Saturday, August 30, 2014

The Next Market Bubble

Bulls and bears alike wonder when the next market bubble will emerge and pop.  In recent years, major stock market downturns have come from bursting bubbles.  Recessions, threats of war, terrorist attacks and other disturbances have caused market ripples.  But the big gut wrenchers--the nosedives that wrecked your retirement--have come from the popping of asset bubbles.  The gross over-valuation of tech stocks in 2000, the ridiculous real estate lending of 2005-07, those are the events that clobbered equities.  What does the future portend?

Today, the mess in the Middle East grips our attention.  Medieval atrocities by the Islamic State, a mosh pit with weapons in Gaza, mind-numbing slaughter in Syria and sectarian strife in Iraq appall and fascinate.  But none of them will significantly drive down stock valuations.  They just don't have the economic impact.  The Ebola epidemic is now raging out of control in West Africa.  But America's economic exposure to West Africa is miniscule.  And the disease isn't likely to present a major threat to the industrialized world.

Is there an impending market bubble that could burst and dynamite the world's financial system?  The answer is maybe, in Europe.   The European economy is slowing.  Growth is seen only on alternating Sundays.  The EU stays afloat on a cushion of sovereign and bank debt--a lot of it.  With Europe's slowing economy, it will be tough to pay down this debt and expedient to refinance by issuing even greater amounts of debt.  Risks to larger members like Italy and France are rising.  The EU is a financial and currency union without a unitary government.  Thus, it is tailor made to borrow in bulk without governmental controls to interfere.  We in America know from the 2007-08 mortgage crisis what happens when you bulk up on debt that can't be easily repaid.  The vast amount of European debt presents potential systemic risk, just like the vast amount of American mortgage debt outstanding in 2007.

Exacerbating Europe's problems is the war between Ukraine and Russia.  As Russia's direct involvement in combat is becoming increasingly clear, the war is likely to have ever greater impact on Europe.  Sanctions by the West will probably be heightened, and Russia's retaliation will likely hit Europe harder than America.  Europe's financial system could begin to totter as the EU is pushed into recession and capital flees the Old World.  (Indeed, part of the buoyancy of U.S. stocks can be attributed to the arrival of capital now fleeing Europe.)  A run on the Euro could be the straw that breaks the bubble's back.

The European Central Bank, as always, does a fan dance about how accommodative it will be.  While it's become much more interventionist in the past couple of years, it remains constrained by its anti-inflation charter and the stolid, ever-frowning Germans. Maybe the ECB will save the day.  Or maybe not.

Europe's economy, as a whole, is larger than America's.  A tummy ache there could affect the rest of the world.  if you're worried about where the next bursting asset bubble could come from, keep your eye on Europe.

Tuesday, August 19, 2014

Vladimir Putin and the Art of War

Sun Tzu, the Chinese military strategist, wrote in The Art of War:  "[T]hose skilled in war subdue the enemy's army without battle.  They capture his cities without assaulting them and overthrow his state without protracted operations."*  This would seem to have been Putin's approach from the beginning of Ukrainian crisis.  Without a shot fired, Russian troops seized Crimea.  Crimea was low hanging fruit, since Russian military personnel were already there on a base that Ukraine had allowed Russia to maintain.  Vlad the Invader was no doubt emboldened by the ease and bloodlessness of this victory to seek control of eastern Ukraine.  And he probably hoped to use his success in Crimea to bluff and bully Ukraine into surrendering without Russia having to fight a hot war.

But things haven't gone Putin's way.  After initial ineffectiveness, the Ukrainian military has rallied and is now on the way to retaking all of eastern Ukraine (except perhaps for Crimea).  Only two major cities (Donetsk and Luhansk) remain in rebel hands, and both are surrounded by the Ukrainians. While a substantial news blackout seems to exist with respect to combat operations, it's clear that the Ukrainian military has suddenly attained the ability to use heavy weapons effectively against the more lightly armed separatist forces.  The success of Ukraine's air force is unclear; the separatists tout shootdowns, but the Ukrainian military is mum on successes.  If Ukraine's air force can now effectively support its ground forces, the separatists haven't got much of a chance.  Air power, as the Islamic State learned the hard way in Iraq, is still the trump card on the battlefield.

