economic cycles.  When people face lousy retirements (see http://blogger.uncleleosden.com/2015/04/is-federal-reserve-wrecking-retirement.html), and can't count on much of any return on savings (especially after netting out inflation), you can get the political unrest that we see today. 

The Fed is missing an important part of the picture.  People don't just want cheap credit.  They want stable long term prospects.  During the 1950's, 60's and 70's, the World War II generation endured many layoffs and cutbacks, due to recessions, factory retoolings, labor strikes and so on.  But their fundamental faith in the future was unshaken, because they knew they had pensions and Social Security to take care of them in their golden years (which in fact were golden for many of them).  This kind of long term stability isn't evident today.  Instead, havoc permeates today's politics.  Angry voters in America and Europe are upending established political orders because they fear the future.

Personal consumption and wealth have suffered greatly from low interest rates.  From 2008 to 2013, savers lost about $750 billion due to low interest rates (see http://www.cbsnews.com/news/report-low-interest-rates-have-cost-consumers-750-billion/).  Adding in likely losses for 2014 through today, the amount now is probably around $1 trillion.  That's real money.  Take that much out of people's hands, and they feel less secure, less inclined to spend, less inclined to borrow (you borrow less if you have less income), and more angry about the status quo.

What's more, the Fed's insistence on favoring risk assets has exacerbated the increasing inequality of income and wealth.  Rich people have the capital to invest in risk assets, and they become increasingly wealthy when cheap money pumps up the value of those assets.  Those getting the short end of the stick are now turning toward political extremism, because they feel they have no other choice.

The last thing the Fed wants to do is get entangled in politics.  It is supposed to be an independent agency that dispassionately dispenses policy in the public interest.  But the Fed's inability to act independently of the financial markets' short term tantrums is having significant impact on social stability and political trends.  Things will only get worse.  As the fall election approaches, the Fed will find itself in the horns of a dilemma largely of its own making.  If it raises rates because inflation is flaring (which is possible given the recent sharp increases in oil and gasoline prices), it will be accused of tilting the political picture one way.  If it does not raise rates despite an upswing in inflation, the markets will hum along on their cheap credit high, and the Fed will be accused of tilting the political landscape another way. 

The Fed is largely staffed and run by economists.  The economists there have failed to appreciate the diminishing returns of continuing the cheap money IV for the markets.  They have also failed to appreciate the costs of their cheap money policy.  If all they acknowledge is the upside (the return to full employment and moderate growth), and fail to acknowledge the pain they inflict on savers and workers who want to retire, then of course they will continue to inject cheap credit into the markets because they only see the benefits and not the costs.  Economists who don't acknowledge diminishing returns and see only benefits but not costs are bound to get policy wrong. 

The Fed measures its performance by short term metrics--current GDP growth, current unemployment, current inflation.  It doesn't appear to pay much attention, if any, to long term factors.  Long term factors are harder to measure.  But that doesn't mean they aren't important.  By focusing on the short term, and ignoring the long term, the Fed inevitably creates problems.  And we all have to live with the consequences of those problems.

Tuesday, March 1, 2016

Bernie Sanders is the Most Electable Candidate for President

The latest CNN/ORC poll shows that Bernie Sanders is the most electable candidate for President.  He would beat Trump (55% to 43%), Cruz (57% to 40%) and Rubio (53% to 45%).  By contrast, Hillary Clinton would beat Trump (52% to 44%), but would trail Cruz (48% to 49%) and Rubio (47% to 50%).  In other words, Sanders is the candidate most likely to win the Presidency in the general election, should he become the Democratic nominee.  Clinton's well-known negatives continue to dog her.

Clinton is supposed to be more electable than Sanders, but the latest poll negates that notion.  While Clinton has numerous advantages that give her the lead in the primaries for the Democratic nomination, she appears more likely to lead the party to defeat in the fall.  Sanders faces a difficult, uphill path in the primaries.  But if he succeeds in getting the nomination, he may well be the next President of the United States.

So if you're voting Democratic, and want to increase the chances for a Democratic President for the next four years, choose Bernie Sanders.  You can find the new CNN/ORC poll here: http://www.cnn.com/2016/03/01/politics/donald-trump-hillary-clinton-bernie-sanders-poll/index.html.

Saturday, February 27, 2016

Hillary's Obama Gambit

Hillary Clinton has embraced Barack Obama's policies and legacy, and has promised to continue them if she is elected President.  This has helped her draw the support of African-American voters, who she desperately needs to counteract Bernie Sanders' appeal to the young and the independent.  It's helping her now, in South Carolina and other Southern states.  But she will pay a price if she becomes the Democratic nominee.

The key to the general election will be the ability to attract the support of independents.  The Republican and Democratic nominees, whoever they may be this year, will have the support of the conservative right and liberal left, respectively.  The winning candidate will be the one to whom independents flock.  Independents, to be sure, aren't always the same as moderates or middle of the road voters.  They are often beyond classification, very conservative on some issues while simultaneously very liberal on others.  But if you try to paint them as libertarians, they will turn out to be staunch supporters of big government safety net programs like Social Security and Medicare.  These are the disaffected drawn to Donald Trump and Bernie Sanders.  They often don't like Barack Obama or Hillary Clinton.  And they are likely to dislike Clinton even more for embracing Obama's legacy.  By positioning herself as Barack Obama's ideological successor, Clinton makes herself less attractive as a candidate to a large group of voters who are likely to be crucial to victory. 

Barack Obama had an almost unique ability to draw the support of traditional Democratic constituencies and independents.  Hillary Clinton doesn't have that ability.  By promising to take up Obama's mantle, she has made herself into a target which, in the general election, the vast right wing conspiracy will bombard with Super PAC funded ads highlighting her sworn fealty Obama.  Many of the Obama haters will turn against her, and vote for the other candidate.  Traditional Democratic constituencies may not be enough to elect her.  She's gained a short term advantage, but a long term problem.