"The higher the amount you put into higher education, at the Federal level particularly, the more the price of higher education rises. It's the dog that never catches its tail. You increase student loans, you increase grants, you increase Pell grants, Stafford loans, and what happens? They raise the price." - Bill Bennett
"I would get my student loans, get my money, register and never really go. It was a system I thought would somehow pan out." - Ray Romano
"By making college unaffordable and student loans unbearable, we risk deterring our best and brightest from pursuing higher education and securing a good paying job." - Mark Pocan
There is a lot of debate going on over the massive $1 trillion student debt that hangs over the heads of all demographics in the United States. This is not a unique situation as global student debts are rising rapidly. There is a concern that this debt level is stunting economic growth as these people struggle to afford to purchase houses, cars and other items that are required to stimulate the economy. Removing this debt, it is thought, would have a massive economic benefit because unlike other forms of debt, student loan debt is unable to be written off through bankruptcy (there are some cases where some of it can be eliminated but for all intents and purposes it is there until paid back).
The issue is that with the government providing loans to almost anyone, more and more people can pay (not necessarily afford) to be educated so the schools are able to continue to raise the cost of education without impacting enrollment. Think about it, if you own a school and you have 100 seats available but 5,000 applicants one way to reduce the number of applicants is to raise the fees until you are left with with only 1,000. From this group you can pick the top students keeping your standards high while increasing your profits significantly.
If governments stop intervening in the school process then school fees suddenly are left to the free markets. Loans would be far harder to come by, student enrollment would drop and schools would be forced to reduce fees. This is a very simple but effective method of taking care of the price of education but what about the students that now do not have access to higher education?
In a very interesting spin on this studies have revealed that higher education does not create wealth but rather hinders wealth creation. Now this flies in the face of consensus which says that the way to prosperity is to get educated. Furthermore this is also the drum that is beat by universities around the world but considering the source of the drum beat questioning it is probably valid as academics are experts at creating formula and science to fit previously created conclusions and calling it their own. In the business world there are too many examples to name but a few that spring to mind are Bill Gates of Microsoft, Steve Jobs of Apple and Mark Zuckerberg of Facebook, none of whom finished their formal education, all of whom have created significant wealth. In an aside Bill Gates received an Honorary Degree from Harvard once again showing how the academic world loves to take credit where none is due.
Now while schooling is required to become a professor, lawyer, engineer or a doctor the question that needs to be asked is does this create wealth and is there another way outside of a formal schooling to get you where you want to be financially? It turns out that most of the really successful people in the world relied far more on a mentorship or apprenticeship program than on any formal education. Thinking back to my formal education I have to say that there were plenty of classes that were of absolutely no value to my education, in fact I could point to a few classes that were beneficial but those could all have been taught in a few months rather than three years. The expertise and skill I have derived have all been post college and I would expect that for most of us it is similar. Take accounting for example, do you really need a degree in accounting to learn your way around a spreadsheet or a financial statement? Business is the same, do you really think that you will learn more or even anything about how to run a business effectively at Harvard versus a three year apprenticeship under the personal tutelage of a successful local entrepreneur? What you will get are a lot of very powerful contacts which you can use to your advantage but education about business will come from trial and error in the real world.
Now while you may not get paid much during your apprenticeship you will be far better qualified to maximize your wealth outlook through this program and you will not be saddled with mountains of student debt. The problem is that society has bought hook line and sinker into the formal education sector rather than embracing the model of apprenticeship. It is almost impossible to get a well paying job unless you have a degree but the question to ask yourself is do you want a well paid job and massive debt or the opportunity to create a massive amount of wealth by learning and using that money spent on education to jettison you into orbit? If you want the latter then you might want to follow the steps of those before you and certainly turning our government support off may not be such a bad idea after all.
Friday, August 29, 2014
Friday, August 22, 2014
Is Goldilocks in the House?
