The Economy – Wenning Advice

China, Federal Reserve Board, Global Economy, Stock Market, The Economy

In China, People Are Disappearing, but Problems Aren’t

January 25, 2016

President Obama has to be at least a little bit jealous of the power yielded by China’s leaders. He may use executive orders to get his way, but he has yet to follow the lead of Chinese President Xi Jinping.

In the U.S., we control the stock market by allowing the Federal Reserve Board to buy trillions of dollars’ worth of bonds and lower interest rates to zero.

China goes a bit further. It not only duplicates the U.S. approach of using quantitative easing to manipulate its stock market and currency; when the market fails to obey orders and go only in the upward direction, the government makes people disappear.

“In all, executives from 34 companies have disappeared, with only some reappearing,” according to The Wall Street Journal’s L. Gordon Crovitz. “Among those was Guo Guangchang, chairman of the Fosun Group, who is known as China’s Warren Buffett. His interests include Cirque du Soleil, Club Med and the former Chase Manhattan Plaza in downtown Manhattan. Brokers and hedge-fund managers are also among the mysteriously missing.”

We suspect that the potential of disappearing creates an even more effective performance incentive than a Wall Street bonus, but China’s leaders don’t stop there.

The Stock Market Needs “Seasonal Adjustment”

wenningadvice

January 18, 2016

How many jobs did the U.S. economy generate in December?

The correct answer is:

292,000
281,000
11,000
None of the above

David Stockman wrote on his “Contra Corner” blog: “According to the BLS (Bureau of Labor Statistics), the US economy generated a miniscule 11,000 jobs in the month of December. Yet notwithstanding the fact that almost nobody works outdoors any more, the BLS fiction writers added 281,000 to their headline number to cover the ‘seasonal adjustment.’”

When we checked the jobs report, the BLS claimed that the economy generated 292,000 jobs in December (after seasonal adjustment), not 281,000. We couldn’t verify Stockman’s claim that the actual figure should be 11,000, but searching the term “seasonal” turned up a whopping 41 hits in a single news release. So Stockman’s numbers may not be 100% accurate, but he’s clearly on to something.

The BLS press release noted, “The effect of such seasonal variation can be very large.” But large enough to use a multiplier of 25+?

Stockman wrote that an upward revision for December is typical as an adjustment to account for cold weather, but December 2015 was an exceptionally warm month. Santa arrived in shorts and sunglasses.

Stockman isn’t the only pundit who viewed the jobs report with skepticism. Noting that the BLS also upwardly revised job numbers for October and November by 50,000 per month (a nice, round number), Paul Craig Roberts added that, “Apparently, the equity market did not believe the report.”

Even if you accept the BLS numbers, Roberts wrote that, “About half of the alleged new jobs—142,000—went to the 55 years old and over age group. This age group consists primarily of retirees who have found it necessary to supplement their retirement income and of those near retirement who are working in order to compensate for the lack of interest on their savings due to the Federal Reserve’s zero interest rate policy. These are part-time, lowly paid jobs without benefits.

“Americans of prime working age, 25 years old to 54 year old, only received 16,000 or 5% o

Happy New Year: Meh.

wenningadvice

January 4, 2016

Well, it’s a brave new world for us cynics. Somehow, we all survived another year, but it wasn’t easy.

It was a good year for terrorists (Paris, San Bernardino), despots (hello Cuba, Syria, Iran, et al.) and hackers (any repercussions from China’s hacking of government records, federal employees sharing classified documents on unsecure servers, etc.?).

It was a bad year for investors. Or, if not bad, not so good. Heck, even Warren Buffett lost money, although he can afford a nick more than the rest of us.

It would be generous to say that stocks ended the year “sideways,” as the year was volatile and the beginning was much more forgiving than the end. Overall, though, the year was as flat as Twiggy in Nebraska. As The New York Times put it:

“Name a financial asset — any financial asset. How did it do in 2015?

“The answer, in all likelihood: Meh.

Taper Tantrum Two

wenningadvice

November 16, 2015

Call it Taper Tantrum Two.

Two of the 12 members of the Federal Open Market Committee suggested on Thursday that it’s time to raise interest rates, causing the Dow Jones Industrial Average to drop 254 points.