How has Ukraine so suddenly become so capable in battle?  One wonders if there aren't advisers in Ukraine, who speak the language with non-native accents and can offer the benefit of experiences from other wars.  No military in the world has as much experience as the U.S. military.  And the Iraq War, fought on flat terrain in and around towns and cities, would have been similar in many ways to the fighting in Ukraine,  It is hard to imagine that there aren't U.S. Special Ops personnel and CIA agents working with the Ukrainians.  Recent claims by Ukraine that its artillery pummeled a Russian armored column entering Ukraine at night, if true, would strongly indicate an American role.  How could Ukrainian artillery smack the yogurt out of a Russian column at night without precise targeting information, such as might be provided by American satellites and drone aircraft? 

But now is not the time for Ukraine and the U.S. to celebrate.  Putin cannot afford to be seen as a loser in this war.  If he were, he'd lose his job, and maybe more.  He'll lash out like a cornered rat if forced to face definitive defeat.  Even as we write, there are reports of rebel reinforcements being sent from Russia into Ukraine--some 1,200 men with 150 armored vehicles, including 30 tanks.  (There we go with U.S aerial surveillance again.)  Putin won't stop fighting.

Yet, the Ukrainian military is holding its own and more.  If Putin overtly sends Russian troops into Ukraine, he'll probably sustain more casualties than the war weary Russian people will tolerate.  (Russia took painful losses in Afghanistan and in the wars in the Caucasus.)  Western sanctions would escalate sharply and capital flight from Russia, already a torrent, would become a flood that would impress Noah.  The Russian economy could crater, threatening to take Putin down with it. So an overt invasion of Ukraine by Russian troops entails tremendous risk.

Putin is for practical purposes limited to using the separatists rebels, who are now outnumbered and outgunned.  As a result, he has violated one of Sun Tzu's principles:  "If weaker numerically, be capable of withdrawing."  He cannot commit the forces needed to win, but he cannot withdraw.  He is trapped.

What will Putin do?  Most likely, he'll continue and perhaps increase the covert assistance and support he's been giving the separatists.  The more success the Ukrainian military enjoys, the more desperate Putin will become, and the more covert action he will take.  Since there seems to be a ready supply of separatist rebels, Putin could keep the war going at least for a while.  If the Ukrainian military defeats the separatist forces on the battlefield, the rebels could go underground and fall back on terrorist tactics that have become all too familiar in today's world.  And Putin could apply the economic weapons he's used in the past, such as shutting off the natural gas Russia exports to Ukraine and Europe.  Ukraine may well be on the way to battlefield victory.  But instability and disruption will continue.

*Sun Tzu, The Art of War, translated by Samuel B. Griffith, Oxford University Press, 1963. 

Monday, July 28, 2014

The Failure of European Economic Integration

Economic integration--intertwining the economies of nations--was supposed to promote economic efficiency, prosperity and ultimately peace.  The idea was that if nations need each other to keep their economies humming, they wouldn't start a shooting war.  Continental Europeans, having suffered tens of millions of deaths in two world wars, were particularly impassioned with this idea.  Who can blame them?  Arms races and wars hadn't solved their problems.  The League of Nations didn't solved their problems.  Why not give mutual dependence on each other for cheese, wine, sardines, sausage, and pasta a chance?

At first the idea seemed to work.  The EU prospered in its early years.  We now know those salad days resulted to a large degree from inexpensive borrowing by poorer EU nations, who snarfed up too much easy money and now struggle to avoid the death of a thousand budget cuts.  But optimism held sway in the early days of the EU, and economic kumbaya was extended to the nations of the former Soviet Union, including the big brown bear itself.

