March 4, 2014
The Ukraine crisis appears to be stalled for now, with Putin—having made his point and essentially occupied the Crimea—deciding to hold there, while the Europeans determine how to proceed. This is probably where we will be for some time, and the markets seem to concur, as they have bounced right back. Move along, nothing to see here.
I don’t necessarily think this story is over, but for the moment, let’s return to a longer-term issue that I discussed on Friday, the U.S. budget deficit. The Congressional Budget Office’s projections are below.
Over the weekend, as you no doubt have heard, Russia reportedly executed a military takeover of the Crimea region of Ukraine in response to last week’s pro-Western revolution. Markets are reacting this morning to the immediate fact of Russia’s action. As investors, we need to think about the context and likely outcome of the immediate situation before we respond.
First, let’s consider whether this is a short- or long-term action. For all the talk of bringing pressure on Russia to reverse the situation, the reality is that the West’s ability to exert any kind of meaningful pressure is limited or nonexistent. Without actually committing military force, we cannot effect change. Europe depends on Russian natural gas to heat its homes and operate its economy; Russia remains a major oil supplier to world markets. It’s impossible to cut Russia off economically, since Europe and world markets depend on it too greatly. From a military perspective, it’s the area’s strongest power. There’s no clear course of action for the West.
February 28, 2014
Add another to the list of “best since 2008” stats (although a better phrase might be “least worst since 2008”). The federal budget deficit for 2013 should come in around $680 billion, down from about $1.1 trillion in 2012.
As a citizen, I can’t help but applaud the drop. We are moving in the right direction. If we consider the deficit as a percentage of the economy as a whole, the improvement is even more substantial, since, in dollar terms, the economy has grown even as the deficit has shrunk. For 2013, the deficit is about 4.1 percent of the economy, down from more than 10 percent at the peak. In 2014, there’s a good chance it may shrink further, to a level below that of economic growth—which means the debt could actually start to shrink as a percentage of the economy. This is exactly where we need to be headed.
February 27, 2014
I was meeting with our asset management group this morning, and one of the topics of discussion was a strategy that hedges against inflation using swaps instead of TIPs. This is a fairly esoteric topic, certainly more so than I normally cover here, but it got me thinking about where inflation might be going and why. Is now the time to start thinking about this risk?
February 26, 2014
What is most interesting in the news is usually the dog that’s not barking. Economics and finance are pretty much absent from the headlines today. Instead, front-page articles in the major newspapers cover childhood obesity, NSA phone surveillance, the Ukraine, and seed-company data harvesting.
This is a shame, but pretty typical. Usually, the best place to look for what will be important in the future is deeper in the paper. Tomorrow’s front-page stories come from further back, and today they’re focused on taxes.
February 26, 2014
Check out Brad’s February 7 interview on Bloomberg Radio’s Taking Stock with hosts Pimm Fox and Carol Massar.
[audio http://theindependentmarketobserver.files.wordpress.com/2014/02/02072014-mcmillian.mp3]
February 25, 2014
Housing has been doing a back-and-forth over the past couple of days, with a number of stats down. Existing home sales were down 5.1 percent in January, with average home prices falling, and housing starts and homebuilder expectations also showing declines. At the same time, other stats, including price increases, remain very strong. In fact, in 2013, home prices rose the most since 2005. What’s going on?
The big picture here is that we should expect moderation in housing and understand that it’s actually a healthy thing. Within that big picture, we can look at several factors—weather, rising mortgage rates, and lower affordability—to decide whether the expected moderation in the housing recovery is going to turn into something worse.
February 24, 2014
There is a real asymmetry about how we treat market ups and downs. In the past couple of weeks, when the market dropped around 1 percent, I got phone calls from advisors and reporters asking why. How could this happen? Today, when the market is up about 1 percent, no calls at all. According to the Wall Street Journal, we are back at record highs, have erased all the losses so far in 2014, and all is right with the world.
February 21, 2014
As I’ve written many times before, profit margins are at or close to all-time highs. The reasons are many, but among the most significant are low wage growth (which has kept labor costs down), low effective (not face!) tax rates, and low interest rates. The argument that current equity valuations are reasonable implicitly assumes that these conditions will remain constant for the medium-term future, and I have had a problem with that.
So far, of course, I’ve been wrong. But I’m okay with it, because I expect over time to be right, and the trends are starting to indicate that might be happening. This week alone, several events have suggested these factors may become less favorable to business profits.
