Wednesday, December 7, 2016

Why a College Education Matters

A recent study released by the Georgetown Center for Education and the Workforce starkly illustrates why getting at least some education after high school really, really matters.  Data from the study ( shows that during the Great Recession, 7.4 million jobs for people with high school diplomas or less education were lost.  During the recovery from the Great Recession, some 11.6 million jobs were created but 11.5 million of these were for people who had at least some postgraduate education.  Only about 80,000 of the new jobs were for people with high school educations or less.

In other words, people with high school educations or less who lost their jobs during the Great Recession are probably still unemployed, unless they managed to get some postgraduate education after being laid off.  And they are likely to stay unemployed unless they advance their educational level or President-elect Trump creates a remarkable jobs program that somehow includes a very large number of low skills jobs with wages high enough to be acceptable to Americans. The latter would be a tough, tough challenge.

We are now in a time of policy flux, with the election of a President whose policy toward postgraduate education seems to be a work in progress at best.  If you're planning for the future, don't wait for the government to decide what it's going to do.  Find a way yourself to get some postgraduate education or training.  Sure, there are ways to make a good living without a college degree.  But electricians and plumbers need a fair amount of training after high school before they can get a license.  It's virtually impossible to attain a middle-class standard of living with just a high school diploma.  Investing in yourself is the most obvious way to step up above flipping hamburgers for a living.  The data shows this to be true.

Thursday, December 1, 2016

Donald Trump's Head Fakes

Donald Trump loves Twitter.  At least, so it would seem with his irrepressible use of the 140-character megaphone.  It grabs peoples' attention, particularly the attention of the press.  A 140-character message is usually easy to grasp and react to.  Not much work for a reader or a reporter.

But what's the purpose of his tweeting?  During the election, he tweeted or retweeted about a deceased Muslim veteran, a former Miss Universe, assertions by white supremacists, and other things that contravened the social values of the Democratic electorate, provoking vigorous and extended efforts by his opponent to argue that he was unfit for the Presidency.

Meanwhile, back on Main Street, Trump was holding rallies and talking about jobs, jobs and jobs.  He kept his eye on the ball (i.e., the economy, stupid), while diverting his opponent with social values head fakes.  She took the bait, and lost sight of the fact that economic distress drives elections more than the character flaws of candidates.  She paid for her mistakes.

Now, Trump has tweeted that flag burners should be imprisoned and lose their citizenship.  Surely he knows that flag burning is protected by the First Amendment to the Constitution and cannot be punished with criminal prosecution or deprivation of citizenship. So why tweet?  Could it be that he wants to divert attention from other things he's doing?  His tax proposals look like they'll make the rich a lot richer, and maybe even increase taxes on some members of the middle class.  His possible changes to Medicaid might leave some folks less well-insured.  His infrastructure proposal seems to focus more on giving businesses tax breaks than fixing the roads and bridges that are in the worst shape.  He's promised to repeal Obamacare, and to roll back financial regulatory reforms of the Dodd-Frank Act.

If you're concerned about what soon-to-be President Trump is going to do, watch out for his head fakes.  Don't be diverted by transparent attempts to yank your chain.  Focus on the big stuff, the things that will change things fundamentally.  Keep your eye on the bottom line, because that's what our incoming businessman President will do.

Monday, November 21, 2016

Why Children Are Afraid of Donald Trump

After the election, newspapers and news services were filled with stories about children crying and suffering anxiety and distress over the election of Donald Trump as President.  Many adults may have thought this to be an over-reaction.  But we're talking about our youngest citizens, who have the sometimes disarming and sometimes disquieting tendency to speak the truth without the convenient filters adults use to soften the harshness of reality.  Why would kids harbor such fear?  There's a simple reason.

The generation that's now in primary schools is approximately half minority.  By 2020, children under 18 will be majority minority. When Trump blew a fuse over a racial category, a religion, or an ethnic group, the blast hit perhaps up to half these kids in a very personal way.  And when Trump delved into misogynistic ranting about women, a partially different half of this generation was directly impacted.  They've been raised to believe that girls and women are worthy, and deserving of dignity and respect.  The specter of a boorish pig in the White House flies in the face of everything that today's parents and schools try to teach.   And remember also that large numbers of white children believe in diversity and respectfulness for all.  They're more colorblind than the Boomer Generation.  Many of their good friends aren't white, and they cherish and value their friends.

