Wednesday, December 16, 2015

Fed Raises Rates, Civilization Ends

Today, the Federal Reserve raised short term interest rates a quarter point.  Stock up on food, water, blankets, toilet paper and ammo.  Barricade your doors and windows.  Civilization is ending.  Massive hordes wielding pitchforks will rage through the streets.  Entropy will increase.  Chaos will reign.



in all likelihood, not much will happen in the near future.  A quarter point really isn't a lot.  If the typically usurious credit card interest rate were increased a quarter point, you'd barely notice it, unless you're so deep in debt that bankruptcy is a more realistic option than minimum monthly payments.  If a quarter point increase on your mortgage rate knocks you out as a buyer of your dream home, you were probably about to pay too much for that house.  Money market funds and bank money market accounts have been paying almost nothing in interest.  If they now start paying a quarter point, you won't see a stampede from stocks to money markets.  The only thing that will happen is that savers will start thinking they can add one four-dollar cup of coffee per year to their budgets.

Will the rate increase exacerbate the fallout in the junk bond market?  Maybe by a bit.  Mathematically speaking, higher interest rates imply lower bond prices.  But, again, a quarter point won't greatly change bond prices.  The junk bond losses are, to a large degree, a result of the oversupply in the energy markets (oil and natural gas).  That's not the result of Fed policy.  It's because the energy markets were overstimulated by rapid growth in some parts of the world (especially China) which has now abated. 

The key question is how fast the Fed will raise rates over the one, two and three years.  Rapid increases will, indeed, significantly change the relative values of assets.  But Fed Chair Janet Yellen is signaling that the Fed will be kinder and gentler with rate increases than it has been in the past. 

Could the Fed be making a mistake?  As one former vice presidential candidate would have put it, you betcha.  The Fed has made many mistakes in the past and some of them were egregious.  Stay alert for trouble--the junk bond market, the manufacturing slowdown, China's slowdown, falling commodities prices and who knows what else could signal the next economic dislocation.  But the market was expecting a quarter point increase today, and if the Fed hadn't raised rates, it would have probably created more market turmoil than raising rates causes. 

Friday, December 11, 2015

A Chill Wind For Hillary Clinton

Hillary Clinton's campaign for President may be in big trouble.  Because of Donald Trump.  We're not talking about polls concerning a hypothetical contest between her and the Donald. We're talking about the fact that Jeb Bush's support is running around 3% in the most recent polls.

Jeb Bush is the GOP's Hillary--from a Presidential family with tons of connections, well-qualified to be Chief Executive, thoughtful speaker, intelligent person.  He is also backed by shiploads and shiploads of money, far more than any other Republican candidate.  With this humongous war chest, he was supposedly going to scare off competing candidates tout de suite and waltz into the nomination.

But Jeb is getting his arse kicked a mile and quarter.  By the Donald no less, a guy who has done only limited fundraising.  Looks like b.s. (at least Trump's b.s.) talks and money walks.

Like Jeb, Hillary has a campaign war chest that was supposed to scare the gym socks off potential rivals.  It hasn't scared off Bernie Sanders, who is running a feisty campaign that gives him poll numbers a seriously underfunded candidate shouldn't have.  That should give Hillary pause.

But Trump's success over Jeb is the red flag that should be setting off huge alarm bells in Hillary's campaign headquarters.  Money is turning out to be relatively inconsequential in this campaign.  Plain talk, speaking from the heart and to the heart, and charisma are carrying the day.  As much as the Establishment media doesn't want to believe it, the truth is that Trump is quite charismatic to a lot of people.  His numbers are growing as the primaries draw near, and his lead may soon become insurmountable.

Hillary's campaign seems utterly confident they can beat Trump.  This is how she lost in 2008--overconfidence.  In actuality, much of Hillary's support is pretty flimsy, and if she faced the Donald, he might shift toward the middle and draw off many of the moderate working class voters she is counting on.  She's already lost the hearts of much of the liberal left; even if she prevails over Sanders, many of his supporters may stay home during the general election.  When it comes to charisma and plain talk, the Donald has Hillary beat by a country mile.  And all her campaign funding can't change that.

Hillary Clinton reminds us of a high school valedictorian--smart, ambitious, headed for bigger and better things.  But people generally don't like high school valedictorians.  They may respect and even admire them.  But they can't connect with them.  Any contest between Hillary and the Donald would probably be close.  But, if she means to win, Hillary needs to look beyond the bank balances and focus on convincing people they want to vote for her. 

If the prospect of a Trump Presidency or another Clinton Presidency has you down, remember that this is America, the land built on hope and dreams.  There's always hope; there's always another dream.  Forget about what dodo is in the White House.  Follow your dreams.  Tomorrow (Dec. 12) is Frank Sinatra's birthday.  Here's what Frank had to say (or sing) about hope and dreams:

Friday, December 4, 2015

Obama's Illusion

Yesterday, President Obama said that the United States is safe from attacks by ISIS.  (See

Today, we have news that the female San Bernardino shooter, Tashfeen Malik, pledged allegiance to ISIS.  (See

The President looks like a fool.  He's been snookered repeatedly by ISIS.  Apparently, until recently, he believed that the U.S. had contained ISIS in the Middle East.  He was then shaken by the Paris attacks, which he described as a "setback."  If he'd had a realistic view of ISIS, he wouldn't have seen those attacks as a setback.  They were simply part of ISIS's obvious strategy of cross-border expansion, and something that was likely to happen.  Before the Paris "setback," ISIS had already spread its tentacles into Asia and Africa.  Why would Europe and North America be immune from ISIS's metastasis?

President Obama is living an illusion.  ISIS is not contained and, as recent events graphically demonstrate, we aren't safe from its attacks.  Obama is now in the seventh year of his Presidency, and is understandably concerned with his legacy.  He seems to want to be able to claim that, while in the White House, he contained ISIS.  This apparent desire seems so strong it may have, in his mind, overwhelmed his capacity to accept the truth.  Human beings are notorious for not letting the facts interfere with their strongly held beliefs and the President seems all too human.

If Barack Obama wants a strong, positive legacy, he has to come to grips with reality.  He can't blame America's intelligence services.  He can't blame all the yes-people with whom he's surrounded himself.  He can't blame gun control laws--gun control (such as France's very strict regulations) won't stop a dedicated enemy like ISIS which couldn't give a rat's left ear about the law.  He has to blame himself.  He is the one who has failed.  His foreign policy legacy is in tatters.  He won't begin the process of recovery until he's hit bottom--and he's laying in the gutter now.  He has to face the fact that ISIS is much tougher than he is.  They've outwitted and outmaneuvered him.  They're winning. 

Obama may still have time to turn the tables.  Even though ISIS is a lot tougher than he is, he has much more power--military, diplomatic, technological, financial and moral.  If he comes to grips with reality, he might turn the tide.  This doesn't mean that hundreds of thousands of U.S. troops need to go back to the Middle East.  It doesn't mean that the NSA should be allowed to trample all over Americans' Constitutional rights.  It does mean that the President has to realize that this is war, and you don't win unless you commit to winning.  Wars aren't won by containing the enemy.  They are won by defeating the enemy, and perhaps in this case, destroying them.

Tuesday, November 17, 2015

A Generation of Terrorism

French President Francois Hollande called the recent terroist attacks in Paris an "act of war."  And so they are, provoking French aerial assaults on ISIS's facilities in Syria.  The United States and other Western nations will be ramping their mliitary efforts in Syria and Iraq against ISIS.

The young adults the military will seek to recruit for this new round of fighting were toddlers and kindergartners at the time of the 9/11/01 attacks.  An entire generation has grown up in the era of terrorism, with no end in sight to the violence. 

ISIS, and in particular its leadership, have taken a pummeling from Western air power in recent months, and suffered setbacks in the battlefields.  Most likely, the self-proclaimed caliphate in ISIS-controlled territory will eventually buckle under the assault of the multi-national force that has assembled against it, although this process will need time.

But we know from our years-long struggle with al-Qaeda that terrorist organizations have a hydra-like ability to metastasize.  Indeed, ISIS is an offshoot of al-Qaeda.  If the ISIS caliphate is destroyed, little ISIS cells sprinkled around the world will likely continue the insanity.  Western air power can't drop smart bombs on every disgruntled, radicalizing teenager.

After a generation of struggle with terrorism in Afghanistan, Iraq and elsewhere, it's clear that military measures aren't alone enough to suppress organizations like ISIS or al-Qaeda.  Even though al-Qaeda has lost its hideouts in Aghanistan, it has resurfaced in a number of other places.  Killing and capturing terrorists, and seizing their territory and assets, hasn't stopped them.

The key to destroying ISIS, al-Qaeda, and others of this ilk is to destroy their ability to recruit new members.  More than money, territory, weapons or other resources, terrorists need new recruits.  As long as they can recruit, their wars, suicide attacks and other outrages can continue indefinitely.  Cut off their recruits, and they're finished.

The coalition of nations aligned against terrorism needs to focus more, and probably much more, attention on undermining the terrorists' recruiting process.  This includes aggressive measures, such as arresting and imprisoning the preachers of violence, prosecution of those that engaged in or aiding terrorist activities, shutting down terrorist websites and social media accounts, and hacking into and destroying terrorist databases and computer systems.  Knock the bad guys off the Internet, and in today's online-dependent world, they're probably done for.

