"The no-brainer step: investing in index funds." - an excerpt from A Random Walk Down Wall Street by Burton G. Malkiel
The book A Random Walk Down Wall Street was published in 1973. The theory behind the book was to invest in a basket of stocks or an index rather than individual stocks. The reason was simple; human investment outside of the index more often than not lags behind the index return. There are multiple reasons for this but one of the main ones is that the cost of trading makes it a negative sum game so it is far better just to buy and hold the index than to spend countless hours trying to beat the market. Malkiel's theory was based on the theory that the market is efficient so there is no way to extract any additional benefit from trading.
Since then a new industry has sprung up called Exchange Traded Funds or ETFs. In the good old days of 1993 when the first ETF was launched to track the S&P 500 (called the SPDR or termed "spider") it seemed like a good idea. Not only could you use the SPDR to invest in the S&P 500 at a fraction of the cost of buying all the stocks individually but you could also use it to hedge or protect your portfolio by buying Put Options on the ETF. Two problems solved in one go!
From this lowly beginning ETFs have become common place. The top 100 ETFs command over $1 trillion of market capitalization. Behind these top 100 come thousands of less well known ETFs. You can literally buy an ETF for anything. Some of the more bizarre ones are Uranium, Global Carbon, Global X Lithium and Livestock Sub index just to name a few. You can buy a 3x Bear Fund that will move three times faster than a market collapse and on the flip you can buy a 3x Bull ETF.
However with all this proliferation of ETFs there come numerous side effects. First of all there is an increase in overall market risk. With innovative financial products meant to reduce risk, often times there comes an increase in the overall market risk in the form of increased market volatility. Traders believing that they can protect their portfolio by structuring downside protection take on ever more risk to achieve their returns. They have to as the cost of protection needs to be more than offset in order to produce a return. In addition if you believe that you are protected then you will risk more than if you are not. Think about cars as an example: how fast do you drive now that you have airbags and state of the art brakes versus driving with no seat belts and a sharp stake in the middle of the steering wheel? The faster you drive negates a lot of the new safety features so more safety features are required to keep you alive and then the faster you drive because you feel protected!
Second is that with the large array of ETFs comes a large array of exotic trading strategies. It is these strategies that could easily derail a burgeoning market when it least expects it much like the blow up of the Whale trade for Morgan Stanley. How about a trade of 2x Oil prices coupled with an S&P 500 bear strategy? Or what about betting on a a spike in the Daily 2x Vix against an S&P 500 bear coupled with a dollar short? Now consider that these are the types of trades going on and if there is a widening of the "normal" spread traders are forced out. Then consider what happened when Long Term Capital Management went bust and they were home to a number of Nobel Prize economists! Now put that horsepower in the hands of thousands and who knows what can happen and it need not even be a market catastrophe but just a trade gone wrong.
Third is a break in the true function of the market. Stock markets exist to provide companies with the ability to raise money by selling an equity ownership in the company to investors. If investors are not interested in buying individual company stocks but turn more and more of their attention to indices there is a disconnect between the value of stocks that are part of the index and those that are not. This is a very real problem in the small company space and has resulted in a barrier to entry for small companies to raise cash through an IPO.
Furthermore there seems to be a lack of concern for individual company earnings. A company can miss earnings and really have no impact on your ETF as it makes up only a small portion of the portfolio. Why even care just buy the ETF? What this does is skew the trading to those companies that are in the ETF at the expense of those that are not. There are plenty of excellent stocks that languish at low price to earnings multiples while ETF participants are rewarded for the simple reason that they are included in the index. There is already talk that Facebook's stock will recover when it becomes part of the spider index regardless of their poor numbers.
The amusing part of this all is that Malkiel's premise was that if you just buy the index you would take advantage of the efficient market whereas now with the proliferation of all of the ETFs the theory of efficient markets itself is falling apart. So just when you think your are safest there is more risk present than meets the eye.
Friday, August 31, 2012
Friday, August 24, 2012
The Debt Drag
"The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. America has a debt problem and a failure of leadership. Americans deserve better. I, therefore, intend to oppose the effort to increase America's debt." - Barrack Obama
"The debt they ran up in the first year of the Obama administration is bigger than the last four years of Bush combined." - Mitch McConnell
In a follow on from last week's blog I want to explore the idea that consensus when it comes to the outlook for higher interest rates and inflation and lower levels of real debt may be completely off target. While a lot of my analysis will focus on Japan I will once again note that there are a lot of differences between Japan and the United States both structurally and socially. Although there is definitely a different mind set in Japan in terms of savings and investments as well as in politics and economic size the most striking difference is that Japan has a current account surplus even while it is running massive budget deficits. In the United States we have neither and both are worsening each year.