"An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. There are no exact markers of a Goldilocks economy, but it is characterized by a low unemployment rate, increasing asset prices (stocks, real estate, etc.), low interest rates, brisk but steady GDP growth and low inflation." - Definition of a Goldilocks Economy taken from Investopedia
I have surveyed all of my charts, data and other tea leaves to get a feel for the current rally that we are experiencing and all indicators point to higher. Now as you know this flies in the face of plenty of my other blogs that I have posted but I have to take the data at face value and while I still do not trust the rally, outside of some economic calamity it seems to point to higher. The question then is are we now in a Goldilocks economy and looking at the definition above, other than a stubbornly high unemployment rate it appears so.
Certainly we have low interest rates and rising asset prices. GDP growth seems moderate and companies have just reported the highest profit levels ever. Inflation seems tame by modern standards, crude oil prices are falling and with excess capacity from labor and factory output it appears that it will remain low. The global economy seems moderately robust, particularly if you take the recent rallies in international stock markets as an indicator, copper is rallying signifying global economic growth and with gold and silver and the VIX down substantially the fear trade seems to be off.
On the surface all is well so it is no wonder that the Federal Reserve is exiting their quantitative easing stimulus and I would be highly surprised if they are not completely done with their stimulus by the end of October. When you look at the dollar index it is breaking out to the upside and while this may hurt exports it does show support for the United States economy and allows the Federal Reserve to continue to issue bonds at low interest rates.
Now while all of the above sounds rosy I have to expect that there will be some repercussions from the Federal Reserve exit. The rally, now more than 1,000 trading days without a correction (10% price reversal) is very long in the tooth. Also looking at the hard numbers from Europe, Japan, China and the United States while the ship is sailing it is dragging the anchors of debt, high levels of government intervention and high unemployment. Also geopolitical problems are currently at extreme levels and any flare up in the Middle East or Europe could spark a correction. Until these anchors are raised I remain on the sidelines and watch things spiral higher. Jumping in head first at these levels is like jumping off a bridge without the bungee cord attached. So while the porridge might seem just right, it is cooling quickly and we know that too cold is just as bad as too hot.
I have surveyed all of my charts, data and other tea leaves to get a feel for the current rally that we are experiencing and all indicators point to higher. Now as you know this flies in the face of plenty of my other blogs that I have posted but I have to take the data at face value and while I still do not trust the rally, outside of some economic calamity it seems to point to higher. The question then is are we now in a Goldilocks economy and looking at the definition above, other than a stubbornly high unemployment rate it appears so.
Certainly we have low interest rates and rising asset prices. GDP growth seems moderate and companies have just reported the highest profit levels ever. Inflation seems tame by modern standards, crude oil prices are falling and with excess capacity from labor and factory output it appears that it will remain low. The global economy seems moderately robust, particularly if you take the recent rallies in international stock markets as an indicator, copper is rallying signifying global economic growth and with gold and silver and the VIX down substantially the fear trade seems to be off.
On the surface all is well so it is no wonder that the Federal Reserve is exiting their quantitative easing stimulus and I would be highly surprised if they are not completely done with their stimulus by the end of October. When you look at the dollar index it is breaking out to the upside and while this may hurt exports it does show support for the United States economy and allows the Federal Reserve to continue to issue bonds at low interest rates.
Now while all of the above sounds rosy I have to expect that there will be some repercussions from the Federal Reserve exit. The rally, now more than 1,000 trading days without a correction (10% price reversal) is very long in the tooth. Also looking at the hard numbers from Europe, Japan, China and the United States while the ship is sailing it is dragging the anchors of debt, high levels of government intervention and high unemployment. Also geopolitical problems are currently at extreme levels and any flare up in the Middle East or Europe could spark a correction. Until these anchors are raised I remain on the sidelines and watch things spiral higher. Jumping in head first at these levels is like jumping off a bridge without the bungee cord attached. So while the porridge might seem just right, it is cooling quickly and we know that too cold is just as bad as too hot.
Friday, August 15, 2014
Laws Can't Be Broken
"This is one of man's oldest riddles. How can the independence of human volition be harmonized with the fact that we are integral parts of a universe which is subject to the rigid order of nature's laws." - Max Planck
Almost everyone breaks the law every day. Just get into your car and I am sure that pretty much everyone does not come to a complete stop at every stop street or light, neither do you indicate for a full three seconds before changing lanes, not to mention following more than 4 car lengths behind the car in.front of you and don't even get me started on the speed limits! So imposed laws are often broken but the Laws of Nature can never be. These laws are set in stone. The universe follows these laws to the letter, that is just the way it is in nature.