Also necessary are kinder and gentler measures that address the reasons why disaffected young people answer the call of the terrorists.  Tolerance and acceptance for immigrants and those of differing religions may be diminishing.  But more is needed, not less.  Young people who might recruited by the killers need to be brought into the mainstream of society, not marginalized or rejected.  Offer them respect and dignity, with a fair chance in the work place, and the purveyors of hate will be left behind in the dust.

Look at today's toddlers.  Look at how cute and lovable they are.  Think about what it would be like to see them, fifteen years from now, climbing in the future equivalent of a Humvee, hoping that there's no IED or ambush waiting for them down the road.  Think of them coming home with blown off limbs or PTSD.  Think of them being buried at Arlington National Cemetery.  Three volleys and Taps aren't much of a substitute for a vibrant, live young person.  If we can deprive ISIS and other terrorists of recruits, we win the war.

Saturday, October 24, 2015

Ask Not What Your Country Can Spend For You

Ask what you can spend for your country.  At least, some folks might like it if you did.  The Federal Reserve is in trouble.  The economy is meandering.  Unemployment levels have reached full employment, but labor force participation levels are low.  The Fed accentuates the negative and projects gloom about employment.  Wages stagnate, and, net of inflation, are lower than a generation ago.  The dollar is strong, which encourages imports while discouraging inflation. The Consumer Price Index is dropping, leading some to conclude that we have deflation.  This conclusion is a classic example of how statistics mislead.  Prices are higher if you take out energy costs.  If the price of everything except energy is going up, and energy is dropping a lot, do we really have deflation?  Or a misleading statistic?

But we digress. The Fed has greatly reduced its quantitative easing measures, since they didn't seem to be doing much good any more.  It's holding short term interest rates lower than a snake's belly.  But it can't do more.  The Fed is now low on ammo and can't expend what it has left; it has to hold something in reserve in case the economy belly flops.

There's no possibility of fiscal stimulus.  The federal government tied its budget into knots with the sequestration law, which requires automatic spending cuts each year through 2021.  Congress and the White House can get around the cuts by passing specific legislation providing for something other than sequestration.  But, given how the daily love fest between Congress and the White House consists of brickbats, but not bouquets, the chance for fiscal stimulus is lower than short term interest rates.

That leaves you, dear consumer.  The U.S. economy is about 70% consumption, and if consumers don't consume, the economy reaches for one of those little airline bags.  So spend, spend, spend.

Right?  Come on, right?

Or maybe not.  Consumers learned the hard way after the 2008 financial crisis that lavish spending and debt accumulation are shortcuts to financial ruin, and that saving improves the quality of your sleep.  Just because the Fed made it cheap to borrow doesn't mean borrowing is a good idea--soda is inexpensive but drinking a lot of it is a very bad idea.  If the Fed can't move short term interest rates above a complete goose egg, you have to suspect that maybe the Fed knows that the economy is a complete goose egg.  In which case, the last thing you want to do is spend freely.

We live with a contradiction:  our individual financial health requires acting in a way that is unhelpful to near term economic growth.  But those who are prudent can get through hard economic times, and it makes sense to put self and family first.  This leaves policy makers with controversial choices--negative interest rates, easing immigration restrictions to bring in educated, ambitious foreigners, and even more hotly debated measures (can you say Ex-Im Bank?).  How likely are these?

The truth is government policy is largely played out.  The economy will have to rise or fall based mostly on its own.  The next surge of growth, whenever that is, will probably come in a rush of technological innovation that may be hard to foresee.  Until then, the economy will likely meander.  If you're building up your savings and preparing for a tough slog, you'll probably be okay.  Ask not what you can spend for your country.  Ask what you can save for yourself and your family.

Monday, October 5, 2015

Everyone's a Loser in Syria

With Russia's entry into the bag of dog doo that is Syria, the chattering classes are all astir over who's up, who's down, who's winning and who's losing.  Russia is the usual nominee for winner.  But what exactly has Russia won?  It can't win the war.  Between ISIS, the Kurds and various other rebel groups, most of Syria is no longer in the hands of the Assad regime.  Russia can't afford to commit the tens of thousands of ground troops, equipment and air power that would be needed to retake and hold all this ground, and the Assad regime's army appears too depleted to mount the major offensives that would be needed.  All Russia can do is prop up an Assad rump regime in western Syria that would be under constant attack.  That would mean an indefinite commitment to a war with no end in sight and no possibility of a Russian victory.  

Russia's puppet in Syria, Bashar al-Assad, isn't a winner; he has only avoided becoming a big loser.  His diminished army can't reconquer what he's lost in Syria.  Russian air strikes will allow him to bolster his lines and tighten up his defenses.  But a few dozen Russian air craft don't begin to provide enough air power to support an offensive that could retake all of Syria.  At the same time, Assad's authority is diminished.  Now, he will have to do whatever Putin tells him to do, and like it, as well.

The Iranians, who apparently negotiated an alliance of sorts with Russia, have had their weakness revealed.  For all their bluster and unacknowledged efforts to build nuclear weapons, they don't have the strength to prop up a two-bit dictator in a small nation.  They had to call in first, their Hezbollah allies, and then Russia.  Maybe the Iranians are claiming a propaganda victory.  But they just ceded power to Vlad the Invader, and it's generally a bad idea to give power to an aggressive despot.  Has the Islamic Iranian government forgotten that one reason Shah Mohammed Reza Pahlavi allied himself so closely with the United States was because the Russians wanted to take over Iran after World War II?

The Shiite dominated government of Iraq has cozied up to Russia and allowed Russian military planes to fly over Iraqi air space in order to reach Syria. Maybe it had no choice; its Iranian handlers could have told it to cuddle up to Putin.  But, reality is you can't be an ally of America and an ally of Russia.  If the Iraqis snuggle up to Putin too much, America may not provide as much military equipment or intelligence to Iraq as it once did.  It may see less value in supporting a Shiite government in Baghdad and perhaps more value in supporting the Kurds.

The Sunni rebel groups--ranging from ISIS to the various metastasizes of al Qaeda to the tiny and shrinking handful of moderate rebels supported by the United States--are ships out of luck.  They can't win, not with Russian military assets located in and protecting western Syria.  They will be battered by Russian air power, and will have to hunker down.

Saudi Arabia and its Sunni allies have quietly been supporting various of Assad's opponents, hoping to unseat him and install a Sunni-friendly government.  That ain't happening now, not with Russian soldiers in Latakia.

The Kurds have enjoyed notable success in Syria, carving out safe havens for themselves and others who aren't Sunni or Shiite crazies.  But Russian air power will likely preclude further Kurdish gains.  The Kurds will have to concentrate on holding what they have.

Turkey has been fighting Russia for centuries.  Now, with Russian military aircraft in Syria, the Russians just flanked Turkey and can hit it from two sides.  Not that Putin has expressed any unfriendly intentions toward Turkey, but given the centuries of war between these two nations, nothing needs to be said.

Israel has been fighting various Russian allies almost since its inception.  Never, however, have Russian military assets been so closely positioned to Israel.  Had Iran been so brazen as to station military aircraft in Latakia, Israel's more advanced air force would have swarmed in the next morning before dawn and walloped the warm living yogurt out of the Iranians.  But Israel cannot attack Russian forces.  It can only watch, and hope that Syria proves to be a hopeless morass for Russia.

And last, but not least, the United States has seen its modest influence in Syria diminish even more.  By propping up Assad, Putin precludes any possibility of an American victory.  Not that it matters since, at this point, America isn't even really engaged in Syria.  The Obama administration issues a steady stream of press releases about Syria, but it's doing little more than talking. Since it's not engaged in Syria, it doesn't have the leverage to get the Russians out.  Hopes that Russia will join hands with the U.S. in attacking ISIS are delusional.  ISIS has weakened America's position in the Middle East.  Why would Putin want to weaken ISIS, which is doing the dirty work for him?  All he needs to do is prop up Assad, his puppet in Syria, while ISIS and America batter away at each other, neither able to conclusively defeat the other.

In the end, the absence of anyone strong enough to impose peace and order in Syria means that the country will be de facto partitioned.  That's what happened to Yugoslavia.  It's what's happening now in Iraq.  The flood of refugees into Europe will continue.  The truth is everyone is a loser in Syria.

Friday, September 25, 2015

Do the Financial Markets Regulate the Fed?

When the Federal Reserve decided last week to hold short term interest rates at zero, the stock market's reaction was to drop.  Even though easy money has been a shot of glucose for stocks since the 2007-08 financial crisis, the market seemed to be saying that there can be too much of a good thing.

Yesterday, Fed Chair Janet Yellen stated her view that rates should rise sometime this year.  The market reacted positively, even though rising interest rates logically should push stock prices down (since fixed rate investments that compete with stocks would offer higher yields than before).

The implication is that the market is leading the Fed.  The market wanted rates to rise, and when they didn't, the market pouted.  That may have prompted Chair Yellen to make more noise about rates rising, and then the market cooed with approval.

Why would the market want rates to rise when conventional wisdom holds that stocks should love easy money?  Maybe it's because the stock market absorbs information from a variety of inputs, both short and long term.  Easy money is positive in the short run, but can be corrosive in the long run.  Accommodative policy by the Fed and other central banks has continued for almost 8 years now, and is distorting asset values and relationships to the point where the social contract may be changing.  With interest rates so low, the ability of pension funds, insurance companies and other asset managers to provide pension and annuity income is becoming impaired.  (For more, see  When private parties can no longer provide retirement income, greater responsibility falls on the government.  Social Security and similar programs become more essential.  If these programs suffer from fiscal imbalance, taxpayers become more burdened.  We can't toss retired and disabled people into the gutter, but who besides taxpayers can cover their needs?

