Today’s Economic News: Woe Is Me

July 27th, 2015

The summer weather and the media’s focus on positive economic news may have you feeling cheerier than usual these days.

Two words: “Bah, humbug.”  Or maybe, “Get real.”

Focus, for a minute, on the cloud, rather than the silver lining; recognize that evaporation has caused the glass to be less than half full (and more than half empty); see the bubble bursting, the interest rates rising and stock prices dropping.  In other words, get realistic about the economy.

In the Keynesian world, the more government spends, the more the economy is “stimulated.” In the real world, more spending means more debt, higher taxes, more regulation and GDP growth well below the historic norm. Chart 1

In the imaginary world, central bankers and government officials can keep the economy growing indefinitely and can boost asset prices to new records forever.  In the real world, asset prices are at artificially induced levels; reality will take hold when the Federal Reserve Board raises interest rates, when China’s stock market tanks (as it has begun to), when Greece is booted out of the Eurozone, or when Iran uses the $150 billion it receives from the lifting of sanctions to further its war against the U.S. and Israel.  Read the rest of this entry »

Worry About China, Not Greece

July 20th, 2015

When’s the last time markets reacted positively to anything happening in Greece?

Last week, just 10 days after Greek voters voted against a resolution that would have required stiffer austerity measures in return for a third Eurozone bailout, the Greek Parliament voted 229 to 64 with six abstentions in favor of harsher austerity measures than would have been required if voters approved the resolution.

As The Economist put it, “Grief, psychiatrists say, has many stages, from denial to acceptance; and Greece seems to have raced through them all.” Shanghai

So Greece needs psychiatric help.  That should have been clear years ago.  These are the folks who elected Alexis Tsipras of the wacky extreme-left Syriza Party as their prime minster.

Tsipras quickly found that his socialist machismo wasn’t very effective, given that his country needs billions of euros just to survive.  So maybe it’s not surprising that he and the Greek Parliament caved so quickly.

Not everyone was pleased. Fellow Syrizan Zoi Konstantopoulou, the parliamentary speaker, called it a “very black day for democracy in Europe.”  Since when does a socialist worry about democracy?

But enough about Greece.  Which country should we be worried about?  Read the rest of this entry »

Big Board Floored

July 13th, 2015

The Big Board is not so big anymore.

A decade ago, it accounted for 80% of stock trades.  Today, it accounts for 20%.  There are also far fewer publicly traded companies in the U.S. – 5,000+ today, compared with 8,000+ in the 1990s.  The NYSE lists about 2,800 of them.

To trade directly on the NYSE, you used to have to buy a “seat.”  In the 1990s, seats sold for as much as $4 million.  Today, you can buy a license to trade on the NYSE for $40,000.

Regardless, when “the leading stock exchange in the world“ shuts down, even for just a few hours, it’s big news.

The NYSE shut down for three-and-a-half hours on Wednesday, which was unprecedented.  Little information has been shared, but the NYSE has blamed the shutdown on a technical glitch.  Call us skeptical, but the odds of a computer glitch shutting down the NYSE, grounding United Continental Holdings planes and bringing down The Wall Street Journal’s website all on the same day are pretty small. Labor Force_1_0

Thanks to Edward Snowden and irresponsible practices by the U.S. Office of Personnel and Management, people who are not our friends now have access to a wealth of information about us.  We’d rather not think about what will happen if Chinese or Iranian hackers disrupt our electrical grid, but it’s something that should concern all of us.  Its impact not only on your investments, but on our national security, would be devastating.  Read the rest of this entry »

How to Retire Early – Part Two

July 6th, 2015

In part one of “How to Retire Early,” we focused on the need to reduce expenses and control debt.  Doing so can create the foundation for a retirement plan by making money available for investment.

What should happen next?  Here are a few suggestions:Retirement 4

Consider all sources of income.  Typically, retirement income comes from a combination of an employer pension, personal savings and Social Security income.  Compare what you are eligible to receive with what you will need.

If you have a shortfall, consider all of your options for making it up before you retire.  You may decide to work part-time.  It you have a marketable skill, you may even be able to develop a base of business that provides you with enough income to meet your needs without dipping into your retirement savings for a few years.  Or maybe you have space you can rent out to produce more income. Read the rest of this entry »

How To Retire Early – Part One

June 29th, 2015

How would you like to retire early?  Maybe 62 is a good age or maybe you’d like to retire at 60 or even 55.

But unless you’ve won the lottery, have a government pension, or are the favorite niece or nephew of a rich uncle, you may find it difficult to achieve your goal.  If can still be done, though.  You have two options: cut your expenses or increase your retirement savings.  Better yet, do both.Retirement 1

More specifically, you should be able to take that job and shove it at an age earlier than 65 if you do the following:

Cut back on your expenses.  Even people who think they’re living frugally usually aren’t.  How often do you dine out?  Do you stop for coffee on your way to work?  What do you spend on hair stylists, clothing, manicures and pedicures?  Do you do your own landscaping and mow your own lawn?

Non-essential expenses add up.  Review everything you spend and make a cost-benefit analysis.  Determine whether the convenience and pleasure you derive from your expenses is worth the investment.  Maybe Two-Buck Chuck is no substitute for your favorite Côtes du Rhône, but would you rather drink good wine or retire early?  You may not be able to do both.  Read the rest of this entry »

What Yellen Should Have Said

June 22nd, 2015

The question reporters should be asking now is, what did the Federal Reserve Board’s Open Market Committee do for two days last week?

