Jobs Jobs Jobs

No, not Steve Jobs.  I know you love to hear about your favorite stock Apple Inc. (NASDAQ: AAPL).  It sure has defied gravity and the market as a whole, despite news of Amazon’s tablet competitor and global demand worries.  I like AAPL, but I wouldn’t build my portfolio around it solely based on the fact that it’s your grandma’s, uncle’s and next door neighbor’s favorite stock too.  That means any stumble on its path to even greater global domination could be exaggerated.  On to more important things… Congress and Obama want to fix the dismal US JOBS picture.  But how?  Probably not the way they want to do it and not the way they will try to do it.

Ben Bernanke is going around telling people unemployment is a national crisis.  He is also saying he doesn’t have the tools to help.  Congress wants to create government programs to “retool” or retrain the labor pool.  They also want to give businesses a tax break.  Sounds good on the surface.  But how does that help get demand going for the products and services businesses provide?  What about hiring – will these measures actually cause hiring?  I will speculate a little.

As a small business owner, I know what it takes to get me to hire a new employee.  Promises of more demand from the government won’t do it.  Now if the phone starts ringing and old clients start asking about new programs, that’s a different story.  How about a lower payroll tax?  I think this is a waste.  Small business owners aren’t making the kind of profits they would like these days, so that little extra money will go right into the S Corp owner’s pocket.  What about big business?  Giving them tax breaks right now is pure nonsense.  They have the cash to hire if they want.  So if Uncle Sam focuses on small businesses, how can he help?  Money, that’s how!  Congress should pick up the tab for new workers and IT CAN. 

Let’s work through a reasonable scenario:  Congress can spend $48 billion over the next 24 months to create one million new jobs.  So we add to the national debt – it’s $14 trillion already.  This money is peanuts compared to what we spend fighting the Taliban and securing Iraq and the bailout we gave big banks a few years ago.  The math is easy.  Start with $2 billion a month.  That’s 20,000 salaried employees making $50,000 a year for two years.  Since Congress won’t agree to foot the entire bill for a new employee, let’s cover 50% of each new employee’s wages for two years.  Now we created 40,000 long-term positions in a month.  Let’s do this for 24 straight months and we only spent $48 billion to generate 960,000 jobs.  We can probably double that easily and spend $100 billion to put 2 million people to work.

Let’s open this program only to businesses with under $100 million in revenue to make sure it hits its intended target.  Put a cap in place on the number of employees a business can hire under the program and you have something raw, but relatively viable.  I can tell you with certainty that small business owners will start hiring if they know a 50% tax credit is coming for their new employee for two straight years.  Call your congressman :)

The Market Speaks… Listen Up

Watching stocks daily is a loser’s game, but as we come to the end of September, it’s high time to pay attention.  Study after study shows individual investors time their buy and sell decisions poorly, buying high and selling low.  There are, however, those moments when a decision can change the long-term course of portfolios.  

Equities and commodities may be sending a signal not to be ignored for the rest of 2011.  Recession fears are the wrong reason to sell any portfolio holding now – this is the oldest news around.  The US was somewhat insulated from declines in Europe and emerging markets so far this month, but we are retesting August’s lows.  Even gold is making new lows.  The market may be giving a signal that a sharp drop is ahead and risky assets could drop 1.5-3x more than the broad market. 

US stocks, especially our favorite technology names, enjoyed some level of insulation this month from worries over the health of the Euro currency and the survival of European banks.  Investors may be concerned about US banks now too after the Fed shared its innermost thoughts with us common folk today.  Bernanke’s crew fears it has no more tools left to fix the economy aside from long-term bond purchases.  Such purchases mean lower long-term bond yields and that can mean a heap of trouble for banks.  Banks make money by borrowing near zero now at the short end of the yield curve and lending at the long end.  When the long end falls, so do banks’ profit margins.  Meanwhile, Republicans and Democrats are very publicly fighting over tax increases and markets hate that regardless of the eventual outcome.  Whether taxes on millionaires and government program cuts matter or not, nobody wants to go out and spend while their income and benefits sit on a giant chopping block. 

Should’t gold be going up now?  Investors who profited from gold’s rise may be freeing up cash to meet future potential margin calls or make quick investments as a rare opportunity presents itself at some point in the intermediate future.  Another theory is that gold is reflecting future relative dollar strength to a basket of global currencies.  Either way, it probably makes sense ot get out of its way.

Poor stock market performance in the fourth year of a President’s term is rare as can be.  And there is no reason to panic over 2012 just yet.  But it’s time to make prudent decisions about the remainder of 2011.  Taking 25-50% of your risky assets (financials sector, non-US equities, gold, commodities) off the table is probably wise.  This may be accomplished with inverse ETFs that go up when markets drop, index put options, or simply holding more cash.

