Photo Credit: Wayne Stadler || Most of us have limited vision, myself included

Photo Credit: Wayne Stadler || Most of us have limited vision, myself included

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In the time I have been managing money for myself and others in my stock strategy, I set a limit on the amount of cash in the strategy.  I don’t let it go below 0%, and I don’t let it go over 20%.

I have bumped against the lower limit six or so times in the last sixteen years.  I bumped against it around five times in 2002, and once in 2008-9.  All occurred near the bottom of the stock market.  In 2002, I raised cash by selling off the stocks that had gotten hurt the least, and concentrating in sound stocks that had taken more punishment.  In September 2002, when things were at their worst, I scraped together what spare cash I had, and invested it.  I don’t often do that.

In 2008-9 I behaved similarly, though my household cash situation was tighter.  Along with other stocks I thought were bulletproof, but had gotten killed, I bought a double position of RGA near the bottom, and then held it until last week, when it finally broke $100.

But, I had never run into a situation yet where I bumped into the 20% cash limit until yesterday.  Enough of my stocks ran up such that I have been selling small bits of a number of companies for risk control purposes.  The cash started to build up, and I didn’t have anything that I deeply wanted to own, so it kept building.  As the limit got closer, I had one stock that I liked that would serve as at least a temporary place to invest — Tesoro [TSO].  Seems cheap, reasonably financed, and refining spreads are relatively low right now.  I bought a position in Tesoro yesterday.

I could have done other things.  I could have moved the position sizes of my portfolio up, but I would have had to increase the position sizes a lot to have some stocks hit the lower edge of the trading band, but that would have been more bullish than I feel now.  As it is, refiners have been lagging — I can live with more exposure there to augment Valero, Marathon Petroleum and PBF.

I also could have doubled a position size of an existing holding, but I didn’t have anything that I was that impressed with.  It takes a lot to make me double a position size.

As it is, my actions are that of following the rules that discipline my investing, but acting in such a way that reflects my moderate bearishness over the intermediate term.  In the short run, things can go higher; the current odds even favor that, though at the end the market plays for small possible gains versus a larger possible loss.

The credit cycle is getting long in the tooth; though many criticize the rating agencies, their research (not their ratings) can serve as a relatively neutral guidepost to investors.  Corporate debt is high and increasing, and profits are flat to shrinking… not the best setup for longs.  (Read John Lonski at Moody’s.)

I will close this piece by saying that I am looking over my existing holdings and analyzing them for need for financing over the next three years, and selling those that seem weak… though what I will replace them with is a mystery to me.

Bumping up against my upper cash limit is bearish… and that is what I am working through now.

Full disclosure: long VLO MPC PBF and TSO

Wiped Out

Before I start this evening, thanks to Dividend Growth Investor for telling me about this book.

This is an obscure little book published in 1966.  The title is direct, simple, and descriptive.  A more flowery title could have been, “Losing Money in the Stock Market as an Art Form.”  Why?  Because he made every mistake possible in an era that favored stock investment, and managed to lose a nice-sized lump sum that could have been a real support to his family.  Instead, he tried to recoup it by anonymously publishing  this short book which goes from tragedy to tragedy with just enough successes to keep him hooked.

Whom God Would Destroy

There is a saying, “”Whom the gods would destroy, they first make mad.”  My modification of it is, “Whom God would destroy, he first makes proud.”  In this book, the author knows little about investing, but wishing to make more money in the midst of a boom, he entrusts a sizable nest egg for a young middle-class family to a broker, and lo and behold, the broker makes money in a rising market with a series of short-term investments, with very few losses.

