Friday, October 14, 2016

The Nobel Committee Got it Right

Awarding the Nobel Prize for Literature to Bob Dylan was exactly the right thing to do.  He's a great singer-songwriter, whose songs touched millions and influenced generations of musicians and composers.  He richly deserved the prize.  Equally important, the Nobel Committee recognized that literature isn't just a dry, narrowly defined collection of dusty texts appreciated only by tweedy, dust-covered obscurants.  It's an organic, dynamic concept that evolves and grows over time.  Stories are told in many ways and today's troubadours are among the modern world's best story tellers.  There's a lot of literature to be found in smoke-filled bars smelling of stale beer and cut rate whiskey, a lot of story telling set to the simple chord progressions of the blues and rock and roll.  The Nobel Committee could have a great time selecting future prize winners from the vast literature of popular music, rocking out instead of plowing through another snoozer of a book.

Who might be eligible for the Prize in today's new, expanded literature?  There are plenty of potential nominees.  How about:

Bill Haley and His Comets.  Rock Around the Clock was the song that start the rock and roll revolution.

B.B. King.  The King of the Blues brought the blues out of the honky tonks into the larger world.  Sweet Sixteen is one of his finest ballads.

The Rolling Stones.  Among the greatest of the rock and roll literati, the Stones give us so many choices.  Honky Tonk Women is a gem.

Mountain.  The Nobel Committee sometimes looks at works of the less well-known.  One of the hardest rocking bands of the 60's and 70's was Mountain, four guys who created a bigger sound than ten other guys could and inspired generations of hard rockers to follow.  Their best song is Mississippi Queen.

Wednesday, September 21, 2016

Would the Fed Please Shut Up?

At the beginning of 2016, the Federal Reserve Board anticipated four quarterly interest rate hikes for the year.  Three quarters of the way through the year, the Fed hasn't lift rates even once.  And it's far from certain it will in December.

Why such a divergence between expectations and reality?  In a nutshell, because economists can't predict the future.  Essentially all leading and well-regarded economists get it wrong when they try to predict future economic growth.  Since the Fed is an economist-driven agency, it devotes a lot of time and energy to being wrong.  And it has been wrong early and often this year.  It's probably wrong in suggesting a significant likelihood of a December increase.  The truth is it has no way (i.e., zero percent probability) of knowing whether or not it will raise rates in December.  Its capacity for error has been copiously demonstrated and its "guidance" is worth less than a palm reader's prognostications.

Who benefits from the Fed's "guidance"?  Not investors, who only profit if they disbelieve what the Fed says.  Not consumers, whose bank accounts and certificates of deposit, money market accounts, bond holdings, pensions, and long term care insurance policies are being devastated by the perpetuation of Lilliputian interest earnings.  Those who would prepare for the future with life insurance and annuities face ever-escalating costs.  Comfortable retirement is increasingly available only for those who have both very high incomes and a ferocious propensity to save.  Everyone else will become a burden on public retirement financing.  Anyone who thinks the government will be balancing the budget by cutting the cost of Social Security and Medicare is chilling on angel dust.  Tax increases and more deficit spending will be necessary--full stop, end of discussion.  The bulk of retirees will be largely or entirely dependent on the government and any thought of cutting retirement benefits will prompt a political insurgency that would make this year's election look like a circle of kindergartners singing Kumbaya.

There are people who benefit from the Fed's "guidance."  Speculators, who make fast money bets on what some Fed official or other will say in the next three days.  Derivatives dealers, who write contracts for those who want to hedge or speculate about the Fed's "guidance."  Pundits and journalists, who try to say something profound about every cough or facial tic from one Fed official or another.  Stock and bond market dealers, who profit when the market churns each time a Fed governor smiles or frowns.  In other words, Wall Street is making money off of this.  But the "guidance" isn't making an overall contribution to the well-being of society.

The Fed used to be pretty discrete.  Back in the 1950's and 60's, we had robust growth, low unemployment, and ebullient optimism, all without a stream of prattle from the Fed.  There's no obvious need for the Fed to yack, yack, yack all the time.  We could do without all the false expectations created by inaccurate Fed prognostications.  Would the Fed just please shut up?