Economic integration provides leverage.  The proponents of the EU thought that the leverage would be used to restrain aggression. But leverage by itself is morally neutral, and can be used for good or evil.  Give leverage to a son of a ditch (sp), and he'll use it for evil.  This is what we see in Ukraine today, where Vlad the Invader has seized Crimea, and is sponsoring a "rebellion" in eastern Ukraine against the Kiev government, a war that is increasingly being conducted by Russian soldiers and Russian operatives.  As Russian personnel take over the fighting, the war is morphing into a clash between nations.  This is exactly what economic integration was supposed to prevent. 

Europe's response to Vlad's invasions has hardly gone beyond a tepid wrist slap, and talk of stronger sanctions is matched by behind the scenes maneuvering to prevent any economic consequences from the sanctions.  The horror of the shoot down of Malaysia Airlines Flight MH 17 was quickly followed by France reaffirming its intention to deliver a Mistral class helicopter carrier to Russia, a substantial warship that Russia apparently could not itself build.  Economic integration, it would appear, trumps moral rectitude.

Putin is using economic integration as a weapon, and in his insidious hands, it's devilishly effective.  Europe is dependent on Russia for gas and oil, and can't easily substitute other suppliers for Russia.  Putin has apparently increased his support for the rebels in Ukraine since the Flight MH 17 atrocity. He has much to gain by doubling down.  His increased aggressiveness forces the U.S. and Europe to struggle to respond, and this struggle heightens the divisions between the New World and the Old. He renders NATO a hollow shell, something the Poles have publicly admitted.  Putin doesn't have to conquer Ukraine, or even eastern Ukraine.  All he has to do is keep stirring the pot, and in so doing highlights Europe's dependence on Russia and America's weakness.

Economic integration doesn't turn a monster into a nice kitty.  When done with a dastard (sp), he remains dastardly, and will look for opportunities to slip the knife between the ribs of his trading partners.  The Europeans have, through economic integration, delivered themselves unto evil, and they are now paying the price.

Friday, July 18, 2014

Malaysia Airlines Flight MH 17: Putin's Money Problem

Inevitably, lawsuits will be filed over the shoot down of Malaysia Airlines Flight MH17 in eastern Ukraine.  Typically, the plaintiffs' attorneys will name as defendants just about everyone who had any connection with the shoot down and his uncle.  The airline itself will surely be a defendant.  But we know that.  What's interesting is that Vladimir Putin might, depending on circumstances, be a defendant.

In a civil lawsuit, such as those that will be filed, legal liability does not necessarily depend on proving that the defendant deliberately pulled the trigger or ordered the downing.  A person who was negligent or reckless with respect to supporting and arming the rebels in eastern Ukraine (assuming they're the ones who actually fired the missile) might have civil liability.  Information reported indicates that Flight MH 17 was following a well-established international route at a cruising altitude of 33,000 feet, which is typical of commercial airliners.  Just what do you think might happen if you give a bunch of Ukrainian rebels under air attack from the Ukrainian air force a missile system capable of reaching that high?

Since the Ukrainian separatists might not have the expertise to operate a missile system such as the one that evidently downed Flight MH 17, Russian personnel may have had their eyes on the radar screen and fingers on the trigger.  If so, the link to Putin may be strengthened, and his potential for personal liability increased.

If Vlad faces potential personal liability to the Flight MH 17 plaintiffs, he could have a serious money problem.  Although he denies having money stashed in the West, news reports have suggested he may control tens of billions of dollars of assets, maybe as much as $50 billion.  The plaintiffs' attorneys and the insurance companies that make payouts to MH 17 claimants have a powerful incentive to hunt down that money, if it exists.  And who knows?  Maybe they'll succeed.  In that case, Vlad could lose some or all of his hell or high water fund.

The nation of Russia, too, might be liable if it is shown to have provided the missile system.  And it's potential for liability would be heightened if Russian personnel actually operated the missile system.