So, it would seem that Donald Trump, with his hateful cacophony, has likely frightened and offended over half of today's children one way or another.  As they grow older, these childhood fears may well morph into anger and a desire for change.  By the 2040s, America as a whole will be majority minority.  Today belongs to the Republican Party.  But its victory may have sown the seeds for its demise.

Wednesday, November 9, 2016

Winners and Losers in the 2016 Election

This was one wacky election, and there are some unusual winners and losers.
Winners.  Among the least obvious, but most important winners are liberal Democrats.  The middle-of-the-road, milk-the-liberals-for-votes-and-then-abandon-them strategy of Bill and Hillary Clinton is definitively dead, with a stake driven through its heart.  Bernie Sanders is a major victor from yesterday's election, as he now has a chance, along with Elizabeth Warren, to reshape the Democratic Party.  The Clintons' decades old strategy of cozying up to Wall Street and other obscenely rich donors while talking but not walking like progressives blinded them to the prairie fire boiling up from people who work hard but for not a lot of money.  Sanders and Warren, who may be the most influential Senators today, won't make that mistake.  They will reach out and try to help the people who are driving politics today.  Politics is ultimately about the flow of crowds, and you can't capture the energy of insurgents by condemning them as deplorable. 

Another major winner is the FBI.  Had Hillary Clinton been elected, the specter of possibly wholesale "personnel changes," shall we say, might have hung over the FBI, crippling its ability to function in numerous crucially important arenas.  Donald Trump and whoever he appoints as Attorney General would be wise to leave the FBI unconstrained to conduct business regular way, with no hint of a political agenda.  Everyone benefits when law enforcement is evenhanded. 

And, of course, another winner is that . . . what's his name?  Oh, yes, Trump.  That Trump fellow will find out that running for President is a whole lot easier than being President.  It's one thing to make speeches.  It's another altogether to make things happen.  Even though the Republicans control both the House and the Senate, that doesn't mean Trump will have a successful Presidency.  Barack Obama had the advantage of a Democratically-controlled Congress at the beginning of his first term, and his approval ratings have fallen dramatically since then.  Donald Trump will have to find a way to work with all kinds of people, and lashing out at them isn't likely to be productive.

Losers.  One of the biggest losers is the Establishment.  Both the Democratic and Republican establishments got their heads handed to them yesterday.  An outside observer can readily tell that it's time for change.  But people holding power rarely give it up without a struggle.  George Washington set a noble example when he refused to run for a third term as President and returned to Mount Vernon.  Try to find someone as noble as that in today's political establishment and you'll have more luck seeking the Seven Cities of Cibola.  Things are likely to get ugly as both parties struggle to change. 

Big Money Donors got hammered in this election.  They bet on Hillary Clinton and a platoon of mainstream Republican primary candidates, and wound up only with much smaller bank accounts.  It turns out that, in democratic politics, money isn't everything.

The Democratic Message was lost.  In fact, perhaps the most important reason Hillary Clinton lost was she had no message.  All she seemingly did was attack Trump and proclaim, ad nauseum, that she wasn't Trump.  Trump had a message, a message of hope for working people who usually have only stagnation and despair.  This was not a message that Clinton or the elitist mainstream press clearly discerned.  But Trump got through loud and clear to his supporters.  Nothing drives voters as much as hope.  Trump instilled hope in his constituents.  Clinton didn't seem to have hardly anything positive to say about the future, and her potential constituents lacked the most powerful motivation in politics to vote.

Of course, there is Hillary Clinton.  Bill and Hillary's time in politics is over.  One wonders if they know it and will be able to step aside graciously.  The successful resurrection of the Democratic Party depends on the establishment of new leadership.  But the tremendous cash flow the Clintons have enjoyed since Bill left the White House appears closely linked to their power in the Democratic Party.  If they give up the power, the cash is likely to flow to the new power players.  Since Bill and Hillary have an obvious love of money, the struggle to rebuild the Democratic Party could be grisly. The Clintons, now more than ever, need to think about their legacy.  They already have more than enough money to live in luxury for the rest of their lives.  But, given their baggage that was recounted ad infinitum during the campaign, their legacy needs a lot of work.  Graciousness would be a very valuable first step.