Rather than be grateful, the author got greedy.  Spurred by success, he became somewhat compulsive, and began reading everything he could on investing.  To brokers, he became “the impossible client,” (my words, not those of the book) because now he could never be satisfied.  Instead of being happy with a long-run impossible goal of 15%/year (double your money every five years), he wanted to double his money every 2-3 years. (26-41%/year)

As such, he moved his money from the broker that later he admitted he should have been satisfied with, and sought out brokers that would try to hit home runs.  The baseball analogy is useful here, because home run hitters tend to strike out a lot.  The analogy breaks down here: a home run hitter can be useful to a team even if he has a .250 average and strikes out three times for every home run.  Baseball is mostly a game of team compounding, where usually a number of batters have to do well in order to score.  Investment is a game of individual compounding, where strikeouts matter a great deal, because losses of capital are very difficult to make up.  Three 25% losses followed by a 100% gain is a 15% loss.

In the process of trying to win big, he ended up losing more and more.  He concentrated his holdings.  He bought speculative stocks, and not “blue chips.”  He borrowed money to buy more stock (used margin).  He bought “story stocks” that did not possess a margin of safety, which would maybe deliver high gains  if the story unfolded as illustrated.  He did not do homework, but listened to “hot tips” and invested off them.  He let his judgment be clouded by his slight relationships with corporate insiders at the end.  HE TRIED TO MAKE BIG MONEY QUICKLY, AND CUT EVERY CORNER TO DO SO.  His expectations were desperately unrealistic, and as a result, he lost it all.

As he lost more and more, he fell into the psychological trap of wanting to get back what he lost, and being willing to lose it all in order to do so.  I.e., if he lost so much already, it was worth losing what was left if there was a chance to prove he wasn’t a fool from his “investing.”  As such, he lost it all… but there are three good things to say about the author:

  1. He had the humility to write the book, baring it all, and he writes well.
  2. He didn’t leave himself in debt at the end, but that was good providence for him, because if he had waited one more day, the margin clerk would have sold him out at a decided loss, and he would have owed the brokerage money.
  3. In the end, he knew why he had gone wrong, and he tells his readers that they need to: a) invest in quality companies, b) diversify, and c) limit speculation to no more than 20% of the portfolio.

His advice could have been better, but at least he got the aforementioned ideas right.  Margin of safety is the key.  Doing significant due diligence if you are going to buy individual stocks is required.

Quibbles

This book will not teach you what to do; it teaches what not to do.  It is best as a type of macabre financial entertainment.

Also, though you can still buy used copies of the book, if enough of you try to buy the used books out there, the price will rise pretty quickly.  If you can, borrow it from interlibrary loan.  It is an interesting historical curiosity of a book, and a cautionary tale for those who are tempted to greed.  As the author closes the book:

“Cupidity is seldom circumspect.”

And thus, much as the greedy need to hear this advice, it is unlikely they will listen.  Greed is compulsive.

Summary / Who Would Benefit from this Book

A good book, subject to the above limitations.  It is best for entertainment, because it will teach you what not to do, rather than what to do.

Borrow it through interlibrary loan.  If you feel you have to buy it, you can buy it here: WIPED OUT. How I Lost a Fortune in the Stock Market While the Averages Were Making New Highs.

Full disclosure: I bought it with my own money for three bucks.

If you enter Amazon through my site, and you buy anything, including books, I get a small commission. This is my main source of blog revenue. I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Photo Credit: elycefeliz

Photo Credit: elycefeliz || Enron and some other US corporations have been ethics-hostile places also

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Yesterday I gave a talk on ethics to the incoming class at The Johns Hopkins Carey Business School.  As some of you might know, I received my BA and MA from Johns Hopkins in 1982 long before they had a business school.  It was fun to talk to all of the entering MBA students who came to the school from all over the world.  It largely serves international students.

At the end of my talk I took questions, both formally, and informally after the talk was over.  The biggest question was, “Mr. Merkel, what you say about ethics might be the best policy for business in the US, but when I return to my home country, it will not be well-received.  What should I do?”

This is a tough one.  I think people have an easier time missing out on gains by being ethical than losing one’s job.  But let me give a few ideas anyway.

