Tag Archives: Gainesville

Bull Market Complacency Calls for Caution—and Action

My Comments: Today is Monday, when I post something about investments. Scott Minerd is not only a global figure in this environment, he has the ability to reduce complex ideas to where even I can understand them. His message, as I understand it, is continue to ride the bull, but be prepared to panic at any time.

  June 09, 2017 | By Scott Minerd, Global CIO

By many measures, the stock and bond markets have rarely been more expensive and more stable, and that has me worried. High-yield bonds and mortgage-backed securities are both trading near their narrowest-ever spreads relative to Treasurys, and they have been hovering around these levels for months. At the same time, U.S. stock market indexes are continuing to make new highs while the Chicago Board Options Exchange Volatility Index (VIX), which measures option-implied S&P 500 volatility, is near its lowest level since 1993. The amount of complacency built into the markets argues for caution.

Plenty of events clustered around this summer and fall could potentially spell disappointment for the markets. In Europe, Emmanuel Macron may have handily won the presidential election in France, but there remains the French parliamentary elections next week. These elections may result in what the French call “cohabitation,” a term that describes when the president and the majority of the members of the French parliament represent two different parties, which has not happened in France since the 1997 election. Meanwhile, the U.K. election results have hobbled Theresa May’s mandate and created a cloud of uncertainty over the timing and direction of Brexit negotiations. German federal elections, due to take place in September, will test Angela Merkel’s conservative bloc.

In Washington, the focus is on the Senate version of the healthcare bill, which is unlikely to be finalized before the August recess. This delay could push back the timeline for enacting tax reform to 2018. This says nothing of the political uncertainty in Russia, North Korea, or in the Middle East.

As this realization settles in, I think some of the hope underpinning the markets will slowly erode this summer. History suggests that there is a high likelihood we will get some sort of shock in the second half of the year, which would lead to tightening financial conditions and widening credit spreads. I have seen it happen a number of times in my career: The stock market crash of 1987 and the Asian crisis in 1998 were both unexpected events late in a lengthy economic expansion that led to a brief but violent repricing of risk assets. Both events, however, were followed by at least two more years of an expanding economy.

Today we are on pace to set a record for the longest expansion in U.S. history, thanks in large part to the slow post-crisis recovery and accommodative monetary policy. The current upward slope of the yield curve offers no indication that it will end soon, but eventually it will, given the Federal Reserve’s indications that further tightening is needed. I believe we will see two more rate hikes in 2017, the next one occurring later this month, and at least three increases in 2018. I also expect that the Fed will announce in September a change to its balance sheet strategy that will involve a gradual tapering of reinvestments in 2018. This should put upward pressure on yields at the short end and the belly of the curve, where most of the new Treasury issuance is likely to come.
Even as conditions call for a healthy dose of caution, there is no need to panic longer term. There is still significant ongoing stimulus coming from the European Central Bank and the Bank of Japan.

The combination of these conditions argues for taking certain near-term portfolio actions. Investors should consider upgrading credit quality whenever possible while reducing exposure to high-yield bonds and stocks. Holding some dry powder* for opportunities that should arise amid a pickup in volatility later this year would be a wise move. With spreads near record tights, fixed-income investors simply are not being compensated for the risk they incur in the hunt for yield. Investors should remain disciplined and not chase returns now. It may not be the most exciting message, but no one ever took a loss by booking a gain.

As I see more life left in this economic expansion, I believe there will be opportunities later in the year to make up for any near-term underperformance. The coming correction might not happen tomorrow, but current conditions bring to mind the legendary response of Baron Rothschild, who, when asked the secret of his great wealth, said he made his fortune by selling early. It might be wise to follow Baron Rothschild’s example and take some chips off the table.

New Options in Long-Term Care Insurance

My Comments: Aging gracefully is not easy. When getting up in the morning is a struggle and you can’t remember if you’ve brushed your teeth, there may be a looming bump in the road. Dr. Gloom here again. I suppose there is value in denial. At least I hope so.