Sunday, October 30, 2016

Happy Halloween, America

This may be the scariest Halloween ever.  Two ghouls are in the lead for the Presidency.  They claim to be people, but that seems to be just a masquerade.  Even in their guises as humans, they are horrifying.  Parents could use their names to scare children to eat their vegetables and do their homework.  But then the children would have nightmares.  The parents already do.

The financial markets are being inflated by the Federal Reserve into a monstrous bubble, a bloated spectral presence that could bring back the demons and vampires of the 2008 financial crisis.  Pension plans, annuities and long term care insurance are being scared to death by ultra-low interest rates.  Anyone hoping to retire is hanging garlic over their front doors.

Overseas, demons, banshees and poltergeists bedevil us.  The Middle East is a seething mass of murderous conflict, seemingly a nightmare from which we can't wake up.  North of the Middle East, a fiendish demon toils at midnight, boiling eye of newt, toe of frog, wool of bat, and tongue of dog into a toxic mix that he flings in all directions while chanting diabolically in a language not heard since ancient times.  In North Korea, a beast with curved horns labors with a crooked smile revealing jagged teeth to find ways to deliver inferno thousands of miles.

Our industrialized economy spews noxious fumes that heat the Earth hotter and hotter.  Everything we ingest--food, water, and air--causes cancer or heart disease.  Even sweetness itself, in the form of sugar and other natural sweeteners, silently stalks our health. 

Alfred Hitchcock never made a movie so scary.  The real world would scare the bejesus out of Vincent Price.  If Stephen King needs inspiration, he can simply pick up a newspaper.  The truth is we have Halloween year round.  The only thing that happens on October 31 is people wear costumes.  The rest of the time, we can only try to stay safe, if that's possible.  Happy Halloween, America.

Friday, October 14, 2016

The Nobel Committee Got it Right

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

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

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

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

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

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

Wednesday, September 21, 2016

Would the Fed Please Shut Up?

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

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

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

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

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

Wednesday, September 14, 2016

Does the Internet Hamper Economic Growth?

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

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

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

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

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

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

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

Monday, August 22, 2016

Is the Fed Undermining Portfolio Diversification?

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

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

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

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

Friday, August 12, 2016

Is the Central Banking Bubble Bursting?

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

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

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

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

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

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

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

Friday, July 22, 2016

Did Ted Cruz Make Trump More Liberal?

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

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

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

Tuesday, July 12, 2016

How the Libertarian Party Could Win the White House

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

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

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

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

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

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

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

Thursday, June 30, 2016

Brexit and the Globalization Bubble

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

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

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

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

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

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

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

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

Friday, June 24, 2016

Put Britain at the Front of the Queue

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

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

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

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

Monday, May 30, 2016

We're All Temporary Workers

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

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

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

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

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

Sunday, May 22, 2016

Big Trouble For the Establishment

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

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

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

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

Tuesday, May 3, 2016

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

With Ted Cruz dropping out of the Republican primaries after losing in Indiana, it really does matter whether the Democrats nominate Hillary Clinton or Bernie Sanders.  A recent Reuters poll shows Clinton leading Trump by almost 9%:!poll/TM651Y15_13.  However, in another Reuters poll, Sanders leads Trump by 16%:!poll/TM651Y15_14. Polls taken two months ago show that Sanders was comparably stronger against Trump than Clinton:

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

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

Thursday, April 14, 2016

A Generation of Stagnation; Retirement Walks the Plank

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

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

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

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

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

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

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

For more on ways to yank your retirement back off the plank, read, and  Good luck.

Sunday, April 10, 2016

Will the GOP Set Up Ted Cruz?