Another change in the social contract is that easy money favors the wealthy.  Low interest rates have pushed up the value of risk assets--stocks, real estate, commodities and so on.  The distribution of income and wealth have become more skewed in favor of those who need the money the least.  Such growing inequality makes it more difficult to attain social and political compromises and consensus.  A resentful and angry society may lack the optimism and initiative for investment and risk-taking that would foster strong economic growth.  (Note that jaded, cynical Europe is hardly a hotbed of innovation.)

The voices that are heard at the Fed tend to be those of elites--Wall Street executives, influential academics, power players like IMF Managing Director Christine Lagarde.  A lot of these voices have advocated keeping interest rates at zero.  But the accumulated knowledge of many thousands of participants in the real financial world seems to signal that continued distortion of asset values is doing more harm than good.  Maybe the market is regulating the Fed.  And maybe, at least this time, that's a good thing.

Tuesday, September 15, 2015

The Fed's International Data Dichotomy

The Federal Reserve Board is meeting to decide whether or not to raise interest rates.  The costs and benefits of its decision, whichever way it goes, will fall to a large degree along international borders.

Most of the data favoring a rate hike are domestic.  The U.S. economy is growing, moderately but steadily (especially after data revisions).  Unemployment has fallen to the level generally regarded as full employment.  Jobs growth continues, not at a blistering pace but indicative of continued expansion.  Inflation is very low, but if you strip out energy and food prices (which are volatile), the rest of the price structure is pretty close to the Fed's 2% target.

Most of the data arguing against a rate hike is from overseas.  Chinese stocks have been volatile and China's growth is slowing.  Europe's and Japan's economies are  barely growing.  Emerging nations and commodities producing nations are on the ropes, with many facing shrinking economies.  The Greek debt crisis has temporarily simmered down, but the most recent "resolution" was just another kick of the can down the road.  So we can be confident that a Greek default will loom anon, and we'll have to revisit familiar angst.  A rate increase will strengthen the dollar, which will possibly exacerbate these international problems.

Much of foreign anxiety stems from the fact that the dollar is the international medium of exchange.  The entire world uses the dollar in numerous trade and cross-border transactions.  The Fed's monetary policy unavoidably affects people in distant lands.  A rate hike may help the domestic economy by easing asset distortions and increasing certainty (and desperately desired income for savers).  It is likely to have a negative impact overseas.  No wonder the IMF and other voices reflecting foreign perspectives argue against a rate hike.

What will the Fed do?  Most likely, not even the Fed knows before its meeting.  We've been told that its decision is data dependent.  What we don't know is how it weighs and balances the data.  What data receive greater consideration?  What data are downplayed?  What thought is given to the effect of the Fed's decision on foreign relations? Central banking is distinct from diplomacy, but the Fed can't ignore foreign concerns.  A rate hike will produce smiles and frowns, mostly on different sides of the border.  After World War II, America became the pre-eminent economic power in the world, and it cannot now avoid the consequences of its dominance.

Friday, September 4, 2015

Deflategate and the Growing Legend of Tom Brady

Some people believe that, on the field, Tom Brady is the best quarterback in the NFL.  There are those who would even contend that he's the best NFL quarterback ever.  He's destined for the Pro Football Hall of Fame--that's for sure.

But now, Brady has prevailed over the NFL Commissioner in federal court.  Federal judge Richard Berman took a highly skeptical view of Commissioner Roger Goodell's four-game suspension of Brady for Deflategate, finding the Commissioner more or less handled disciplinary matters by the seat of his pants.  Concerned about deficits of fairness and due process in the Commissioner's decision, the court tossed Brady's four-game suspension.  Even though the NFL appealed the court's ruling almost immediately, its chances of prevailing on appeal aren't pretty.  Most of the time, appealing parties lose and Judge Berman doesn't appear to have given the Court of Appeals much room to find problems with his decision, assuming it's even inclined to try.  And if the NFL loses at the Court of Appeals and petitions the U.S. Supreme Court to take the case, it will likely be grasping at straws.  The Supremes have much more important stuff to deal with than football inflation levels.

Tom Brady was drafted in the next-to-last round of the 2000 draft, and barely played during his rookie year.  The next year, when starting quarterback Drew Bledsoe was sidelined due to injury, Brady stepped in and took the Patriots to the Super Bowl, where he led them to their first Super Bowl victory.  Since then, Brady has led the Patriots to five more Super Bowls, with three more victories.  All the while, he built a record of on-the-field performance and awards that's too long to reproduce here.  He married a Brazilian super model and lives a glamorous life supported by multi-million dollar wealth.  The man has become an NFL legend. 

His courtroom victory over Roger Goodell will only fuel that legend.  Twenty-five or thirty years from now, only football aficionados will remember most of today's star quarterbacks.  But Tom Brady will likely be remembered as the guy who whupped the Commissioner's arse in court.  When you consider Goodell's decision, you have to wonder what on Earth was he thinking?  What was the point of coming down so hard on Tom Brady for being "generally aware" of underinflated footballs?  Why did the NFL make such a big deal over this case?  Has anything constructive come out of the Commissioner trying to administer such a high-profile walloping?  Whatever Goodell was trying to accomplish, he's managed to do just the opposite and make the legend of Tom Brady greater than ever before.

Why The Donald Would Sign the No Third Party Pledge

Just a short while ago, Donald Trump was keeping his options open for a third party candidacy for President.  Yet, he just signed a pledge not to run as a third party candidate.  Republican establishment types seem to be patting themselves on the back for securing Trump's pledge.  But perhaps they're celebrating too soon. Let us consider why Trump would make such an abrupt turnaround.

The Donald is an experienced businessman who thinks things through.  He wouldn't tie his own hands.  That would mean he probably doesn't think the pledge actually ties his hands.  He very likely has concluded that he can get the Republican nomination, using his aggressive brand of political campaigning 2.0.  The fact that just about no Republican insiders think Trump can secure the nomination makes them vulnerable to the insurgency tactics he's been using.  The Republican establishment may now think it has Trump under control.  But the reality may be that he has figured out how to checkmate them.

Wednesday, August 26, 2015

The Market Dropped 3%, So What's For Dinner?

On Monday, Oct. 19, 1987, the U.S. stock market nose-dived, with the Dow Jones Industrial Average falling 22.61% in a single day.  That was volatility.

Recently, the market has been bouncing around, losing as much as a few percent a day, and edging into correction territory (a loss of over 10% from the latest high).  This turbulence isn't surprising, given the six year age of the longstanding bull market.  Indeed, in the summer of 2011, the market dropped around 17% on account of various investor jitters.  Then, it recovered.  Markets regularly have downturns, even bull markets.

So what does the future hold?  Nothing that anyone can reliably foretell.  The direction of the financial markets today is determined first and foremost by central bank policies.  The key players are the U.S. Federal Reserve, the European Central Bank and the Bank of China.  Predicting central bank policies is difficult in the best of times.  These days, with the data unusually uncertain, central bank policy is harder to predict than one's luck at the  roulette wheel.  This is especially so since politics appears to infiltrate central bank policy, making prediction even harder.  But one thing you can expect is they'll be cautious about doing anything that isn't accommodative.  If the Fed raises rates in 2015, it will probably do so once, and be done with rate raising for quite a long while.

The Chinese stock markets have a bubbly aura, making further volatility in Shanghai and Shenzen likely.  But China's economy is not heavily dependent on rising Chinese stock prices--and neither are Europe's economy or North America's.  Many individual savers in China are getting hosed, but the Chinese economy doesn't rely on domestic consumption. If Chinese investors lose their savings, Chinese manufacturers will still keep exporting to the rest of the world.  So the acid reflux in the Chinese stock markets may, ultimately, have only so much impact and not more.

Keep an eye on the market, but don't miss any meals over it.  If you're nervous, stay the course and don't invest more right now.  On the other hand, if you're feeling lucky, think about adding a bit to your stock holdings as the averages move down.  You know what they say about not letting a good crisis go to waste.

Is there a black swan lurking?  Maybe.  Since China has been the major source of world economic growth in recent years, any major upheaval in China could be the black swan.  What could happen there?  Well, President Xi Jinping has been aggressively consolidating power.  He may be the most powerful leader China has had since Mao Zedong.  But the market turmoil in China, and the recent slowdown in its economic growth, may be causing some to question his leadership.  The secretive nature of China's Communist Party makes it impossible to know for sure how strong Xi's grip on power may be.  While there are no overt signs of change, if Xi is forced out of power and there is a struggle for control in China, then all bets are off and you might want to do some hard thinking about how much risk you care to hold in your portfolio.

Tuesday, August 11, 2015

How The Donald Could Beat Hillary

The stolid burgermeisters who run the Republican Party shrink with horror at the thought of nominating Donald Trump as their presidential candidate.  His verbal atrocities are reaching the level where they might offend Attila the Hun, and the conventional Republican wisdom is that there is no way Trump could beat Hillary Clinton, the likely Democratic nominee.

However, the latest polls that follow Trump's bloody comments directed at Fox News moderator Megyn Kelly show that Trump's support among the electorate remains essentially unchanged.  If this persists, The Donald will be a force to be reckoned with in the Republican primaries.  Democratic strategists are probably delighted, because they, too, are likely to believe that Clinton can easily beat Trump.

