God is a Capitalist

Monday, April 17, 2017

Morgan Stanley says ride the raging bull

Morgan Stanley’s analysts suggest running with the bulls this week. They recently announced that they expect the S&P 500 to rise 15% in the next twelve months and possibly to reach 3,000, a gain of 27.4%. They wrote, 
Although optimism is a late cycle phenomenon, history tells us the best returns often come at the end."
Essentially, they are shouting “the end is near!” but “party while you can!” They credited President Trump for their optimism:
While acknowledging that the pro-business agenda of President Trump has awakened "animal spirits" in the economy, the Morgan Stanley strategists feel that Trump has simply "turbocharged" a global business recovery that already has been underway since the first quarter of 2016. They note that one of the worst economic contractions in 30 years, as measured by U.S. GDP, bottomed out a year ago. Since then, their favorite economic indicators have been accelerating, including those capturing business conditions, business outlook and global trade.

Sunday, April 9, 2017

Creative destruction becoming less destructive

Investors should worry about productivity growth of the firms they invest in because it is one of the major determinants of profits and market share. Innovation should drive old technology firms out of business and improve productivity but that hasn’t been the case for half a century.

Productivity growth has been falling since about 1970 for many companies according to Andrew Haldane, Bank of England Chief Economist, in his speech “Productivity puzzles” at the London School of Economics last month in which he reported what’s happening to productivity in the UK and globally.

Haldane said the future is already here — it’s just not very evenly distributed. Some companies are highly innovative with rapidly growing productivity, but most lag far behind. There are broad differences in productivity growth between advanced economies and emerging market economies, between the US and other advanced economies, across industries and within industries. After providing the fruits of excellent research, however, Haldane offered an anticlimactic solution:
The Mayfield Commission aims to create an app which enables companies to measure their productivity and benchmark themselves against other companies operating in similar sectors and regions. By shining a light on companies’ relative performance, the aim is that this would serve as a catalyst for remedial action by company management.”

Sunday, April 2, 2017

Show me the money

Most business cycle models include the money supply as a leading indicator of the economy, meaning that changes in the money supply tend to precede and signal changes in the economy in the near future. The money supply year-to-year change spiked late last year, giving some money watchers goose bumps.

According to Ryan McMaken at the Mises Institute, the money supply jumped 11.3 percent on the Austrian money supply (AMS) index late last year. Murray Rothbard and Joseph Salerno created the Austrian money supply index to provide a better measure than the Fed’s M2. That spurt in money occurred after a several years of sedate money growth. 

McMaken wrote that since 2014, money supply growth has ranged from about 7 percent to 8.5 percent. In October of last year, money supply growth hit a seven-year low of 6.8 percent. The AMS spiked to 11.3 percent in the fourth quarter, then in February it collapsed back to a year-to-year growth rate of 7.7 percent.

Saturday, March 25, 2017

The four biggest mistakes in option trading

Years ago I had a friend attend a seminar on options in which he learned to buy out-of-the-money options on commodities and keep buying them until he hit the jackpot. Theoretically, the one big win would pay off all of the losses and add a hefty profit.

That strategy is pure gambling according to Jay Kaeppel, author of The Four Biggest Mistakes in Option Trading. The four are 1) relying solely on market timing to trade options, 2) buying only out-of-the-money options, 3) using strategies that are too complex and 4) casting too wide of a net.

Options and futures originated in the 17th century in the Dutch Republic to provide farmers a way to protect themselves against falling prices at harvest time and as a way for processors to protect their businesses against shortages caused by drought or disease. Options are still a good way to protect all kinds of assets, including shares of stocks. For example, a simple strategy for protecting one’s nest egg from a market collapse is simply to buy put options on an index of on the stock of specific companies. If the market declines, the option should increase in value enough to make up for the loss in the stock portfolio.

Sunday, March 19, 2017

Now economists want to steal your wealth

Keeping your hard-earned wealth is hard. The state wants most of it in taxes. A couple of weeks ago I explained how socialists use randomness to steal your wealth. Now economists want to use a cashless society to take it. 

Many of the world’s top economists want to get rid of paper currency and force all of us to use electronic banking. One of the top mainstream economists, Kenneth Rogoff, has written a manifesto for them in his 2016 book, The Curse of Cash. Rogoff is the Thomas D. Cabot Professor of Public Policy at Harvard and former chief economist of the International Monetary Fund. Many economists around the world have subscribed to his manifesto. Here are Rogoff’s main reasons for wanting a cashless society:
The real issues involve the ability to use monetary policy to (1) stabilize the economy, (2) issue credit in response to financial crises (act as lender of last resort), and (3) be able to inflate the price level in an emergency where it is necessary to engage in partial default (in real terms) on government debt. To achieve these ends effectively, it is extremely helpful for the government to control the unit of account and the currency to which most private contracts are indexed. 

