Staying Alive

You know it's alright, it's ok
I'll live to see another day
--Bee Gees

When the Virgina Tech shootings occurred in 2007, I remember thinking that one of the last thoughts that ran thru the minds of students who were in a room with the shooter was, "I wish I had a gun."

SCENARIO: you’re in a room with an armed crazy person...

Choose one:

— Cliff Maloney (@LibertyCliff) December 30, 2019

When facing an aggressor with a gun and no chance of being rescued by someone else, you'll likely throw any anti-gun political views out the window. When it is a matter of life or death, you'll yearn for a firearm that will help you stay alive.

Tech Tonic

Sandy Riggs: So, what is Microspan Corporation all about?
Mitch Leary: I just came to meet the president. I wouldn't presume to bore you with my business.
Sandy Riggs: I don't blame you. One thing I don't understand is high tech.
--In the Line of Fire

When's the last time the tech sector was valued at ~1.75x the S&P 500? October 2000.

Ratio of the Tech sector to S&P 500 is at its highest level since October 2000. pic.twitter.com/KxqcChaL5d

— Charlie Bilello (@charliebilello) December 30, 2019

Doesn't mean the ratio can't go higher. After all, we were on the way down from dot.com top when we last marked these levels.

What it does mean is that relative tech valuations are getting pretty rich on a historical basis.

Jesus, Socialism, and Covetousness

"Their prophet says 'submit.' Jesus says 'decide.'"
--Sybilla (Kingdom of Heaven)

These pages have previously discussed the absurd claim that Jesus was a socialist. My sense is that those who make the claim are ignorant of economics, the bible, or perhaps both.

Lawrence Reed thoroughly refutes the Jesus/socialist canard here. One of his references is Christ's admonishment of envy that sets up the Parable of the Rich Fool (Luke 12: 13-21) which comprised the gospel last summer on the 18th Sunday of Ordinary Time. Someone in a crowd says to Jesus, "Teacher, tell my brother to share the inheritance with me." Jesus replied, "Man, who appointed me as your judge and arbitrator?"

He then turned to the crowd and said, "Take care to guard against all greed." Emphasis is mine, as it is straightforward to construe that Jesus is reprimanding covetousness as a form of greed.

If Jesus was a socialist, then He would have rebuked the brother who purportedly was not 'sharing' his inheritance and, likely, campaigned for a program of forced redistribution in the name of fairness and equality.

Instead, Jesus reinforced what God has commanded: Thou shall not covet.

Not QE

Don't need money
Don't need fame
Don't need no credit card
To ride this train
--Huey Lewis & the News

Charlie Bilello notes that, at the current run rate, the Fed's balance sheet will exceed its peak 'QE' level by spring.

If the Fed's balance sheet continues to expand at the pace of the last 4 months (>$100 billion per month), it will hit a new all-time high by April 2020. pic.twitter.com/gYB5t6Ocb8

— Charlie Bilello (@charliebilello) December 27, 2019

But remember, this is not QE...

Working Orders

I got something now to think about
I'll work all day but not to pay it out
--Pete Townshend

Pension buyout funds were deposited into my rollover IRA yesterday. I look forward to allocating these resources primarily toward dividend paying stocks and precious metals/miners. However, with stock markets at all time highs and the metals complex in rally mode, it is difficult to do a lot right here as prices are stretched to the upside.

Instead, I plan to spread out my buys over time. By 'working' my buy orders, I accumulate shares at various prices which, given the extended nature of the tape, increases the likelihood that my cost basis will be lower than if I purchased an entire position all at once right around here.

In the 'olden days,' working orders in small increments was uncommon. When brokers served as investment agents for most investors, those agents rarely had the time or patience to piece out trades for clients. Moreover, the transaction fees associated with trading in small quantities made trading in small size cost prohibitive.

Now, however, individual investors have the operational resources trade on their own behalf. And with brokerage commissions largely a thing of the past, it makes little sense to make big trades in risky situations--such as our present overbought condition.

So I'll work my orders by buying small and scaling in.

Silver Strength

Silver and gold, silver and gold
Means so much more when I see
Silver and gold decorations
On every Christmas tree
--Burl Ives

Technical picture for precious metals continues to improve, particularly for silver. The metal itself has broken a multi-month downtrend.