Couple that with both the staggering cost of professional care if you become goofy, and the mindset in Congress these days that it’s your fault if you haven’t already died, the looming bump in the road is increasingly difficult to manage. Here are some thoughts to help you overcome your fears.

In addition to what you read below, there are ways to use qualified money to leverage your dollars when it comes to paying for long term care needs.

July 05, 2016

According to the U.S. Department of Health and Human Services, almost 70% of Americans turning 65 today will need some type of long-term care (LTC) as they age. And 20% will likely need care for five or more years. Given that the annual cost of that care can extend into six figures, that’s a daunting prospect for many retirees.

“There’s no way to know for sure whether you’ll need long-term care,” says Carrie Schwab-Pomerantz, CFP®, president of Charles Schwab Foundation. “But if you do, it could jeopardize your retirement savings if you’re not prepared.”

For decades, purchasing a long-term care insurance policy has been a common solution. But many insurers—facing lower interest rates and higher claims payouts—have raised their premiums or stopped offering the policies.

Fortunately, the long-term care industry has developed a variety of new options that may provide more appealing coverage, given your needs and overall financial plan.

A new era of long-term care insurance

Traditional LTC policies (in addition to their increasing expense) are typically “use it or lose it” products, similar to homeowner’s insurance. You might pay premiums for years without ever needing coverage—and never get your cash back.

There are newer LTC policies, however, that are different. They’re often combination products that provide either a life insurance or annuity component and may allow premium returns. Here are three common types of newer long-term care policies, with some advantages and drawbacks.

1) Hybrid long-term care policies merge traditional long-term care insurance with life insurance, while offering a return of the premium.
The advantage of a hybrid policy is that it offers a benefit whether you need long-term care, pass away, or discontinue the policy and want your premiums back. That said, this type of policy also comes with drawbacks, including how the premiums are paid, as well as a higher bar to qualify for the coverage.

Hybrid plan premiums are typically paid in a lump sum, or spread out over a short period of time (10 years, for example). And because you’re paying for life insurance as well as LTC coverage, plus the return-of-premium feature, the cost can be prohibitive. Also, because this option bundles two products in one, you’ll need to qualify for both coverage types in order to get a policy.

2) Permanent life insurance policies with long-term care riders enable a percentage of the death benefit to be used for long-term care costs.
These policies can offer some payment flexibility—allowing lump sum premiums or annual payments over a lifetime. And their costs tend to be lower than other types of combined coverage.

The drawbacks? The policies don’t offer the return-of-premium option and the terms of reimbursement can be stringent. For example, with these policies a doctor must attest that your inability to perform basic activities is permanent—which could seriously limit the benefits you receive. For a traditional or hybrid LTC claim to be paid, on the other hand, you typically only need a doctor’s validation that you cannot perform certain activities of daily living (or that you’re cognitively impaired).

Similar to the hybrid policies above, applicants must also qualify for both life insurance and the LTC rider.

3) Annuities with long-term care riders have terms that are similar to those of fixed annuities. You typically purchase the annuity with a lump sum and receive a monthly benefit. In some cases, no extra cost is incurred for the long-term care component because it’s funded by the annuity premium.

For example, you can buy a deferred long-term care annuity with a lump sum premium. The annuity creates two funds: one for long-term care expenses, the other for whatever you choose. That said, the terms of the annuity dictate how much you can withdraw from each fund, and the tax implications can be complicated.

Given the complex terms of some annuity products, you may want the advice of a tax professional when exploring this option.

What to know, what to ask about LTC coverage

Buying LTC insurance can be an exacting process, but one that’s well worth it.

“Long-term care insurance can be staggeringly expensive, but so is the cost of care itself,” Carrie notes. In addition to examining the payment and coverage features, be sure to evaluate the insurer’s reputation and financial strength.

