Tag Archives: economics

3 Charts That Show Stock Market Euphoria Is Totally Unprecedented

My Comments: I’m thinking of getting into the markets. That’s a sure sign the bottom will soon drop out.

Jesse Felder on March 18, 2017

Last week I focused on fundamentals, sharing 3 charts that show stock market valuations are totally unprecedented. This week I’ll focus on sentiment.

When looking at sentiment many people like to look at surveys. I prefer to look at what people are actually doing with their money. It’s a fact that we are now seeing record inflows into the equity markets but how do we put this into context?

First, I would just note that Rydex traders have been a good contrarian indicator for a long time. They recently positioned themselves more bullishly than any time in the history of this fund family, even surpassing the peak seen during the height of the dotcom mania.

I also like to look at margin debt, or total borrowing in brokerage accounts, as way of assessing speculative fervor. Nominal margin debt recently hit a new record high but I prefer to normalize this measure by comparing it to the size of the economy. This adjusted measure also recently hit a new, all-time high greater than that set in 2000.

Finally, we can look at household financial assets invested in the stock market compared to those in money market funds. Here is where we see the direct result of 7 years of zero percent interest rate policy. Households now have more than 15 times as much money invested in stocks than they do in money market funds, well beyond anything we have seen since the invention of these cash vehicles.

With as much money as they are now pouring into the equity markets, investors might do well to remember that bull markets aren’t born on euphoria.

Source: http://seekingalpha.com/article/4056252-3-charts-show-stock-market-euphoria-totally-unprecedented

The US Is Going Through a Profound Demographic Shift That Will Affect Everyone

My Comments: Our economy is dying. And it has nothing to do with Republicans or Democrats. It has to do with demographics.

A solution is to encourage immigration, a source of new people to add to the labor force, buy homes, buy cars, buy groceries, buy insurance policies, and everything else normal people do. Yes, there are going to be some bad apples, just like there are bad apples today. Think Timothy McVea, the white American Christian who killed 160 people a few years ago in Oklahoma.

The challenge is similar to the one I teach people who are investing money; it’s not risk that is bad, it’s the inability to manage that risk that is bad. When it comes to immigration, it’s not the immigrants who are necessarily bad, but our inability to welcome the good ones and at the same time figure out how to screen for those who would do us harm.

The consequences of dramatically limiting immigrants to this country is a slow economic death, and forcing hard working people who might otherwise be on a path to citizenship, is foolish and stupid. Especially if you think free enterprise with a goal of making money is a viable objective.

If we are going to follow 45 and invest $1T in infrastructure, and at the same time reduce the existing $17T federal debt, we’re going to need lots of immigrants.

by Patrick Cox / March 6, 2017

The US fertility rate fell again last year, marking the lowest rate of reproduction since the CDC started keeping records in 1909. This prompted the amusing Bloomberg headline, “Make America Mate Again.”

The above chart shows that in 2015, there were only 62.5 births per 1,000 women of childbearing age. That fertility rate dropped even further, touching 62.3 births per 1,000 women, in the first half of 2016.

Demographic Headwinds

To put the fertility rate in perspective, it is now at about 1.85 births per woman. To maintain a stable population requires at least 2.1 births per woman. The US has been at or below the replacement fertility rate since 1972, as the chart below shows.

Demographers worry that a dwindling birth rate will hurt economic growth and tax revenues needed to fund transfer payments to a growing elderly population. Some project that fertility rates will rise when the economy expands.

If the Trump administration achieves higher economic growth, it’s unlikely to do so fast enough to support the mandated 9% increase in entitlement spending for older Americans without more deficit spending. Trump says he intends to preserve Social Security and Medicare spending levels, but he seems unaware of the demographic headwinds we are sailing into.

Few policymakers grasp the profound impact of an inverting demographic pyramid, simply because it has never happened before.

The Cure for a Broken Dependency Ratio

History does show, however, that there’s been a persistent downward ratchet effect in the US fertility rate: the downward movement may be temporarily interrupted, but then it resumes again.

Moreover, this is a long-term trend. Fertility rates began falling prior to World War II, despite the temporary uptick that led to the baby boom (blue segment of line). This chart shows births per 1,000 people in the US.