 Miners are getting their groove on as well. Pan American Silver (PAAS) has broken thru multi-year resistance at 19ish and is now making tracks higher. Technically, there is little in the way between here and previous highs more than 10 pts higher.

What's going on? The obvious answer is central banks' renewed affinity for easy credit and monetization. Markets are doing the math and they've calculated that currency destruction is a comin.'

position in gold, silver, PAAS

Emmanuel

The people who walked in darkness have seen a great light, upon those who dwelt in the land of gloom a light has shone.

You have brought them abundant joy and great rejoicing; they rejoice before you as with joy at the harvest, as people exult when dividing spoils.

For the yoke that burdened them, and the bar across their shoulders, the rod of their oppressor, you have broken as on the day of Midian.

For every boot that tramped in battle, every cloak rolled in blood, shall be burned as fuel for the fire.

For a child has been born for us, a son given to us; upon his shoulders dominion rests. They name him Wonderful Counselor, Mighty God, Everlasting Father, Prince of Peace.

His dominion is vast and forever peaceful for the throne of David and his kingdom. He will establish and uphold it with justice and with righteousness from this time onward and forevermore. The zeal of the Lord of hosts will do this.

Isaiah 9: 1-7

Opposite Eves

"Heaven help me. I love psychotic!"
--Margo Channing (All About Eve)

A year ago Christmas Eve found markets plumbing the depths of a 20% decline from previous highs. Panic was palpable.

We find the opposite this Eve. Indexes are marking record highs by the day. Optimism abounds.

Nothing, it seems, can go wrong.

Policy Uncertainty and Inflation Expectations

"Remember, sometimes when you're blind, and times seem darkest, you can often see more clearly."
--David Sloan (Kickboxer 2)

Article suggests a negative relationship between policy uncertainty and inflation expectations. The greater the policy uncertainty, the lower the expectations of inflation.

This is not necessarily intuitive. I suppose the argument goes like this. When people have trouble predicting what will happen in the institutional/regulatory environment, they will hoard cash and pull back on purchases (kind of like the 'wait and see' approach to investment advanced by researchers). Expectations of price increases therefore decline.

But we've seen the opposite as well, haven't we? In unstable policy environments, people can get nervous about holding onto cash because it might degrade in the future. Dumping cash on the market causes expectations of prices to explode higher. A reinforcing cycle commences where Big Inflation motivates even bigger inflation expectations.

The relationship between policy uncertainty and inflation expectations is moderated, it seems. What are those moderating variables?

OK Boomer

Darby Shaw: Don't laugh. It was ludicrous of me to think I could solve it. Hubris of the young, huh?
Thomas Callihan: Don't knock the hubris that I love.
--The Pelican Brief

'OK Boomer' has become a popular catchphrase among younger generations used to taunt or mock behavior or attitudes of older generations--particularly the Baby Boomer cohort. Some claim that this is yet more evidence of disrespect and apathy running rampant among youngsters these days.

These claims tend to emanate from the oldsters, of course.

This back and forth is nothing new. Friction between young and old has been at work since the beginning of sociological time. The young have what seems to be limitless time ahead of them. They see themselves as growing stronger and gaining more control over their environments by the day. Some degree of arrogance naturally results from this process, as does proclivity for rebellion against establishment.

Youthful attitudes also foster covetousness and envy toward the old. After all, the old possess relatively large stocks of economic resources that facilitate prosperous life. It is only natural for the young to want some.

'OK Boomer' is just another expression of youthful energy and hubris. OK [fill in blank with words like whatever, pop, old man]. We've heard it before.

While the young see time as infinite, the old are learning the opposite. Family and friends are passing at increasing rates, and mortality looms. The reality is that life time is limited, and older generations are becoming aware that they are closer to the end than to the beginning. It is easy, therefore, for the old to envy the young, because the young have time on their side.

Because of their tendencies for rebellion and covetousness, the young are also seen as a threat. Youngsters want to tear down what oldsters have built. Oldsters see their institutions and legacies at risk.

Thus, the old push back with memes of their own to describe the young. Brats, scallawags, whippersnappers, slackers.

Same as it ever was.