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

Friday, March 18, 2016

How the Federal Reserve Destabilizes the Markets and Influences Politics

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

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

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

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

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

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

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

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

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

Tuesday, March 1, 2016

Bernie Sanders is the Most Electable Candidate for President

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

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

So if you're voting Democratic, and want to increase the chances for a Democratic President for the next four years, choose Bernie Sanders.  You can find the new CNN/ORC poll here:

Saturday, February 27, 2016

Hillary's Obama Gambit

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

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

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

Tuesday, February 9, 2016

Afraid of Another Financial Crisis? Watch the Banks

Financial crises like we had in 2008 before the Great Recession, and earlier in the 1930's before the Great Depression, are the triggers for big, long lasting economic downturns that require painfully long times from which to recover.  They differ from ordinary economic recessions (i.e., two quarters of negative economic growth), which generally don't last more than a couple of years and are usually followed by good levels of growth.  Financial crises are caused by liquidity shortages in the financial system.  When major banks and other financial institutions cannot obtain ready access to loans, especially short term loans, the financial system can teeter, and in worst case scenarios, collapse. 

Recent news articles report that European banks are under stress because of the decline in oil prices (, and because of low interest rates and legal costs, as well as oil prices (  Things got so shaky today that Deutsche Bank, Germany's largest, felt compelled to put out a statement reassuring shareholders about its financial condition.  If Europe's major banks begin to encounter liquidity shortfalls, we could have a problem.  If not addressed properly, it could be a big problem.

Europe's big banks are in general not as well capitalized as America's big banks, so it's not surprising that the Europeans might encounter turbulence sooner.  But if Europe's big banks teeter, America's big banks will, because of the interconnections between all major banks worldwide, at least feel pretty nauseated.  Of course, in such a scenario, the European Central Bank and U.S. Federal Reserve will mount up and ride to the rescue.  But not even the Brobdingnagian bailouts of 2008 prevented the Great Recession.

If the financial system stays sound, the slowdown in China and the other BRICS may cause a recession, but probably not a catastrophe.  But if the financial system dives into the septic tank, as it did in 2008, then we can expect a stinky mess.  So watch the banks.

Thursday, February 4, 2016

How to Manipulate the Stock Market

The recent unusually close correlation between the price of oil and the prices of stocks offers an opportunity to manipulate the stock market.  A trader could purchase a large holding of stock index futures that would increase in value if the stock market rises, and then purchase oil futures contracts in rapid sequence in order to push up the price of oil.  The price jump in oil would, presumably, pump up stocks.  The stock index futures would rise in value and the trader could sell them for a quick profit.  An individual person couldn't do this, except one who is exceptionally wealthy.  But large hedge funds and other financial entities might have enough funding to pull this off.  It could be done in the U.S. markets, and some foreign markets (since the oil-stocks correlation isn't limited just to the U.S. markets).

Doing something like this could be seriously illegal.  Kids, don't try this at home, not unless you want to be a long term guest of the U.S. government at a facility not of your choosing.  But, as hardly needs to be said, not all participants in the financial markets observe the highest degree of fidelity to legal requirements.  Mega bucks could be made this way, and for some, money talks even if getting it involves stepping off the curb.  Hopefully, financial regulators worldwide are tuned into this possibility.  The recent exceptional volatility in the oil markets, and consequential sympathetic gyrations in stock prices, could raise the specter of shenanigans.  Some financial markets players are big thinkers, and will do very aggressive things to make big money.  Regulators need to think as big in order to keep up with them.

Tuesday, January 19, 2016

Bernie Sanders' Appeal

Bernie Sanders is now running neck and neck with Hillary Clinton in the first two primary states, Iowa and New Hampshire.  How is it possible that a first term senator, an avowed Socialist, from one of the smallest states, a virtual unknown a year ago, could challenged the mighty Clinton political machine?

In a word, because he cares.  Bernie Sanders is a throwback to the 1960s, a let's-change-the-world type who, after fifty-five years, seems still to be responding to John F. Kennedy's challenge:  "ask what you can do for your country."  His campaign is about helping others and improving their lives.  His rumpled sartorial disarray is vivid evidence that he doesn't obsess over himself.