  1. Many countries where business ethics aren’t practiced set themselves up for financial crises and scandals.  One strategy could be to bide your time and wait for the next large scandal or crisis.  Then suggest to your management (assuming your firm survived) that managing in an ethical way could prevent these problems, and potentially attract more business to your firm.
  2. Take a chance and try to create your country’s equivalent of Vanguard.  Low cost, mostly passive investing, owned by clients, limited management salaries, etc.
  3. Same as #2, but if you get the chance to start or run any firm, adopt ethical practices and make it a selling point.  You could be the start of cultural change.  (Now elements of that could prove difficult if there are government officials expecting bribes… how you work that out is difficult.  Friends of mine working as missionaries in corrupt countries tell me that you can still get things done without bribes, but it takes longer, with more effort.)
  4. Suggest to government ministers that a lack of ethics holds back growth.  Countries with no bribery, low corruption, and moderate regulations tend to grow faster.
  5. Propose small experiments in your firm testing whether an ethical approach will produce better results.
  6. Consider working for a foreign firm in your country if they have ethical standards.
  7. Consider gaining experience in a country other than your home country, and propose to that firm that they try setting up a subsidiary in your home country.
  8. On the side, develop a voluntary organization that promotes ethical business conduct.  Consider publishing some books that point out how unscrupulous business practices are harming most people.  Recruit well-known foreign businessmen known for clean business practices to come talk in your country.

I can’t think of anything more right now.  Readers, if you can think of other ideas, please mention them in the comments.  Thanks.

PS — One more note, having worked for a few firms that were ethics-challenged as far as accounting and sales practices went, I can say that trying to promote change from inside is tough.  Taking a job at another firm was my way out of those situations.  No surprise that almost all of those firms failed.

Photo Credit: Fortune Live Media

Photo Credit: Fortune Live Media

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Yesterday, Berkshire Hathaway issued a press release:

WARNING – On-Line Article Regarding Warren Buffett, BREXIT and Anderson Cooper is a Fraud

OMAHA, Neb.–(BUSINESS WIRE)–Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B) —

It has come to Berkshire’s attention that there is an article on-line concerning Warren Buffett and BREXIT with respect to a conversation that Mr. Buffett allegedly had with Anderson Cooper. The article is headlined as follows – “Warren Buffett Warns “BREXIT” Chaos is going to cost Millions of Americans Jobs.” For the record, Mr. Buffett has not spoken with Anderson Cooper for about five years and never about BREXIT.

The article among other fraudulent claims states that Mr. Buffett spoke with Mr. Cooper and indicated that Mr. Buffett was recommending something called “The Global Cash Code.” Allegedly, per the on-line article, Mr. Buffett indicated that Sandra Barnes, the party who allegedly created “The Global Cash Code,” has been teaching people how to successfully use “The Global Cash Code.” Prior to learning of this fraudulent article, Mr. Buffett has never spoken with or even heard of Sandra Barnes.

Contacts

Berkshire Hathaway Inc.
Marc D. Hamburg, 402-346-1400

There is no end of those that want to cash in on Warren Buffett.  But those that know Buffett know that he doesn’t give investment advice aside from what he has written publicly himself.  But to the uninformed, the pitch mentioned looks real enough.

I was curious, so I went looking for it, and I found a version of it here.  It came up number one on my Google search.  It looks like a fake CNN site, which fits the shtick of using Anderson Cooper interviewing Buffett.  I decided to do a WHOIS search on the domain name “com-politics.us” to see if there was anything interesting.  There was.

The domain was registered on June 28th, 2016.  Here’s the data I found at the WHOIS site:

Name: Devin Karapoulos
Organization: Devin Karapoulos
Address: 1348 high bluff cir
City: Park City
State / Province: UT
Postal Code: 84060
Country: United States
Phone: 1-435-214-1857
Email: dkarapoulos@gmail.com

Now, that might not be the main site — the Global Cash Code site has hidden its owner, so you can’t tell, but who knows?  That said, I can’t find another one.  Maybe Mr. Karapoulos knows something about this misuse of Mr. Buffett’s name, likeness, and reputation.