Measuring Global Temperature

Feel the heat
Pushing you to decide
Feel the heat
Burning you up
Ready or not
--Power Station

Climate change enthusiasts point to series like the one below as 'proof' that the earth is warming. Makes sense at first blush. After all, gauges like thermometers generate objective measures, and measures are the basis of science, right?

 

Not so fast, my friend. So-called 'science' is easily corrupted by false signals from bogus approaches to measurement. Consequently, the reasoning mind will need acceptable answers to a number of questions before the above data series can be admitted at face value. Let's list a few:

Where is 'global' temperature currently measured? Presumably, it is not a single location. What sites are used? Why are these sites representative of the world? How are temperatures combined statistically to get a 'global' number? Why is this method valid?

What instrument is used to measure temperature? Are the gauges the same at each site? How are they calibrated to maintain precision and accuracy?

How often is temperature measured at each site? By the minute? Hourly? Daily? Is the frequency the same at each site? Why is this frequency reasonable? How are all the readings combined? Why is this combination valid?

Once the current measurement process is understood, then questions must be aimed at the past--because it is a near certainty that historical temperature data in the above series were not all collected using the same method. So we must understand the old locations, frequencies, methods, etc associated with temperature measurement. Then, we must understand how old data have been combined with new data in a manner that validates the notion of continuity over time. The central question is this: How confident can we be that we are comparing apples-to-apples knowing that the global temperature measurement process has changed over the period encompassed by the above series.

Then, of course, come questions about global temperatures prior to 1850--i.e., the first year appearing in the above graph. The earth is estimated to be more than 4.5 billion years old. Temperature data collected over the past 150 years represents a mere speck on the historical timeline. Any claims w.r.t. temperature levels and trends since 1850 must be compared to long ago to judge their significance. This gets us into methods for estimating global temperatures thousands of years ago, and their comparability to modern measures.

Not surprisingly, questions along these lines have not produced satisfactory answers. Until they do, global warming theory has trouble getting out of square one.

Doing Drugs

One pill makes you larger
And one pill makes you small
And the ones that mother gives you
Don't do anything at all
--Jefferson Airplane

A sector that embodies the melt-up, gappy feel to the tape is pharma. Many names (e.g., ABT, AMGN, JNJ, LLY, MRK) are marking all time highs with charts taking on parabolic shape.

Stochastics twisting high in over-bought territory reflect technical risk of buying the traditionally staid, boring drug sector up here. That makes no never mind currently to traders and black boxes that are prescribe to the notion that objects in motions tend to stay in motion.

Until, of course, that motion reverses.

position in JNJ, MRK

Impeachment and Political Risk

"You're all committing suicide!"
--Lou Zabel (Wall Street: Money Never Sleeps)

There are competing arguments about the long term consequences of the impeachment circus staged by House Democrats. One argument is that the Democrat's abuse of the impeachment process threatens the Constitution and sets up future presidents for similar partisan impeachment votes over petty issues.

The open ended criteria for impeachment proposed by the Democratic experts are dangerous and place Congress above the law. That’s why the Framers demanded specific criteria that sound of crime, rather than “abuse of office.”

— Alan Dershowitz (@AlanDersh) December 4, 2019

Another argument is that voters will see thru the sham for what it is, and rally behind those falsely accused. The backfire will scare future congresses from invoking impeachment for years.

Some say this impeachment sets a new low and every president from now on will face an impeachment vote over something petty.

But if Trump wins re-election and/or Republicans take back the House, it could be 2 or 3 decades before another congress does something this partisan.

— Thomas Massie (@RepThomasMassie) December 18, 2019

These pages have already suggested merit in the second argument.

Perhaps our founding ancestors understood the political risk of such recklessness as well.

Household Stock Allocation

Anthony Judson Lawrence: Mrs Allen, now I don't mean to pry, but I assume that you have some stock--General Motors, General Electric--something like that.
Mrs. J Arthur Allen: Well, doesn't everyone?
--The Young Philadelphians

Interesting graph showing percentage of household assets allocated to equity vs subsequent 10 year stock market returns. We're near the high end currently, with slightly more than 50% of household assets in stocks.

The bad news is that subsequent returns following these peaks have historically not been impressive. When household allocations toward stocks have been in the upper quintile (as they are now), market returns 10 yrs later have averaged about 4%.

On the other hand, equity allocations in the bottom quintile have preceded rosier futures--with market returns averaging ~16% a decade later.

