7/31/13 – The Future Arrives Faster These Days

July 31, 2013

Wow. While I like to think I get things right more often than not, I rarely get positive feedback this quickly. The economic numbers this morning were very interesting. Expectations for economic growth in the second quarter were substantially wrong, but for all the right reasons, which I pointed out yesterday.

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7/30/13 – Why the Economy Should Get Better

July 30, 2013

We can expect the announcement of GDP growth for the second quarter to be lousy—around 1 percent or so if we’re lucky, less than that if we’re not. Why is this, and what does it say about the rest of the year?

The short answer is that we got what we asked for at the start of the year. If you remember, back then we had the fiscal cliff and a record, uncontrollable deficit. Some wanted higher taxes, others wanted reduced spending; everyone wanted a lower deficit.

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7/29/13 – Washington, DC: Not Just the Financial Capital of the U.S.

July 29, 2013

The other day, a Commonwealth colleague of mine who works outside of the investment groups asked about a point I had made a couple of years ago—that Washington, DC, had become the financial capital of the United States, in addition to the governmental capital. “Is that still the case, post-crisis?” he wanted to know.

I believe it is, and for reasons that extend beyond those that obtained in the crisis. While DC has largely exited the banking system and the auto industry, the role of the government in the economy has only grown. Part of this is politically driven, and therefore subject to debate, but part is structural, reflecting a growing change in how the economy works.

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7/26/13 - Ten Years

July 26, 2013

Today is Nora’s and my 10th anniversary. We got married on July 26, 2003. It was a great wedding. To celebrate, last night we went out to No. 9 Park—a very nice restaurant in Boston—and tried the tasting menu, which I highly recommend. We also went to Tiffany’s, despite my protests that I had already bought her a ring. You can imagine how effective the protests were, and, well, she’s earned it. I can honestly say that I love her even more now than when I married her. Thanks for 10 great years, sweetheart, and I look forward to many more.

Part of our conversation last night was about where we were 10 years ago, and how much has changed. It occurred to me as we spoke that this was a conversation we rarely have—one that explicitly looks at longer periods of time, rather than having an incessant focus on the now. Looking over a decade, events that seemed so important at one time become less so, while events that may have seemed insignificant turn out to be major.

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7/25/13 – Is the Detroit Bankruptcy the Beginning of the End?

July 25, 2013

Short answer: no. Detroit is an exceptional situation, which was telegraphed well in advance, and investors and portfolio managers had lots of time to relocate their money if they were paying attention. Retirees, of course, may not be so lucky.

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7/24/13 – Five Questions About the U.S. Stock Market

July 24, 2013

In today’s post (the last in this series, for the moment), we’ll look at the U.S. stock market.

We are in the middle of a very significant bull market—up almost 150 percent since the bottom in 2009—and the question right now is whether the run can continue. I was on a CIO panel at Financial Advisor magazine’s alternative investments conference yesterday, and the views of my fellow panelists—a really impressive group, in which I was flattered to be included—ranged from major declines to consistent, multiyear advances. Even the pros disagree. My own views, as you know, are cautious. Why that is will become clear.

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7/23/13 – Five Questions About China

July 23, 2013

As regular readers know, I’ve been a long-term China bear. This attitude has become mainstream recently, but I still believe there’s value in thinking about China. First of all, I could still be wrong, and second, looking at China as an investment gives us another chance to ask some of the questions I posed the other day.

First, of course, is do we understand what’s going on? Earlier in the Chinese story, the answer was yes. China was using very low wage rates to attract manufacturing, the products of which were then sold to Western markets—a simple, well-proven business model. Recently, though, that model has developed cracks. Chinese wage rates are no longer as attractive, while demand from the West has dropped off.

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7/22/13 – More About Things Not to Invest In

July 22, 2013

I was going to touch on China and the U.S. markets today, but something happened over the weekend that’s such a good illustration of the points I made on Friday that I have to talk about it first.

Saturday afternoon, my dad forwarded me an investment offer he had received from an oil and gas sponsor in Kentucky. They wanted to sell him a 1/64-of-1-percent interest in oil and gas wells there for $2,500, for which they believed he could receive a payout of about 90 percent of his initial investment in year one.

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7/19/13 – Why Not to Invest in “Hedge Funds”

July 19, 2013

Per yesterday’s post, I want to start off by defining my terms. “Hedge fund,” for purposes of this discussion, means “currently fashionable investment that everyone wants because they think they will make a lot of money.” In this sense, “hedge fund” could mean housing in the mid-2000s, tech stocks in the late 1990s, commodities or the Nifty Fifty stocks in the 1970s, or—well, you get the idea.

At any given time, there will be a hot investment idea that is valid. (That’s probably how it got hot in the first place.) There will be well-established managers executing successfully in that space. They will understand the market, know what they’re doing and why, and will be very unhappy to see the rest of the world showing up in their niche.