However, Clinton's 2008 campaign also thought she could beat Obama, and there was a problem with that line of thinking.  How could Trump beat Clinton in 2016?  By doing pretty much what he is doing now.

Within living memory, Trump has been a political centrist, and has even expressed support for liberal positions on some issues.  He's made donations to Democratic candidates.  He even made donations to the Clinton Foundation and invited the Clintons to his 2005 wedding.  As a candidate for the Republican nomination, Trump has slid dramatically to the right, proposing a wall at the U.S.-Mexico border that Mexico would have to pay for and the defunding Planned Parenthood, and generally foaming out of the right side of his mouth.  Plain talk pays off in this election cycle (see and Trump is presumably saying what he thinks will help him win the primaries.  Plain talk is certainly paying off for Bernie Sanders.

In the general election, however, if Trump is the Republican nominee, he could easily slide leftward, shifting his views to draw enough support from the political middle to win.  It wouldn't be hard for him to adopt centrist positions, since he's been a centrist for much of his life.  There is plenty of precedent for candidates from both parties to shift toward the middle in the general election.  The advantage that Trump has over Clinton is that he appears sincere, unscripted and bold.  Clinton seems unable to emerge from her cautious, calculated, too well-burnished image.  We can't see the real Hillary; and her destruction of e-mails only compounds the sense that we'll never get to truly know her. 

Both Trump and Clinton have tarnished images.  But Trump appears to have a way to overcome the tarnishes in his image.  Clinton seems bedeviled by the tarnishes in her image, and apparently can't prevent them from dominating the news coverage of her candidacy.  If this state of play continues, The Donald just might beat Hillary if they were to meet in the general election.

Tuesday, July 28, 2015

China's Financial Isolation

China's manufacturing sector is deeply embedded in the world economy, and has made China an economic superpower.  But China's government has isolated the Chinese financial system, and that turns out to be a good thing for the rest of the world.

China's stock market has fallen about 30% from its recent high in June 2015.  The impact on investors of this dizzying drop has been acutely painful, especially for recent entrants.  Many of those purchased on margin, and have taken crushing losses.  The Chinese government has announced various measures to pump more money into the stock market and stabilize prices.  The verdict on this blatant governmental effort to manipulate prices has yet to come in. 

However, the rest of the world hasn't felt much impact from the gyration's of China's stock market.  While foreign investors in Chinese stocks have taken losses, it's not that easy for foreigners to invest in Chinese securities.  Similarly, it's difficult for foreign banks to do business in China.  They wouldn't have that much at stake, since the Chinese government limits the scope of their activities.  Although foreign losses in China aren't trivial, they also aren't enough to destabilize the international financial system.

The Chinese government deliberately limited foreign access to the Chinese financial system, fearing the volatility seen in the 1997 Asian financial crisis, when Western capital exited, stage right, as things got stinky.  This rapid outflow of capital only made things worse for the developing Asian nations.  The last thing the Chinese government wanted to do was indenture itself to Western capital.

Of course, what the Chinese government did on its own was pretty silly.  It tried to use monetary and regulatory policy to stimulate the economy by pumping up stock prices.  This is unpleasantly reminiscent of U.S. government policy in the early 2000's to stimulate the economy by pumping up real estate prices.  The Chinese have greatly modernized their nation in the last 40 years by adopting ideas from the West, but imitation can be taken too far. 

Financial websites are filled with speculation about the supposedly dire consequences to everything in the entire world from the drop in Chinese stocks.  Not to be a cynic, but bad news is news and good news is trash left at the copy desk.  The most likely impact from the turbulence in the Chinese financial markets is an economic slowdown within China, and a possible economic slowdown in the rest of the world.  But the Chinese financial system won't collapse.  That's because the Chinese government, which owns and/or controls China's banks, can simply print money to recapitalize them.  Since the Chinese government controls trillions of dollars of foreign exchange, it can make sure that foreign banks having exposure to Chinese financial institutions aren't left in the lurch.  The Chinese can't let their stock market gyrations take down the rest of the world's financial system, or they won't have any export markets.  And if the Chinese economy slows, they'll seek to export their way back to prosperity.

Of course, stay vigilant.  The economic slowdown in China is one of the major factors pushing down commodities prices.  It's possible that secondary and tertiary effects of the drop in commodities (and the currencies of commodities producing nations) could have unanticipated impact on Western financial institutions.  (Don't underestimate the potential for major banks to have unexpected exposures from derivatives positions and overly optimistic lending policies.)  But, thus far, China's financial isolation has largely protected the rest of the world from China's financial mistakes.

Monday, July 13, 2015

Is Greece No Longer a Risk?

In the last few days, the upstart government of Greece formed by Syriza Party leader Alexis Tsipras has completely reversed itself and signed up for a bailout from the EU that requires far more austerity than Greek voters rejected in a referendum just a week ago.  By all appearances, the EU rammed the ultra austere package down the throat of the Greek left-wing party, flattening Syriza's contentions like a tractor trailer rolling over a marshmallow.  We've had months of hand-wringing and teeth-gnashing over the dangers of a Grexit, and financial markets have shuddered every time Greece appeared to be heading out of the EU.  The EU's peremptory demands at the last minute might seem to have been a high-risk roll of the dice that somehow went in the EU's favor.  Or the EU knew that Greece had no leverage and made the Greeks take everything the EU wanted.

Considering how cautious the EU has been in the past, giving Greece two earlier bailouts totaling some $250 billion, it isn't probable the EU was bluffing in this round of talks.  That would likely mean it believes it has built a shield wall around its banking system that could withstand the consequences of a Grexit.  Stated otherwise, Grexit may no longer be thought to be a major risk to the European financial system. 

Even though the EU and Greece announced a "deal" today for a bailout, it's not at all a firm agreement, but rather a process for pursuing the possibility of more European assistance to Greece.  First, Greece has to adopt a number of austerity measures dictated by the EU.  Next, the parliaments of individual EU member nations have to approve further bailout talks.  Then, Greece will get interim financing that will keep it barely afloat while it and the EU yak for more months, maybe many more, to try to reach the final terms of a third bailout. 

There are many contingencies in this process, and it's quite possible the process won't lead to another bailout.  In that case, Grexit will follow.  But will it matter?  The EU seems to believe that Grexit wouldn't be a disaster, or it wouldn't have taken such a seemingly high risk negotiating position.  If it's right, then Greece will be mired for a long time in austerity and hard times one way or another.  And if the EU is wrong, then watch out, because a European financial crisis could lead to many, many bad consequences for a lot of people.

Monday, July 6, 2015

Ode To Greece's No Vote

Greek voters said "no" to the EU's latest bailout proposal, defiantly rebuffing another round of austerity. Democracy spoke, but the fat lady has yet to sing.  With a nod to Gilbert and Sullivan, this is how the song might go:

Here's a how-de-do.
If I vote for you,
When the time comes to make payments,
You will tell them we have ailments,
Default will ensue.
Here's a how-de-do,
Here's a how-de-do.

Here's a pretty mess.
In a month or less,
Greece will add some extra drama
By reviving the old drachma.
Banks will be distressted.
Here's a pretty mess,
Here's a pretty mess.

Greece's state of things
Is to life it barely clings.
Paying its debts with devotion
Doesn't seem to suit its notion.
More depression it brings.
Here's a state of things,
Here's a state of things.

No one knows what will be the result of this crisis.  Just remember that, no matter what, a good gyros makes for a fine meal.

Saturday, June 27, 2015

Greece, the EU and the Power of Fiat Currency

Greece is evidently going to hit the financial skids next week.  The EU appears to have stopped bargaining (as have the Greeks, who now want to put the issue of austerity in exchange for another EU bailout to their voters).  Without bargaining, there won't be a deal.

How did things end up this way?  One perspective is that, by entering the Euro Zone, Greece gave up a lot of power and put itself under the control of the EU.  When a country issues its own currency (i.e., fiat currency), it has considerable control over its currency's value in relation to other currencies.  If the country slides downhill economically speaking, it can devalue its currency and export its way out of trouble.  The Japanese have done this for decades, and the Chinese and other developing nations are endeavoring to emulate the Japanese. 

But what if the country, instead of issuing its own currency, uses another medium of exchange?  Historically, gold and silver, and sometimes copper, served such a role.  But a country that uses an independent medium of exchange can't devalue its way out of a recession.  It has to find another way; and sometimes it can't.  That's why the industrialized West moved off the gold standard in the 20th Century.  It prevented them from using central bank policies to recover from economic downturns.

Fiat currencies have a very bad image among many in the political right.  Gold standard conservatives fear that governments will inflate the wealth of citizens away for reasons of political expediency.  They rightly point to the morass of post-World War I Germany, when the Weimar Republic did that, resulting in widespread malaise and paving the way for fascism. 

But gold standard adherents forget a basic principle of economics:  goods become widespread in the market because people demand them.  Fiat currency is simply another good, and people demand a lot of it.  It serves as a medium of exchange, and no major economy can exist without a copious supply of the medium of exchange.  Gold was extremely scarce in Colonial America, and deer skins (i.e., buck skins, from whence came the term "buck"), tobacco and other goods served as an alternative to gold.  Various commercial promises to pay, such as drafts, promissory notes, banker's notes, and the like, also came to be used in lieu of gold.  Fiat currency was government's way of simplifying the problem of lack of gold and silver that could be used as media of exchange.