First we will look at the level of debt in Japan.
As you can clearly see Japanese debt as a percent of GDP is above 200 percent and climbing. This is far in excess of where the United States is but even with this level of debt there is still a large demand for Japanese bonds both locally and from abroad. Furthermore Japanese yields have been effectively zero for decades and yet investors continue to buy them. Regardless of this effort to stimulate the economy through increase the debt level and keeping interest rates low the country continues to be mired in a deflationary spiral.
The effect of this on Japanese stocks is marked.
As you can see Japanese stocks have been mired in a downward spiral for decades. As the Japanese government tried to kick start the economy by printing money the debt level grew. This has crowded out private enterprise creating a drag on GDP growth and has kept a lid on Japanese stocks. If there is no growth or if growth is muted by government crowding out stocks will languish and this is the case in Japan.
There is another issue bubbling in Japan however and that is the aging of the Japanese population. As in the United States, Japan faces a huge burden from the aging population. A large portion of this demographic holds investments in the Government Pension Fund which in turn invests 63 percent of its assets in Japanese bonds. They are going to have to start selling these to meet obligations and this may be what breaks the low interest rate environment in Japan. The effect of this could be catastrophic for Japanese industry and may actually drive stocks lower. Furthermore the interest on the debt paid by the government is being kept to a minimal level due to the low interest rates. Should interest rates spike higher it would not take long for the Japanese government to find itself in a worse predicament than Greece. There is one caveat though, they will be able to depreciate their currency!
Turning to the United States you can see that the debt levels, while not nearly as high as the Japanese, are spiralling higher at an alarming rate. Furthermore as it has now crossed over 100 percent of GDP the drag on economic growth is being and will be felt for years to come.
The amazing thing is that the psychology of the US investor is stuck on stock investments.
One key though is the little chart at the bottom of the US stock chart. This shows the volume levels for the S&P 500. As you can see while the market continues higher the volumes are steadily dropping. Now for stocks to fall all you need is no volume while the opposite is true for stocks to rise. So the question is why are stocks in the United States rising when the debt level is spiralling and the volumes are dropping?
To me it is back to the market psychology in the United States. As far as most investors and investment gurus are concerned you have to be invested in stocks. This thought is teleported straight to you through numerous television channels and shows as well as through legions of financial planners. I would argue that this is nonsense and that you should shun it as an investment unless you trade it professionally or have a massive investment portfolio for the simple reason that the chips are heavily skewed against you.
A book written by Buchanan called "Ubiquity: Why Catastrophes Happen" highlights some interesting data. Effectively the argument goes that in the markets stability and complacency breads instability. Just like a child throwing buckets of sand onto a pile of sand at some point the sand pile collapses. Now not all of it may collapse and sometimes the slide is small but other times it is drastic, you just never know when it will happen and how large the issue will be you just know that it is only a matter of time. The same thing happens in the markets. As things appear stable more and more risk is taken (as it is perceived that the equilibrium level will remain the same forever) until eventually everything collapses. At the time the collapse happens most people are bullish but once the pile crashes down people become risk averse as they have been burned. In fact the opposite should be true. Be risk averse when the pile gets too high and buy whatever you like when the pile collapses as the risk has been removed.
My hypothesis is then that the United States interest rates just as they did in Japan can and will continue to remain low and even potentially fall further for a significant period of time even while the Federal Reserve prints money hand over fist. Why? Because there is nowhere else to invest that offers the supposed safety of the Untied States. This debt level will create a massive drag on GDP growth for years to come (as it has in Japan) and will come at the expense of the stock market and its upside. Remain patient and wait for your time as when the opportunity presents itself those with the cash will be able to scoop up what they want for pennies on the dollar and that is worth waiting for!