The statement it issued based on its meeting is a rehash of its last statement, which itself was not worth repeating.  Check the link from The Wall Street Journal, which you can use to compare the two most recent statements (as well as others), and you’ll see that the Fed mailed it in this time.

Yellen

These folks are managing our economy.  The fate of the world is in their hands.  And the best they can do is come up with an update to a previous statement.  No wonder the economy has practically flatlined throughout the current “recovery.”

It’s worth adding, though, that the Fed’s Seinfeld approach of having meetings about nothing may be better for the economy and for the American taxpayer than the previous chair’s pronouncements about Operation Twist and unlimited QE programs.

The latest Fed statement starts with this: “Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat.”  Really?  What does “has moderated somewhat” mean?  And where is the “information” received from?  NSA wiretaps?  Drones?  Ben Bernanke’s blog?

Read the rest of this entry »

Central Bankers: Masters of the Universe

June 15th, 2015

Earlier this month, along with our usual dire observations about an economy that has come unhinged, I noted that the world was not coming to an end.  On closer inspection, I may have been wrong on that one.

One sign that all is not right in the world of investing is the increasing volatility.  Volatility is not a good thing for investors seeking to limit their risk and markets recently have been as spiked as Jonestown Kool-Aid.  The results could be nearly as disastrous. Volatility

As the chart shows, currency, oil and interest rates have been up, down and all around.  Bonds, too, have been volatile, and price shifts have been taking place with increasing frequency.

It makes me uncomfortable when I see government bonds flash crashing along with currencies of developed markets with enormous debt levels.  The Swiss National Bank’s unpegged its currency and, if Japan keeps burning yens, China is likely to unpeg its currency. When that happens, it isn’t going to be fun.

Why is this happening?  Because central bankers have become the masters of the universe.  Make that Masters of the Universe.

As Zerohedge notes, “For the last few years, valuations in more and more markets seem to have stopped following traditional relationships and instead followed global QE.  Likewise in meetings with investors, we have been struck by how little time anyone spends discussing fundamentals these days, and how much revolves around central banks.  Record-high proportions of investors think fixed income is expensive and think equities are expensive.  A growing number of property market participants seem to think real estate is expensive. And yet almost all have had to remain long, as each of these markets has rallied.  Could it be that central bank liquidity has forced investors to be the same way round more so than previously, and that this is making markets prone to sudden corrections?”  Read the rest of this entry »

Economic Schizophrenia

June 8th, 2015

Schizophrenia is “a long-term mental disorder of a type involving a breakdown in the relation between thought, emotion, and behavior, leading to faulty perception, inappropriate actions and feelings, withdrawal from reality and personal relationships into fantasy and delusion, and a sense of mental fragmentation.”Personal Income

In general use it is referred to as “a mentality or approach characterized by inconsistent or contradictory elements.”  It is also often used to refer to someone with a split personality.

It is a truly severe mental disorder that is difficult to treat.  And it seems to be a perfect description of today’s economy.

Thursday: Don’t Raise Rates This Year

As a recent example, consider last week’s announcement by the International Monetary Fund (IMF) that it was lowering its growth estimate for the U.S. economy from 3.1% to 2.5%.  Both estimates are well below the 3.3% annual growth rate that was the norm before the financial crisis, but even 2.5% is average the average we’ve seen throughout the Obama presidency. Read the rest of this entry »

Stock Market Continues to Set Records, But Why?

June 1st, 2015

Let’s take a simple quiz and answer the following multiple choice question.

The stock market is hitting new highs because:

  1. Corporate earnings are at an all-time high.
  2. The economy is recovering.
  3. The market is being manipulated by the Federal Reserve Board.
  4. Investors lack common sense.

Corporate earnings are supposed to drive stock prices.  That used to be true, before the market was made dysfunctional by Fed mingling, high-frequency trading, overbearing regulations and other factors.  It’s not true anymore.  At least not now. S&P 500

The stock market has been setting records, even though S&P company earnings declined 13% in the first quarter of 2015.  That follows a 14% declined in the fourth quarter of 2014.  Do you see a trend here?

As our friend Charlie Bilello of Pension Partners, LLC pointed out on Contra Corner, six out of the ten major S&P 500 sectors showed year-over-year declines, including consumer sectors, which were supposed to have benefited most from a decline in gas prices.

Read the rest of this entry »

Habitat for Inhumanity

May 25th, 2015

The idea was logical enough.

Reduce interest rates, making housing more affordable, which would produce a recovery in the housing market.  The housing market was at the heart of the financial crisis, so bringing the housing market back to health would, presumably, bring the economy back to health.

That conclusion was sound, too.  Housing is a leading economic indicator, so a recovering housing market should mean a recovering economy.

But in economics, as in life, things don’t always go as planned.  The housing market still hasn’t recovered.  And, while low interest rates may have given housing prices a boost, they have not increased home ownership.Home Ownership

In addition, government programs have only made matters worse, while costing taxpayers a bundle.

As Lance Roberts noted on his Street Talk blog, “trillions of dollars have been directly focused at the housing markets including HAMP, HARP, mortgage write-downs, delayed foreclosures, government backed settlements of ‘fraud-closure’ issues, debt forgiveness and direct buying of mortgage bonds by the Fed to drive refinancing and purchase rates lower.”

Yet, as the chart shows, the net result has been that the home ownership rate has dropped to where it was in 1980.

Why did government help” fail would-be homeowners?  Read the rest of this entry »