Fiat currency also conferred power. When the American Revolution began, the Continental Congress issued paper money in order to finance the rebellion.   This paper was subject to inflation, and considerable controversy eventually surrounded its use.  Nevertheless, the Continental Congress' ability to issue fiat currency helped to sustain the Revolution.

The U.S. government in the 19th Century outlawed the issuance of bank notes and other private currency and substituted the greenback in their stead.  Although the U.S. government clung to the gold standard, it devalued the dollar against gold once the Great Depression began, and took the dollar off the gold standard during the economic difficulties of the early 1970's.  In other words, gold wasn't really the standard.  The dollar was worth what the government said it was worth, not what the market price of gold happened to be.

The power of fiat currency became vividly clear during the Great Depression and World War II.  The U.S. government began to borrow in large amounts (i.e., engage in deficit spending) in order to alleviate the Depression.  Then, it borrowed enormous amounts to finance the war and defeat fascism.  After World War II, the U.S. government flooded the free world with dollars, so that there would be a currency to replace the British pound as the world's reserve currency.  The U.S. government derives enormous power from the fact that the dollar is the world's reserve currency.  People in other countries have to pay attention to America, because America's currency keeps the world's economy going.  Even in the Communist bloc, the dollar mattered.  As Communist economies flagged, the dollar became the underground, but de facto real, currency in many Communist nations.  Communism's legitimacy was in part undermined by the strength of America's fiat currency.

Greece is in a real fix, because its citizens don't want austerity, but they want to remain part of the EU.  Reality is that they are damned if they do and damned if they don't.  Staying in the EU will require agreement to the EU's demands for more austerity, which will probably worsen Greece's depression.  Leaving the EU will also likely mean that the Greek depression will worsen.  Who's at fault for this mess is a complicated question, but the answer, in short, is like Agatha Christy's novel, Murder on the Orient Express.  Everyone involved in and with the EU is responsible.  And there's no easy way out of the mess, for anyone.

But a larger point is that fiat currencies aren't good or evil.  They are a tool, one that can be used productively or counter-productively.  We need to watch what the Fed is doing--closely.  But let us recognize that much of America's strength comes from its fiat currency. 

Friday, June 19, 2015

An Epidemic of Price Fixing in the Financial Markets

Nothing is more antithetical to the principles of free enterprise than price fixing.  Rigged prices undermine the efficient functioning of markets and defeat their ability to maximize economic welfare.  Sadly, we've had an epidemic of price fixing in the financial markets, frequently involving the largest and most important banks.

The London Interbank Offered Rate has been the subject of governmental investigations in Europe and the U.S. for alleged years-long collusion. Billions of dollars of fines, penalties and other payments have been assessed on various big banks, and the investigation of other major banks continues.  Trillions of dollars of loans and contracts were priced based on Libor, and the potential impact of this price fixing is massive.

Foreign exchange rates have been investigated for rigged prices, and billions of dollars of fines, penalties, etc. have been paid in government and private civil lawsuits.  Again, some of the largest banks are implicated.

Now, word comes that the market for interest rate swaps has been under investigation for price fixing via the alleged collusive manipulation of the ISDAfix, a benchmark swap rate that is used in the pricing of a variety of financial products.  The interest rate swaps market, although obscure to the general public, involves hundreds of trillions of dollars of financial products (in notional value) sold to corporations and other commercial customers to offset interest rate risk.  Big banks are reportedly involved this collusion and the fines, penalties, etc. could total perhaps billions.

There are also reports of investigations of price manipulation by big banks in the metals markets.  These might involve restricting supply and other maneuvers to rig prices.  If wrongdoing is uncovered, more large fines, penalties, etc, can be expected.

Many of the banks involved in these matters are likely to be too big to fail.  In other words, while conspiring against the public in very large and important markets, these banks enjoyed the explicit and/or implicit backing of the taxpayers.  This backing helped them attain Brobdingnagian size, which in turn probably facilitated their ability to rig markets. 

The financial markets are the central venue of the capitalist system, being the place where holders of capital and borrowers of capital meet to determine the allocation of society's financial resources.  The largest banks are at the center of the financial markets, and their conduct ripples through the financial markets and the entire free enterprise system.  That such crucially important players are so regularly conspiring against the public and the public interest presents a galling spectacle that damages the credibility of the capitalist system.  Are markets truly socially beneficial or are they simply a means by which the rich and powerful fleece others? 

The world's largest banks have the legal and social responsibility to refrain from such reprehensible conduct.  However, their sad record of massive, multi-market price fixing seems to tell us that their chances of upholding these responsibilities aren't very high.  Their collusive activities often arise in markets that have a bi-level structure:  an inner inter-dealer market where the big banks and other financial firms trade among themselves, and an outer market where the dealers trade with the public at usually marked up prices.  The inside inter-dealer market is a perfect venue for price-fixing, as the dealers have to talk and trade with each other every business day.  As Adam Smith put it in The Wealth of Nations, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices."

Thus, the challenge falls on regulators and law enforcement authorities to be vigilant and firm.  The sheer magnitude of the wrongdoing, as demonstrated by the billions that have been paid out to date, is astonishing.  Those who may seem paranoid about the financial markets have it right--way too often, the markets are rigged.

Wednesday, June 3, 2015

How To Beat ISIS

It's clear that conventional warfare won't beat ISIS.  The Iraqi Army is a joke, and not a very funny one.  Whatever it does, it doesn't fight.  The Shiite militias in Iraq can't be expected to succeed in the mostly Sunni areas of Iraq now controlled by ISIS,  because they present too much risk of sectarian conflict.  The U.S. isn't going to send in ground troops to fight for the Baghdad regime (nor should it).  The Kurds, like the Shiites, can't effectively take and hold Sunni majority areas.  So how to beat ISIS?

Stop fighting World War II.  There isn't a conventional force available that can realistically be expected to beat ISIS, and probably won't be one for the foreseeable future.  Instead, hoist the Islamic insurgents on their own petard.  Sponsor insurgency against ISIS.

The problem ISIS has is that it is trying to establish a caliphate--an actual country representing the promised land of ISIS's ideology.  ISIS doesn't merely conquer.  It endeavors to establish governments, social order and a functioning economy.  If it succeeds at nation building, its legitimacy will be heightened. 

The United States, although the most powerful nation in the world, is in the uncomfortable position of being weaker in Iraq and Syria than ISIS.  Time to take a page from insurgents going back to Ho Chi Minh and Mao Tse-Tung.  When you're weak, go asymmetric.  America doesn't have armored columns to roll into ISIS-land.  The armor was surrendered by the Iraqi Army to ISIS.  Giving the Iraqis more conventional weapons may turn out to be provisioning ISIS even more.  Remember that to this day, Iran flies American F-14 and F-4 fighter-bombers. 

Instead, America should foment rebellion against ISIS.  This would be rebellion by the Sunni population in the areas where ISIS governs.  ISIS imposes a very harsh, medieval form of Islam, complete with diverse and sundry outrages such as televised beheadings, burnings, shootings, and so on.  As time passes, more and more of the population under ISIS's heel will likely harbor desires to turn their Kalashnikovs on their draconian overlords. Organized nations provide easy targets for insurgencies, since governments have to operate openly.  Their facilities, personnel and infrastructure can all be attacked.  ISIS would expend substantial resources trying to defend itself internally, leaving fewer resources for further territorial aggresion.  Predictably, ISIS would respond to insurrection harshly, and that in turn would harden hearts and minds among the oppressed.  The rebellion would continue apace.

Of course, American-supplied weapons for such an insurgency could some day be turned against America.  That was a problem in Afghanistan, when the CIA helped to arm and train Afghan rebels fighting the Soviet occupation.  But would we be better off with a Soviet/Russian controlled Afghanistan today?  What would a guy like Vlad the Invader (you know, that Putin fellow) do if he had Afghanistan as a launching pad for further territorial aggression?

We have no effective conventional options in Iraq.  Let's go unconventional.  Let's go asymmetric.

Sunday, May 24, 2015

A Winning Strategy for the 2016 Presidential Election

Be unscripted.  That's the way to win the Presidential election in 2016.  The American people are looking for an authentic, sincere, unscripted candidate they can, for the most part, agree with.  Someone who speaks from the heart, and empathizes and sympathizes with them.  Someone they can sit down and have a beer with.  Not that they need to agree with everything the candidate advocates.  You can disagree with your friends and still like them.  But you can't be friends with a phony.

Unfortunately, scripting is what modern politics is all about.  Data-driven, Internet-interfaced, bet-hedged down to the last precinct, today's politics is a game of angles, maneuver and percentages.  There is a lot of well-deserved publicity about money in politics. But the money has to be spent wisely.  As Mitt Romney demonstrated in 2012, simply having a lot of money doesn't win the election.  It's important to appear genuine.  Mitt couldn't pull that off when it came to hunting or being a right wing maniac (a prerequsite for bringing the far right to the polls).  He is basically a moderate who tried to pose as a conservative and came across as implausible.  That cost him the election.

The political cognoscenti understand the importance of appearances.  Armies of political scriptwriters are furiously working on scripts for how to appear unscripted.  Candidates are making appearances in very small towns in Iowa with real people, as in folks who might drive nine-year old cars because they can't afford anything better.  Candidates appear in shirtsleeves and eat ethnic food, preferably the kind that's not healthy so that you don't appear preachy about diet. 