There is historical precedent for holding bad actors on the international scene liable for civil liabilities.  In 1988, Libyan agents bombed Pan American Airlines Flight 103.  The next year, Libyan agents bombed a commercial airliner flown by UTA, a French airline (UTA Flight 772).  In both cases, the nation of Libya ultimately paid substantial sums of money (totaling billions of dollars) to settle civil claims. 

One big problem for Vlad is that the toothpaste is out of the tube and he can't put it back.  With the plane already shot down, all he can do is scramble to cover his butt.  Current news reports indicate that heavily armed men of uncertain identity are blocking international investigators from getting to the crash site.  Perhaps other men of uncertain identity have recovered the black box and . . . well, maybe the black box will be another victim in this tragedy.  Possibly, many bankers in Western nations are working day and night to shift assets of shadowy Russian entities to new and more obscure locations that are likely to entangle the curious in a briar patch of banking secrecy laws.  But Russia itself can't disappear, nor can it conceal all of its assets. 

The Obama administration has been accused of taking a tepid tack on sanctions over the Russian invasion of Ukraine.  European nations have been criticized for being even more equivocal.  But, to make a living as a plaintiff's attorney, you have to be as shy as a great white shark.  And, unless they have accidents with poison-tipped umbrellas, plaintiffs' counsel for Flight MH 17 claimants may be relentlessly pursuing Vlad and Russia for years.

Thursday, July 10, 2014

The EU Bubble

Today's kerfluffle in the stock markets over the debt default of an entity affiliated with Portugal's largest bank reminds us that if there is a financial bubble anywhere, it's in EU sovereign and bank debt.  EU sovereign debt and the debt of EU banks have become almost synonymous.  That's because they are linked by a problematic circularity.  EU banks have invested heavily in EU sovereign debt.  EU nations, in turn, have pretty much become the guarantors of the debts of their banks.  Thus, the banks borrow to invest in sovereign debt, and the sovereigns in turn guarantee the banks' debt that funds the sovereigns.  It's rather clever, as long as nothing goes wrong.

However, one could note that EU banks and sovereign nations appear to be burdened with each others' liabilities, and that the guarantees of EU nations accordingly have limited efficacy.  Given that the EU and its banks, in toto, can be reasonably described as overleveraged, this circularity can become a circular firing squad if there is a run on a major EU bank or an EU sovereign member nation.  This is particularly so since no EU nation can issue its own currency and pay its or its banks' debts with printed money.

Of course, the European Central Bank has in recent years made a show of pointing to shining armor it could don and white horses it could mount to ride to the rescue if there is another European financial crisis.  And it has adopted accommodative, money printing-like maneuvers when the going got tough (like letting EU banks use sovereign debt as collateral for borrowings at the ECB without any discounting of their face value).  If the dustup across the pond is limited to Portugal, the ECB should be able to find one way or another to keep the cookie from crumbling.  But if other EU nations, particularly larger ones like France, begin to waver, the EU financial bubble could burst in a nasty way.  The economic consequences could be bad.  Given the growing extremism in Europe, the political consequences could be worse.

There are some asset classes in the U.S. that may be getting bubbly.  Many Internet stocks are suspect. Housing except for the $1 million and up price range seems to be struggling.  In addition, small cap stocks haven't been doing well recently and may turn out to be a bubble bursting.  But it's unlikely that the frothiness of these asset classes could re-trigger the Great Recession.   On the other hand, if the EU sovereign nations can't keep their banking systems on an even keel, then all bets are off. 

Wednesday, July 2, 2014

Guinea Pigs On Facebook

There's a bunch of guinea pigs on Facebook, around 689,000 of them.  You wouldn't recognize them as rodents if you just looked at their Facebook pages.  Instead, you'd probably think they were people, some younger than the age of 18.  But guinea pigs they are, used by Facebook in an experiment to manipulate users' emotions by making the news feeds these users received either more negative or positive, and then measuring the effect on posts written by the g-pigs.  Evidently, g-pigs' emotions could be changed positively or negatively by the content of the posts they received.  In other words, emotion manipulation by Facebook seems possible.