And when comparing options, make sure to ask the following questions:
• What sort of inflation protection does the policy offer?
• Are there limitations on preexisting conditions?
• Is Alzheimer’s disease covered?
• What is the lag time until the benefits kick in, and how long will they last?
• How often has the insurer raised rates?

What you can do next
With the cost of long-term care rising, now is a good time to explore how you can integrate LTC insurance into your financial plan

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.

Trump’s Thin Skin Shows CEOs Are Not Made For Politics

Pieter-Bruegel-The-Younger-Flemish-ProverbsMy thoughts on this: We can argue ‘till the cows come home whether Donald or Hillary is more reprehensible. And we can wonder if the other two national candidates will meaningfully affect the outcome next November.

Donald may indeed be a nice guy, but I’m not ready to cede him the prize as CEO of these United States of America. Because the skill sets necessary to be CEO of the USA are very different from the skill sets necessary for someone to be the CEO of a player in corporate America.

Frankly, I don’t think he has the necessary talent. To borrow a sports metaphor, someone may be a talented and very successful athlete, then become a fantastic position coach in football. But time and again, we see people promoted beyond their ability to be successful. In Gainesville, think Will Muschamp to name just one. I’m casting my vote for the person most likely to be a functioning CEO of these United States for the next four years. There is no do-over once the die is cast; it better be right.

Michael Skapinker, August 10, 2016, in the Financial Times

We need political leaders with real world experience. Too many of those who govern us have never worked outside politics. It is a frequent cry. But if we think business leaders are the answer, Donald Trump, the Republican presidential candidate, is providing a near-daily display of how hard it is to leap from running a business to winning elections.

There are two reasons. First, business leaders such as Meg Whitman and Carly Fiorina, who have both lost elections, did not seem to grasp that holders of political office have less control over events than does a chief executive. While a business boss can hire, fire, acquire and sell, even the US president is hemmed in by the constitution and can be stymied by Congress, as the political economist Francis Fukuyama has noted.

British prime ministers have more executive and legislative power but still have to accommodate rivals who might challenge for their job. The aggravation Tony Blair tolerated from his chancellor Gordon Brown? No chief executive would put up with it for a week, let alone 10 years.

The second and more important reason business leaders struggle in the political fray is that they are unprepared for the criticism, invective and ridicule they will have to endure.

The press does sometimes attack chief executives. Politicians occasionally attack them too. Hauled before legislative committees, they react badly to the kind of questioning a political office-holder expects as a matter of course.

Some respond truculently, as did British retailer Sir Philip Green when asked by a House of Commons committee in June to explain the shortfall in the pension fund of BHS, the chain he ran that has since gone bust. Or they blink into the bright lights of a televised hearing and stumble through their answers — which were the reactions of Starbucks, Amazon and Google executives when questioned about tax arrangements by a UK parliamentary committee in 2012, and US car industry chiefs when congressional inquisitors demanded to know why they had flown to Washington in their private jets in 2008.

Few business bosses know what it feels like to face the vituperation endured by politicians or to be caricatured relentlessly. Steve Bell, the Guardian cartoonist, decided that David Cameron’s shiny pink complexion made it look as if he had a condom over his head — and he drew the former prime minister that way for years. Zapiro, the South African cartoonist, always draws President Jacob Zuma with a shower growing out of his head — never allowing him to forget that while on trial in 2006 for allegedly raping a woman who was HIV-positive (he was acquitted), he said he had avoided infection by taking a shower.

Politicians may loathe these depictions but they have to put up with them. Mr Bell says Mr Cameron once said to him “you can only push a condom so far” — which he wrote on the back of the moving truck in the cartoon he drew last month of the Camerons leaving 10 Downing Street.

Chief executives, by contrast, are surrounded by managers and staff eager to win favour. Talking back to the boss does not get people far. Business leaders become used to the admiration but this can make them thin-skinned when outsiders criticise them. A retired business leader once called to yell at me for writing that he couldn’t take criticism.

Politicians’ press officers try to bully critics too but those who successfully run for public office know they often have to let the brickbats sail by.