An implication is that households tend to buy high and sell low. They add exposure as markets rise, and they cut exposure as returns fall.

Consequently, household asset allocation toward stocks serves as a contrarian indicator of sorts.

Raising Cash

"He's right, you know, I had to sell. The key to the game is your capital reserves. If you don't have enough, you can't piss in the tall weeds with the big dogs."
--Gordon Gekko (Wall Street)

Although investing involves acquiring financial assets and holding them for long-term payoff, every now and then investment positions may need to be liquidated to raise cash for urgent near-term matters. For example, portions of an investment portfolio may need to be sold to free funds for extinguishing unwanted debt.

Suppose that you hold a stock portfolio with 40-50 positions, many of them inherited, in a taxable brokerage account and you want to sell some holdings to raise cash. How to determine what to sell? A few thoughts:

1) Know what you own--and what you don't want to own. Review the names in your portfolio. What companies do I own? What industries are they in? What are their dividend yields? Be on the lookout for positions that you're not happy with. Some companies may be making strategic mistakes that are weakening their competitive position. Kraft Heinz Co (KHC) was a holding of mine that I thought fit this category. Some companies may be operating in sectors that don't excite you. Lack of enthusiasm for the tobacco and military sectors caused me to look hard at positions in Altria Group (MO) and Lockheed Martin Corp (LMT) when I wanted to raise cash. If you identify positions that you don't feel good about, then these are prime candidates for sale.

2) Are any holdings grossly overvalued? Reflect on the valuations of your holdings with a focus on positions that appear over-priced. Be aware, though, that valuation is a tricky exercise and that general conditions of overvaluation are usually NOT good reasons to liquidate. Stock prices sometimes get ahead of themselves a bit because the story is good and improving. In most cases, it pays (literally) just to hold on and enjoy the ride. Trading in and out of names based on point estimates of valuation is often a losing game. However, in some cases a security's price has been bid so far to the moon that it might make sense to sell. As solid as the company is, the current valuation of Microsoft (MSFT) prompted me to sell a couple months ago at what I perceived to be an extremely rich valuation. I may be wrong, of course (the stock price is up 10-15% since I sold it). But exchanging my MSFT shares for cash was a worthy trade for me at this juncture. Plus, there is nothing stopping me from buying the stock back should things change in the future.

3) Look for opportunities to pair capital gains with capital losses. In a taxable brokerage account, when you sell stocks that have appreciated in price, you will be obligated to pay taxes on the 'capital gains.' However, tax liability can be reduced if you offset capital gains with losses from positions sold for less than their purchase price. For example, I sold some of my losing position in Gap Inc (GPS) earlier this year to offset gains realized by selling winning positions like MSFT discussed above. Every now and then, it makes sense to prune losing positions to obtain a 'tax asset.'

4) Strive for a manageable number of positions. The higher the number of stocks in a portfolio, the greater the degree of diversification, BUT the harder it is to keep track of all positions. Personally, I've found that ~30 positions is my limit. Beyond that, I struggle to stay on top the news flow vital to ongoing fund management. When raising cash, there may be opportunity to reduce portfolio positions to a more manageable number.

Selling can be a hard thing to do. Assets that you've owned--particularly those that have been productive--are often difficult to let go. When done in taxable accounts, the tax bite can also sting. When thoughtfully done, however, raising cash from an investment portfolio can be a healthy exercise. Not only does it enable the funding of immediate needs, but selling also serves to prune and streamline a portfolio so that the remaining assets work better for you in the future.

position in GPS

Peak Melt

I saw the world crashing all around your face
Never realizing it was always mesh and lace
--Modern English

How does melt up sentiment correspond to asset prices movements in the past?

The "melt up" chatter is ramping up. A few more days like this and we could challenge the early '18 euphoria. pic.twitter.com/IUtM8QMb9r

— SentimenTrader (@sentimentrader) December 16, 2019

Peaks, tops, reversals...

All of these terms seem appropriate.

Melt Up Feel

Things are going great
And they're only getting better
The future's so bright
I gotta wear shades
--Timbuk 3

Market open has a melt up feel to it this am. My whole list is green. Commentators have turned very bullish into year end.

Lopsided sentiment that seems ripe for an off-side.