"The debt they ran up in the first year of the Obama administration is bigger than the last four years of Bush combined." - Mitch McConnell
In a follow on from last week's blog I want to explore the idea that consensus when it comes to the outlook for higher interest rates and inflation and lower levels of real debt may be completely off target. While a lot of my analysis will focus on Japan I will once again note that there are a lot of differences between Japan and the United States both structurally and socially. Although there is definitely a different mind set in Japan in terms of savings and investments as well as in politics and economic size the most striking difference is that Japan has a current account surplus even while it is running massive budget deficits. In the United States we have neither and both are worsening each year.
First we will look at the level of debt in Japan.
As you can clearly see Japanese debt as a percent of GDP is above 200 percent and climbing. This is far in excess of where the United States is but even with this level of debt there is still a large demand for Japanese bonds both locally and from abroad. Furthermore Japanese yields have been effectively zero for decades and yet investors continue to buy them. Regardless of this effort to stimulate the economy through increase the debt level and keeping interest rates low the country continues to be mired in a deflationary spiral.
The effect of this on Japanese stocks is marked.
As you can see Japanese stocks have been mired in a downward spiral for decades. As the Japanese government tried to kick start the economy by printing money the debt level grew. This has crowded out private enterprise creating a drag on GDP growth and has kept a lid on Japanese stocks. If there is no growth or if growth is muted by government crowding out stocks will languish and this is the case in Japan.
There is another issue bubbling in Japan however and that is the aging of the Japanese population. As in the United States, Japan faces a huge burden from the aging population. A large portion of this demographic holds investments in the Government Pension Fund which in turn invests 63 percent of its assets in Japanese bonds. They are going to have to start selling these to meet obligations and this may be what breaks the low interest rate environment in Japan. The effect of this could be catastrophic for Japanese industry and may actually drive stocks lower. Furthermore the interest on the debt paid by the government is being kept to a minimal level due to the low interest rates. Should interest rates spike higher it would not take long for the Japanese government to find itself in a worse predicament than Greece. There is one caveat though, they will be able to depreciate their currency!
Turning to the United States you can see that the debt levels, while not nearly as high as the Japanese, are spiralling higher at an alarming rate. Furthermore as it has now crossed over 100 percent of GDP the drag on economic growth is being and will be felt for years to come.
The amazing thing is that the psychology of the US investor is stuck on stock investments.
One key though is the little chart at the bottom of the US stock chart. This shows the volume levels for the S&P 500. As you can see while the market continues higher the volumes are steadily dropping. Now for stocks to fall all you need is no volume while the opposite is true for stocks to rise. So the question is why are stocks in the United States rising when the debt level is spiralling and the volumes are dropping?
To me it is back to the market psychology in the United States. As far as most investors and investment gurus are concerned you have to be invested in stocks. This thought is teleported straight to you through numerous television channels and shows as well as through legions of financial planners. I would argue that this is nonsense and that you should shun it as an investment unless you trade it professionally or have a massive investment portfolio for the simple reason that the chips are heavily skewed against you.
A book written by Buchanan called "Ubiquity: Why Catastrophes Happen" highlights some interesting data. Effectively the argument goes that in the markets stability and complacency breads instability. Just like a child throwing buckets of sand onto a pile of sand at some point the sand pile collapses. Now not all of it may collapse and sometimes the slide is small but other times it is drastic, you just never know when it will happen and how large the issue will be you just know that it is only a matter of time. The same thing happens in the markets. As things appear stable more and more risk is taken (as it is perceived that the equilibrium level will remain the same forever) until eventually everything collapses. At the time the collapse happens most people are bullish but once the pile crashes down people become risk averse as they have been burned. In fact the opposite should be true. Be risk averse when the pile gets too high and buy whatever you like when the pile collapses as the risk has been removed.
My hypothesis is then that the United States interest rates just as they did in Japan can and will continue to remain low and even potentially fall further for a significant period of time even while the Federal Reserve prints money hand over fist. Why? Because there is nowhere else to invest that offers the supposed safety of the Untied States. This debt level will create a massive drag on GDP growth for years to come (as it has in Japan) and will come at the expense of the stock market and its upside. Remain patient and wait for your time as when the opportunity presents itself those with the cash will be able to scoop up what they want for pennies on the dollar and that is worth waiting for!
Friday, August 17, 2012
Words Not Action!