Any political leader could have told Mr Trump not to attack Megyn Kelly, a Fox News female television presenter, by saying she had “blood coming out of her eyes, blood coming out of her wherever”. A sensible politician would have responded to criticism from the parents of a dead US Muslim soldier by saying how much he respected their sacrifice, rather than suggesting, as Mr Trump did, that the soldier’s mother had been prevented from speaking at the Democratic convention.

Few chief executives are as abusive towards their detractors as Mr Trump. Even fewer speak as recklessly or pick as many fights. Many will, rightly, object to being likened to him. But he is just an extreme example of the narcissistic boss who, once in the public arena, is incredulous that people dare to criticise him.

7 Things That Will Soon Disappear Forever

My Comments: I try hard to worry only about the present and the future. Here are seven things I took for granted today that will soon be gone. Trying to bring these back, even if they hold good memories for us, will not be possible. I tell myself to get used to it, but it’s not always easy.

By David Muhlbaum, Ed Maixner and John Miley – April 19, 2016

Ten years ago, thousands of Blockbuster Video stores occupied buildings like the one above all over the country, renting DVDs and selling popcorn. Today, they’re virtually all gone. The company’s shares once traded for nearly $30. Now Blockbuster is a penny stock.

Obsolescence isn’t always so quick or so complete, but emerging technologies and changing practices are sounding the death knell for other familiar items. Check out these seven that we’ll be saying goodbye to soon.

Few things are as symbolic of farming as the moldboard plow, but the truth is, the practice of “turning the soil” is dying off.

Modern farmers have little use for it. It provides a deep tillage that turns up too much soil, encouraging erosion because the plow leaves no plant material on the surface to stop wind and rain water from carrying the soil away. It also requires a huge amount of diesel fuel to plow, compared with other tillage methods, cutting into farmers’ profits. The final straw: It releases more carbon dioxide into the air than other tillage methods.

The plow is winding down its days on small, poor farms that can’t afford new machinery. Most U.S. cropland is now managed as “no-till” or minimum-till, relying on herbicides and implements such as seed drills that work the ground with very little disturbance, among other practices.

By the end of this decade, digital formats for tablets and e-readers will displace physical books for assigned reading on college campuses, The Kiplinger Letter is forecasting. K–12 schools won’t be far behind, though they’ll mostly stick with larger computers as their platform of choice.

Digital texts figure to yield more bang for the buck than today’s textbooks. Interactive software will test younger pupils’ mastery of basic skills such as arithmetic and create customized lesson plans based on their responses. Older students will be able to take digital notes and even simulate chemistry experiments when bricks-and-mortar labs aren’t handy.

This is a mixed bag for publishers. They’ll sell more digital licenses of semester- or yearlong usage of electronic textbooks as their customers can’t turn to the used-book marketplace anymore. On the other hand, schools will seek free online, open-source databases of information and collaborate with other institutions and districts to develop their own content on digital models, cutting out traditional educational publishers.

Every year it seems that an additional car model loses the manual transmission option. Even the Ford F-150 pickup truck can’t be purchased with a stick anymore.

The decline of the manual transmission (in the U.S.) has been decades in the making, but two factors are, ahem, accelerating its demise:

Number one: Automatics are getting more efficient, with up to nine gear ratios, allowing engines to run at the lowest, most economical speeds. Many Mazdas and some BMWs, among others, now score better fuel mileage with an automatic than with a stick.

Number two: Among high-performance cars, such as Porsches, “automated” manual shifts are taking hold. They do away with the clutch pedal and use electronics to control shifting instead. The result: Shifting is faster than even for the most talented clutch-and-stick jockey. Plus, the costs on these are coming down, and they can be found in less-expensive sporty cars, such as the Golf GTI.

Even the biggest of highway trucks are abandoning the clutch and stick for automatics, for fuel-efficiency gains and to attract more drivers who won’t need to learn how to grind the gears.