Looking at the the fundamental law of investing that more risk should receive more reward and we find a blend of the human style imposed laws and the laws of nature in that this law is often bent but is never broken. In times of extreme fear or greed the boundaries of this equation or law are stretched to a breaking point and it is at these times when a reversion to the norm is in order. The problem with finance is that no-one knows exactly when this reversion will happen we just know that the boundaries are being stretched and the more that they are stretched the more likely it is that the reversion will occur sooner rather than later.
Looking around the world at the markets it is very apparent that the risk to reward investment is skewed toward high risk and low reward or extreme complacency. Take the stock market as an example, when you buy a stock you are expecting that future company cash flows will provide a base for continued company success and therefore a return on your investment. The higher the price that you pay the more risk you are taking as the risk premium, or the return, is compressed. The reason is that if the company growth is linear the returns should be linear therefore paying a higher price today should result in slower future stock appreciation to offset the premium paid. At present with the stock markets around the world all near or at all time highs with no real improvement in the global economic outlook it is clear that unless the outlook improves significantly that returns on new stock purchases will be far lower than during the past three years and have a high probability of being negative.
Another example is the high yield bond market. As investors have tried to find yield they have turned to increasingly risky investments. Yields of bonds in Greece, Portugal, Spain and Italy are at levels not seen since before the Great Recession began while their ability to service these debts has barely improved since 2008. Money from the housing bubble has flown into these high yield markets for the simple reason that the "carry" (the spread between the interest rate received on the investment less the cost to borrow the money to buy the investment) is so low that the investors are drawn in to invest in these assets believing that the spread will last for the life of the loan. Furthermore with money as cheap as it is right now investors believe that the problems will alleviate themselves by a magical wave of the wand as somehow more debt at lower interest rates will be the solution!
I could go on but it is clear that until investors realize that the investments that they are making are high risk with low levels of expected return and that the law requires a reversion, the markets will continue to compress the risk premiums. In such an environment it is not a case of if there will be another financial crisis it is just a matter of when do investors wake up to the lack of return and all run for the exits. Remember that you may get away with a few misdemeanors for a while but at some stage the law will enforce itself.
Almost everyone breaks the law every day. Just get into your car and I am sure that pretty much everyone does not come to a complete stop at every stop street or light, neither do you indicate for a full three seconds before changing lanes, not to mention following more than 4 car lengths behind the car in.front of you and don't even get me started on the speed limits! So imposed laws are often broken but the Laws of Nature can never be. These laws are set in stone. The universe follows these laws to the letter, that is just the way it is in nature.
Looking at the the fundamental law of investing that more risk should receive more reward and we find a blend of the human style imposed laws and the laws of nature in that this law is often bent but is never broken. In times of extreme fear or greed the boundaries of this equation or law are stretched to a breaking point and it is at these times when a reversion to the norm is in order. The problem with finance is that no-one knows exactly when this reversion will happen we just know that the boundaries are being stretched and the more that they are stretched the more likely it is that the reversion will occur sooner rather than later.
Looking around the world at the markets it is very apparent that the risk to reward investment is skewed toward high risk and low reward or extreme complacency. Take the stock market as an example, when you buy a stock you are expecting that future company cash flows will provide a base for continued company success and therefore a return on your investment. The higher the price that you pay the more risk you are taking as the risk premium, or the return, is compressed. The reason is that if the company growth is linear the returns should be linear therefore paying a higher price today should result in slower future stock appreciation to offset the premium paid. At present with the stock markets around the world all near or at all time highs with no real improvement in the global economic outlook it is clear that unless the outlook improves significantly that returns on new stock purchases will be far lower than during the past three years and have a high probability of being negative.