Friday, March 10, 2017

God is a Capitalist! Markets from Moses to Marx

In his book, Jesus in Beijing, author David Aikman describes a lecture that he attended in Beijing in 2002. The speaker, a scholar from one of China’s premier academic research institutes, the Chinese Academy of Social Sciences, said the following:

One of the things we were asked to look into was what accounted for the success, in fact, the pre-eminence of the West all over the world . . . We studied everything we could from the historical, political, economic, and cultural perspective. At first, we thought it was because you had more powerful guns than we had. Then we thought it was because you had the best political system. Next we focused on your economic system. But in the past twenty years, we have realized that the heart of your culture is your religion: Christianity. That is why the West has been so powerful. The Christian moral foundation of social and cultural life was what made possible the emergence of capitalism and then the successful transition to democratic politics. We don’t have any doubt about this.

Wednesday, March 8, 2017

Baptists and bootleggers explains lofty stock market

Jason Zweig, who writes the Intelligent Investor column for the Wall Street Journal, posted recently about “Disturbing New Facts about American Capitalism.” He wrote:

“Modern capitalism is built on the idea that as companies get big, they become fat and happy, opening themselves up to lean and hungry competitors who can underprice and overtake them. That cycle of creative destruction may be changing in ways that help explain the seemingly unstoppable rise of the stock market."

Zweig cites new research by academics that claims the US is moving to a “a winner-take-all system in which giants get stronger, not weaker, as they grow.” The evidence consists of higher concentrations of market share among just a handful of companies. For example, the top four grocery chains hold 89% of the market. The top four real-estate service companies command 78%. In intro to economics those are called oligopolies.

Sunday, March 5, 2017

The idol of randomness wants to steal your wealth

If you’re reading this post, I assume you have built some wealth and are wondering how to keep it and possibly make it grow. You should know that many people claim you have no right to that wealth because you didn’t earn it. You got it by luck, like a lottery winner.

Alexander Green, Chief Investment Strategist at the Oxford Club, wrote a great post recently on the topic, “Is Business and investment success due to skill...or luck?” The post issued from a debate he had with a New York Times columnist, Robert Frank, author of the book Success and Luck: Good Fortune and the Myth of Meritocracy.

Frank wrote in his book that “If you have been so economically successful that your income and net worth put you in the top 1% or 2% in the country, the deciding factor was not talent, education, hard work, risk-taking, persistence, resilience or all of the above...It was luck, plain and simple.” Frank is clever to assault only the top 2% of wealthy. They have no friends and attacking them will excite envy in the rest. 

Sunday, February 26, 2017

Trump channels Hoover’s economic strategies

President Trump has saved dozens of US jobs from moving to other countries, mostly Mexico, by employing the shock and awe of a personal phone call to CEOs. Had he made the same visits before he became president he likely would have failed. And let’s not discuss the numbers of jobs his policies will cost the US that go unreported.

Another Republican president used a similar style to “encourage” business to comply – Herbert Hoover. Before he scaled the political mountain to the presidency, Hoover had become famous as an organizer of humanitarian efforts. He led 500 volunteers in distributing food, clothing, steamship tickets and cash to Americans in Europe to help them get home after war broke out in Europe in 1914. Later he worked to feed starving Belgians. The Belgian city of Leuven named a prominent square after him – Hooverplein.

Monday, February 13, 2017

Couch potato investing: better that betting on a horse race

In Financial Bull Riding I wrote that annual percentage returns is the wrong measure of investment performance. The better metric is absolute dollar return. Naive investors, and most financial journalists, assume the two will produce the same results, but they don't. 

Josh Peters, Director of Equity Income Strategy for Morningstar and the author of The Ultimate Dividend Playbook, calls chasing percentage returns a horse race
Almost all of Wall Street is geared around this idea of a horserace. That it’s all about trying to beat your benchmark, beat the S&P 500 — to do it every quarter regardless of whether that quarter is up or down. That’s not what most people are looking to do. That’s only how money managers evaluate each other, maybe. But that’s not necessarily what’s going to serve the actual financial requirements or financial needs of people who are out there. The biggest demand out there is for income and it’s not just because interest rates are low, it’s because baby-boomers are retiring and most of them don’t have those defined benefit pension plans to count on.

Monday, February 6, 2017

Interest rates have fallen and can’t get up!

Some of us suffer from Fed head: we have allowed anger at the Fed to infect our brains to the point that we blame it for everything from flat tires to broken bed springs. George Selgin, an Austrian friendly economist at the Cato Institute, says take two aspirin and read his blog in the morning:
The view that the Fed might have raised interest rates long ago, had it only wanted to, became notorious during the presidential campaign, when Donald Trump publicly accused Janet Yellen’s Fed of keeping rates low for political reasons. But Trump was merely embroidering a belief common among many (mostly conservative) Fed critics...
The unvarnished truth, I hope to persuade you, is that interest rates have been low since the last months of 2008, not because the Fed has deliberately kept them so, but in large part owing to its misguided attempt, back in 2008, to keep them from falling in the first place.