A small segment of enthusiast cars, such as the Ford Mustang, as well as a few price-leader economy models, such as the Nissan Versa and Ford Fiesta, will continue to offer the traditional three-pedal arrangement for some years to come. “It will be reserved for the ‘driver’s vehicle,’” says Ivan Drury, an analyst for Edmunds.com. But dealers will stock only a handful of the cars, and some will need to be special-ordered.

First-class mail volume is plummeting, down 55% from 2004 to 2013. So, around the country, the U.S. Postal Service has been cutting back on those iconic blue collection boxes. The number has fallen by more than half since the mid 1980s. Since it costs time and fuel for mail carriers to stop by each one, the USPS monitors usage and pulls out boxes that don’t see enough traffic.

Some boxes will find new homes in places with greater foot traffic, such as shopping centers, public transit stops and grocery stores. But on a quiet corner at the end of your street? Say goodbye.

No, government energy cops are not going to come yank the lightbulbs out of your fixtures, as some firebrand politicians foment. But the traditional incandescent lightbulb that traces its roots back to Thomas Edison is definitely on its way out. As of January 1, 2014, the manufacture and importation of 40- to 100-watt incandescent bulbs became illegal in the U.S., part of a much broader effort to get Americans to use less electricity.

Stores can still sell whatever inventory they have left, but once the hoarders have had their run, that’s it. And with incandescent bulbs burning for only about 1,000 hours each, eventually they’ll flicker out.

The lighting industry has moved forward with compact fluorescents, LEDs, halogen bulbs and other technologies.

Soon, the only places you’ll still see the telltale glow of a tungsten filament in a glass vacuum will be in three-way bulbs (such as the 50/100/150 watt), heavy-duty and appliance bulbs, and some decorative bulbs.

If you are online, you better assume that you already have no privacy and act accordingly. Every mouse click and keystroke is tracked, logged and potentially analyzed and eventually used by Web site product managers, marketers, hackers and others. To use most services, users have to opt-in to lengthy terms and conditions that allow their data to be crunched by all sorts of actors.

The list of tracking devices is set to boom, as sensors are added to appliances, lights, locks, HVAC systems and even trash cans. Other innovations: Using Wi-Fi signals, for instance, to track movements, from where you’re driving or walking down to your heartbeat. Retailers will use the technology to track in minute detail how folks walk around a store and reach for products. Also, facial-recognition software that can change display advertising to personalize it to you (time for a mask?). Transcription software will be so good that many businesses will soon collect mountains of phone-conversation data to mine and analyze.

And think of this: Most of us already carry around an always-on tracking device for which we usually pay good money—a smart phone. Your phone is loaded up with sensors and GPS data, and will soon collect lots of health data, too.

One reason not to fret: Encryption methods are getting better at walling off at least some aspects of our digital lives. But living the reclusive life of J.D. Salinger might soon become real fiction.

If you want to hear the once-familiar beeps and whirs of a computer going online through a modem, you will soon need to do that either in a museum or in some very, very remote location.

According to a study from the Pew Foundation, only 3% of U.S. households went online via a dial-up connection in 2013. Thirteen years before that, only 3% had broadband (Today, 70% have home broadband). Massive federal spending on broadband initiatives, passed during the last recession to encourage economic recovery, has helped considerably.

Some providers will continue to offer dial-up as an afterthought for those who can’t or don’t want to connect via cable or another broadband means. But a number of the bigger internet service providers, such as Verizon Online, have quit signing up new dial-up subscribers altogether.

Andre The Giant

My Thoughts: Happened across an article about Andre the Giant yesterday. I remembered an event from  about 25 years ago while in the Atlanta airport. It was in a departure area with lots of people milling about, all of waiting to board. I glimpsed, perhaps 50 feet away, a face I thought I recognized from TV. Initially, I thought it was Andre the Giant, but this person wasn’t tall enough so I thought I was mistaken.