Another example is the high yield bond market. As investors have tried to find yield they have turned to increasingly risky investments. Yields of bonds in Greece, Portugal, Spain and Italy are at levels not seen since before the Great Recession began while their ability to service these debts has barely improved since 2008. Money from the housing bubble has flown into these high yield markets for the simple reason that the "carry" (the spread between the interest rate received on the investment less the cost to borrow the money to buy the investment) is so low that the investors are drawn in to invest in these assets believing that the spread will last for the life of the loan. Furthermore with money as cheap as it is right now investors believe that the problems will alleviate themselves by a magical wave of the wand as somehow more debt at lower interest rates will be the solution!
I could go on but it is clear that until investors realize that the investments that they are making are high risk with low levels of expected return and that the law requires a reversion, the markets will continue to compress the risk premiums. In such an environment it is not a case of if there will be another financial crisis it is just a matter of when do investors wake up to the lack of return and all run for the exits. Remember that you may get away with a few misdemeanors for a while but at some stage the law will enforce itself.
Friday, August 8, 2014
I'm Just Saying....
"The world is in greater turmoil than at any time in my lifetime." - Senator John McCain
While the Federal Reserve and out leaders continue to reassure us that everything is going according to plan, today's blog takes a look at the real world. You can draw your own conclusions (as I hope you always do) as I'm Just Saying...
First off the US GDP has not managed to post anything near a 3% annual growth number (the number required at a minimum to create jobs) since the end of the Great Recession even though we have thrown almost $4 Trillion at the problem. As this experiment in "stimulus" has provided no results the Federal Reserve is now reducing the purchases on a monthly basis. They have cut their "stimulus" from $85 billion a month to $25 billion and will cut another $10 billion in September and the remaining $15 billion in October. The reason for the slow withdrawal is that in the past when they stopped cold turkey the markets went into a tailspin and the one thing that they managed to manipulate higher was undone in a matter of weeks. So with much fanfare they have managed to sell Wall Street on the idea of a slow tapering and through the end July it was working as the markets continued their heavenly spiral unabated. Recently it appears that the markets are finally waking up to the reality that their stimulus is almost gone (I say "their" as this was the only place where it was actually producing results) and that the economy is not in any shape to take up the slack.
The high flier stocks have already been killed and although they have recovered some of their losses many are still down more than 30% from their highs. The market has now rotated from these stocks into the larger capitalized stocks but these too are starting to show signs of trouble ahead. Recently it took just a week for the market to essentially lose all of its upward momentum and a large portion of its returns for the year and based on the lack of bounce and follow through there is little reason to see any recovery bounce from here. The small cap index, the IWM, is down more than 3% for the year and this does not bode well for the market as a whole as this is the growth engine of the market.
On the global front there is more strife now than in many years. Just yesterday bombs were dropped in Iraq, Russia is still "negotiating" its way back into the Ukraine, Malaysia airlines have now lost two passenger planes and Afghanistan is as unstable as before the United States and the coalition forces arrived. Last week Portugal's second largest bank needed to be bailed out and the German economy stalled in the second quarter. Any thoughts that Europe's troubles were behind them can clearly be seen as smoke and mirrors.
Through all of this the Federal Reserve is trying to reassure the market that their policies are going to provide the economic growth that will provide jobs and stability, but the more that they try to manipulate the numbers the worse things are and the more unstable everything is becoming. What the Federal Reserve policies (and I am going back in time and not blaming all of this problem just on Janet Yellen, although she has left no doubt that she is on the same page as the rest of the chairs) have done is to create moral hazard, encourage the formation of asset bubbles, widen the wealth inequality gap, discourage and penalize savings and investment and monetize the government deficit spending. These policies have not created jobs or stimulated the economy but have left us with a huge debt to service and ultimately repay.
Now that they are trying to unwind their "stimulus" the market is awakening to the actual problems in the world. It appears that the party is over and will be until the Federal Reserve decides to try a "new" (read same old experiment again) which will produce worse results than the previous four or more (if you include Greenspan) erroneous policies but you can make up your own mind as to how to proceed, I'm Just Saying....
While the Federal Reserve and out leaders continue to reassure us that everything is going according to plan, today's blog takes a look at the real world. You can draw your own conclusions (as I hope you always do) as I'm Just Saying...