By contrast, Hillary Clinton continues to run a perfectly coiffed, highly calculated, endlessly scripted campaign focused on burnishing her image, protecting her from attack, and saying what the pollsters tell her voters want to hear.  It's hard to avoid the feeling that she's in it for herself, that this is all about Hillary. 

Voters respond favorably to candidates who care about them.  That's Politics 101, but not every politician seems to get it.  Bernie Sanders does.  Even though he still faces a very steep climb to get the Democratic nomination, his chances are growing.  Eight years ago, a first time senator from Illinois convinced voters that he cared about them, and beat Hillary Clinton for the Democratic nomination.  It could happen again.

Friday, January 8, 2016

The Challenge For China

The Chinese stock market fell some 12% this first week of 2016.  The downturn triggered corresponding drops in other stock markets around the world, including a loss of over 6% for the week in the U.S.  The financial press is probably secretly delighted, since such volatility captures the attention of a lot of people and brings a surge of traffic onto their websites.  But most people are unhappy.

The Chinese stock market fell for a simple reason--it's overvalued.  It's been overvalued for a while, at least since early 2015.  As we in America know, overvalued stocks fall sooner or later.  It happened in 2000 and 2008.  It's happening now in China, and elsewhere. 

Chinese financial regulators complicated matters by halting trading after a circuit breaker was triggered by a 7% fall two days in a row.  Circuit breakers can be useful in ameliorating short term panics.  But significant overvaluation, as one sees in China, is a long term problem, and circuit breakers may actually increase selling pressure by sharply limiting the time available for trading.  When trading hours are circumscribed, sellers want to move quickly to sell, but buyers want time to evaluate whether or not prices are leveling out.  The result is that there are many more sellers than buyers in a limited amount of time and prices plummet.  Chinese regulators had to suspend the circuit breakers, which was followed by a modest rise in Chinese stocks at the end of the week.

But the regulatory miscues aren't the long term story.  Stocks in China were pumped up by a number of government policies that directly or indirectly encouraged investment in equities.  The bubble peaked and burst this past summer, and the Chinese government has since been trying to prop up the market with restrictions on selling and government-induced purchasing.  These measures to balance supply and demand don't address the basic underlying problem--Chinese stocks aren't worth their nominal market prices--and consequently can't really calm things down. 

At this point, losses inhere in Chinese stocks.  These losses have not been fully recognized in market prices.  With the Chinese economy slowing and capital flowing out of China, there isn't much realistic prospect of the losses reversing.  They will have to be realized sooner or later.  The Chinese government probably understands this, but will endeavor to smooth out the process of realization of the losses to reduce the pain perceived by investors.  The U.S. Federal Reserve and European Central Bank used similar smoothing strategies to deal with the fallout from the Great Recession and the European sovereign debt crisis.  Smoothing carries a major risk of kicking the can down the road, with losses emerging like new heads of the Hydra if underlying economic growth hasn't been revived.  The challenge for China will be to accelerate its economic growth.  But the prospects for a near-term rebound of the Chinese economy are poor.  Low-cost manufacturing is gradually shifting out of China, where wages are rising, and hasn't yet been fully replaced by anything else.  China's economy seems to be meandering.  We can expect more market volatility.

Tuesday, January 5, 2016

Another Obama Foreign Policy Miss

The ongoing dustup between Iran and Saudi Arabia over the Saudi execution of a Shiite cleric (Nimr al-Nimr) and three other Shiites reflects another foreign policy foul up by the Obama administration.  Instead of tamping down sectarian tensions in the Middle East, the Obama administration (and its predecessor, the George W. Bush administration) made it easier for conflict to flare up.  A "democratically elected" government was established in Baghdad which, not surprisingly was Shiite dominated because Iraq is majority Shiite.  But adequate protection for the interests of Iraqi Sunnis, Kurds and other ethnic or religious groups wasn't ensured.  So Iraq degenerated into sectarian warfare, with the Sunni-dominated ISIS readily able to seize vast amounts of Sunni Iraq without facing much of a fight.  For the same reasons, it's been impossible to organize a military force in Iraq that can dislodge ISIS, except at the margins.