In short, the population dynamics that have broken the dependency ratio and created the unfunded liability crisis worsened in 2016. This dynamic won’t change fast enough to prevent a crisis that can only be fixed by extending health spans.

With longer health spans, older people can live healthier and longer and be more economically productive. They can then support their own retirements instead of relying on fewer and poorer young people to do so.

The 5 Worst Possible Shocks To The Economy; From Washington, D.C.

My Comments: Fixing what ails us ain’t going to be easy. Especially when the two political parties are more intent on having the other fail than doing what we hired them to do in the first place.

My future is limited while that of my children and grandchildren has decades to run. Economics, despite it being hard for most of us to understand, is at the heart of a credible financial future for the vast majority of us. What follows are five things that must not happen.

Stan Collender, Forbes Contributor / Mar 5, 2017

What had been widely expected to be sure bets and slam dunk policy changes has quickly turned into multiple missteps and infighting as the White House and congressional GOP find it difficult to shift from opposing and resisting to legislating and governing.

Yes…as it planned…Congress did adopt a fiscal 2017 budget resolution in January. But that first (and by far easiest) step in the Trump/GOP economic strategy is the only one it has completed. The January 27 deadline Congress set for itself on the Affordable Care Act has long since been passed with no action by either the House or Senate and none expected anytime soon.

Meanwhile, the ACA repeal and replace saga is about to run smack into a series of economic events and requirements that will force the White House and Congress to devote their time, energy and political capital to other issues. This includes the soon-to-expire suspension of the national debt ceiling, the Trump fiscal 2018 budget that presumably will be released the middle of March (we’ll see), a continuing resolution that if not dealt with by April 29 will cause a government shutdown and a 2018 congressional budget resolution fight that could greatly complicate both repeal and replace/repair/rename and tax reform.

In a bout of irrationally optimistic expectations, investors and their advisors still seem to be assuming (or is it wishing and praying?) that it somehow will all come together. And the Trump/GOP economic policies may indeed all still happen even if they don’t occur as originally planned.

But in light of the unexpected that’s already happened, several new possibilities need to to be added to Wall Street’s calculus.

There are 5 economic policy-related events that aren’t currently being priced in by investors that will send severe shockwaves through the markets if they occur. Instead of a wrench, any of these 5 will throw a nuclear bomb into the GOP’s economic policymaking efforts.

1. No Tax Reform
As I’ve posted before, the corporate tax reform that seemed to be such a sure thing right after the election is now in trouble substantively, conceptually, procedurally and politically. It’s already hard to see it being enacted and going into effect in 2017, and it may still may not be in place in 2018. If the GOP loses House seats in the 2018 election, tax reform may have to wait until after 2020.

2. OMB Director Mick Mulvaney Resigns Or Is Fired
Trump’s budget plans are at odds with the preferences of the House Freedom Caucus, the group of 30-50 ultra fiscally conservative House Republicans who have the power to stop the president’s economic plans dead in their tracks. Before becoming Trump’s OMB director, Mick Mulvaney was a HFC leader and his at least tacit approval of the spending, tax and deficit changes the president wants will be one of the biggest reasons they’re enacted.

But as a member of Congress, Mulvaney specifically rejected much of what Trump is going to propose. If those plans or the compromises needed to get them adopted become more than he can stomach, it’s not hard to imagine Mulvaney leaving the cabinet. That would give the House Freedom Caucus license to oppose the president’s economic agenda.

3. Congress Refuses To Raise The Debt Ceiling
As noted above, the current suspension of the national debt ceiling expires shortly…on March 15. The Bipartisan Policy Center said last week that the Treasury will be able to manipulate the federal government’s cash balances until sometime this fall. What happens then, however, is anyone’s guess.

The common assumption is that congressional Republicans, who routinely opposed debt ceiling increases during the Obama administration, will hold their noses and vote to increase it this time when it’s needed. But that’s anything but certain, especially if the House Freedom Caucus feels that it has given up enough on everything from repeal and replace to tax cuts and military increases that aren’t offset with spending reductions elsewhere.

And just to complicate the situation further, OMB Director Mulvaney (see #1) steadfastly opposed raising the debt ceiling when he was a member of Congress.