"I think they're now in Phase Three which is really jawboning." - Gary Shilling
Over the past few months there really has been no action on the part of the Federal Reserve or for that matter any of the central banks of the world but there has been a lot of talk about potentially doing something soon. Cases in point are some of the numerous headlines out of prominent newspapers such as the Wall Street Journal and the New York Times;
So what drives the markets higher? I recently read an article that threw some light on human behavior and particularly on the behavior of traders. The authors of the article tested the testosterone levels of traders that were making money versus those that were not and what they found was that the more money a trader made the higher his testosterone went. Furthermore traders are encouraged by their employers to take on more risk even as their hormones push them towards recklessness. So it appears that the largest bets are placed right at the time when prudence is needed. This certainly seems to pinpoint the arrogance of some of the large trading houses and Morgan Stanley's Whale trade.
On the surface then if traders are making money by forcing the market higher any signal is enough to push things higher. In fact it is clear looking at historic trends that markets go far further than anyone considers possible before imploding spectacularly. This lack of rationality right at the point when it is needed most has and will cause wild swings in market prices.
So while there are constant cries from the central bankers that they stand ready to act, the world is rapidly slipping into another recession. As in the past the Federal Reserves policy has always been and seems to continue to be to try to kick start inflation. Getting inflation going raises up the value of assets (although it only benefits the few who own the assets at the expense of those that do not) making debt a smaller percent of the asset value. This way you can keep the debt level the same and magically you have it under control. Printing money normally works but at this stage of the "recovery" and after unprecedented money printing this has not happened yet.
Behind the scenes the traders consensus is that with money printing comes inflation and with inflation comes fantastic returns to stock investors. Buying into this strategy means becoming aggressive early. Get in and wait for inflation to raise up all ships. The first mover who is now trading stocks ever higher is expecting inflation to start, however until the velocity of money starts to move things will remain benign leading at some point to a revaluation of the stock portfolio. Now what if the velocity of money remains static for an extended period? Is that even possible?
Well the first thing to consider is that we are deeply into uncharted territory as far as money printing goes and it appears that we are not done yet. I recall an article printed by the Economist back in 2006 saying that the global real estate bubble was a $30 trillion bubble. We all have seen the effects of that burst bubble so can a few trillion here and there from central bankers plug this hole and stave off the vacuum caused by this pop? With Europe almost certainly in a recession it looks likely that the US will enter one soon (although I have argued it will be shallow) but it could point to a prolonged slow recovery devoid of inflation and that could disastrous consequences. Why? Without inflation suddenly the debt that has been built up will not become a smaller percent of GDP but rather will continue to spiral higher leading to even larger budget deficits and long drawn out periods of recession as governments fight to contain spending right when it is needed most.
This thesis certainly is not appealing but it seems that with everything consensus is not often right and this time may be no exception. Printing money on a scale as large as the coordinated global money printing binge taken on by the central bankers of the globe may result in an overburdening of debt. This massive debt level (as I have argued) will crowd out private sector growth and will result in more and more frequent recessions. I will delve more deeply into this topic next week but ensure that you stay patient and maintain the course of prudence and a commitment to not risking your hard earned assets any time soon because the market will only listen to jawboning for a short period of time.
Over the past few months there really has been no action on the part of the Federal Reserve or for that matter any of the central banks of the world but there has been a lot of talk about potentially doing something soon. Cases in point are some of the numerous headlines out of prominent newspapers such as the Wall Street Journal and the New York Times;
- Weak Report Lifts Chance of Fed Action - Wall Street Journal
- Fed Weighs More Stimulus - Wall Street Journal
- Fed Moves Closer To Action - Central Bank Prepares Steps to Spur the Economy Unless Recovery Picks Up - New York Times
- Wary Fed Is Poised To Act - Wall Street Journal
- ECB Signals Readiness To Do More - Wall Street Journal
- ECB will do "whatever it takes to preserve the euro and, believe me, it will be enough" - Mario Draghi
So what drives the markets higher? I recently read an article that threw some light on human behavior and particularly on the behavior of traders. The authors of the article tested the testosterone levels of traders that were making money versus those that were not and what they found was that the more money a trader made the higher his testosterone went. Furthermore traders are encouraged by their employers to take on more risk even as their hormones push them towards recklessness. So it appears that the largest bets are placed right at the time when prudence is needed. This certainly seems to pinpoint the arrogance of some of the large trading houses and Morgan Stanley's Whale trade.