Tuesday, January 31, 2017

Why the Fed can't drive

One of Milton Friedman’s favorite analogies about monetary policy was driving a car. He compared money creation by the Fed to pushing on the gas pedal. On flat ground giving the engine more gas makes the car speed up, so giving the economy more gas should cause it to accelerate as well. But giving the engine more gas by pushing on the pedal may allow the car to slow down when climbing a hill if the engine doesn’t get enough gas to overcome the gravity involved in climbing the hill.

Friedman’s point: interest rates tell us nothing about whether Fed policy is too tight or too loose. Only the speed of economic growth can tell us that. Low interest rates may be too high if the economy is climbing a steep hill, like a recession. On the other hand, high rates may be too low if the economy is speeding up, as it does near the end of an expansion. The grandchildren of Friedman use that analogy to argue for nominal GDP targeting by the Fed instead of price targets. The problem with the Fed’s driving strategy is that it never knows if it is climbing or descending a hill or how fast the economy is growing at the time it makes its policy decisions because of long lag times from policy decision to its impact.

Sunday, January 22, 2017

Bank of England: mainstream econ is broken

It seems that the Bank of England has been feeling the heat from its forecast that Brexit would plunge the UK into a depression. Added to the failure of mainstream economists to predict the Great Recession, the public is losing confidence in its gurus, according to a story in the Guardian,
Haldane described the collapse of Lehman Brothers as the economics profession’s “Michael Fish moment” (a reference to when the BBC weather forecaster predicted in 1987 that the UK would avoid a hurricane that went on to devastate large parts of southern England). Speaking at the Institute for Government in central London, Haldane [Bank of England Chief Economist] said meteorological forecasting had improved markedly following that embarrassing mistake and that the economics profession could follow in its footsteps.
The bank has come under intense criticism for predicting a dramatic slowdown in the UK’s fortunes in the event of a vote for Brexit only for the economy to bounce back strongly and remain one of the best performing in the developed world.
Before the referendum on divorcing the EU, Bank of England governor Mark Carney had warned that that the split would cause a recession in the second half of 2016. Instead, the UK economy grew at an annual rate of 2.4% in the third quarter with no signs of a slowdown in the fourth.

Sunday, January 15, 2017

The case for a raging market in 2017

Trumpeting a new boss in the White House wasn’t the only cause of the recent spectacular rise in the stock market. Several economic indicators improved in the fourth quarter. Nicholas Vardy wrote,
Consumer confidence stands at its highest level since August 2001. The unemployment rate is at nine-year low. The U.S. economy is close to full employment. S&P 500 earnings are coming out of an earnings recession, and are expected to grow by double-digit percentages in 2017. 
And the money supply jumped:
The supply of US dollars accelerated during late 2016 with October's year-over-year percentage increase in the money supply hitting a 46-month high of 11.2 percent. The YOY growth rate fell slightly to 10.3 percent in November.
This comes after a long period of relatively sedate growth in the money supply through most of 2013, 2014 and 2015.
The recent surge in money supply growth suggests that the likelihood of an economic contraction in the near future has been reduced, with the next downturn being pushed out further into the future. 

Saturday, January 7, 2017

Trump's strength is his weakness - businessman economics

President Trump is clearly a good businessman. His wealth proves it. And it was partly his success in business that encouraged many adults to vote for him. The logic seemed sound: if the problem with the US is the economy then surely a successful businessman can fix it. But the fact that he is a successful businessman is Mr. Trump’s weakness as well.

Mises used to say that businessmen are better at predicting the short run than are economists so economists should not try to compete with them in their area of comparative advantage. The job of the good economist is to force business people to look up once in a while and acknowledge the long run. They can spurn the long run and court the short run, but the long run always shows up and the longer she has been ignored the uglier she is. The field of economics was born out of that insight, Mises wrote:
In order to discover the immediate-the short-run-effects brought about by a change in a datum, there is as a rule no need to resort to a thorough investigation. The short-run effects are for the most part obvious and seldom escape the notice of a naive observer unfamiliar with searching investigations. What started economic studies was precisely the fact that some men of genius began to suspect that the remoter consequences of an event may differ from the immediate effects visible even to the most simple-minded layman. The main achievement of economics was the disclosure of such long-run effects hitherto unnoticed by the unaffected observer and neglected by the statesman. (Mises, Human Action, 649)

Tuesday, January 3, 2017

Zombies threaten growth in 2017

Most economists expect the economy to grow at its most rapid rate next year. One of my favorite economists wrote this:

“If the new Trump administration cuts taxes and deregulates the economy, expect higher economic growth and another good year on Wall Street. However, I also expect higher interest rates and more inflation. 'King Dollar' should continue its rise, which will make it difficult for gold and other commodities. Avoid bonds and gold -- stay invested in the stock market.”

Let’s get the obvious problems with that forecast out of the way: higher interest rates and inflation are bad for the stock market and inflation is good for gold prices. And inflation means a lower dollar, not higher.