Full disclosure: my clients and I own shares of BRK/B

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Would you like a 100 million-plus percent return on your money in a little more than four years? You would? Well, it can be done, but there are a couple of catches at the end that may prevent the enjoyment of the unearned riches.

Have a look at this article from Bloomberg.com: A $35 Billion Stock, an SEC Halt and Suspicions of Manipulation.  Then meander, if you want, to the SEC EDGAR page for Neuromama.

If you read through the documents on Neuromama, it’s not different from what gets done with a penny stock to boost its value, and that is largely because it was a new penny stock when it was formed and started trading over-the-counter four years ago.

So how do you turn a sow’s ear into several billion silk purses?  Simple:

  • In March 2011, start the company for $3500.  35MM shares at $0.001 each.
  • In 2012, sell 720,000 shares @ $0.03 each ($21,600) and go public.  30x as expensive as the first valuation.  Initial name is Trance Global.
  • In 2013, change the name to Neuromama, split the stock 750:1, and announce really big plans.  Total shares: 3.1B+
  • Borrow $370,000 to develop a website, and do a few other things.
  • In late 2013, acquire a Library of Entertainment Assets including variety shows, feature films, television pilots, etc. Acquire the Assets in exchange for 4,866,180 of new common shares at a price of $20.55 (the closing price on September 3, 2013) for a total value of $100,000,000.  The main owner cancels 80% of the common shares (which belonged to him) as an aspect of the deal.  (Note: no cash changes hands.)  Total shares:  630MM+
  • Never file another financial statement with the SEC.  Issue occasional 8Ks, and engage in a running dialogue with the SEC over how the development stage company doesn’t earn any money and has negative tangible net worth.
  • Watch occasional minimal trading raise the price of the shares to $56+/sh.  Market cap exceeds $35 Billion.
  • Watch the SEC halt trading.

In my opinion, buying the intangible assets and attributing a price of $20.55/share for the stock given in exchange was the critical element of getting the market valuation so high.  If you look at the graph at Bloomberg.com, and click the 5Y button, you will see that in late 2013 after the exchange was made, the stock price hovered in the $20s.  (or, click on the image below for a static image of poorer quality abstracted from the Bloomberg website)

NERO_OTC US Stock Quote

Picture Credit: Bloomberg.com

Here is a market cap of $35 billion for this stock with no business, no appreciable assets, no proprietary technology, no tangible net worth and no income — and can’t even do a few filings with the SEC.  (It looks like they gave up talking in September 2014.)

So what is it worth?  My best estimate is zero, to the nearest billion. 😉  This is still a cash-starved developmental stage business with no revenues after five or so years.  It has had the chance to bootstrap a business together, and there is nothing except the website.  The price should drop to something near zero when trading resumes.

Even if trading had not been halted, the ability of the owners to realize the value would have been quite limited.  All they would have had to do is sell a 100,000 shares, and the stock price would collapse, because there is no one out there with $5 million of real cash that wants to buy 0.015% of an empty company like Neuromama.  The interesting question is “who has been trading the stock,” because it is strictly speculative.  It is possible that related parties have slowly pushed the price up.

Anyway, this is a good reason to stay away from developmental stage companies — really, anything that doesn’t generate significant revenue.  It is also a reason to watch the fundamentals of a company rather than the stock chart only, which in this case has run up hard since 2014, but on almost no volume.  The market capitalization is an illusion if there is nothing that can produce the cash flow to justify it.