On the surface then if traders are making money by forcing the market higher any signal is enough to push things higher. In fact it is clear looking at historic trends that markets go far further than anyone considers possible before imploding spectacularly. This lack of rationality right at the point when it is needed most has and will cause wild swings in market prices.
So while there are constant cries from the central bankers that they stand ready to act, the world is rapidly slipping into another recession. As in the past the Federal Reserves policy has always been and seems to continue to be to try to kick start inflation. Getting inflation going raises up the value of assets (although it only benefits the few who own the assets at the expense of those that do not) making debt a smaller percent of the asset value. This way you can keep the debt level the same and magically you have it under control. Printing money normally works but at this stage of the "recovery" and after unprecedented money printing this has not happened yet.
Behind the scenes the traders consensus is that with money printing comes inflation and with inflation comes fantastic returns to stock investors. Buying into this strategy means becoming aggressive early. Get in and wait for inflation to raise up all ships. The first mover who is now trading stocks ever higher is expecting inflation to start, however until the velocity of money starts to move things will remain benign leading at some point to a revaluation of the stock portfolio. Now what if the velocity of money remains static for an extended period? Is that even possible?
Well the first thing to consider is that we are deeply into uncharted territory as far as money printing goes and it appears that we are not done yet. I recall an article printed by the Economist back in 2006 saying that the global real estate bubble was a $30 trillion bubble. We all have seen the effects of that burst bubble so can a few trillion here and there from central bankers plug this hole and stave off the vacuum caused by this pop? With Europe almost certainly in a recession it looks likely that the US will enter one soon (although I have argued it will be shallow) but it could point to a prolonged slow recovery devoid of inflation and that could disastrous consequences. Why? Without inflation suddenly the debt that has been built up will not become a smaller percent of GDP but rather will continue to spiral higher leading to even larger budget deficits and long drawn out periods of recession as governments fight to contain spending right when it is needed most.
This thesis certainly is not appealing but it seems that with everything consensus is not often right and this time may be no exception. Printing money on a scale as large as the coordinated global money printing binge taken on by the central bankers of the globe may result in an overburdening of debt. This massive debt level (as I have argued) will crowd out private sector growth and will result in more and more frequent recessions. I will delve more deeply into this topic next week but ensure that you stay patient and maintain the course of prudence and a commitment to not risking your hard earned assets any time soon because the market will only listen to jawboning for a short period of time.
Friday, August 10, 2012
Coincident or Not?
"Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom." - Viktor E. Frankl
In order to track economic growth or contraction economists use three types of indicators - leading, coincident and lagging. The first two point to where we are headed and where we have come from and the middle one points to where we are now. These measures are relatively vague but are used to estimate the future and are used to determine whether an economy is in an expansionary or a recessionary (contraction) cycle. Normally people focus on the leading indicators, but as the economy is dragging along at a snails pace of 1.5% annual growth it is worth taking a look at the coincident indicators.
So what components of the economy makes up the coincident indicator? There are four components; employment, real income growth, real wholesale sales and industrial production. It is clear that the economy has not recovered in terms of employment.
So the last index to look at is industrial production which amazingly is firing on all cylinders. So if that is going well then we should be able to stave off a recession right? Well it is hard to imagine that with the drags of a struggling consumer and Europe that industrial production can last. You need to be able to sell the products that you are creating. Also in the past this growth in industrial production resulted in more employment as factories started to hire, but as you saw above this has not happened this time around.
So what is the outlook? As I have been saying for a while now it appears that for the present time the United States is relatively insulated from the rest of the world's problems but a hiccup in Europe could push us into a recession. Furthermore until Europe can fix its problems and the United States can wean itself off the intravenous support of printing money there will be a fiscal drag on economic growth that will continue to mute any form of a recovery.
The long and short of it is that if we are in a recession it should be mild and if we are not in one then the slow growth and constant personal struggles will continue for an extended period and will feel much like a prolonged recession. So now is not the time for pressing the accelerator. Prepare yourself for a long slow recovery by making sure that wherever you invest it is protected from any bumps in the road.
In order to track economic growth or contraction economists use three types of indicators - leading, coincident and lagging. The first two point to where we are headed and where we have come from and the middle one points to where we are now. These measures are relatively vague but are used to estimate the future and are used to determine whether an economy is in an expansionary or a recessionary (contraction) cycle. Normally people focus on the leading indicators, but as the economy is dragging along at a snails pace of 1.5% annual growth it is worth taking a look at the coincident indicators.