Several minutes later the crowd had thinned and I looked again. Same person, again no taller than I as he talked with other people. But I then realized he was sitting down on one of those departure area benches. It was definitely Andre the Giant and sitting down, his eyes were level with mine as I stood and stared, carefully.

David Goldenberg / 21 Dec 2015

There are 42 half- or full-page ads in the December 21, 1981 issue of Sports Illustrated, and 29 of them are for alcohol or cigarettes. But that two page photo spread featuring what appears to be a new miniature version of the Molson beer can? It’s not an ad at all. It’s the opening image to an amazing story about one of the largest characters the world has ever known: André Roussimoff, aka André the Giant.

You can find the whole article HERE.

The Fed: Mission Accomplished?

My Comments: I think the Fed’s raising interest rates the other day is more symbolic than meaningful. The follow on events were/are inevitable.

As usual, life does not move in a straight line. And like death and taxes, interest rates had to eventually move off Zero where they’ve been for many, many months. So moving the goal posts slightly toward an “up” number had to happen. The outcome is uncertain.

The challenge is not to simply second guess what the Fed did, but to try and understand the implications and attempt to manage the follow on. This article might help.

Dec. 20, 2015 by Peter Schiff

Summary:

  1. The Fed has finally raised rates.
  2. But this time they are in a more precarious position.
  3. It won’t go well this time around.

On May 1, 2003 on the flight deck of the USS Abraham Lincoln then President George W. Bush, after becoming the first U.S. president to land on an aircraft carrier in a fixed wing aircraft (in a dashing olive drab flight suit), declared underneath an enormous “Mission Accomplished” banner that “major combat operations” in Iraq had been concluded, that regime change had been effected, and that America had prevailed in its mission to transform the Middle East. 13 years later, after years of additional combat operations in Iraq, and a Middle East that is spiraling out of control and increasingly disdainful of America’s influence, we look back at the “Mission Accomplished” event as the epitome of false confidence and premature celebration.

The image of W on the flight deck comes to mind in much of the reaction to this week’s decision by the Federal Reserve to raise interest rates for the first time in nearly a decade. While many in the media and on Wall Street talked of a “concluded experiment” and the “dawning of a new era,” few realize that we are just as firmly caught in the thickets of failed policy as were Bush, Cheney, and Rumsfeld in the misunderstood quagmire of 2003 Iraq.
In its initial story of the day’s events, The Washington Post (12/16/15) declared that by raising the Fed Funds rate to one quarter of a percent The Fed is “ending an era of easy money that helped save the nation from another Great Depression.” Putting aside the fact that 25 basis points is still 175 points below the near 2.0% rate of core inflation that the government has reported over the past 12 months (and should therefore be considered undeniably easy), the more important question to ask is into what environment the Fed is apparently turning this page.

Historically, the Fed has begun its tightening cycles during the early stages of expansions, when the economy had enough forward momentum to absorb the headwinds of rate increases. But that is not at all the case this time around.

Prior to the recent Great Recession, there had been six recessions since 1969, and over those episodes, on average 13.3 months passed from the time the recession ended to when the Fed felt confident enough in the recovery to raise rates. (The lag time was just 3.5 months in the four recessions between 1971 and 1991). (The National Bureau of Economic Research, US Business Cycle Expansions and Contractions, 4/23/12)

But after the recession of 2008 – 2009, the Fed waited a staggering 78 months to tighten the monetary levers. Those prior tightening cycles also occurred at times when GDP was much higher than it is today. Over the prior six occasions GDP, in the quarter when the Fed moved, averaged a robust 5.3%. While the current quarterly GDP is still unknown, the data suggests that we will get a figure between 1% and 2% annualized. (Bureau of Economic Analysis)

Another key difference is the level of unemployment at the time the hikes occurred. As they started tightening much earlier in the expansion cycles, unemployment at the times of those prior recoveries tended to be high but falling. The average unemployment rate at the time the six prior tightenings occurred was 7.5%. But that average rate had fallen to 5.1% (a level that most economists consider to be “full employment”) an average of 42 months after the initial Fed tightening. In other words, those expansions were young enough and strong enough to absorb the rate hikes while still bringing down unemployment. (Bureau of Labor Statistics; Federal Reserve Bank of NY)

Our current unemployment rate has already fallen to 5.0% (mostly because workers have dropped out of the labor force). Few economists allow for the possibility that it could fall much lower. This is particularly true when you acknowledge the rapidly deteriorating economic conditions that we are seeing today.