Facebook claims that its terms of service allow this kind of experimentation.  If you didn't read the terms of service, then bear in mind that the possibility of this kind of horseship (sp) is exactly is the reason why you should read them.  But it may also be the case that Facebook's terms of service were kind of general, and written in that uniquely obtuse and obstructive language called legalese.   We would guess they didn't include a guinea pig clause, which explicitly informed users that they might be selected to be subjects in experiments in emotional manipulation where they wouldn't be informed of their selection and the emotional manipulation would be conducted in quite a non-obvious way.  So even if you were among the assiduous 0.01% who actually read the terms of service, you still might not have realized that you had just registered for the guinea pig draft and could be called up for service at any time.

Of course, one suspects that Facebook might not have wanted to let the g-pigs know what was going on.  Unknowing g-pigs would likely produce more meaningful experimental results than users who knew what was going on.  And if one considers Facebook's corporate interests to be more important than the interests and dignity of its users, then all this might make sense.  But if users are thought to be deserving of fair treatment--radical notion, that--then you'd have to conclude that Facebook really stinks for having done this.

The world is full of emotional manipulation: advertisements, political campaigning, editorials, op-ed pages, robo-calls from every manner of charity you never heard of, etc.  And when it's clear that the game is to manipulate your emotions, that's okay (at least when it's directed at adults).  But when emotions are manipulated sneakily, and your participation isn't made known to you, then that's a reason to avoid Facebook and any other social networking websites that pull similar carp (sp). 

You have to wonder if the emotion manipulation experiment signals that Facebook has reached its zenith and is in decline.  Has Facebook run out of bona fide, valuable services to provide to users?  Is it now stooping to emotional manipulation to keep existing users and bring in new ones?  Do we really need Facebook, or have we been manipulated into thinking we need Facebook?

Thursday, June 26, 2014

Partition Iraq

Joe Biden, while a Senator, got it right.  Iraq should be partitioned.  Not that prescriptive advice like this really matters any more because the partitioning has already happened and there really isn't any way to undo it.

ISIS, the Sunni extremists, already control northwestern Iraq, along with a good chunk of northeastern Syria.  No one will be able to dislodge them.  The Iraqi government's army is too busy surrendering territory and weapons to retake lost ground.  The Assad regime in Syria no longer has the ability to defeat a force as powerful as ISIS.  And the U.S. isn't sending in ground troops, without which you can't take or hold territory.

The Kurds have carved out a homeland for themselves, anchored by the city of Kirkuk, and they won't give it up, not after centuries of subjugation.  Certainly, the Iraqi army can't retake the Kurdish territory, and the Kurdish paramilitary Pesh Merga appears more formidable than ISIS. 

The Shiites in Iraq hold the southern and southeastern portions of the country, which contains most of Iraq's oil wealth.  Why fight for the less valuable land farther north when they already hold the jackpot?

Trying to keep Iraq together is guaranteed to produce unmanageable friction and endless warfare.  The Iranians now have their claws into the Baghdad government, and won't give that up.  America's Sunni allies on the Arabian Peninsula--Saudi Arabia, Kuwait, Qatar, etc.--have many secret supporters of ISIS, who will be royally p.o.'d if the Shiite government in Baghdad is able, with American assistance, to repress Sunni tribes in Iraq.  The Kurds have quietly allied themselves with Israel and sometimes with America, and pissing them off could weaken America's influence in the region.

America's power in the region might increase if Iraq were partitioned.  Even though once betrayed by the CIA, the Kurds would still ally themselves with the U.S., and offer American personnel a centrally located place from which to operate.  The Shiite Baghdad government might want to maintain friendly ties with America in order to counterbalance the Iranians.  Yes, the Baghdad government has cozied up to Iran.  But the Iranians are Persian, and the people in Baghdad are Arabs.  Iraq and Iran fought a bitter war with over a million dead in the 1980s, and the Baghdad government won't want its territory to become a province of a new Persian empire.