So what components of the economy makes up the coincident indicator? There are four components; employment, real income growth, real wholesale sales and industrial production. It is clear that the economy has not recovered in terms of employment.
Also in comparison to other recoveries the employment picture continues to lag and this has impacted real personal income (people have less discretionary income to spend on luxuries). In fact the current cycle has the auspicious title of being the worst recovery in real personal income on record! There are not many people that can look in their wallet and see extra cash, in fact most people are wondering how they will be able to cover their bills let alone take a Caribbean Cruise.
Real wholesale sales appear to be holding up fairly well but I expect that these numbers will start to trend lower as this recovery cannot continue without a marked improvement in real personal income.
So the last index to look at is industrial production which amazingly is firing on all cylinders. So if that is going well then we should be able to stave off a recession right? Well it is hard to imagine that with the drags of a struggling consumer and Europe that industrial production can last. You need to be able to sell the products that you are creating. Also in the past this growth in industrial production resulted in more employment as factories started to hire, but as you saw above this has not happened this time around.
So what is the outlook? As I have been saying for a while now it appears that for the present time the United States is relatively insulated from the rest of the world's problems but a hiccup in Europe could push us into a recession. Furthermore until Europe can fix its problems and the United States can wean itself off the intravenous support of printing money there will be a fiscal drag on economic growth that will continue to mute any form of a recovery.
The long and short of it is that if we are in a recession it should be mild and if we are not in one then the slow growth and constant personal struggles will continue for an extended period and will feel much like a prolonged recession. So now is not the time for pressing the accelerator. Prepare yourself for a long slow recovery by making sure that wherever you invest it is protected from any bumps in the road.
Friday, August 3, 2012
OMG - It Is Up To The Policians
"Politics, it seems to me, for years, or all too long, has been concerned with right or left instead of right or wrong." - Richard Armour
Taking a look at the various data points available to the Federal Reserve and the rest of the investment world it is clear that while there are some positive signs there are a myriad of negative data points offsetting those. In order to create a strategy that gets the economy (and for this blog I will selfishly look at the United States economy) out of its current malaise is now out of the control of the Federal Reserve and in the hands of a group of self-serving politicians. Until the political leaders look inward and consider the implications of all their self-serving policies this economy will continue to stagnate and will continue to benefit a few at the expense of the majority.
So first off, why do I believe that the Federal Reserve is powerless to tinker and save us once again? In my opinion another round of quantitative easing will not work and will create more pain at a later stage than any perceived current benefit. Since 2000 and the era of Greenspan the answer has been to print money and in essence this has not worked. We owe trillions of dollars and throwing a few more hundred billion at the problem will only result in another bubble or worse will result in a loss of faith in the US economy causing untold grief. Certainly there are some good data points at present, interest rates are low and housing prices seem to have leveled off. That said housing overall is stable but there are pockets of continued distress where housing prices continue to fall (such as Atlanta) while other pockets are rising rapidly (Phoenix, Las Vegas and San Diego) averaging to a stable market. This points to a speculative market rather than one based on true fundamentals but that is for another discussion. The stock market continues to power higher and this week the job market seemed to pick up slightly.
On the negative side the stock market seems completely manipulated and while employment this week looked better, the overall unemployment level rose to 8.3%. This is after five years of printing money! Furthermore while the United States seems to have insulated itself relatively well against any exogenous shocks from Europe and China, as those countries continue to struggle the threat of an economic down draft is still high. Furthermore, printing more money will crowd out the private sector even more and will continue to drag on economic growth. So for these reasons I believe that another round of quantitative easing will do nothing to stimulate but will do everything to put more money into the hands of the wealthy while having no impact on the overall economy.
So who can change things? Well I hate to be the bearer of bad news but it appears to me that our fate is in the hands of the politicians. They have created the mess through their party policies and until these party policies are changed and aligned to repairing the issues at hand there is no way out. Last week's blog about Inequality showed how the playing field has been radically shifted in the favor of big business at the expense of the innovators and the engine of any economy - small business. These policies were not done last year or the year before but have slowly been implemented since the 80's (shaped through various laws and influenced by lobbying and special interest groups) and have now created a system whereby it really does not matter who is president as either way their policies end up moving back to the center and back to their funding sources and lobbying groups interests. As the ingrained political thought process is one of catering to large business, until there is a change in these policies there is little that the Federal Reserve can do to repair the problem and certainly printing more money will not do the trick!