June 2016July 2016Comments
Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate.FOMC shades GDP down and employment up, which is the opposite of last time.
Although the unemployment rate has declined, job gains have diminished.Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Sentence moved up in the statement.  Expresses less confidence in the labor market.
Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft.Household spending has been growing strongly but business fixed investment has been soft.Drops comments on the housing sector and net exports.
Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.No change.
Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.No change.  TIPS are showing higher inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 1.65%, up 0.18% from March.  Undid the significant move from earlier in 2016.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen.The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen.No change.
Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.No change. CPI is at +1.1% now, yoy.
The Committee continues to closely monitor inflation indicators and global economic and financial developments.Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.No change.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.No change.
The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.No change.  They don’t get that policy direction, not position, is what makes policy accommodative or restrictive.  Think of monetary policy as a drug for which a tolerance gets built up.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.No change.
This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.No change.  Gives the FOMC flexibility in decision-making, because they really don’t know what matters, and whether they can truly do anything with monetary policy.
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.No change.  Says that they will go slowly, and react to new data.  Big surprises, those.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.No change.  Says it will keep reinvesting maturing proceeds of agency debt and MBS, which blunts any tightening.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.Back to a small dissent.
 Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.Our favorite dissenter returns.

 

Comments

  • This statement was a nothing-burger.
  • Policy continues to stall, as the economy muddles along.
  • But policy should be tighter. Savers deserve returns, and that would be good for the economy.
  • The changes for the FOMC’s view are that labor indicators are stronger, and GDP and household spending are weaker.
  • Equities and bonds rise a little. Commodity prices rise and the dollar falls.  Everything is a little looser.
  • The FOMC says that any future change to policy is contingent on almost everything.
  • The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations. As a result, the FOMC ain’t moving rates up much, absent much higher inflation, or a US Dollar crisis.

Picture Credit Bloomberg

Picture Credit: Bloomberg

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Rates can go lower from here.  For as long as I can remember, I have been told by many experts that rates can’t go lower, or, that they must go up — there is no way they can go lower.  I have argued with that idea, as has Hoisington (Lacy Hunt), Gary Shilling and a few others.

Note also that the Fed and most central banks have been on the wrong side of this as well.  They keep saying that inflation will come, economic activity will pick up, and that interest rates will rise.

The Fed keeps saying that they will tighten policy.  I’ll tell you this — with only 0.82% between the yields on 10- and 2-year Treasuries, the Fed is not tightening.

WIth debt levels as high as they are (both government and private), trying to influence economic activity though interest rates is a dumb idea.  Incenting borrowers to borrow more is difficult, aside from the government — and they rarely do anything with the money that helps produce opportunities for greater economic activity.

We would be better off without “policymakers” trying to “stimulate” the economy, “manage” it, “stabilize” it, etc.  (But where is the political will to change things — the populace wants easy prosperity, and who is there to tell them to accept a rough world where work and competition is tough, and there is no “Big Daddy” to make life easy?  The people are the problem.  The politicians are only a symptom.)

There is one thing that could change this, but it would lay bare the intellectual and moral bankruptcy of what policymakers have been trying to do, which is try to maintain the real value of debt claims while still trying to “stimulate” the economy.  They could burn away the value of debt claims through an inflation greater than that of the 1970s.

So far, they aren’t willing to do that.  But their existing policies will prolong the stagnation.

And as such, rates can fall further — with a lot of noise/variation around it.

Picture Credit: Peanuts Reloaded || Perhaps today Brexit; Monday an exit from Italy or Spain; [then] Europe dismantles

Picture Credit: Peanuts Reloaded || Roughly: “Perhaps today Brexit; Monday an exit from Italy or Spain; [then] Europe dismantles”

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At a time like this, when the Brexit Boogeyman goes “Boo!” it’s time to take stock of the situation amid panic.

Though the UK will face some political unrest as the Prime Minister resigns, and article 50 is likely but not certainly invoked, the nature of political discourse hasn’t shifted in full.  Though an important question, it is only one question, and more things will remain stable than change.