The Obama administration stood by the sidelines as Syria descended into civil warfare, without having a discernible, let alone coherent, policy.  The only line in the sand drawn by President Obama was to warn Bashar Assad against using poisonous gas, and when Assad did just that, Obama flinched.  His flinch paved the way for Vladimir Putin to start mucking around in Syria, a role that Putin has now expanded to a much larger military commitment to Assad.  Iran has been supporting Assad, because he is a member of the Alawites, a religious group affiliated with the Shiites.  So we have Russia and Iran working against the Saudis and their allies, who have been supporting Sunni interests in Syria.  The war in Syria is now firmly sectarian.  The ideals of the Arab Spring died a hard death there.

In Yemen, Shiite rebels have booted the Sunni ruler, and Iran is supporting the Shiite side of a civil war against the Saudi-supported Sunni side.  The U.S. used to have a Special Forces presence in Yemen, but those troops reportedly have left the country.  So we have in Yemen a second proxy war between Iran and Saudi Arabia.

The Obama administration has been trying to sell the nuclear accord with Iran as a great diplomatic achievement.  But the Saudis are nervous about the agreement, apparently believing that it doesn't truly restrain Iranian nuclear ambitions.  So, even while Obama thinks he's getting somewhere with Iran, he's losing influence over the Saudis.  It shouldn't be a surprise that the Saudis are getting feistier.  They evidently don't believe they can count on the U.S.  One would think that the U.S. might have restrained the Saudis from executing Nimr al-Nimr.  But either the administration didn't know the execution was scheduled (which would seem an intelligence failure) or it didn't understand the importance of the execution to the Iranians (which would seem an intelligence analysis failure). 

At the same time, the nuclear accord appears to have emboldened the Iranians.  They fired missiles from a ship that was hardly a mile away from an American aircraft carrier in the Persian Gulf.  They've announced they'll increase their ballistic missile capabilities, apparently in violation of a UN resolution.  But neither action generated a response from the U.S. other than commentary by official spokespersons along the lines of "naughty, naughty." 

The President reportedly is holding back on sanctions against Iran because he wants to implement the nuclear accord and strengthen the hand of Irans moderates.  The problem is we don't really know who is in control of Iran (another intelligence failure).  Implementing the accord means rolling back sanctions and allowing Iran to sell more oil internationally and otherwise engage in more international trade.  This will increase Iran's financial strength.  Who really controls that strength--Iranian moderates, Iranian radicals or Iranian terrorists?  No wonder the Saudis think they may have to go their own way.  If Obama is, in effect, going to strengthen Iran, the Saudis have to find ways to push back.

President Obama is dead set on avoiding conflict.  That much is clear to everyone.  Assad steps across his line in the sand and he does nothing.  Iran engages in provocative behavior after the nuclear accord, and he does nothing.  Putin has Russian jets bomb American-supported moderate rebels in Syria and Obama does nothing.  While almost no one in America wants our ground troops back in the Middle East, it's clear that the administration's policies are heightening sectarian tensions in the Middle East.   Just as the Obama administration was unduly focused on al-Qaeda until ISIS literally blasted its way into the administration's consciousness, it's now too obsessed with combating ISIS and not focused enough on the root problem of reducing sectarian tension.

The Middle East could degenerate into regionwide sectarian warfare in a flash--indeed, it's already partly there.  ISIS has been able to hold large amounts of territory only because sectarian tensions have been allowed to flare up.  It's important now to try to get the Iranians and Saudis to stand down.  The more Obama appeases Iran, the more provocative Iran becomes.  The recent Iranian Persian Gulf missile firing and ballistic missile program boost should be met with sanctions and a delay in the implementation of the nuclear accord.  The Iranians need to be firmly told that if they want to be re-admitted to international society, they have to be good citizens.  At the same time, the U.S. should quietly reassure the Saudis that it stands with them, and that they need to cool their jets.  Saudi arms should be twisted if necessary.  In other words, Obama has to stop appeasing and get tough with the toughs in the Middle East.