As for the Sunni area now controlled by ISIS, the U.S. could do what it did during the 2007 surge:  buy off the indigenous Iraqi Sunni tribes.  That's how the U.S. defeated al-Qaeda once before, and it's a way to undermine ISIS now.  The whack jobs that control ISIS impose an extremely harsh form of Islam--even al-Qaeda gave ISIS the boot because it thought ISIS unduly brutal (imagine that!).  The indigenous Sunni tribes in Iraq tend toward moderation, and won't be happy with the beheadings, stonings, non-medical amputations, and other barbarism that ISIS will inflict.  It's a safe assumption that U.S. Special Forces personnel and CIA agents have already started slipping into ISIS controlled areas.  Money talks, and thoughtfully large sums of money placed in the hands of the right Sunni chieftains might well lead to an ousting of ISIS.  The Sunnis might well want to carve out their own independent state, and the U.S. shouldn't get in the way.  A stable, moderate Sunni state in northern Iraq is far less likely than an ISIS caliphate to serve as an incubator of Islamic extremists who would target the U.S.  Especially if American aid flows generously to such a nation.  And America's allies in the Arabian peninsula might look favorably upon such a sanctuary for their religious brethren.

Partitioning has flaws, but not as many as the alternatives.  Yugoslavia no longer exists, but its constituent parts have learned with assistance from NATO how to refrain from ethnic cleansing.  The borders of the Near East (Israel, Jordan, the Palestinian Authority, Syria and Egypt) are the result of partitioning.  Yes, there's a lot of tension and some low level warfare in the Near East.  But the utter chaos of today's Iraq isn't present.  And South Asia is functional, if not entirely peaceful.

Re-uniting Iraq will involve combat and civilian deaths, probably a lot of them.  All of America's elites, war hawks, chicken hawks, experts, pundits, and bombasts don't have an effective way to put Iraq back together again, not unless hundreds of thousands of American troops are reintroduced to re-fight the ground war.  And that ain't happening.  It's better to leverage the new status quo, which we can't change anyway, to our advantage. 

Thursday, June 12, 2014

How To Reduce Volatility in Your Retirement Income

The S&P 500 has dropped three days in a row, and after all the market calm of recent months, many investors must be thinking that the apocalypse looms.  There are understandable explanations for the recent downdrafts.  Islamic radicals of the Sunni variety have rapidly seized several towns and cities in Iraq, along with American weapons and vehicles provided to the Iraqi government (and the administration worries about giving small arms to moderate Syrian rebels?).  Iranian paramilitary troops, who are Shiites, supposedly are fighting alongside Iraqi government troops to retake territory seized by the Sunni radicals. Is Iran now a more important ally of the Iraqi government than the U.S.?

Russian tanks have reportedly rolled into Ukraine, where the fighting is escalating.  Bashir Assad is winning in Syria, and the moderate rebels that the U.S. supports seem to be almost inconsequential.  Most of East Asia is squabbling over this island or that, with contending nations issuing many a proclamation declaiming a neighbor as a ratfink, a double ratfink or even a triple ratfink. 

Domestic politics also create uncertainty for the markets.  Eric Cantor, House Majority Leader, was just defenestrated in a primary election by a guy from far right field whose name, even if we mentioned it now, you probably wouldn't recognize.  (But we're going to, because it's Dave Brat, a marvelously fitting name for a guy who ousted the Majority Leader.)  Cantor, who outspent his opponent's six-figure campaign by $5 million, convincingly proved that money isn't everything.  Not even in politics.  The Koch brothers must be scratching their heads about what checks to write next.

The markets will always be plagued by volatility.  And it tends to pop up when you least expect it.  That might be inherent in the definition of volatility, but you know what we mean.  Yogurt happens, but you don't want your retirement finances smeared with yogurt.  While there are no complete protections against the ups and downs of life, here are a few ideas for calming the financial waves.