Economic Anxiety Ferris Wheel

As the market figures out a direction this week, let’s examine three headlines; each worrisome for different reasons:

Some very bright men opine on the Euro’s future here:  http://www.bloomberg.com/news/2011-08-21/el-erian-joining-feldstein-fels-on-prospect-of-euro-evolving-into-new-core.html.  If you want to be part of a union, strong partners must support weaker partners in times of need.  Partners in a union also work out compromises when they disagree.  Kicking the PIIGS (Portugal, Italy, Ireland, Greece, Spain) off the Euro currency presents a real potential shock to global markets and at this time the EU will likely sidestep this immense policy blunder.  To put this issue in perspective, most US citizens would love to be rid of “housing bubble and illegal immigration” states like Florida, Arizona and Nevada.  I leave out California because it’s simply too darn big and important to the US as a whole.  You could argue the “parasite” sates are dragging the dollar down with big budgets, falling tax revenue, and localized economic problems the folks in Illinois and Virginia just don’t care about.  You can see how this argument can quickly turn to political civil war and roil markets.

Warren Buffett’s tax rhetoric gains supporters: http://economix.blogs.nytimes.com/2011/08/23/what-the-rich-can-afford-in-income-tax/.  Bruce Bartlett is a conservative guy when it comes to economics.  Why is he talking about tax increases for the rich at a time when populist headlines are all the rage?  I won’t discuss the specific merits of his argument, but opening yet another pitch fork stand for angry villagers doesn’t seem like a great idea.  It is important to note that changes in the tax code represent a shift in the distribution of wealth–markets get depressed when this happens, no matter the direction of the shift.  Losers hate losing more than winners like winning: that’s basic behavioral economics. 

So ridiculous, it’s worrisome: http://www.marketwatch.com/Story/story/print?guid=CF3F1872-CCE9-11E0-BE2D-00212803FAD6.  The future is always scary, I agree.  Human civilization will successfully deal with the challenges a more populous planet Earth presents.  We are capable of immense innovation at an exponential rate relative to what we believe is possible today.  Gloom and doom stories like this about post-apocalyptic investment ideas are about as useful as umbrellas at Chernobyl.  if you feel inspired, don’t log into your Schwab account.  Go out and buy a Nissan Leaf with some roof-mounted solar panels.

Real Clear Markets

http://www.realclearmarkets.com/ is an excellent site reposting the day’s headlines relevant to global markets from a variety of media outlets.  From time to time, I will repost articles I believe to be particularly relevant, impactful and/or ridiculous with my own commentary.  Here are a few: 

  1. Richard Salsman’s dog and pony show for a return to the gold standard: http://www.forbes.com/sites/richardsalsman/2011/08/16/gold-reagan-and-the-reds-from-degraded-dollar-to-downgraded-debt/3/.  Life is immitating art:  remember the movie “Lord of War,” where the African dictator asks the arms dealer character played by Nicholas Cage for a solid gold machine gun?  The 007 series also comes to mind with a shadowy New World Order set to control the globe’s currencies and natural resources.  I say ask the Treasury Department to hold endangered species as collateral for currency.  I think the dollar is worth its weight in black rhinos, giant pandas, and beluga sturgeons.  Caviar is the new black gold. 
  2. http://www.realclearmarkets.com/articles/2011/08/17/gov_rick_perrys_red-hot_bernanke_slam_99198.html.  A blurry picture is forming of the 2012 competition for leader of the free world.  Governor Perry says “Printing more money to play politics at this particular time in American history is almost treacherous, or treasonous, in my opinion.”  Mr. Perry is certainly no economist.  And Mitt Romney reminds me of John Kerry with a more obscure religious profile.  Doesn’t look like Barak and Michelle need to worry about packing up just yet.  Whether you approve of the President’s performance or not, Mr. Obama is more camera shy than he was during his first year.  What has he accomplished so far?  I recall something about healthcare reform and a promise to pull back from global conflicts; and oh yeah, he said he would fix the economy and create jobs.
  3. http://www.nytimes.com/2011/08/17/opinion/why-we-should-end-homeownership-subsidies.html?_r=2&ref=opinion.  The NYT proposes we kill GSEs Fannie and Freddie currently financing the vast majority of US home purchases at a time when private investors want to sit on the sidelines.  Let’s assume these are good ideas.  Unfortunately, stories like this are used by nasty politicians to argue for crazy notions like removing mortgage interest as a tax deduction.  This article says GSEs cost $700 billion in lost revenue over five years, whatever that statistical mumbo jumbo means.  That is the tiniest of fractions in relation to our aggregate spending on the military industrial complex.  Where would you rather cut?
  4. http://www.nakedcapitalism.com/2011/08/bank-of-america-death-watch-unloading-non-core-assets-aggressively.html.  This story would not be worth discussing were it not for what transpired in the US financial sector over 2008 and 2009.  Words sometimes equate to Chinese water torture.  Each word holds little weight, but add them up over time and Bank of America could end up in the hands of a competitor for pennies on the dollar.  There are only seven and a half dollars left as of this writing, so caveat emptor.  This is not some gloom and doom prediction, but confidence is key to market stability.  Just remember that Wall Street is even better at spreading rumors and manipulating feelings than making money and political contributions.