Deep State Scandal

I was born in a cross-fire hurricane
And I howled at the morning driving rain
--The Rolling Stones

Earlier this week the Office of the Inspector General released a long-awaited report on its examination of the FBI's conduct during Donald Trump's presidential campaign. The report, in the words of Glenn Greenwald, "reveals a scandal of historic magnitude." The IG report documents instances of lying, concealment of evidence, and manipulation of documents in order to convince a FISA court that FBI agents should be allowed to spy on a U.S. citizen in the midst of a presidential campaign.

Greenwald states that these findings reinforce what the security state agencies are: "They are out of control, virtually unlimited police state factions that lie, abuse their spying and law enforcement powers, and subvert democracy and civic and political freedoms as a matter of course."

The IG report, in others words, is an indictment of the Deep State.

As Greenwald observes, the report also implicates the mainstream media, whose major claims and narratives concerning Russian collusion and election interference were "utterly false."

It should be no surprise that the mainstream media paid little attention to the IG report findings--save for some outlets making the claim that the report exonerates the FBI of wrongdoing.

Only dedicated lackeys of the Deep State could rationalize such an incredible claim.

Leading with Leverage

"These here are the historical volatility index limits which, of course, our entire trading model relies on pretty fucking heavily. Well, now we're so levered up that once it gets outside of these limits, it gets ugly in a hurry."
--Will Emerson (Margin Call)

What Liz Sonders doesn't note is that the last time the Fins peaked at this level was just prior to the credit crisis.

Financial Crisis is “over” ... yesterday, the S&P 500 Financial sector finally surpassed its 2007 peak, closing at a new all-time high @SPGlobal pic.twitter.com/jRyhXbtjdL

— Liz Ann Sonders (@LizAnnSonders) December 13, 2019

Yes, banks leading the way to higher prices seems naturally bullish. But when the system is being levered up on artificial stimulus, it is also intuitive that the financial sector is likely to lead all the way up until the trap door opens.

As in 2007...

Ocean of Stock Fuel

Singing to the ocean
I can hear the ocean's roar
Play for free, play for me
And play a whole lot more, more!
--Led Zeppelin

With stocks marking all time highs, common wisdom is that economic fundamentals must be great. But let's not kid ourselves. Central banks around the world are cutting rates like mad:

In fact, we haven't this degree of rate cutting since the credit crisis 10+ yrs ago:

The Fed, of course, is pushing the gas pedal further by monetizing short term debt:

Its balance sheet has quickly grown back over the $4 trillion mark:

And, as the Fed's balance sheet grows, so do stock prices--both in the short term...

...and the long term.

Stock prices are being fueled by an ocean of liquidity that is rising at epic rates.

Stocks as Bonds

"I've saved forty two grand, and it's in T-bills earning interest."
--Ophelia (Trading Places)

With interest rates in secular decline, it was only a matter of time before yields on stocks would begin to challenge yields on bonds. That time kicked during the credit crisis when interest rates were forced lower by the Fed.

Now, ten+ years later, about 80% of the stocks in the S&P 500 yield more than T-notes.

In an era of financial repression, dividend-paying stocks start looking like bonds.

Widespread MM Ignorance

"They've got all these fancy names for trillions of dollars of credit: CMOs, CDOs, SIVs, ABSs. I honestly think there's maybe only 75 people in the world who know what they are."
--Gordon Gekko (Wall Street: Money Never Sleeps)

The guy who wrote this previously worked for Treasury and the Fed and, by many accounts, was central to the design of modern repo and money markets (MM). He theorizes that money markets are headed toward a year end crack up that will require the Fed to begin buying longer dated Treasuries ('coupons) once again in a more traditional QE arrangement.

The complexity of the process that he describes gives one the sense that very few high level execs at the G-SIBs (Globally Systematically Important Banks), and the regulators that oversee these markets, currently comprehend what is going on in the MM plumbing underneath their feet.

Feeling some deja vu, as I got a similar sense of widespread ignorance w.r.t. mortgage-backed securities and credit default swaps back in 07-08...

Organization Size, Slack, and Regulatory Uncertainty

"Better get under cover, Sylvester. There's a storm brewing...a whopper!"
--Professor Marvel (Wizard of Oz)

Not a huge gap compared to pre-tariff war period, but it does appear that shares of smaller companies have increased less than their larger share brethren over the past couple of years.