4. An Annual $ Trillion Deficit
It’s both conceivable and likely that, in spite of the guarantees given during the campaign, the Trump economic and budget policies coupled with the now seemingly inevitable tightening of monetary policy by the Federal Reserve will lead to an annual budget deficit of $1 trillion or more as early as fiscal 2019. The total increase in the national debt during the first 4 years of the Trump administration could range between $4 trillion and $5 trillion.

5. A Downgrade Of U.S. Debt By The Rating Agencies
The last time the federal government’s credit rating was downgraded was in August 2011 when Standard & Poor’s said it was taking the action because the U.S. needed to raise the debt ceiling and have a “credible” plan to deal with long-term debt. S&P also said the government had become less effective or predictable.

Since then the U.S. debt held by the public has increased by about $4 trillion. And all of the same factors that convinced S&P to downgrade in 2011 will be present again in 2017.

RIP The Affordable Care Act. Maybe.

My friend Bill Goodman wrote this and posted it to his Facebook page. My thoughts about what he wrote follow his comments.

Approximately 50 percent of the students in Alachua County come from households that qualify them for free or reduced lunch services. Most of these students’ parents are employed and work one or more jobs to make ends meet. Reducing or taking away healthcare entirely for these families would take us backwards, rather than forward in our quest to provide quality healthcare to all of our citizens.

As a school counselor and Supervisor of Student Services for the Alachua County Public School System, I lived through the time period when many students did not have access to healthcare except through an emergency room visit. With the support of federal funds Children’s Medical Services came to life in Alachua County, and a few years later we had school nurses on our school campuses to provide health services to all students, but especially to students who were most in need of proper healthcare and medical guidance in their lives.

Students living in families that can afford healthcare do better in school and in life. Prior to these services being made available to students and their families, children were forced to go to emergency rooms to access healthcare. This is a horrible place for a child to have to go to get healthcare. Yes they had access, but because of the time and distance involved to access this most expensive form of healthcare, many students simply did not receive healthcare at all.

Under the Affordable Care Act (ACA), and with the federal funding for Children’s Medical Services and school nurses, these children and their parents have had adequate healthcare/medical services in an appropriate healthcare setting. The new healthcare legislation, as it is written, is NOT the improvement that Republicans promised. It would boot many low and middle class income families off the healthcare rolls, and force them back into emergency rooms to receive healthcare services. We live in the WEALTHIEST NATION IN THE WORLD. What is needed is a redistribution of our tax dollars with a higher percentage of those dollars going to healthcare and education. A healthy, well-educated citizenry is what is needed to move our country forward.

Please call or email your Congressman and Senators and ask them to VOTE NO on the new healthcare legislation being proposed by Republicans in Congress. Legislation that can IMPROVE OUR CURRENT HEALTHCARE SYSTEM IS POSSIBLE. We simply have to put politics aside.

(TK) My thoughts. I’ve sold health insurance policies to individuals, families and small business owners for over 40 years. Before the ACA came into being, the average annual premium, for the same level of benefits, was increasing about 8% to 10% every year. How long do you think it would take to overwhelm all of us if left unchecked? A significant portion of those annual increases resulted from forcing those on the lower end of the economic spectrum to use emergency care facilities for their health care. Much of the rest of it comes from drug companies.

There are 5 principal stakeholders in the American health care system. Individually, none of them has enough leverage to cause a correction and provide a remedy. They are the hospital industry, insurance companies, the medical profession, the drug manufacturers and we the public. Hospitals, drug companies and insurance companies don’t give a damn about better health care. They make more money when health is bad. The medical profession does care, but their focus is to deal with those of us who are already unhealthy and encourage the rest of us stay healthy. That leaves you and I and we can only hope we can afford care when we need it.

Keep in mind we have the most expensive health care system on the planet, and by every metric the health care outcomes are surpassed by dozens of other countries, including longevity, at a lower cost. Nothing in the Republican alternative to the ACA addresses the roots of this fact.

The relevance of the ACA for me was the creation of an overriding structure under which the five stakeholder can adapt and probably survive. But I would have you keep in mind who the politicians are beholden to: drug companies, the hospital industry, and the insurance industry. Unless and until we the public are willing to remove from elected office those who would do us harm, we can expect to pay and pay and pay and watch the unfortunate suffer and die too soon.