But the electorate isn't fooled.  Hillary Clinton seems to have used her financial war chest to scare off serious primary challengers.  But she's so heavily scripted she's having trouble generating enthusiasm outside her longtime coterie of loyalists. Jeb Bush was against the invasion of Iraq, then he was for it, then, last we heard, he was against it.  At this rate, he won't have a chance even with the ardent support of the Republican establishment.  There are genuine, sincere wackos on the far left and far right.  But the general election won't be won by a mouth-foamer.  It will be won by a charismatic, empathetic, reasonable candidate who captures the public's imagination.  And that candidate will . . .  uh . . . perhaps . . . um . . . arrive with Godot.

Wednesday, May 20, 2015

Planning For Your Obsolescence

The ongoing debate over trade policy highlights a major career risk:  the possibility that you could become obsolescent because of cheaper labor elsewhere and/or automation.  For example, in the auto industry, many car parts and some cars are made in other countries and shipped to America because labor and other costs are cheaper elsewhere.  In America's auto assembly plants, robots have replaced large numbers of people because robots are more reliable and cheaper.  This trend will continue as many other tasks become mechanized and/or cost-effective in lower wage nations.  Computer programming, radiology, legal research and legal document review have joined data entry and call center jobs as routinized work that can be done by smart people living in many countries.  What can you do about your potential obsolescence?

Keep up your skills.  Maintain and upgrade your professional skills.  People capable of cutting edge work will often have an advantage over foreign competition and robots.

Be flexible.  Keep an open mind about working in new and different jobs.  Many people have succeeded in fields they didn't plan on entering.  But they were open minded about learning new things and taking on new challenges.  The economy will keep changing, and success can follow if you change with it.  If you're unemployed, be open to taking temporary and part-time work in order to prevent your personal finances from eroding faster than necessary.

Computers and computer science.  Much of the reason for personal obsolescence is computerization.  Computers and related technologies (most importantly, the Internet) make it possible for workers overseas and robots to compete against American workers.  Don't get angry about this because computerization will continue--and most likely at an accelerating pace.  If you can't beat them, join them.  Acquire and maintain computer skills.  Go into a computer-related field.  Become a programmer, technician, data management engineer or something else computer-related that fits your skills.  Computers won't become obsolete, and people who can work with them have a better chance of staying employable.

Build your benefits.  Work as long as possible to build Social Security credits.  If you have the potential to earn a pension, stay in that job long enough to qualify.  Having a stream of payments that doesn't depend on your employability is a major victory over obsolescence.

Save.  Here's an ugly truth:  just as the wages and salaries of the middle class have fallen due to globalization and other reasons, the returns on capital have improved.  People who hold capital are becoming comparatively better off, while people who work are on average becoming comparatively worse off.  Save. Acquire capital and improve your chances for a comfortable life.  Then save some more.  Whatever your views on social issues like the distribution of income and wealth, you are individually better off with a pool of savings to protect you from the riptides of a free enterprise economy.

Sunday, May 17, 2015

Obama's Irrelevance

Barack Obama is becoming irrelevant.  With a Republican-controlled Congress, he cannot implement much of his agenda.  When he tries, he has to ally himself with the Republicans, as he recently did on trade policy.  The result was to aggravate the Democrats in Congress, who used the moment to extract concessions of their own.  Now, the Republicans don't like Obama, because he's a Democrat.  The Democrats don't like Obama, because he's not really a Democrat.  And Obama finds himself without any real friends in Washington.  Not that anyone has real friends in Washington, except maybe their dogs.  

ISIS does its best to give the President opportunities to shine.  With every atrocity, the extremists provide another excuse to drop a smart bomb or authorize a Special Ops raid on the hideaway of some senior nasty guy.  But in the war against terrorism, there is no Omaha Beach, no Bastogne, no bridge at Remagen, no unconditional surrender.  And there won't be much opportunity for a President to build a lasting legacy. 

The President would like very much to pivot toward Asia.  And smaller Asian nations, watching China literally construct territory in the South China Sea, would like America to swivel their way.  But the increasing chaos of the Middle East keeps sucking the President into its vortex.  He dreams of detente with Iran, seemingly unaware that making nice nice with the ayatollahs will probably increase the desire of Saudi and Gulf State Sunnis to support Sunni insurgents in Iraq and Syria (possibly including ISIS) in order to counterbalance growing Iranian power.  A gain in stability could be met with an increase in instability.

But even as Obama recedes into the background, the Republicans can take no comfort.  They will achieve little in Washington without control of the White House.  And they're bogged down by a mosh pit full of Presidential hopefuls, none of whom have captivated the electorate.  Perhaps they, too, are fading into irrelevance.

Thursday, May 7, 2015

The Zen of Investing

How do you allocate your investment funds in times like these?  Stocks bound upwards for a couple of days when statistical data indicates the economy is slowing or a Fed governor smiles.  Then, the market nose dives crazily the next couple of days when oil prices rise or unemployment falls or another Fed governor frowns.  Bonds slump and then surge, or surge and then slump when inflation expectations rise or fall.  One constant in the financial markets is volatility.  Another is unpredictability.  And a third is no net gains--as in, for all the hysteria, stocks have hardly done squat this year.

The financial media is full of conflicting predictions--the market will boom, the market will crash--and conflicting advice--buy this, sell that, short the world and stock up on survivalist gear.  To paraphrase former Fed Chairman Ben Bernanke, things are unusually uncertain.

At times like this, the best option may be to step back from the chaos and cleanse your mind of desire.  At least, of desire for short term gains and avoidance of losses.  It's impossible to make money all the time, or to avoid all loss.  With entropy seemingly on the increase, any effort to make every day a good market day will have you believing six impossible things before breakfast and doing battle with windmills.

There's nothing wrong with holding cash, maybe even a lot of it.  Cash is beautiful.  A goodly amount in a federally insured bank account or U.S. Treasury debt promotes equanimity and sound sleep.  You will smile more.  There may be some who would argue that a fully invested, well-diversified, periodically rebalanced portfolio will provide better returns than a partially invested portfolio with a lot of cash.  This may be true in theory, but an awful lot of investors don't have the nerve to stay the course with a fully invested portfolio through the periodic mania of the markets.  They sell and freeze up, never again to invest, and potentially lose a great deal of future gains.  All the nice theory in the world doesn't amount to diddly if you're too stressed to implement the theory.  To maximize returns in real life, you have to be calm and unemotional.  And if doing that takes having bundle of greenbacks under the mattress, then so be it.  Don't feel the need to allocate every last dollar to something or other right away.  Hold off on betting your last buck until you feel comfortable.  Be zen, and increase your chances of becoming rich.

Tuesday, April 14, 2015

Is the Federal Reserve Wrecking Retirement?

We're now in the 7th year of Federal Reserve induced ultra low interest rates.  The Fed has kept short term rates at zero (actually negative, once you take inflation into account) through monetary policy.  Long term rates fell as well, especially after the Fed devoted years to quantitative easing (i.e., purchasing bonds in the open market).  Those people old-fashioned enough to actually save money have been bedeviled by the near-absence of interest income.  While some have been desperate enough to gamble with risky investments like junk bonds in order to generate more income, many and perhaps most have simply tightened their belts and spent less.  After all, if you're not getting any interest income, the last thing you want to do is spend down your principal.  That's like eating the seed corn--there will be no more harvests once the seed corn is gone.

Insidiously, the years-long pandemic of low long term interest rates has undermined retirements.  Pension funds, insurance companies and other persons and entities trying to provide for America's retirees have historically depended on long term bonds to provide a stable source of predictable income.  Pensions funds, insurance companies offering annuities, and other providers of retirement income tend to have relatively predictable obligations (i.e., the payouts they must make to current and future retirees), and look for predictable sources of funding to ensure that they can meet their obligations.  U.S. Treasury securities, agency bonds and high quality corporates were the bread and butter of retirement funding.  But these same stable long term investments have since the 2008 financial crisis been paying lower and lower interest rates. It's getting harder and harder to finance defined benefits.  While pension funds, insurance companies, municipalities and the like have sometimes turned to stocks and alternative investments, the volatility of these alternatives makes them a poor substitute for the plain vanilla fixed-rate, meat-and-potatoes high quality bond.

Of course, pension providers could contribute more funding to pension plans to make up for the shortfall in interest income.  But how many corporations, states and municipalities do you see leading the charge to put extra profits or taxpayer dollars into pension plans?  Many seem to be looking for spots on the increasing crowded sides of the road to dump current and future pensioners.

Corporations have curtailed and terminated defined benefit pension plans.  States and municipalities are in the process of doing the same.  Multi-employer pension plans are going belly up like fish in a toxic waste spill.  Soon, almost all of America's workers will be left with largely self-funded defined-contribution retirement plans, like the 401(k), or with self-funded retirements using IRAs.  Experience teaches that self-funded retirements are usually not as stable or comfortable as retirements funded with defined benefit pensions.  And that's just for the 40% of Americans who have any retirement savings at all.  As for the 60% who have none (as in zero, zilch, nada), the opulence of life on Social Security beckons. 

To be sure, Fed policy isn't the only reason why interest rates are low.  Economic and political instability in many other parts of the world are driving capital into safe dollar-denominated investments.  Low inflation tends to keep interest rates low.  But the Fed, as the single most powerful force in the money markets, has played a crucial role in eradicating high long term rates.