First off the US GDP has not managed to post anything near a 3% annual growth number (the number required at a minimum to create jobs) since the end of the Great Recession even though we have thrown almost $4 Trillion at the problem. As this experiment in "stimulus" has provided no results the Federal Reserve is now reducing the purchases on a monthly basis. They have cut their "stimulus" from $85 billion a month to $25 billion and will cut another $10 billion in September and the remaining $15 billion in October. The reason for the slow withdrawal is that in the past when they stopped cold turkey the markets went into a tailspin and the one thing that they managed to manipulate higher was undone in a matter of weeks. So with much fanfare they have managed to sell Wall Street on the idea of a slow tapering and through the end July it was working as the markets continued their heavenly spiral unabated. Recently it appears that the markets are finally waking up to the reality that their stimulus is almost gone (I say "their" as this was the only place where it was actually producing results) and that the economy is not in any shape to take up the slack.
The high flier stocks have already been killed and although they have recovered some of their losses many are still down more than 30% from their highs. The market has now rotated from these stocks into the larger capitalized stocks but these too are starting to show signs of trouble ahead. Recently it took just a week for the market to essentially lose all of its upward momentum and a large portion of its returns for the year and based on the lack of bounce and follow through there is little reason to see any recovery bounce from here. The small cap index, the IWM, is down more than 3% for the year and this does not bode well for the market as a whole as this is the growth engine of the market.
On the global front there is more strife now than in many years. Just yesterday bombs were dropped in Iraq, Russia is still "negotiating" its way back into the Ukraine, Malaysia airlines have now lost two passenger planes and Afghanistan is as unstable as before the United States and the coalition forces arrived. Last week Portugal's second largest bank needed to be bailed out and the German economy stalled in the second quarter. Any thoughts that Europe's troubles were behind them can clearly be seen as smoke and mirrors.
Through all of this the Federal Reserve is trying to reassure the market that their policies are going to provide the economic growth that will provide jobs and stability, but the more that they try to manipulate the numbers the worse things are and the more unstable everything is becoming. What the Federal Reserve policies (and I am going back in time and not blaming all of this problem just on Janet Yellen, although she has left no doubt that she is on the same page as the rest of the chairs) have done is to create moral hazard, encourage the formation of asset bubbles, widen the wealth inequality gap, discourage and penalize savings and investment and monetize the government deficit spending. These policies have not created jobs or stimulated the economy but have left us with a huge debt to service and ultimately repay.
Now that they are trying to unwind their "stimulus" the market is awakening to the actual problems in the world. It appears that the party is over and will be until the Federal Reserve decides to try a "new" (read same old experiment again) which will produce worse results than the previous four or more (if you include Greenspan) erroneous policies but you can make up your own mind as to how to proceed, I'm Just Saying....
Friday, August 1, 2014
The Beginning of the End?
"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning." - Winston Churchill
I have to say that Churchill is one of my all time favorite people to quote. He certainly had a way with words that inspired a generation. The words come from a speech at the Lord Mayor's Day luncheon in November 1942 when Britain was in the grips of the struggle to keep Germany off its shores and, at the time, it was looking pretty bleak for the British. In contrast to what was going on in 1942 the week in review is not even remotely as dismal although the market's were certainly roiled by the Argentina default and the weak outlook for United States economy in general. Not that this news (other than maybe Argentina) should be surprising to those of you who read this blog, but the question remains whether this down week marks a top in the market and a return to a bear market or just a blimp on the radar screen.
I have reviewed all of my economic data points and reviewed all of my charts and I have to say that the markets are looking particularly weak. The S&P 500, the Dow Jones and the NASDAQ all broke down through their 40 day moving averages and seem destined to test their 200 day moving averages about 10% below where they closed today. Fundamentally the US Dollar gained more strength as investors flocked to the safe haven (after being rattled by the Argentina mess) and this will weaken exports which has largely fueled U.S. economic growth.
On the debt side there was a sharp correction in the high yield bond world. This market was already at historic highs as investors desperate for yield pushed the yield on risky investments to historic lows. This bet was bound to result in pain and the high yield ETF plunged 5%. The recipient of this selling fueled buying in United States treasuries which saw the yield on the 10-Year Note fall to 2.52%. A continued sell off in this market is likely although until the market is completely spooked and investors lose confidence in the economy as a whole I doubt that we will see a panicked sell off just yet.