If the U.S. can lower sectarian animosity in the Middle East, it may be able to put together a working alliance to defeat and eventually destroy ISIS.  But if sectarian tensions keep increasing, there will be no workable solution for dealing with ISIS, and more conflict will likely erupt, further eroding American interests and influence.  ISIS could survive and perhaps even prosper.  It seems unlikely, however, that Obama, now firmly ensconced in his Ivy League populated bubble, will somehow connect with the realities of foreign relations.  That's a shame, because it means that he, like George W. Bush before him, will leave a foreign policy mess for his successor.

Friday, January 1, 2016

The Case For Regulating Drug Prices

Perhaps the most important reason for rising health insurance costs is continued large, and sometimes astronomical, increases in the price of pharmaceutical products.  These increases don't apply to aspirin or antacids.  They tend to appear in the price of lifesaving drugs.  Or they are imposed on drugs for serious medical conditions that require treatment if the patient is to have a decent quality of life. 

Also alarming is the fact that the people behind the rising prices are sometimes speculators, who purchase the rights to the drug and then ratchet up the cost.  While some major pharmaceutical companies may be able to point to substantial research and development costs as a reason for the expensive prices of new drugs, a speculator who buys the rights to established drugs and takes advantage of seriously ill patients is doing something that, as Berkshire Hathaway Vice Chairman Charlie Munger put it, is "deeply immoral."

In addition, those drug companies that can legitimately claim to have significant research and development costs aren't necessarily playing fair.  Many, and perhaps most, other countries around the world already regulate pharmaceutical prices.  Frequently, the prices they permit are so low that pharmaceutical companies may not recoup much, if any, of their R & D expenses.  So the drug manufacturers often seek to recover most or all of the R& D expenses from American consumers.  Americans are paying through the nose so people in other countries can enjoy low health care costs.

How can drug prices shoot up like a geyser when the economy is sluggish, incomes stagnant and general inflation almost nonexistent?  In a word, health insurance.  Health insurance programs allow drug companies to spread the cost of expensive drugs across large numbers of insured people, most of whom don't need the expensive drugs.  Even though health insurers are taking many steps to control drug price increases on many pedestrian pharmaceutical products, the price levitators have concentrated their immorality on drugs that people badly need.  It's hard for insurers to combat these price increases, since many patients may suffer dire consequences without the expensive drugs. 

While price controls are generally undesirable, as they can produce misallocation of resources, we are seeing a failure of market forces with expensive pharmaceutical products.  The prices American consumers pay aren't the result of the free interplay of competitive markets.  They are the product of exploitation of very ill people through speculative excess and the misallocation of outsized amounts of R & D expenses to Americans.  People with major medical problems have what economists call inelastic demand, a desire or need for a product that is unaffected by its price.  If you're dying, you'll pay any price for a medication that will let you live.  Price isn't a consideration if you otherwise have to live with terrible suffering.  Other countries around the world (including major industrial nations) don't allow drug companies to exploit this inelasticity of demand of their seriously ill citizens.  Why should Americans be hammered over the head?

There's no need for price regulation of most pharmaceutical products.  Go into any drug store and you'll see lots of price competition for lots of products.  These can be left alone.  The drugs that need regulation are the ones for which there aren't competitive and effective substitutes, especially if they are used for serious or life threatening ailments or conditions.  Lobbyists for the pharmaceutical companies and their running dog economists will endeavor to over-complicate the issues, asking how can a bureaucrat come up with a more rational pricing scheme than market forces.  However, let us note that market forces aren't working rationally in the drug market and most of the rest of the world doesn't get into a tizzy over the self-serving palaver of the drug industry. 

It may be difficult to construct a model for price regulation that the economics profession as a whole would consider elegant.  But how can it be elegant or fair for Americans to bear pharmaceutical R& D costs for most of the rest of the world?  How about allocating some of that cost to persons in Europe and Asia, many of whom live in wealthy, industrialized nations?  How can it be socially beneficial for speculators to exploit the inelastic demand of seriously ill people?  Perhaps price regulation models couldn't be certain of offering more than rough justice to the drug companies.  But rough justice to them is better than gross injustice to the seriously or desperately ill and to the Americans who pay already high and ever rising health insurance premiums.