Micro-caps hit hardest since #TradeWar began@DataArbor pic.twitter.com/DbEFl0PiIw

— Liz Ann Sonders (@LizAnnSonders) December 10, 2019

Many factors could be involved outside of trade, of course. But to the extent that there is a significant relationship with policy uncertainty, then what is the underlying explanation?

One is that larger organizations carry more slack. Slack is a pool of excess resources that can be brought to bear during uncertain times to help weather the storm. Slack can be employed to either a) insulate the organization from external forces or threats (e.g., inventory, excess capacity, staff that can contract for better deals), or b) help the organization change in a way to better adapt to the turbulent environmental conditions (e.g., R&D processes, resources for lobbying for institutional change).

Because they possess less slack, smaller organizations are more subject to the vagaries of regulatory uncertainty. Perhaps investors have been pricing this in.

No Generation Gap

One day our generation
Is gonna rule the nation
--John Mayer

Included in this article discussing inter-generational investment preferences is recent data from Schwab showing top retirement account holdings for Millennials, Gen Xers, and Boomers.

The article emphasizes Millennials' unique faith in Bitcoin, which clocks in at number 5 at 1.84% of assets.

More striking to me, however, is what the generations have in common. Big FAANG exposure, Alibaba, Berkshire, Microsoft (MSFT). Few high dividend payers in the bunch.

These top positions suggest all three gens are betting their retirement futures on growth, not stability.

Suggests to me that there is little true generation gap when it comes to investing for retirement. Generally, all tend to throw caution to the wind--at least when it comes to their top positions.

no positions

Ideas Held Hostage

"Spread the word. Get on the wire to every squadron around the world. Tell them how to bring those sons of bitches down."--General William Gray

God made physical resources scarce. What isn't scarce is the creativity that springs forth from our minds. By combining those scarce resources with our abundant ideas we can alleviate some of that scarcity thru productivity improvement.

When we restrain ideas and our ability to use them in production, as we do thru 'intellectual property' laws, then we restrain prosperity.

When we hold ideas hostage, the world is a more barren place than it would be otherwise.

World of Debt

I am not the actor
This can't be the scene
But I am in the water
As far as I can see
--The Who

These page have noted the rising debt:GDP ratio in the US for some time. But this is not just a domestic phenomenon.

Global public debt has also reached its highest level in peacetime.

The $50 trillion + question is this: What is it that is drowning the world in debt?

Selling Strength

"He's right, you know, I had to sell. The key to the game is your capital reserves. If you don't have enough, you can't piss in the tall weeds with the big dogs."
--Gordon Gekko (Wall Street)

Stating the obvious, the best time to sell is when prices are high. But this is easier said than done. Account values are swelling. Plus, prices could go higher yet.

That said, I'm selling strength here as markets challenge all time highs after this morning's strong job report.

Need to have some extra liquidity for projects over the next year. To obtain it, I'm happy to 'feed the ducks' during rallies like this.

Concentrated Portfolios

Daniel LaRusso: What do you want me to do?
Miyagi: You stay focused.
--Karate Kid 3

Liz Sonders shares data indicating that active money managers are concentrating portfolio holdings more than in the past.

Growth of pas­sive in­vest­ing mo­ti­vating in­creas­ing # of ac­tive man­agers to shun di­ver­si­fi­ca­tion & fo­cus on fewer stocks to dif­fer­en­ti­ate them­selves from low cost, in­dex-track­ing ETFs that have done so well dur­ing 10-year bull mar­ket @WSJ @MorningstarInc pic.twitter.com/5vYX3fqJ9w

— Liz Ann Sonders (@LizAnnSonders) December 4, 2019

Funds holding 35 or less positions have been on the rise for years. Fund holding 20 positions or less have also been rising.

Since Markowitz's (1952) groundbreaking work on portfolio theory, diversification has been a widely accepted way for spreading risk and stabilizing returns. But risk and reward are directly related. Reducing risk also reduces potential returns. Fund managers competing against passively managed funds that spread risk across hundreds of positions have little chance of winning the diversification battle against index funds.

Instead, they are determining that they can compete for investment capital by positioning themselves as superior superior reward producers. The primary way to do this is to manage more focused portfolios. Potential for loss is greater but so is potential for reward.