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7/18/13 – Those Evil Hedge Fund Managers

July 18, 2013

One of the more, shall we say, interesting magazine covers showed up on my desk yesterday. Not, as you might expect, the Rolling Stone cover, which is simply a contemptible bid for publicity. No, I’m referring to the Bloomberg BusinessWeek cover, which displayed a somewhat graphic, at least on an implied basis, picture and graph.

The headline on the cover is “The Hedge Fund Myth,” and the cover story spends quite a bit of time excoriating hedge fund managers for making lots of money and not deserving it.

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7/17/13 – More About Lobster Rolls

July 17, 2013

So my wife, who is the more organized thinker of the two of us, wanted to continue last summer’s research project in a more structured way. Rather than just randomly looking for lobster rolls to try, she researched which local restaurants had received accolades for them, with the idea that we’d work our way through the award winners.

As I have learned to do over the years, I bowed to her superior wisdom, with the result that we tried the lobster rolls at the Clam Shack, a small place right by the bridge in the center of Kennebunkport, Maine.

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7/16/13 – Slowdown, Tapering, and Interest Rates

July 16, 2013

Many of the economic stats coming out now are pretty weak. Over the past couple of days, headlines announced that economic growth had fallen short of expectations, with growth for the second quarter quite possibly below 1 percent.

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7/15/13 – A Day at the Beach and Obamacare

July 15, 2013

I woke up in Maine this morning with the sun shining and Jackson running into my room as I read the papers. We spent yesterday at the beach, with quite a bit of the time devoted to searching around a large tide pool. We found lots of crabs, small lobsters, starfish, eels, hermit crabs, and, of course, tons of snails, all hiding in and around rocks and seaweed.

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7/12/13 – It’s Back! Glass-Steagall Returns

July 12, 2013

For those of you who don’t know, Glass-Steagall was the law that, to put it at its simplest, separated deposit-taking banks from the investment banks. It was passed during the Great Depression to prevent Wall Street risks from affecting the normal day-to-day business of Main Street, which had happened prior to the Depression. It did this by prohibiting banks that offered deposit insurance from engaging in Wall Street activities like trading. The big thing is, it worked. There were no systemic banking crises like that of 2008 while the law was in force, from 1933 to 1999.

A modernized version was just introduced in Congress by Elizabeth Warren and John McCain, an interesting pair. Warren is the Massachusetts senator who made her name trying to regulate the financial industry, while McCain is a former Republican presidential nominee. They propose a very similar set of restrictions, with the express purpose of taking the financial industry back to 1998, before Glass-Steagall was repealed.

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7/11/13 – Much Ado About Nothing?

July 11, 2013

I had a chance to speak on Bloomberg Radio last night about the release of the Fed minutes from the June meeting. After spending some time going through them, looking at the exact wording and thinking about what was likely to happen over the next couple of months, I came to a conclusion: there really wasn’t all that much there.

Let’s recap. First, the markets reacted strongly to Ben Bernanke’s post-June-meeting press conference, where he said that the Fed would start to reduce stimulus at some point, not soon, if the economy’s performance warranted it. The market apparently interpreted this to mean the Fed would be exiting the stimulus immediately and raising interest rates shortly thereafter, resulting in a rise in rates and a hit to the stock market.

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7/10/13 – Financial Services: Less Risk, Less Return?

July 10, 2013

I wrote on June 11 that the financial services sector was under pressure, and the heat continues. One of the big memes floating around about the banking industry has been how nothing fundamental was really done, in the aftermath of the financial crisis, to rein in systemic risk. The Dodd-Frank Act was supposed to do so, but, the narrative went, it didn’t go far enough and had been gamed by the banks to remove the most onerous provisions.

Regardless of whether this was true—and there was enough truth there to make it plausible—the narrative has supported a continued push to rein in the biggest banks. Today, federal regulators took, to quote the Wall Street Journal, “their first big swing at addressing fears that Wall Street’s largest firms remain too risky five years after the financial crisis.”

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7/9/13 – Economics and Political Risk

July 9, 2013

I wrote on July 3 that the U.S. is the only continental power with voluntary economic integration. By that, I meant that the fiscal transfer mechanisms have been in place for a long time and are generally accepted. Few people know, for example, how much their state pays to the federal government versus how much it receives. It has come up in the past, of course, usually in stressed economic times, but it has never become a long-term political issue.

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7/8/13 – Economic Growth, Politics, and Interest Rates

July 8, 2013

The data that has come out over the past couple of days has been somewhat contradictory, but, taken in context, I think it gives us a reasonably good idea of where we are economically.

The bad news is that second-quarter economic growth is probably going to be much weaker than people think, for several reasons. First, consumer spending has been growing more slowly than estimated; second, business investment has been declining faster than projected. Both of these factors have already contributed to the downward revision in first-quarter growth, and their effects have extended to the second quarter as well. The third major factor is that the U.S. trade deficit has come in much higher than expected, which will further knock economic growth for this quarter.