Yes, the ACA has flaws, but the premise is sound, both economically, socially and politically. It’s OK to have a difference of opinion but for the life of me, I cannot understand the animus among the Republicans for better health care for all Americans, especially those on the lower end of the economic spectrum. Since we don’t allow them to simply suffer and die, why not save money by making sure they are healthy so they can effectively contribute to society and pay taxes? Offering tax credits to those who don’t earn enough to pay taxes is a shameful way to promise a benefit that cannot be used.

If the objective is to make money, a healthy and motivated workforce seems to be in everyone’s best interest.  Unless we as a society are OK with letting people die in the street, you would think we’d elect people committed to finding a way to provide meaningful healthcare for ALL OF US.

The American Dream is Fading, and May Be Very Hard To Revive

30-rk-fam-1955My Comments: From age 10, I grew up in middle America with an educated father, a full time mother and a dog. It was assumed I would go to college, get a job, be self sufficient, and at the very least maintain the same standard of living as my parents.

I achieved that goal but that expectation is fading. The economic threshold promised by higher education is lower than it was when I was in college. We can argue ‘till the cows come home why this is so, but the reality is causing young people to struggle where I did not.

Economic inequality in this country is increasingly dramatic, and in my opinion, the cause of much of the tension we experience and describe as racial, as urban vs rural, as educated vs uneducated, and so on.

If there is a reason to try and preserve the integrity and opportunity for greatness in this country, then our political leaders have to address income inequality or we can kiss our ass goodby.

by Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, Jimmy Narang December 8, 2016

The American dream isn’t dead, but it’s got one foot in the grave, according to new research.

The Washington Post reports that 92% of people born in 1940 earned more money at 30 years old than their parents did when they were the same age.
Researchers say doing better than your parents is the American dream, economically speaking. But for people born in 1980, that percentage had dropped to 51, according to the Wall Street Journal.

That means barely half of today’s 30-somethings are doing better than their parents. People born in the middle class and the Midwest have seen the steepest declines. The New York Times calls it some of the “most eye-opening economics work in recent years,” as well as “deeply alarming.”

A slowing economy alone doesn’t explain the drop off in the American dream, and researchers place the blame largely at the feet of growing inequality.

Over the past 30-some years, nearly 70% of income gains went to just the richest 10% of Americans. Researchers say that if inequality had stayed where it was in 1970, 80% of today’s 30-year-olds would be out-earning their parents.

“We need to have more equal growth if we want to revive the American dream,” researcher Raj Chetty says.

Without addressing inequality, researchers say the economy would need to grow 6% annually to reverse these trends. Donald Trump is only promising to grow it by 3.8% per year; experts say it’s more likely to be closer to 2%. (The American lawn, too, has seen better days.)

25 Reasons To Help Avoid Economic Suicide

pieter-bruegel-the-younger-proverbs-2My Comments: Don’t freak out yet! Yes, this is about economics and for some of you, it might as well be written in Russian or Greek. But it is relevant to your future standard of living. Try hard to at least get through the first paragraph. And let me know your thoughts.

Mark J. Perry Tuesday, February 14, 2017

It’s a scientifically and mathematically provable fact that all tariffs, at any time and in any country, will harm economic growth, eliminate net jobs, destroy prosperity, and lower the standard of living of the protectionist country because tariffs are guaranteed by the ironclad laws of economics to generate costs to consumers that outweigh the benefits to producers, i.e. tariffs will always impose deadweight losses on the protectionist country (see diagram below, and “An economic analysis of protectionism clearly shows that Trump’s tariffs would make us poorer, not greater“). That is, the reality that tariffs always inflict great economic damage and leave society worse off is not a debatable outcome, rather it’s a provable fact, like the law of gravity.

(There’s a chart that goes here. It’s complicated. If you want to see it, visit the source: https://goo.gl/i2rOkZ )

Update: There is plenty of empirical evidence showing that protectionism and tariffs always generate costs to consumers that are far in excess of the benefits to producers (i.e. deadweight costs) see CD posts here, here and here.

The Justification

So why is protectionism being taken so seriously, and given so much credibility, when it’s actually a job-destroying, prosperity-destroying form of economic suicide and an economic death wish?