As I stated in my most recent commentary, there is a growing troth of data that shows that the U.S. economy is rapidly losing momentum. Some data points, such as the inventory to sales ratio and the ISM manufacturing data suggest that a bona fide recession may be right around the corner (among them, this week’s truly terrible manufacturing PMI and industrial production numbers, a very weak Philly Fed Outlook, the weakest service sector PMI of the year, a big drop in the Kansas City Fed Manufacturing Index, and the announcement that the Third Quarter current account deficit had “unexpectedly” increased 11.7% to post the widest gap since the fourth quarter of 2008, are just the latest such indicators).

Given that the U.S. economy has, on average, experienced a recession every six years, the 6.5-year longevity of the current “expansion” should be raising eyebrows, even if the data wasn’t falling faster than a bowling ball with wings.

So what happens when the Fed postpones its first rate hike until the death throes of a tepid recovery rather than doing so at the beginning of a strong one? If unemployment starts ticking up during an election cycle, can anyone really expect the Fed to follow through with its projected additional rate hikes and allow a full-blown recession to take hold prior to voters casting their ballots? All of this strongly suggests that this week’s rate hike was a “one-and-done” scenario that does nothing to extricate the Fed from the monetary trap it has created for itself.

Another big question is why the Fed decided to move in December, after doing nothing for so long. Clearly the markets were surprised and confused by the Fed’s failure to pull the trigger in September, when the economy appeared, at least to those who chose to ignore the bad data, to be on relatively solid footing. At that time, the Fed suggested that it needed to see more improvement before green lighting a liftoff. And while I tend not to place much stock in the pronouncements of most economists, one would be hard-pressed to find anyone who would claim that the data in December looks better than it did in September.

A much more likely explanation is that through its rhetoric the Fed had inadvertently backed itself into a corner. Even though the Fed would have preferred to leave rates at zero, the fear was that failure to raise them would damage its credibility. After having indicated for much of the past year that they had believed that the economy had improved enough to merit a rate increase later in 2015, to continue do to nothing would suggest that the Fed did not actually believe what it was saying. This was an outcome that they could not abide. If we could doubt them about their economic pronouncements, perhaps they have been equally disingenuous with their professed ability to shrink their balance sheet over the next few years, contain inflation if it ever reared its ugly head, or to prevent financial contagion from spreading during a new recession.

In truth there should be very little confidence that a new era has begun. A symbolic 25 basis point credibility-saving gesture, coming just two weeks before year-end, is really a non-event. It’s the equivalent of a credibility Hail Mary, with the Fed desperately trying to infuse confidence into a “recovery” that for all practical purposes has already ended.

The question will be whether such a small move will be enough to push an already slowing economy into recession that much sooner. Over the past seven years the U.S. economy has become dependent on zero percent interest rates. But as with the famous Warren Buffet bathing suit maxim, these dependencies won’t be fully revealed until the tide rolls out and those zero percent rates are taken away. The bigger question is how quickly the Fed will reverse course. Will it move once it becomes painfully obvious to everyone that we are headed into another recession, or will it wait until we are officially knee deep in a contraction that is even bigger than the last one?
The new rounds of rate cutting and Quantitative Easing that the Fed will have to unleash will echo the military “surge” in Iraq in 2007. Those fresh troops were needed to roll back the chaos that the Administration had ignored for so long. But just as that surge only bought us a few years of relative calm, look for the gains brought about by our next monetary surge to be even more transitory. That is a development for which virtually no one on Wall Street is preparing.