To get a better idea of how ludicrous this is, consider the following:

The two hawks represent a sixth of the board. The hawks will need to more than triple their numbers to represent a majority.
The two Fed members were speaking at a Cato Institute event called, “Rethinking Monetary Policy.” The event was not called, “Seven More Years of ZIRP,” “Zero Everlasting” or “Bring on QE4.” Why would anyone be surprised that they spoke in favor of a rate hike?
One of the two, St. Louis Federal Reserve President James Bullard, is an alternate member of the FOMC and has long been advocating for a rate hike. This is the guy who caused the Dow to drop 100 points when he suggested in June 2014 that interest rates might be hiked in the first quarter of 2015. We tried to determine the role of an alternate member, but the Federal Reserve Board’s description is about as clear as a Fed policy statement. The page says there are 12 members of the FOMC, but lists 10, as well as four alternates. So how do they come up with 12? These are the people who are managing our economy.

Abnormalization and QE4

wenningadvice

September 28, 2015

It seems to be a policy of the Federal Reserve Board to never use a two-syllable word when a four- or five-syllable word is available.

So we have “quantitative easing” instead of “bond buying,” “tapering” instead of “reducing,” “forward guidance” to describe announcements of future Fed activities, and “macroprudential supervision” for “we have no idea what to do, but we have to say something that sounds important.”

What may be the most annoying Fed malapropism, though, is the Fed’s use of the word “normalization,” as in the following quote from Fed Chair Janet Yellen after a recent Fed meeting:

“For all of us, the appropriate policy decision is going to be data dependent and all of us will be looking at the incoming data and our opinions about the appropriate timing of normalization are likely to shift as we look at how the data evolves.”

In other words, we’re currently going through a period of abnormalization and the return to “normalization” will begin when the Fed starts raising interest rates. Although, after eight years of zero interest rate policy (ZIRP), shouldn’t we consider ZIRP to be the new normal?

Yellen’s Soliloquy: To Raise or Not to Raise

wenningadvice

August 10, 2015

To raise, or not to raise – that is the question:

Whether ’tis nobler in the mind to suffer

The barbs and insults of outraged pundits and journalists

Or to raise rates in spite of a sea of troubles

And by raising rates extend them. To stagnate, to grow —

No more (than 2%) – and by a flatlined economy to say we end

The headache, and the thousand natural shocks

The stock market is heir to.

We could go on imagining Fed Chair Janet Yellen in the role of Hamlet, another famous person who met with tragedy due to procrastination. We could make note of “the law’s delay, the insolence of office, and the spurns that patient merit of th’ unworthy takes,” even if we don’t know what “spurns” Shakespeare was talking about when he wrote Hamlet.

We could go on, but “conscience does make cowards of us all,” so we’ll leave it at that and turn instead to last week’s comments by Dennis Lockhart, president of the Federal Reserve Bank of Atlanta. Lockhart said “the economy is ready for the first increase in short-term interest rates in more than nine years and it would take a significant deterioration in the data to convince him not to move in September.”

The experts will tell you that anticipation of increasing rates is built into current stock prices, but if that’s the case, why did stock prices drop to their lowest levels since February after Lockhart’s remarks? Maybe it was the disappointing earnings reports for the quarter, or the still-not-there employment numbers, but the most direct correlation appears to be with the fear of rising interest rates.

Keep in mind, too, that the statement didn’t come from the chairwoman. Granted, Mr. Lockhart is a member of the Federal Open Market Committee, but he’s not Janet Yellen. Perhaps the idea was to see what impact his comments would have so the Fed as a whole would still have the option to not raise rates in September. Mr. Lockhart apparently drew the short straw at the last FOMC meeting.

Big Board Floored

wenningadvice

July 13, 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.

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.

How to Retire Early – Part Two

wenningadvice

July 6, 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:

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.

Economic Schizophrenia

wenningadvice

June 8, 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.

Do You Believe in Santa Claus? You May Be A Keynesian.

wenningadvice

December 29, 2014

The Christmas season is an appropriate time to reflect on Keynesian economics, given this: believing in Keynesian economics is a lot like believing in Santa Claus.

Most Americans grow up believing some chubby guy in a red suit has the stamina to deliver gifts worldwide to billions of people in a single night. Young children, by their nature, are self-absorbed and gullible enough to think that Santa knows how they behaved throughout the year and will deliver presents accordingly.

Most of us grow up and realize that reindeer can’t fly, Santa would freeze to death in the North Pole and his elves would unionize.

But not everyone outgrows gullibility. Some become Keynesian economists. As Keynesians, they don’t quite understand unemployment, because they never experience it – there is plenty of demand for Keynesians, who can find jobs working for the government, in academia or as journalists.

Keynesians believe that increased government spending (aka “aggregate demand”) stimulates the economy and money can be handed out, like Christmas presents, with only positive consequences. They even believe that a dollar spent by the government results in many dollars being spent throughout the economy (the “Keynesian multiplier”). Since they believe there is a Santa Claus, they give little thought to the reality that someone, somewhere has to pay for this largesse.