Here are my top 25 reasons that explain why protectionism is taken so seriously, despite the fact that it’s guaranteed to impoverish America and destroy jobs, not make us “great again”:

1. The false belief that trade is a zero-sum game (win-lose), when in fact it’s win-win.
2. The costs of protectionism to consumers are mostly hidden.
3. The benefits of protectionism to producers are easily identifiable and visible.
4. The jobs saved by protectionism are observable and visible.
5. The jobs lost from protectionism are not easily observable or visible.
6. The benefits of protectionism to individual producers are very high (e.g. $300,000 annual increase in revenues per sugar farm from trade barriers for foreign sugar).
7. The costs of protectionism to individual consumers is very low (e.g. $5-10 per year in higher sugar prices per person due to sugar tariffs), although the costs in the aggregate of protectionism are very high.
8. The costs of protectionism to consumers are delayed over many years.
9. The benefits of protectionism to producers are immediate.
10. Producers seeking the benefits of protectionism are concentrated and well-organized.
11. Consumers paying the costs of protectionism are dispersed and disorganized.
12. There is a huge political payoff to politicians from protectionism in the form of votes, political support, and financial contributions from protected domestic firms and industries.
13. There is a huge political cost to politicians who attempt to remove or lower trade barriers in the form of lost votes, support and financial contributions from previously protected domestic producers.
14. The pathological, but false obsession that exports are good.
15. The pathological, but false obsession that imports are bad.
16. The fact that most Americans work for a company that produces a single product or group of similar products (e.g. cars, steel, textiles, appliances) and are therefore favorably disposed to supporting protectionist trade policies that benefit their employer and industry.
17. The fact that American consumers purchase hundreds, if not thousands of individual products, goods and services, and are therefore unlikely to be fully aware of the negative effects of protectionism or be motivated to fight protectionism.
18. Many Americans think that exporting US products is patriotic.
19. Many Americans think that importing foreign products is unpatriotic.
20. The false belief that trade deficits are a sign of economic weakness.
21. The false belief that trade surpluses are a sign of economic strength.
22. The fact that protectionism is guaranteed to create economic deadweight losses is not easily understood, nor are those losses easily observable or measurable.
23. The general lack of economic literacy among the general public.
24. The general lack of economic literacy among politicians, or their intentional disregard for the economics of protectionism in favor of enacting public policies that help them get re-elected.
25. The failure to recognize that most imports are inputs purchased by American firms, which allow them to be as competitive as possible when selling their outputs in global markets.
26. Taken together, the 25 reasons above help us understand the popularity of protectionism, despite the fact that it’s guaranteed to inflict great economic harm. Protectionism is popular primarily for political reasons, not economic reasons. To paraphrase Thomas Sowell, the first lesson of international economics is that free trade makes us better off and protectionism makes us worse off.
27. The first lesson of politics when it comes to international trade is to ignore the first lesson of international economics, and impose protectionist trade policies when they further the political interests of short-sighted elected officials. When politicians can count on the economic illiteracy of the general public and their blind patriotism to “Buy American,” the political payoffs from protectionism are too tempting to ignore despite the reality that it’s a form of economic suicide.
28. And because the benefits of tariffs to producers (and jobs created or saved) are concentrated, immediate and visible, while the costs to consumers (and jobs lost) are diffused, delayed and invisible, it’s pretty easy to understand why protectionism is popular, even though the economic costs far outweigh the economic benefits (i.e. deadweight losses result) and it’s therefore ultimately a form of self-inflicted economic poison.

Why China Doesn’t Need The U.S. For Trade

USA ChinaMy Comments: China First! Are you OK with China leading the world through the 21st Century? While I have issues with the politics of Steve Forbes, I have no issues with the credibility of Forbes Magazine, who published this article by Winter Nie.

Now that Trump has ceded global economic leadership to China, it’s important to now understand what has to happen in this country for us to maintain the economic role we still have, much less once again ride to the top.

Consider this: price is the number assigned to something you want to buy. As a ten year old, if I wanted a piece of bubble gum that came with a picture of a baseball player, I had to give the store person 5¢. The same principal applies today when I gas up my car; I give them about $2.30 for every gallon I need.