Wednesday, September 14, 2016

Does the Internet Hamper Economic Growth?

The sharing economy--Uber, Airbnb, Zipcar, bike sharing and so on--makes more efficient use of resources.  Cars that might sit around are instead used more often.  Living space that might remain empty provides accommodation.  People don't have to buy a bike any more.  They can just rent the short term use of one. 

But does all this sharing hinder economic growth?  If people use cars, bikes, homes and other things more efficiently, fewer of these items need to be produced and sold.  Manufacturers may see decreased demand.  Jobs may be lost.  Growth could slacken.  The country's tax base might stagnate, just at a time when increased government funding is sought for everything from national defense and security to infrastructure repair and expansion to Social Security and Medicare.

Gig-based employment could have similar implications.  People who work short term gigs tend to earn less than full-time employees, reducing their ability to contribute to the consumer demand that comprises 70% of America's economy.  Employers have little or no incentive to improve the abilities and productivity of gig employees, so improvements in worker productivity could be hampered.  Without productivity growth, we won't have long term gains in employee compensation or national wealth.  Gig employees may be unable to save significantly for retirement, which would place more of the burden of their golden years on public funding.  These increased tax burdens could further impair growth.  As gig-based employment grows, so would these problems. 

The Internet greatly enhances globalization.  Customer support centers in Third World countries can inexpensively serve the needs of corporations in the industrialized world.  All manner of services, from manufacturing to radiology to routine legal work, can be cheaply coordinated and/or delivered from distant, low wage places over the Internet.  Workers in America who provided those services are out of luck.

The Internet provides the communications process that allows the sharing economy, gig-based employment, and globalization of services, to operate.  But greater micro-economic efficiencies such as these may have negative macro-economic implications.  One of the great mysteries of modern economics is why the economy is growing so slowly.  Increased efficiency creates losers as well as winners.  Those losses will have aggregate impact eventually, when they grow large enough. 

The Internet is an astonishingly effective conveyor of information.  But, as regards the sharing economy, gig-based employment, and globalization, owners of assets, holders of capital, and employers benefit more than employees--except employees willing to work for lower wages  The Internet may have enhanced total global economic growth.  But the distribution of that increased growth may well favor low wage countries, leaving industrialized nations with dimmer futures.   

It's impossible to stop the march of technological advance.  But the Internet is almost too effective in cutting costs and creating efficiencies.  When artificial intelligence and robots have driven millions of people out of the labor force, leaving them penniless, economic stagnation may be more likely than prosperity.  We had damn well better come up with a way to maintain social equilibrium in such a circumstance, or the political insurgencies of today will seem like gentle summer breezes.

Monday, August 22, 2016

Is the Fed Undermining Portfolio Diversification?

A basic investment strategy for investors is to diversify.  Typically, investors put some of their money into stocks, and most of the rest into bonds.  Small portions may go into gold or other commodities, or be held as cash.  Stocks and bonds historically have tended to offset each other.  When stocks rose, bonds would fall, and vice versa.  A diversified portfolio would be hedged, ameliorating the ups and downs of the market and making investing less stressful. 

Today, though, central bank accommodation--in the form of ultra low interest rates, negative interest rates and quantitative easing--has distorted this historical relationship.  As the Fed and other central banks print more and more money, both stocks and bonds rise in value.  They no longer offset, and diversified portfolios are becoming unhedged.  If and when the era of easy money ends, both stocks and bonds could fall, and perhaps precipitously.   

By unhedging diversified portfolios, the central banks are heightening investor risks.  Many wealthy and institutional investors, apparently sensing the danger, have been increasing their levels of cash.  But ordinary mom and pop 401(k) investors may not be able to shift gears so easily.  They may face increasing exposure, and perhaps not know it.  If they sustain losses when they expected to be hedged, they could lose confidence in the markets.  The result could be rapid and ugly.  That's what happened on Black Monday, October 19, 1987, when the stock market crashed and fell 22.61% in a single day because many institutional investors thought they'd be hedged by a financial product called portfolio insurance and found out unexpectedly that portfolio insurance didn't work. 