It so happens that I've been moving toward a similar portfolio design. I like the idea of a 20-30 stock portfolio as a good balance between risk and reward.

Reference

Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7: 77-91.

Equity Market Tops

"Made it, Ma...top of the world!"
--Cody Jarrett (White Heat)

Interesting graphs showing tops in various equity markets. By definition, a top is a high point. Following tops in Japan, Europe, and emerging markets, major indexes in those geographies have essentially moved sideways--in some cases for decades.

US stock markets have not fallen in line with the pattern...as of yet.

Valuation Variety

Here by intervention
I want your attention
--Duran Duran

Liz Sonders writes that valuation methods are so subjective that at any time you can find some showing markets as undervalued while other metrics indicate overvaluation. Perhaps, but it is often the case that underlying assumptions cause metrics to diverge for predictable reasons.

The valuation metrics that Sonders presents help demonstrate. The first three metrics suggest that markets are cheap while the rest suggest that markets are expensive. What do the first three have in common? They all employ current interest rates as the discount rate for valuing stocks. As these pages have noted repeatedly, rates are at historic lows, driving discounting operations to render  'fair values' higher than they would be otherwise. Plugging in discount rates closer to long term average interest rates reduces fair values considerably, thereby reducing the 'undervalued' signal.

The other metrics on the list do not employ discount rates directly. Most of them reflect investor operations driven by low interest rate policies. One of these operation is known as TINA. In low interest rate regimes, investors buy stocks--particularly those with yield--because There Is No Alternative.

Low interest rates also encourage borrowing money to buy stocks, also known as the carry trade. Cheap sources of funds add to the amount of money in the market buying stocks, thereby bidding prices higher. Margin debt near all time highs provides a sense of the state of leveraged buying currently in effect. When that leverage comes off, prices will certainly feel downward pressure.

There is also, of course, the effect of non-economic buyers in the market, such as central banks and sovereign wealth funds, that are buying securities in part to complement low interest rate policies already in effect as a means to prop up markets and economic activity.

The message conveyed by different valuation methods may diverge in their message on the surface, but digging deeper suggests more convergence than meets the eye.

Impeachment Partisanship

Here comes the rain again
Falling on my head like a memory
Falling on my head like a new emotion
--Eurythmics

Alan Dershowitz discusses the Constitutional basis of impeachment and the debates of our founding ancestors about the issue. To be impeached, a president must commit a crime, and the commission of that crime must also constitute an abuse of office. Abuse of office by itself may be wrong, but it is not an impeachable offense.

The basis for impeachment was debated at the Constitutional Convention. When simply 'maladminstration' was proposed as grounds for impeachment, James Madison objected, arguing that the criterion was so vague and open-ended that the president would serve at the will of Congress and turn the federal government into a parliamentary democracy where the president could be removed with a vote of no confidence.

Instead, the framers adopted strict requirements for impeachment. Bribery, treason, or other high crimes and misdemeanors must be evident. A 2/3 super-majority vote in the Senate is required for removal.

In Federalist 65, Alexander Hamilton wrote of the dangers of a partisan approach to impeachment. Dershowitz suggests that the recent House impeachment circus demonstrates the partisan approach well. He suggests that impeachment partisanship further divides the nation and threatens to weaken the Constitution.

Perhaps, but the framers might also suggest that a partisan approach to impeachment is also likely to boomerang the party that goes on a unilateral witch hunt for all to see.

Wage Arbitrage

"So, arbitrage. Talk about adrenaline, huh? What do you think is the most important quality for a great arbitrager?"
--Tess McGill (Working Girl)

Larry Elder concludes what any reasoned person would conclude. If people were being paid less than their true market value, then employers would hire them.

"We’re going to end the absurdity of women making 80 cents on the dollar compared to men."
--@SenSanders 11/27/19

Women make 80cents on the dollar compared to men FOR DOING THE SAME WORK? REALLY? Then why don't employers fire men, hire women--and pocket the labor cost savings?

— Larry Elder (@larryelder) November 29, 2019

In free markets driven by the profit motive, employers can't afford to discriminate. They will arbitrage any wage discrimination away to acquire the extra productive capacity.