At least that is most likely.  If you think of “real options” theory, you could say, “Okay, a door opened today that was previously locked.  What new doors beyond that one could be opened?”  Other countries could leave the EU and/or Eurozone [EZ].  The EU/EZ could dissolve.  The odds of other countries leaving isn’t that high.  For the EU or EZ to dissolve would take a lot of doing, and the odds of that happening is very low, though higher than the odds yesterday.

As I said a week ago:

Governments are smaller than markets; markets are smaller than cultures.

What I am saying is that almost everything affecting the needs of people will get done when there is sufficient freedom.  If Brexit occurs, the UK will negotiate some agreement that is mutually beneficial to the UK and the EU, and most things will go on as they do today.  Even with a subpar agreement, perfidious Albion is very effective at getting what they need completed.  This is especially true of their very effective and creative financial sector in the City of London without which most effective international secrecy, taxation avoidance and regulatory avoidance business could not be done.

Whatever happens, it will happen slowly.  Leaving a complex multinational group like the EU takes two years at least.  How it all works out in detail is not predictable.

I can say that human systems tend toward stability.  People act to preserve the things that they like.  Only under severe conditions does that cease to be true, and even then typically only for short periods of time.

I can also say something a little more controversial.  Wealth, assets, and money [WAM] act like they are alive and have more votes than people do under most conditions.  Why am I saying this?

Governments come in, and go out, but for the most part, the same things get done.  Those thinking that radical change will come are usually deeply disappointed.  WAM tend to maintain the status quo, not because their owners bribe politicians and suborn regulators pay political action contributions,  but because people want the streams of goods and services that help make WAM valuable.  Only a genuine crisis at least as large as the Great Depression or the Civil War can create truly radical change that reshapes the basic desires of most of the people in a nation.

Capitalist democracies that respect the rule of law (e.g., the government is also governed by a higher law) are usually pretty stable; systems that don’t have significant capitalism or democracy may last a couple generations, but tend to fall apart.

All that said, there is significant economic pressure to do two things after the Brexit:

  • Rethink the single currency and common laws
  • Maintain a free-ish trade zone in goods and services

The Eurozone does not allow for the necessary economic adjustments across nations in a fiat monetary system.  Nations need their own currencies, central banks, etc.  They also need to govern themselves via their local culture, not someplace far away with misguided idealists who think they know what’s best for all.

Free-ish trade maintains most of what is needed for human needs.  The European Union is a political construct meant to prevent war from ever recurring in Europe.  The best way to do that is through trade.  Severe wars rare start between nations that rely on each other and interact through commerce.

My view is that ten years from now, the goods and services that people want will get delivered, regardless of the governmental structures in Europe.  I will invest accordingly.

Practical Implications

Things will be rocky in the short run, and there will be more bumps along the road as the Brexit negotiations go on.  I will be resisting panic and euphoria in modest ways.  This isn’t the sum total of my strategies, but I expect that profitable business will continue, and that people and nations will pursue generally intelligent long-term self-interest as events unfold.

When I say modest, I tweak my portfolios at the edges.  Brexit does not comprise more than 5% of what I would do with assets.  As with any investment idea, spread your bets, diversify, don’t bet the farm.

And, I would say the same even to governments — if you don’t have contingency plans for the possibility of the EU shrinking or even disappearing, you are not truly prepared for all contingencies.  As Warren Buffett once said (something like) “We’re paid to think about the things that ‘can’t happen.'”

In closing, many thought that Brexit could not happen.  Now, what else “can’t happen?” 😉

When do you admit that you are wrong?  Do you do it publicly?  Do you hide it?

Do you hide it plain sight?

When I look at the graph for Fed funds for 2017 and later, I think the FOMC is admitting that they were wrong for a long time, and now hide that in plain sight.

They don’t admit that they were wrong.  They don’t admit that the economy has proven to be a lot weaker than they ever expected, and that they now expect that to persist for a while.