Right now that $2.30 is much less than it was a couple of years ago, principally because there are a lot more gallons of gas available for me to buy. The demand has not shrunk but the supply has increased. Ergo the price went down.

Starting a trade war with China, given the state of our mature economy today, is going to mean we lose. There is only one way we might win and that’s to embrace immigration. With hundreds of thousands of additional people available for low end jobs, the price of labor will go down, and the US will grow. At the same time, in order for the Trump voters to gain what they want, they will have to be educated, or re-educated, so they can move into the higher paying jobs that will result from growth.

Unless you’re OK with China leading the world through the 21st Century.

Winter Nie | February 7, 2017, in Forbes magazine

During his election campaign, President Donald Trump threatened to impose 35% to 45% tariffs on Chinese imports to force China into renegotiating its trade balance with the U.S. The immediate result of that would be a fierce trade war that America would almost certainly lose. And while we don’t know yet whether Trump will follow through with this threat, his abandonment of the Trans Pacific Partnership (TPP) in his first few days in office is an indication that he is not shying away from his campaign pledges.

Trump is now entering uncharted waters. He has already demonstrated his ignorance of Asian affairs when he publicly accepted a phone call from Taiwan’s president, Tsai Ing-wen, in December, and shortly afterwards announced that he didn’t understand the “One China” policy, or why he should respect it. His abandonment of the TPP will simply accelerate China’s displacement of America as the world’s leading economic power.

For the moment, China has decided to wait for the U.S. to make the first move. A trade war would be problematic for the region, not least for South East Asia, which would be most likely to suffer negative fallout as a major trade partner to both the U.S. and to China. But it would not be a disaster for China, mainly because the U.S. needs China more than vice versa.

Unfortunately for Trump, it’s not the 1980s anymore. Twenty years ago, the situation might have been different. China was dramatically underdeveloped, and it wanted access to Western technology and manufacturing techniques. China has most of what it needs now, and what it doesn’t have it can easily obtain from vendors outside the U.S. While the American market looked enticing a few decades ago, it is relatively mature, and today the newer emerging market countries have become much more interesting to Beijing.

The fastest growing markets for the best items China produces, like laptop computers and cell phones, are in developing regions such as India, Latin America, and Africa. In contrast, China itself is a market that the U.S. can hardly ignore. By the end of 2015, Chinese consumers had bought 131 million iPhones. The total sales to U.S. customers during the same period stood at only 110 million. And iPhones are only a small part of U.S. exports. Boeing, which employs 150,000 workers in the U.S., estimates that China will buy some 6,810 airplanes over the next 20 years, and that market alone will be worth more than $1 trillion.

Were Trump to start a trade war, the most immediate effects would probably be felt by companies like Walmart, which import billions of dollars of cheap goods that are bought mostly by the people who voted Trump into office. The prices on almost all of these items would quickly skyrocket beyond the reach of the lower economic brackets—not because of manufacturing costs, but because of the tariffs. The result would be an economic war of attrition that China is infinitely better positioned to win.

China’s foreign currency reserves now stand at more than $3 trillion. In contrast, the U.S. has foreign exchange reserves that hover at around $120 billion. Trump’s tariffs would automatically trigger penalties against the U.S. in the World Trade Organization (WTO), and might even lead to the WTO’s collapse, which would lead to higher tariffs against U.S. exports. While it might take a while for that to happen, the turmoil would be catastrophic for American business and employment. China, on the other hand, would emerge relatively unscathed.

In fact, the importance of the U.S.-China relationship is already being challenged by other players. Apple’s iPhone sales in China are running into competition from local Chinese manufacturers, and Samsung is more than happy to fill any void that the Chinese can’t deal with. Likewise, the Chinese would happily shift their trillion dollars in future aircraft purchases to Airbus, a European firm that is already building a plant in China to finish assembly of large, twin-aisle jets. As for automobiles, most Chinese would just as soon drive a Mercedes, BMW, or Lexus as a Ford.

Both China and leading economic experts hope that a trade war won’t happen. The American political system is relatively mature with checks and balances, but with a president who often acts uniquely based on his own beliefs regarding complex issues, almost anything is possible.