 

Gold = WMD

The last time I felt this way, the year was 2003.  Newsflash: Gold is the bubble; the new tech; the new real estate if you will.  Dinner parties, hair salons, and golf courses are awash with its glory.  I don’t mean to be arrogant, but when you hear people with very low IQs adopt a new trend as their own, the froth is forming.  Unfortunately, calling a top is an impossible task and stupidity can rule for very long periods of time.  Real estate roared for another three years post-2003 before contrarian views were vindicated. 

In a round about way, it’s safe to join the lunacy for now.  The bravest among us can move to a short position in 12 months using one of the many new ETFs created just for this purpose.  But enough about gambling, let’s get to the fundamentals driving the price of gold and its standing as an investment for the masses.  First, please examine the inflation-adjusted gold price chart below:

Gold is described as a hedge against government policy errors including rampant inflation, deflation, and general world collapse.  Taking inflation into account, we are approaching the peak of the inflationary, oil-shocked 1970s before Carter moved out of the White House.  The smart folks at Barclays Bank recently commented on the forces driving this trend: “First, a structural shift in macroeconomic insecurity on the back of the heightening of sovereign debt risks and credit downgrades,” Barclays said. “Second, the sharp acceleration of broad investment demand after a mostly absent (first half of 2011). And, third, central bank buying has returned and from new corners in sizeable tranches, a trend that is set to continue.”

Gold is a WMD in my view – a Weapon of Mass Destruction.  It would make more sense if all the world’s nuclear warheads were made of the lustrous metal.  Then it might be useful someday.  There are almost no real world uses for gold aside from its value as currency prior to the advent of paper money.  The same is true of nuclear weapons.  Nuclear weapons were useful 70 years ago when their still-limited power was more manageable in very few hands. 

A primary justification for the high price of gold today relative to other points in history is government hoarding.  It seems they worry that fiat currency may go the way of the buffalo.  Government debt crises aren’t helping.  But currency crises are nothing new – think back to 1998.  It’s pretty simple: governments will curb spending on entitlements and huge military programs or be removed from power.  They never plan to use their massive troves of nuclear warheads, and the same goes for their gold. 

Below I address the remaining reasons for the high price of gold: speculation, inflation/deflation, global economic collapse, and the collapse of the US Dollar (USD) as de facto currency of the world. 

  1. Speculation is alive and well.  The current trend has room to run, but sentiment shifts on a dime.  I hesitate betting against the trend for another 12-18 months.
  2. Emerging markets are busy making sure inflation will remain muted for decades to come.  Their cheap labor pool keeps consumer goods prices falling.  Meanwhile, their heavy use of commodities like oil and useful metals keeps deflation at bay.  As you can see, these forces are mostly a wash to the developed world. 
  3. So what of global economic collapse and depression?  Sure, it’s possible, but not likely.  If it does happen, you won’t need to worry about your stocks and bonds.  Since your gold is held in funds and electronic accounts, you won’t get a chance to touch it after our institutions collapse and your precious holdings are “reappropriated.”  If you are the type to hold the physical asset itself, the roaming militias or forces aligned with the new world dictator should take care of you.
  4. Finally, the hot topic of USD weakness.  It certainly took quite a fall on the world stage over the past decade.  This can be explained by low relative interest rates and rising economic competition from across the globe.  Keep in mind the falling USD has been a benefit to US investors in foreign securities and US corporations exporting goods abroad.  The trend did hurt US consumers traveling abroad and drove the cost of imports from other developed nations higher.  But the downward trend in USD has consolidated in the past three years.  The USD index (DXY) against a basket of major currencies barely budged during the most recent August stock market turmoil.  USD may yet push gold aside from the position of global reserve currency.  Keep an eye on the DXY index the remainder of 2011.  If it continues to move in the opposite direction of gold, 12-18 months may prove too long for gold prices to begin descending..

Bill Gross takes a shot at America, but misses

Interesting read from the Washing Post written by the most important man in the bond market, Bill Gross of PIMCO: http://www.washingtonpost.com/opinions/americas-debt-is-not-its-biggest-problem/2011/08/10/gIQAgYvE7I_story.html.  He makes a good point that Washington is focused on deficits when they should be worried about demand growth.  He asserts the U.S. economy could be constrained by nearsighted politicians, entitlements and deleveraging baby boomers.  As is to be expected of an ENORMOUS bond investor, he quietly pushes his agenda of long-term interest rates slowly moving to zero.  Bill Gross’ take on the stock market hasn’t been particularly prescient.  He misses the mark by failing to note the importance of thousands of thriving corporations catering to growing demand outside our small nation relative to the globe as a whole. 
 
If we take a break as consumers along with our Western European and Japanese counterparts, it may permit emerging economies to leap ahead with infrastructure projects and education.  This can in turn raise billions of human beings’ standard of living. 
 
It would behoove the developed countries to let the emerging world catch up a little to make the race to the economic top more fun.  This is not a zero sum game.  As the competition catches up, their ascent may offset a lot of populist hatred that gets easily converted to terror by despots and dictators.