So while the numbers across the board were weak I am not sure that this weakness will spread into universal panic. A lot of my indicators are showing a high over sold level so I would expect some form of a bounce next week. Furthermore the selling was not panicked and in fact the markets staged a minor recovery in the middle of the day. This type of recovery buying is indicative of buyers not leaving the market so I would not be surprised to see a bounce early next week.
On the flip I would not say that this is a buying opportunity as the market is finally showing its true colors. The Federal Reserve support is weakening with every $10 billion reduction in the level of quantitative easing and volumes in the market (which show buyer conviction) were low (until the past two days). This is not a metric that you want to see - high volume on down days and low volume on up days as the tendency is for the dramatic market moves to be in the direction of the higher volume or in this case, down.
With weakening global fundamentals, the default out of Argentina and the loss of economic stimulus from the Federal Reserve the market is due for a correction. Furthermore the market rally is extremely long in the tooth and we are in the part of the year where volumes are low leading to volatility and weakness. For these reasons I would not try to time an entry to the market (in fact I would be a seller on any bounce) and would wait until the dust settles later in the year to pick a market direction, although as long time blog followers will know I would not be surprised to see a healthy correction sooner rather than later.
I have to say that Churchill is one of my all time favorite people to quote. He certainly had a way with words that inspired a generation. The words come from a speech at the Lord Mayor's Day luncheon in November 1942 when Britain was in the grips of the struggle to keep Germany off its shores and, at the time, it was looking pretty bleak for the British. In contrast to what was going on in 1942 the week in review is not even remotely as dismal although the market's were certainly roiled by the Argentina default and the weak outlook for United States economy in general. Not that this news (other than maybe Argentina) should be surprising to those of you who read this blog, but the question remains whether this down week marks a top in the market and a return to a bear market or just a blimp on the radar screen.
I have reviewed all of my economic data points and reviewed all of my charts and I have to say that the markets are looking particularly weak. The S&P 500, the Dow Jones and the NASDAQ all broke down through their 40 day moving averages and seem destined to test their 200 day moving averages about 10% below where they closed today. Fundamentally the US Dollar gained more strength as investors flocked to the safe haven (after being rattled by the Argentina mess) and this will weaken exports which has largely fueled U.S. economic growth.
On the debt side there was a sharp correction in the high yield bond world. This market was already at historic highs as investors desperate for yield pushed the yield on risky investments to historic lows. This bet was bound to result in pain and the high yield ETF plunged 5%. The recipient of this selling fueled buying in United States treasuries which saw the yield on the 10-Year Note fall to 2.52%. A continued sell off in this market is likely although until the market is completely spooked and investors lose confidence in the economy as a whole I doubt that we will see a panicked sell off just yet.
So while the numbers across the board were weak I am not sure that this weakness will spread into universal panic. A lot of my indicators are showing a high over sold level so I would expect some form of a bounce next week. Furthermore the selling was not panicked and in fact the markets staged a minor recovery in the middle of the day. This type of recovery buying is indicative of buyers not leaving the market so I would not be surprised to see a bounce early next week.
On the flip I would not say that this is a buying opportunity as the market is finally showing its true colors. The Federal Reserve support is weakening with every $10 billion reduction in the level of quantitative easing and volumes in the market (which show buyer conviction) were low (until the past two days). This is not a metric that you want to see - high volume on down days and low volume on up days as the tendency is for the dramatic market moves to be in the direction of the higher volume or in this case, down.
With weakening global fundamentals, the default out of Argentina and the loss of economic stimulus from the Federal Reserve the market is due for a correction. Furthermore the market rally is extremely long in the tooth and we are in the part of the year where volumes are low leading to volatility and weakness. For these reasons I would not try to time an entry to the market (in fact I would be a seller on any bounce) and would wait until the dust settles later in the year to pick a market direction, although as long time blog followers will know I would not be surprised to see a healthy correction sooner rather than later.
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