The central banks could reduce accommodative policies in order to raise rates and normalize the financial markets.  But that process could cause investor losses and trigger selling that leads to a market meltdown.  If, on the other hand, central banks keep printing money, they may worsen the problem.  You could shift more assets to cash (or at least refrain from committing fresh cash to the markets).  Otherwise, understand that diversification, like everything else in the financial markets, is starting to look a little hinky.

Friday, August 12, 2016

Is the Central Banking Bubble Bursting?

America's economy is stuck in first gear, China's economic growth is slowing, Europe's economy is dead in the water, and Japan's economy has been lost in a fog bank for decades.  Corporate profits have been declining on a year-to-year basis.  But stocks keep reaching new highs.  Given the backdrop of pessimistic data from the real world, one must wonder how much longer the delirious jollity of the markets can continue.

It's no secret that the frothiness of stocks stems from the service-minded attitude of the world's major central banks:  they aim to please.  Accommodation is the word of the day.  Money will be printed early and often, and served on a silver platter with a flute of champagne.  The central bankers are not about to take the champagne away, even though some Federal Reserve officials occasionally mutter something or other about raising rates.  The markets know this--the futures market seem to view rate rises as likely as pigs flying.  So the central bank bubble persists.

It's true that the central banks' tools are becoming dull.  Quantitative easing--the purchasing of bonds by central banks--is playing out.  Vast amounts of government bonds have been bought up, and now corporate bonds are being targeted.  Private sector retirement savings are being pummeled by the lack of sources of reliable long term earnings.  Pension fund deficits are like festering sores, annuity payouts are shrinking, long care insurance policies are becoming extortionately expensive, and interest payments on personal savings are going the way of the passenger pigeon.  With shrinking retirement prospects, people are saving more so that they can limit the need for dog food in their retirement diets.  As a result, both current and future consumption are constrained.  Since consumption is 70% of the U.S. economy, the Fed is seeking short gains in aggregate economic statistics by sacrificing long term financial prospects.  We've had eight years of ultra low interest rates with no end in sight, and recovery from the resulting income losses will take many years, if it ever happens.

More recently, the monetary tool that has become au courant among central bankers is the negative interest rate.  Negative rates are a counter-intuitive policy where borrowers are paid to take out loans.  They are supposed to stimulate lending by penalizing commercial banks for holding deposits.  However, despite being all the rage among central banks in Europe and Japan, they haven't worked out. It seems that people, concerned by the weirdness of negative rates, aren't borrowing but instead are saving more.   See  Negative interest rates signal that the world is not well.  People are hunkering down and building up financial reserves in case times get worse.  This, too, dampens consumption and current economic growth.

But the deleterious effects of ultra low and negative interest rates are more likely to cause further economic stagnation, not a sudden collapse of stock prices.  The reality is that central banks aren't subject to market forces the way the rest of us are.  They are, however, subject to a lot of political pressure to keep current economic statistics looking good.  They know that the political process is largely dysfunctional, and fiscal proactivity isn't on the agenda. So they keep exchanging small near term benefits for large long term costs without any immediate consequence.  The bubble won't burst simply because they are making a bad long term deal. 

Could the central banking bubble burst?  The breakup of the EU might do the trick.  A return of significant inflation would be a major risk factor.  But it's hard to predict the likelihood of either.  In the meantime, stock prices could remain manically frothy.  Central banks can't defeat market forces when the market works against them, as the Bank of England found out in 1992 when it tried to support an overvalued pound against market forces pushing the pound down.  But right now, the financial markets want the central banks to be accommodative.  They applaud the idea.  Since the central banks face no reality checks, they can keep printing money indefinitely.

So, should you suspend belief and keep buying stocks?  Certainly, seeing stocks go ever higher just about every day is encouragement to drink the Kool-Aid and invest more.  But staying well-diversified, with a healthy dollop of cash, may be the sanest choice in an insane world.

Friday, July 22, 2016

Did Ted Cruz Make Trump More Liberal?

Ted Cruz's up your's speech at the Republican National Convention may end up pushing Trump toward the political left.  By advocating "vote your conscience," Cruz encouraged far right members of the Republican Party to abandon Trump.  To make up for this loss, Trump may shift to the left to win over voters in the political middle.  Indeed, he could be doing so already, with a favorable nod toward the gay community in his acceptance speech last night, and with his daughter Ivanka's promise that he would address the gender gap in pay.