When we consider the details, though, things look better. First, much of the slowdown was due to weakness elsewhere in the world, which now seems to have been incorporated in U.S. activity. Second, the decline in the trade balance is arguably a good sign overall, as it suggests stronger domestic spending. Third, the slowdown in spending by both consumers and business largely took place in April, and spending seems to have picked up again in May and June.

The big picture here is that we had a second-quarter slowdown, like previous years, but we still grew. Moreover, we did so in the face of weakness in the rest of the world, as well as the turbulence in May and June, not to mention interest rate increases from the Fed’s intimations of exit. This actually says to me that growth is reasonably well positioned going forward.

Further, the most recent data is more encouraging. Employment grew more strongly than expected, according to the latest reports, as did personal income. Earlier, weaker reports had significant upward revisions. Importantly, state and local governments, and even the federal government, are starting to be positive rather than negative contributors. The rest of the world is also looking somewhat stronger.

Overall, the picture is a bit cloudy but generally encouraging from an economic perspective. In this sense, what we are seeing in the economic commentary is an expectation that the Fed will indeed start tapering (that is, reducing) its stimulus measures in September, driven by the improving economy as well as a growing fear that the risks of maintaining stimulus exceed those of decreasing it.

That may be, but I have my doubts. I’ve been writing for some time that, economically, we are in a sustainable recovery—and, from a strictly economic perspective, I agree that stimulus should be reduced. From a political perspective, not so much.

As I wrote a couple of weeks ago, from a federal budget standpoint, we are at Defcon 1 and have been since mid-May. We should hit the red line on the federal debt limit sometime around September—right around when the Fed will decide whether to start tapering.

It could be that Congress will, unlike past times, quickly come to an agreement to raise the debt ceiling, without any confrontation or drama. If so, and if done before the Fed’s meeting, tapering would probably make sense. I am not sure, were I Ben Bernanke, that I’d be willing to bet on that.

Another critical political event, the German elections, also happens in September. As we are seeing with Portugal right now, the European crisis is far from resolved, and when everyone returns from summer vacation, we often see more volatility in Europe.

Given all of the political balls in the air, here and abroad, I have serious doubts whether it makes sense to start the taper in September. December is more likely, assuming everything goes well in September, but even then, the Fed may be cautious. The markets seem to be realizing this as well. Rates spiked on Friday but today are drifting down again.

Overall, I am encouraged by the latest data, but the recent weakness combined with the pending political issues suggests that we’re not completely out of the woods yet, and that the Fed may well hesitate before declaring victory.

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7/5/13 – Beach Reading

July 5, 2013

I will freely admit that I wrote this post ahead of time. When you read this on Friday, I plan to be on a beach, either flying a kite or dragging my son around on a boogie board.

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7/3/13 – Happy Fourth of July!

July 3, 2013

As I prepare to head to Maine to celebrate the Fourth with my family, I’ve been reflecting on a number of my past themes—the place of the U.S. in the world, the structure of the republic, how grateful and lucky I am to live here, and how well positioned we are in the world.

The first thing I want to mention is an excellent New York Times blog post about the meaning of the Battle of Gettysburg, by Allen Guelzo. Briefly, Professor Guelzo makes a strong case that the Civil War, with Gettysburg as the turning point, helped refute the argument that democracies were unstable and could not survive. Given that democracy has become a de facto gold standard for government, the early elimination of the U.S. as an exemplar would have changed the way the world has evolved—for the worse.

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7/2/13 - Market Thoughts for July 2013 Video

July 2, 2013

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7/2/13 – Productivity and Education

July 2, 2013

There are many driving factors behind the potential crisis in student loans, but one of the largest is the increase in the cost of college over the past couple of decades. It’s difficult to derive the actual statistics from the data, but several datasets I reviewed show that the college education inflation rate is between 150 percent and 200 percent of the base price inflation rate. Financial planning courses suggest planners use a similar ratio.

In a previous post, I talked about why service industries, such as medicine and education, are much more difficult to scale. Inputs—doctors and teachers—become less effective with scale, which means that costs go up with size. That’s why medical and educational expenses increase faster than overall prices.

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7/1/13 – Health Care Costs: Time Bomb or Improving Trend?

July 1, 2013

Probably the most important industry in America, for many reasons, is health care. As a percentage of the economy, as a growth sector, and, of course, as a key to people’s health, this industry touches everyone in multiple ways. It is so central, in fact, that many would deny it’s an industry at all. Doctors refer to themselves, as they should, as professionals serving patients, not the economy.

But health care is an industry, and it does take money; as such, what happens here affects the country as a whole. Precisely because it’s been seen as something beyond economics, health care has been more or less exempt from the contractionary forces operating on the rest of the economy.

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