That’s what the graphs for Fed funds and GDP say.

central tendency_GDP

But what does the FOMC say in its statement?  It expresses confidence in future GDP robust growth, even though their expectations have collapsed to 2% real growth as far as they care to opine.

Look at the above graph, and see how it has all converged to 2%.

central tendency_PCE

PCE Inflation? They assume it will be 2% before the year starts, and then they adapt to incoming data.

There’s no model here, just a disappointed ideology that says they wish to  produce a 2% PCE inflation rate, dubious as that goal is.

The only thing more dubious there is their ability to achieve their ideology.

central tendency_Unemp

Remember after the financial crisis? There were those who said unemployment would never return to 5% — that the natural rate of unemployment was permanently higher.

I may have been among them.

Well, now the FOMC has a new consensus.  Unemployment below 5% as far as they care to opine.

When I look at these graphs, particularly the ones for Fed funds and GDP growth, I see a paradigm shift where Bayesian priors have been dragged kicking and screaming by the data to No Man’s Land.

Grudgingly they acknowledge the data in the graphs, but they don’t have a theory to go along with it, so their statements and minutes sound the same.

Nothing is changed.  Soon our policies will restore robust real GDP growth, produce inflation and then we will tighten policy and restore normalcy.

Well, that’s what their minutes and statements say.

But who are you going to believe?  The FOMC and their words, or your lying eyes looking at their graphs?

PS — modified to reflect Bullard’s lack of a vote on long-term Fed funds rate.

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April 2016June 2016Comments
Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed.Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.FOMC shades GDP up and employment down, which is the opposite of last time.
 Although the unemployment rate has declined, job gains have diminished.Sentence moved up in the statement.  Expresses less confidence in the labor market.
Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.Growth in household spending has strengthened.Shades up household spending.
Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft.Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft.Shades up net exports.
A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Sentence moved up in the statement.
Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports.Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.No change.
Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.No change.  TIPS are showing higher inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 1.48%, down 0.25% from March.  Undid the significant move from earlier in 2016.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen.The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen.No change.
Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.No change. CPI is at +1.1% now, yoy.
The Committee continues to closely monitor inflation indicators and global economic and financial developments.The Committee continues to closely monitor inflation indicators and global economic and financial developments.No change.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.No change.
The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.No change.  They don’t get that policy direction, not position, is what makes policy accommodative or restrictive.  Think of monetary policy as a drug for which a tolerance gets built up.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.No change.
This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.No change.  Gives the FOMC flexibility in decision-making, because they really don’t know what matters, and whether they can truly do anything with monetary policy.
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.No change.  Says that they will go slowly, and react to new data.  Big surprises, those.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.No change.  Says it will keep reinvesting maturing proceeds of agency debt and MBS, which blunts any tightening.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.Back to unanimity in the monoculture of neoclassical economics.
Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent. Say bye to the small dissent.

Comments

  • The FOMC meets too frequently. Often the economic signals at one meeting get reversed at the next meeting, as was true this time.  Rather than hyper-interpreting every wiggle, maybe the FOMC should meet every six months, with the proviso that the chairman could call an interim meeting if the situation demanded it.
  • That this is true regarding economic aggregates has been known since the ‘50s. For a variety of reasons, it is difficult to distinguish signal from noise over periods of less than a year.
  • Then again, maybe the FOMC meets to make it look like they are doing something. 😉
  • This statement was a nothing-burger.
  • Policy continues to stall, as the economy muddles along.
  • But policy should be tighter. Savers deserve returns, and that would be good for the economy.
  • The changes for the FOMC’s view are that labor indicators are weaker, and GDP and household spending are stronger.
  • Equities fall and bonds rise a little. Commodity prices rise and the dollar falls.
  • The FOMC says that any future change to policy is contingent on almost everything.
  • The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations. As a result, the FOMC ain’t moving rates up much, absent much higher inflation, or a US Dollar crisis.