If Trump wins in November, a possibility even though polls indicate that it's Hillary Clinton's election to lose, then as President he may prove to be more liberal than he now seems.  That's because Cruz and other far right members of Congress will probably obstinately refuse to compromise with him, just as Cruz wouldn't compromise at the convention.  Trump is a wheeler and dealer.  If he can't do deals with the far right, he might do deals with moderate Democrats.  This wouldn't be hard, since Trump has been a moderate Democrat at times in his life. 

It's debatable whether Ted Cruz helped or hurt himself by digitally saluting Trump at the convention.  But he may have given Trump more latitude to go more liberal.  And if Trump wins, Cruz may have empowered moderate Democrats. 

Tuesday, July 12, 2016

How the Libertarian Party Could Win the White House

Polls persistently show that many, if not most voters, reach for one of those little white airline bags every time they think of the two leading Presidential candidates.  Never before have so many voters been so nauseated by so few candidates.

But if you look away from the mainstream press for a moment, you'd find out there are two other parties fielding Presidential candidates.  The Libertarian Party has nominated Gary Johnson, former governor of New Mexico, for President, and William Weld, former governor of Massachusetts, for Vice President.  The Green Party has nominated Jill Stein for President and Cheri Honkala for Vice President.  The Green Party has only a tiny presence in national politics.  But the Libertarian Party, seemingly a minor player, might actually have a shot at the White House.  Here's how.

To be elected President, a candidate in the first instance has to win a majority of the electoral votes (i.e., 270 of the 538 total electoral votes).  The Twelfth Amendment to the Constitution provides that if no candidate has a majority, the House of Representatives then selects the President from the top three candidates. 

If the two leading candidates are running neck-and-neck in electoral votes, a third party could deny each of the two top candidates a majority by winning one, two or a few states (and thereby denying the electoral votes from those few states to either of the leading contenders).  Even though the third party might not have anywhere near a majority, it could force the election into the House.

The contest between Hillary Clinton and Donald Trump is likely to be close; neither seems to be able to open up much of a lead over the other.  More importantly, Clinton's unremitting tawdriness and Trump's unerring aim at his own feet ensure that many voters will yearn for an alternative.  Johnson and Weld are experienced politicians will real electoral credentials, having respectively served as governors of their home states.  They are polling between 5% and 10% nationally.  But, in some conservative states, they might be able to become real contenders.  The Libertarian agenda of small government and low taxes might resonate strongly in states like Wyoming, Utah, Idaho, Kansas, Oklahoma and Texas, all of which gave primary victories to Ted Cruz over Donald Trump.  If Johnson and Weld won one or more of these states, and the electoral breakdown between Clinton and Trump is close, it's possible no candidate would have a majority of the electoral votes and the election would go to the House.

In the Republican-controlled House, Clinton would be toast.  Period.  Trump would have supporters.  But he'd have detractors, too.  The Libertarian platform would appeal to many Tea Party and other right-wing members of Congress.  Both Johnson and Weld were Republicans when they served as governors, and perhaps many members of the House would prefer them to the unpredictable Trump, who in the past was sometimes Democratic and sometimes Independent.  Johnson and Weld would have to demonstrate flexibility and open-mindedness.  The zealotry of many past Libertarian candidates has ensured the party would be marginalized.  But, having had much real-life experience in politics, Johnson and Weld might talk turkey well enough to win over a majority of the House.  And Speaker Paul Ryan's extremely tentative, to say the least, support of Trump would probably not present much of a barrier to a Libertarian victory if most of his Republican colleagues wanted to vote that way.

Of course, many mainstream Republicans in the House might well balk at supporting the Libertarian candidates.  But when they consider the alternative--Mr. Maniacal Mouth--they'd probably give Johnson and Weld a pretty close look.  All this may sound like an overly elaborate speculation on a very long shot.  But, given how weird this election has already been, it just might be the way things turn out.

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  The same group will have, on average, experienced 5 or 6 periods of unemployment by the age of 48. See  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.