While Wall Street, corporate America, the 1% and many of the unemployed have benefited to varying degrees from the Fed's suppression of positive interest rates, there is, as economics teaches, no free lunch. There are costs to persistently low interest rates, and much of the cost has fallen on those middle and modest income workers who have or hoped for a defined benefit retirement.  Okay, so we already know the wealthy enjoy a heads-we-win, tails-those-little-people-lose advantage.  But we shouldn't buy into the Fed's story that it's creating stability to prevent a Great Depression.  What the Fed has done is transfer losses and instability that could have manifested themselves in another Great Depression, to many of America's current and future retirees, whose golden years may now be more unpredictable and depressed than they had hoped. 

Thursday, April 2, 2015

The Low Euro: Greece's Salvation?

Greece is within a few weeks of running out of money to pay its debts.  Default looms, and it could cause financial disruption in Europe and around the world.  Yet the Greek government and the Euro bloc are at loggerheads in an Alphonse-and-Gaston routine where true compromise is as commonplace as hen's teeth.  Sounds like Congress.  Meanwhile, the rest of us wait for Godot. 

Luck, however, is part of life, and both Greece and the EU are very lucky.  In its current state of economic extremis (and Greece is suffering the equivalent of the U.S. Great Depression of the 1930s),  Greece would want to depreciate its currency.  If it could do so, depreciation would make its export businesses more competitive and bring in tourism.  But Greece, being part of the Euro bloc, has no control over its currency.  The European Central Bank calls the shots for the Euro. 

Serendipity would have it that the ECB decided recently to engage in quantitative easing (i.e., the buying of Euro-denominated bonds in the open market) as a way to stimulate the EU's stagnant economy.  Quantitative easing is one way of printing money, and the Euro has fallen by about 25% as a consequence.  A 25% price move is an elephantine move in the currency markets, and changes all kinds of economic relationships.  European exports just got gussied up in a big way, and European tourism is now a bargain compared to a year ago. 

Greece doesn't export a lot outside of Europe, but it is one heck of a tourist destination.  If given some time, Greece's tourist business will probably pick up.  Some of Greece's exports might be shifted to non-Euro bloc nations.  Greece might have a shot at recovery.

Much of the problem is that neither the EU nor the Greek government trust each other.  Definitive resolution is impossible without trust.  The result has been a steady kicking of the can down the road every time Greece and the EU have to negotiate.  This time, however, if they kick the can down the road (which is one possible outcome of the current impasse), the consequence may be positive.  If Greece has a couple of years to turn itself around using the low Euro, it may have a shot at recovering enough to satisfy the EU's debt collectors.  But will the EU and Greece muddle through one more set of negotiations?  If everyone were rational, they might pull it off.  But then again, if everyone were rational, they wouldn't be in the mess they are now in.

Thursday, March 19, 2015

How the Fed Told the Market What It Wanted to Hear

One of the most human things about humans is that they tend to hear what they want.  It's easy to take advantage of this trait. Politicians do it as a matter of course.  Many, and perhaps most, Congressional districts are gerrymandered to favor one party or the other, so that members of Congress can be elected, and then endlessly re-elected, simply for saying what their constituents want to hear.  Our gridlocked government doesn't actually do anything.  We pay members of Congress nice salaries simply to say what we want to hear--and in the final analysis the shame is on us.

Government officials aren't above telling us what we want to hear, either.  The Fed's latest policy statement is a good example.  The word "patient" was removed, indicating that there wouldn't necessarily be much warning of an interest rate hike.  This is hawkish. 

But the statement also tried to make nice-nice with all the skittish investors out there who bet on continued money printing by saying that a rate increase in April is unlikely, and that the timing of future rate increases would be dependent on economic data.  The Fed also continued from the previous statement to say that it anticipated moderate economic growth, lower than average inflation in the near term and a continuation of its practice of re-investing principal payments from its holdings of federal agency and Treasury securities into other agency and Treasury securities (thereby maintaining the size of its balance sheet).  These dovish statements softened expectations for rate hikes in the near future.

The market rallied yesterday (Wednesday, March 18, 2015), with the Dow Jones Industrial Average rising almost 230 points (more than 1%).  Today, the Dow dropped 117 points, or 0.65% (although the Nasdaq rose 0.2%).  What gives?  The market initially read the Fed statement to be dovish and drank deeply of the punch bowl.  But Fed Chair Janet Yellen also has made clear that there are no assurances as to June and a rate increase in June is possible.  The market evident sobered up today and took some money off the table.  The Fed statement didn't change from yesterday to today.  What changed was how the market read the statement.

The Fed is now in the position it wants to be in--it can move rates without giving a lot of notice.  It has much more flexibility to react to changes in economic data.  Investors who are caught leaning the wrong way can't expect a bailout.  We're back to the past, to the Fed of the 1970s, 80s and 90s, which tended to be opaque and liked it that way.  It had room to move.  For example, in 1994, the Fed decided to raise rates, when large swaths of the market didn't expect a rate increase.  Many hedge funds and other investors were seriously discombobulated, but there was no money printing done to make the boo boo go away.  All the losers could do was to reflect on how there's a certain amount of rancid cheese in life and you just have to deal with it.

Now, let the investor beware. 

Friday, March 6, 2015

Dreaming of Higher Interest Rates

Today's employment report, which shows a gain of 295,000 jobs and a lower unemployment level of 5.5%, knocked the wind out of the stock market's sails.  The Dow Jones Industrial Average fell almost 279 points or about 1.5%.  Bonds retreated as well, while the dollar rose.  The new employment data heightens the chances of the Federal Reserve Board raising interest rates as early as June, something that's detrimental to today's rosy asset valuations. 

In the past year, there have been innumerable rumblings from hawks and doves on the Fed about when to raise interest rates and how quickly.  As the economy has improved, the Fed's public signals have morphed from waiting a significant time and being patient, toward saying that their decision on rate increases will be data dependent.  That means rates could increase any time, if the Fed decides that the data warrants an increase.  Fed Chair Janet Yellen is a dove on rate increases, but she also wants to have a free hand without necessarily having to be patient.

There's so much debate and angst over rate increases that the sensible thing for the Fed would be to raise rates a quarter point this summer or fall.  That would give the markets a chance to adjust to a world without zero interest rates, something they haven't experienced in seven years.  After an initial tantrum, the market would probably figure out that 25 basis points is just 25 basis points, not the beginning of a massive depression and the end of civilization as we know it.  Some of the heat in the debate over rate increases would dissipate, and the dialogue could become calmer.  The hawks would have had their way, at least for a first step.  And the doves would realize they don't have much to worry about.

That's because economics would dictate that rates should remain low as long as inflation remains low.  Inflation, even without considering the falling price of petroleum, remains below 2%.  There is no economic justification for rates to rise much.  On or two quarter point rate increases would establish that the Fed is not locked into perpetual pedal-to-the-metal stimulus.  And low inflation rates would give the doves a basis for tightening ever so gently--and patiently.

So, if you're dreaming of higher interest rates, dream on.  When you wake up, you'll find that our low inflation reality means it was just a dream.

Wednesday, February 25, 2015

Fighting ISIS: Are We Ready To Invade Syria?

As Congress mulls the issue of authorizing the President to wage war against the Islamic State, there is a lot of discussion of how much involvement U.S. troops should have.  Should they be involved in training, advisory roles during combat, or actual combat?  But these may put the cart before the horse.  Before talking about where on the battlefield U.S. troops should be located, we should talk about what it would take to win the war. 

The Islamic State's attractiveness to its young, disaffected recruits is that, more than anything else, it is a caliphate--an actual geographic location where Islam in its supposed purest form can prevail.  ISIS offers a promised land to go to, a place where you can not only go yourself, but take your family and raise your children (as some jihadists have done).  You aren't just fighting for a cause.  You and your family can live a life of holiness and purity. 

The caliphate is a safe haven for ISIS jihadists.  Defeating ISIS requires conquering its territory--all of its territory, in Iraq and in Syria.  There is no debate over whether U.S. troops should operate in Iraq--they already are, and nobody argues they shouldn't.  But the elephant in the discussion is what to do if the U.S. and its allies succeed in pushing ISIS out of Iraq and back to its lair in Syria.  America currently has no proxy troops to attack and seize the ISIS heartland in Syria.  No other forces in Syria--the Assad regime, the moderate rebels, non-ISIS Islamic extremists, the Kurds, or anyone else--can defeat ISIS in Syria.  But if ISIS is able to maintain its safe haven in Syria, it can persist and even renew its conquering ways if and when America tires of endless troop commitments in the Middle East.  The only way to suppress ISIS is to seize control of its safe haven in Syria.

Simply authorizing the President to wage war against ISIS for three years, as he has requested, only tells ISIS that it needs to hold the fort in Syria for the next three years.  Under present circumstances, it may well be able to do that.  One reason the U.S. lost the Vietnam War was it had no way to effectively control Communist safe havens in Laos and Cambodia.  Not having a strategy for eliminating ISIS in Syria precludes victory.  We need to hear from the President and other proponents of waging war against ISIS how the war will be won in Syria.

Friday, February 20, 2015

Better Science, Please

There's nothing wrong with cholesterol in your diet.  After four decades of admonitions to the contrary, federal authorities are reportedly about to withdraw recommended limitations on cholesterol in the diet.  Lovers of eggs, shrimp and shrimp omelettes can rejoice. 

But, if dietary cholesterol isn't bad for you, why were we badgered for decades about eating more than two egg yolks a year?  The answer is bad science.  Researchers weren't careful enough to separate the consequences of high cholesterol in the blood (which can be a real medical issue) from the consequences of a lot of cholesterol in food (which is not proven to be a risk factor). 