Changing the playing field will not happen overnight (it took over 30 years to get us to where we find ourselves now), but a leader that can actually implement change is needed now. The people are ready, they were ready four years ago when Obama swept to power with the ideal of change, the shame of it is that after four years little has changed other than we are now more of a welfare state than ever and we have a burdensome heath care system. Had change come in the form of improving the ability to innovate and compete by stimulating small and medium sized businesses combined with spending money on "shovel ready projects" to improve the countries infrastructure we would be in a far better situation than we are today. Unfortunately trillions of dollars has already left the building and party politics seems to have become more entrenched than ever. Furthermore I doubt that either Obama or Romney is the man to do this job! However while the outlook is bleak there is still time and our only hope is that one of these men will take a leadership role that implements the much needed changes but it appears that the next four years will once again be more of the same.
Taking a look at the various data points available to the Federal Reserve and the rest of the investment world it is clear that while there are some positive signs there are a myriad of negative data points offsetting those. In order to create a strategy that gets the economy (and for this blog I will selfishly look at the United States economy) out of its current malaise is now out of the control of the Federal Reserve and in the hands of a group of self-serving politicians. Until the political leaders look inward and consider the implications of all their self-serving policies this economy will continue to stagnate and will continue to benefit a few at the expense of the majority.
So first off, why do I believe that the Federal Reserve is powerless to tinker and save us once again? In my opinion another round of quantitative easing will not work and will create more pain at a later stage than any perceived current benefit. Since 2000 and the era of Greenspan the answer has been to print money and in essence this has not worked. We owe trillions of dollars and throwing a few more hundred billion at the problem will only result in another bubble or worse will result in a loss of faith in the US economy causing untold grief. Certainly there are some good data points at present, interest rates are low and housing prices seem to have leveled off. That said housing overall is stable but there are pockets of continued distress where housing prices continue to fall (such as Atlanta) while other pockets are rising rapidly (Phoenix, Las Vegas and San Diego) averaging to a stable market. This points to a speculative market rather than one based on true fundamentals but that is for another discussion. The stock market continues to power higher and this week the job market seemed to pick up slightly.
On the negative side the stock market seems completely manipulated and while employment this week looked better, the overall unemployment level rose to 8.3%. This is after five years of printing money! Furthermore while the United States seems to have insulated itself relatively well against any exogenous shocks from Europe and China, as those countries continue to struggle the threat of an economic down draft is still high. Furthermore, printing more money will crowd out the private sector even more and will continue to drag on economic growth. So for these reasons I believe that another round of quantitative easing will do nothing to stimulate but will do everything to put more money into the hands of the wealthy while having no impact on the overall economy.
So who can change things? Well I hate to be the bearer of bad news but it appears to me that our fate is in the hands of the politicians. They have created the mess through their party policies and until these party policies are changed and aligned to repairing the issues at hand there is no way out. Last week's blog about Inequality showed how the playing field has been radically shifted in the favor of big business at the expense of the innovators and the engine of any economy - small business. These policies were not done last year or the year before but have slowly been implemented since the 80's (shaped through various laws and influenced by lobbying and special interest groups) and have now created a system whereby it really does not matter who is president as either way their policies end up moving back to the center and back to their funding sources and lobbying groups interests. As the ingrained political thought process is one of catering to large business, until there is a change in these policies there is little that the Federal Reserve can do to repair the problem and certainly printing more money will not do the trick!
Changing the playing field will not happen overnight (it took over 30 years to get us to where we find ourselves now), but a leader that can actually implement change is needed now. The people are ready, they were ready four years ago when Obama swept to power with the ideal of change, the shame of it is that after four years little has changed other than we are now more of a welfare state than ever and we have a burdensome heath care system. Had change come in the form of improving the ability to innovate and compete by stimulating small and medium sized businesses combined with spending money on "shovel ready projects" to improve the countries infrastructure we would be in a far better situation than we are today. Unfortunately trillions of dollars has already left the building and party politics seems to have become more entrenched than ever. Furthermore I doubt that either Obama or Romney is the man to do this job! However while the outlook is bleak there is still time and our only hope is that one of these men will take a leadership role that implements the much needed changes but it appears that the next four years will once again be more of the same.
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