Build Up Social Security Benefits.  Disregard the hyperbole.  Social Security will be there when you retire.  Maybe not exactly as it is now, but nevertheless in a meaningful form.  Any politician who votes to eliminate or sharply reduce Social Security retirement benefits will end up doing an Eric Cantor faster than Eric Cantor as voters reject the idea that they should have to eat dog food in their old age.  Work as long as you can to build up your benefits.

Get a Pension.  If you're lucky enough to get a pension, stick out it long enough in that job to qualify.  Although classic defined benefits pensions are usually found these days only alongside the remains of diplodocus, lasso one if you can.  Other pension arrangements, like cash balance plans, are a lot better than no pension. 

Save More.  Saving more is a salve for portfolio instability and financial insecurity.  Those that have the saving jones won't have to get loans.

Use Retirement Accounts.  Retirement accounts like 401(k)s, IRAs and so on offer tax advantages that let you leverage your retirement savings, while limiting your ability to prematurely spend your savings.  A particular advantage to a 401(k) account comes if your employer provides a matching contribution, which is the freest money most people can get.  Use these accounts as much as you can.

Diversity Your Investments.  The values of all assets wax and wane.  But they usually don't wax and wane in unison.  More commonly, some assets get yeasty while others do the fallen souffle thing.  And vice versa.  So a diversified portfolio is usually kind to your antacid budget.  There are moments, like the 2008-09 financial crisis, when it seems like almost all assets belly flop.  But these cognitively dissonant interludes are the exception and not the rule. 

Consider an Annuity.  A fixed annuity (one that pays a specified dollar amount per month) or a fixed annuity adjusted for inflation can be a reasonable way to provide a steady income.  Annuities aren't cheap, and you should buy only from an insurance company with a strong credit rating. Don't put more than about one-third to one-half of your portfolio into an annuity because cash needs in old age can be unpredictable and it helps to have a nice pool of cash or cash equivalents.  Be very cautious about variable annuities--they often have high expenses, and the point here is to reduce volatility, not subject yourself to it in another form. 

Health Insurance and Long Term Care Insurance.  Financial volatility can sometimes come from sudden increases in expenses, and not just decreases in portfolio values.  Health care and long term care needs are the biggest landmines in the journey through retirement.  Most retirees are covered by Medicare, but if you're not, then buy something else.  The Affordable Care Act, despite all the teeth-gnashing on the right, is likely to be a good option if you don't have anything else.  If you have a significant net worth, consider buying long term care insurance, especially if you have a spouse who may depend on that net worth after you've gone to the great Dance Party in the sky.  It's expensive, but so is long term care.  If you want more than the quality of care given to Medicaid patients, long term care insurance may be a good choice.

Part-time Work.  Okay, you want to hear about retirement, not employment.  But part-time employment reduces the extent you need to draw down your savings, so you can keep more powder dry for later.  It also lessens your risk of dying from the boredom of day time TV.  It may boost your Social Security benefits (depending on your work history).  And the dignity of work is better than the indignity of looking for sales on dog food.

Saturday, June 7, 2014

Going Negative in Europe

"Going negative" is a political term of art, usually meaning that one candidate campaigns primarily by throwing mud at the other candidate(s).  In our jaded times, going negative has come to predominate.  Trash talking, if nothing else, captures attention.

These days, Europe is going negative for political reasons, although not in the usual sense.  The European Central Bank announced recently that it was cutting the interest rate it pays on deposits from banks to -0.1%.  In other words, banks that deposit funds with the ECB will pay a 0.1% fee for the privilege of having the ECB hold their money.  The ECB claims to be concerned with a low nominal interest rate of 0.5%, and supposedly cut rates below zero to spur bank lending.  Whether more lending will be done is unclear, as banks in the EU have been awfully finicky about extending credit in recent years (except to sovereign nations that sometimes aren't creditworthy).  Banks could cover the costs of the ECB's negative move by lowering interest rates paid on deposits (i.e., on longer term deposits that still have a positive rate) and increasing lending rates for existing borrowers. There's no necessary reason for them to make new loans.