This isn't the only instance in recent years of bad science.  Three decades ago, it was often claimed (although not by federal authorities) that high doses of antioxidant supplements would be beneficial to health.  Now, we know that some antioxidants, like Vitamin A, can increase cancer risks if you take large doses of supplements. It's nice that the truth finally emerged, but what about the people who might have increased their cancer risks through mistaken reliance on this advice?  How do you explain to a man dying of prostate cancer that he shouldn't have taken Vitamin A supplements even though various supposedly knowledgeable medical researchers said that Vitamin A in large doses was a good thing?

Then there were the lobotomies.  Some decades ago, there were physicians who believed that a crude and imprecise surgical procedure that involved pushing a surgical instrument into the brain and making various cuts was an appropriate way to treat mental illness.  If this sounds horrendous, well, it was.  There were often some reductions of the symptoms of mental illness, but many patients were left with intellectual and personality deficits and some had to be institutionalized.  Lobotomies produced change, but it was debatable in many cases whether they made the patient truly better off.  Lobotomies haven't been done in 40 years and today are generally regarded as abhorrent.  Yet, the 1949 Nobel Prize for Medicine was awarded to a doctor for helping to develop lobotomies. 

And, before World War II, there were many scientists who seriously claimed that science could prove that some peoples were superior or inferior to other peoples.  These claims contributed to the ethnic and religious cleansing of millions, a scale that would seem beyond contemplation in any civilized nation--except that it wasn't.

The vaccination deniers have it wrong.  Vaccines are a good thing and kids should be vaccinated.  The climate change deniers are being pressed hard by the recent and ongoing snowmageddon in New England and the record cold now sweeping the Southeast and Midwest.  But scientists--and those that evaluate their work--need to do better.  If you do a little channel surfing on cable TV, you might find people who would prosecute teachers for teaching evolution.  The dietary cholesterol goofup involves much more than what you should have for breakfast or an hors d'oeuvre.  It undermines belief in science, which is one of the foundations of modern society.  Science is the reason we have the comfortable lives and wondrous technological conveniences we now enjoy.  We don't want to go back to a world without electricity where people are prosecuted for contending that the Earth is round.  Ignorance is an everpresent threat, even in the most techologically advanced nations.  If science loses its credibility, it will be replaced by far worse alternatives.  Scientists should be careful, cautious, and above all, accurate.  Pride goeth before the fall.  The incautious scientist can do more harm than good.

Sunday, January 25, 2015

Obama's 529 Mistakes

President Obama's proposal to tax earnings distributed from 529 college plans derived from future contributions is one of the worst ideas he's had in tax policy.  He would make withdrawals derived from earnings on new contributions taxable to the student (although withdrawals derived from earnings on funds already contributed would remain tax-free).  Let us count the ways this makes no sense.

Defies Tax Logic.  The redistribution of income through a progressive tax structure is a concept that virtually all Americans agree on, including many who are very wealthy.  However, Obama's 529 proposal creates a much smaller redistribution loop consisting of college students (and perhaps indirectly their families).  Students from more prosperous families will pay taxes that will subsidize students from less well-off families.  Why have a redistribution loop consisting of only the student community?  If that makes sense, why not have wealthier farmers subsidize less wealthy ones?  And why not have higher earning servers and bartenders (e.g., those at high end restaurants and hotels)  subsidizing the employees at Mickey D's.  Since college educations are so important to America's future, subsidies for middle-class and less fortunate students shouldn't come at the expense of other students who, through no choice of their own, were born into more prosperous families.  If redistribution of income is a societal goal, it shouldn't be done in a distorted way like this. 

Bad Social Policy.  Having children and raising them well is beneficial for America as a nation.  A healthy birth rate is crucial to America's future success as a nation.  More prosperous families are better able to afford to have children and raise them well.  The extremely low birth rates in Japan and Europe have seriously impaired the economies--and futures--of those nations.  Disincentives to have and educate children shouldn't be built into the tax code.

Bad Trickle Down.  Obama's 529 proposal effectively raises the cost of college for students from more prosperous families.  It defies economic logic to believe that won't have consequences.  Some students might lose opportunities when this happens.  Let's take this hypothetical example to see how that could work.  Valedictoria, a brilliant high school student from a well-off but not rich family, might barely be able to afford the unconscionably high costs of an Ivy League school if 529 plans remain unchanged.  But she would opt for a less expensive school (the well-regarded University of Home State) with the Obama changes because she doesn't want to or can't take on the additional debt required for the Ivy League (and wants to spare her parents that burden).  She opts for the less expensive school.  Her enrollment there could bump out a student who was marginally able to gain admission to the University of Home State.  The marginal applicant then goes to a less-well regarded school, perhaps losing educational quality and opportunities he might have had at the University of Home State.  Is the nation somehow better off if this happens?

Punishes Self-Sufficiency.  The people who fund 529 plans are the kind of people who, in past generations, would have been viewed as good citizens prudently saving for the future education and improvement of their children.  They hope not to rely on handouts or loans or governments to finance their childrens' educations.  They'd like do it themselves, thank you.  Indeed, self-sufficiency was once regarded as one of the most golden of American virtues.  In a land where there were many opportunities, but also many hazards, the self-sufficient were the bedrock and pillars of a growing nation that wanted to keep growing.  To be self-sufficient, you necessarily have to build your wealth.  Why penalize self-sufficiency by taxing college savings?   We have become a nation obsessed with instant gratification, the faux celebrity status offered by social networking, easy credit for all, and bailouts for almost every need imaginable.  Will discouraging self-sufficiency improve things? 

Friday, January 16, 2015

Did Someone Blow Up the Swiss Currency Peg?

Much to the surprise of numerous market players, the Swiss National Bank yesterday (Jan. 15, 2015) dropped its commitment to peg the Swiss franc at 1.20 to the Euro.  The Swiss franc suddenly rose some 20% in value, a price shift that clobbered anyone betting the peg would hold.  Losses have been sudden and very sharp.  A major foreign exchange broker, FXCM, has received an emergency $300 million bailout loan from Leucadia National.  Another forex broker, Alpari UK, has entered insolvency proceedings.  A new Zealand broker, Excel Markets, has been knocked out of business.

The Swiss National Bank's reasons for abandoning the peg aren't very clear.  But the abrupt demise of the peg is reminiscent of the UK's withdrawal of the British pound from the European Exchange Rate Mechanism in 1992, after a large hedge fund shorted over 10 billion pounds on September 16, 1992.  The Bank of England was trying to fight market forces that dictated a lower valuation for the pound, and in the end couldn't win that fight. 

A news story reports that in December 2014, there was a very large capital inflow into the Swiss franc, with some 34 billion francs being bought up.  See  This is about 10 times the monthly average.  One can wonder whether this flood of capital was the result of a calculated move by one or a few big market players.  While there has for some months been a flight to safety resulting from the EU's economic slowdown (and the likely de facto devaluation in the near future of the Euro via ECB quantitative easing), Vladimir Putin's banditry in Ukraine, and the never-ending turmoil in the Middle East, December's inflow is so abruptly large than one cannot exclude the possibility that it was a move made by a few powerful players.  And if it was, they would have profited handsomely from the Swiss franc's recent price rise.

Thursday, January 15, 2015

Artificial Intelligence in the Stock Markets

Artificial intelligence has been much in the news recently.  Well-recognized deep thinkers have propounded profound thoughts that predict good and bad outcomes for artificial intelligence as it becomes ever more of a reality.  The takeover of the world by machines is inevitable--with monstrous consequences--or not, depending on who you ask.

There isn't much real-world empirical data relevant to the opposing sides of this argument.  But one big clinical trial is underway:  in the stock markets.  Most of the trading done today in the stock markets consists of computerized trading.  Institutional investors, like mutual funds, pension funds, and so on, comprise most of the rest.  Mom and Pop, trying to invest a few nickels for their retirement, are like pedestrians surrounded by massive semis barreling along at interstate speeds.

Much of the computerized trading is done by dynamic computer programs.  In other words, the computer doesn't buy and sell based on a static algorithm embodied in the program coding.  The program can change itself in response to market conditions and activities.  In essence, depending on what the program detects is happening in the market, it can alter its own coding without the need for a human programmer to keypunch and proofread line after tedious line of code.  The details of how these dynamic programs work are generally shrouded in commercial secrecy.  But we have a situation where computer programs take note of what's going on in their working environments, think about how to change themselves to be more effective (i.e., profitable) in light of changing conditions, and then alter themselves to do better.  That's getting rather close to what people do: try to change and improve themselves in order to advance their careers or make more money in their professional activities.

We have seen in recent years how computerized trading can cause mini-crashes and other short term  turbulence in the stock markets.  Mom and Pop are often finding the waters too rough, and suddenly see the virtue in the paltry returns of passbook savings accounts or certificates of deposit whose yields have been flattened by the nearly supine yield curve.  Even some professional money managers are looking for ways to fly over or around the storm clouds of computerized trading, moving trading to venues that claim to allow only "natural" (non-computerized) investors to participate.

For academic researchers and other prognosticators, the dynamic computerized trading in the stock markets could furnish a useful body of data with which to work.  The rest of us, unwilling guinea pigs in a clinical trial we didn't sign up for, can only look to financial regulators and other government officials to ensure that the results of the experiment don't turn out too badly,