The 0.5% inflation rate that supposedly led the ECB to go negative isn't strikingly different from the low inflation that already prevailed in Europe. One can't help wondering how much the EU was motivated by politics, as opposed to monetary policy.  The EU's badly conceived structure--a monetary union without true fiscal controls--encouraged overly enthusiastic borrowing by sovereign members, particularly those that were economically weaker.  The resulting debt crisis was met with the EU's BYOB (bring your own bailout) policy that meant austerity for those least able to cope, and economic recession (or, in some EU member nations, depression).  It's hardly surprising that political extremism flourished.
Nationalistic parties in Europe have recently made striking gains in EU parliamentary elections (yes, in the election of delegates to the EU Parliament, a quarter of whom now would favor the dissolution of the EU).  It must scare the mudcakes out of the ECB's bureaucrats that a quarter of the EU's governing body would be pleased to defenestrate the ECB.

Moreover, nationalistic impulses in Russia led to its seizure of Crimea from Ukraine.  Even though Russia formally transferred Crimea in political marriage to Ukraine in the 1950s, Vladimir Putin (Vlad the Invader, one might call him) seems to believe that Russia nevertheless holds a droit du seigneur to take Crimea for itself. In addition, Russian nationalism (plus surreptitious Russian military intervention) has fueled unrest in eastern Ukraine, leading to civil warfare.  It now looks like Ukraine may go the way of Syria.  Neither side is strong enough to win, and both sides are supported by outside interests that cannot afford to lose.  Russia can protect its interests by keeping the insurgency going at a low boil, just enough that Ukraine is afraid to cozy up too closely to NATO.  America has to do something to help Ukraine, but can't offer enough military assistance to decisively defeat the insurgents.  (Given the pathetic performance of the Ukrainian military, the only way the insurgents can be defeated is if we send in the Marines, and that ain't happening).  So, the nastiness of irregular warfare and flight of civilians from war zones, so familiar to observers of the Syrian civil war, is now being replayed in Ukraine.

Policy makers at the ECB undoubtedly noticed the rising manifestations of nationalism around them, and surely understand that the fiscal austerity imposed by the doyennes of the EU isn't doing a bang up job of fostering economic growth.  That leaves the central bank as the only actor in this drama who can administer the antidote to extremism:  the promotion of economic prosperity.  So, the ECB surely is going negative for political reasons.  And that's a problem.  Central banks were created to foster financial stability, not political stability.  But, with political processes in Europe (as well as in America) moribund on their best days, the ECB is trying to bail out a life raft with a tea cup.  And it's not hard to figure out its chances of success.

Thursday, May 29, 2014

The Lucky, Lucky Fed

Soldiers want their generals to be lucky.  As capable and knowledgeable as generals may be, they still need luck to win.  And citizens want their central banks to be lucky, because central bankers often fail even if they are capable and knowledgeable.

The Federal Reserve has been very, very lucky.  Unrest in Ukraine, territorial disputes in East Asia, the usual morass in the Middle East, and now nationalist parties winning European elections, have all combined to push U.S. Treasury yields down even as the Fed steadily withdraws its quantitative easing.  Financial markets mavens who confidently predicted that this would be the year of rising interest rates and falling stock prices have had to substitute excuses and explanations for predictions. 

Some still persist in forecasting rising rates and falling stocks.  Perhaps they will be proven correct.  But if you're betting your money on these predictions, remember that you're, at least in part, betting on the Fed's luck running out.  A bet on bad luck is still a bet on luck.  If you wouldn't play the lottery or patronize a casino, why bet on (or against) the central bank's luck?  The smart thing to do is stay diversified, and be patient.  (See  The tortoise tends to be a better investor than the hare.