Taking the Buyout

"I'm gonna do it."
--Robert Gould Shaw (Glory)

I wound up taking the pension buyout. There were strong arguments for keeping the monthly benefit, which I would have begun collecting a few years from now at age 65. In particular, the diversification offered by the fixed pension payment (vs other income streams that are more market dependent) was particularly compelling to me.

There was also the 8-9% annual appreciation until age 65 associated with keeping the pension benefit. I know of few investments with that kind of 'guaranteed' return profile over the next few years.

There is a good chance that if I had a spouse who could collect a residual pension benefit upon my death, then I may have declined the buyout offer for these reasons. 

However, several factors pulled me in the other direction to accept the buyout offer. One was that the offer was better than expected. The low discount rates currently employed in actuarial estimates have driven lump sum valuations higher than they would be under more normalized interest rate conditions. My sense is that interest rates may be headed higher, which would both reduce future lump sum buyout valuations as well as erode the real value of monthly pension payouts. Stated differently, the low interest rate environment that we're currently experiencing makes the buyout option an unusually attractive risk:reward proposition.

Another reason for taking the buyout is that the pension was forecast to comprise a minor percentage of my monthly retirement income. As such, the diversification effect from the fixed monthly payment discussed above would have been muted. If my pension benefit was to be a larger fraction of forecast retirement income, then the buyout choice would have been a more difficult one.

As discussed in a previous post, I also suspect that there is a significant degree of systemic risk building in the financial system stemming from the general state of underfunded pensions. That risk, if realized, ultimately translates into lower real pension payouts--either through plan defaults or through inflationary bailout actions by the federal government. I would rather have a 'bird in the hand' to invest in a manner designed to guard against purchasing power decline wrought by such an event.

Finally, I enjoy markets and investing. The challenge posed by managing the lump sum funds over the next few years offers an intangible benefit that I hope to convert into tangible value over time. At the very least, there should be some residual assets from the original pension benefit available to my heirs should I pass away prematurely.

In any event, my packet has been submitted and is being processed. The lump sum is supposed to be distributed in early-mid December. Once the funds are deposited in my IRA, I will update on what I plan to do with them.

Buying Small, Scaling In

Now
The mist across the windows hides the lines
But nothing hides the colors of the lights that shine
--Joe Jackson

Years ago it hardly made sense to buy stocks in small quantities because of high trading commissions. Because it was not unusual to pay hundreds of dollars to a broker when placing a trade, investors typically bought relatively large blocks of stock at a time to keep transaction costs down. In fact, stock purchases of less than 100 share quantities became known as 'odd lots' because of their unusual nature. 

Now, with Charles Schwab (SCHW) recently eliminating trading commissions and most of the discount brokerage industry following along, purchasing stocks in odd lot quantities makes tons of sense for the everyday investor. Not only have transaction costs disappeared, but spreading buys out over longer periods of time helps manage risk, and often gets you in at a lower average price.

For example, today I began a position in General Mills (GIS) by purchasing a single share at about $53.20. I like the company's story (nice stable of brands and products, attractive 3.7% dividend yield, solid management), but, as you can see from the chart above, the stock has rallied over the past year and now trades at the high end of the 2-3 year range. As such, I suspect that I may be able to buy the stock at a lower price sometime in the near future.

However, by buying a little bit of GIS right here, I have satisfied my desire to own a piece of the company. Now that I own it, I'll be more prone to watch and study it. If the stock price does go down, then I don't have lots of capital at risk. In fact, I'll likely buy more if price declines (as long as the story hasn't materially changed). Perhaps I'll buy several times over the next few months until I acquire the full amount of GIS that I want. Meanwhile, if the stock happens to rocket to Pluto from here, then at least I have some exposure to the name that will allow me to participate in a big price advance.

By spreading my buys over time, I will have done what is called 'scaling into' a position. Scaling in reduces risk because it allows for acquiring shares at lower prices as the position is built in several increments.

Now that trading commissions have disappeared, there is little downside to buying small and scaling in.

position in GIS

Table Manners

And there's a message that I'm sending out
Like a telegraph to your soul
And if I can't bridge this distance
Stop this heartbreak overload
--John Waite

Grateful today for all of God's gifts--life, liberty, and today especially, family.

To those who have gone before us, we will miss you at the table today. We hope and pray for the opportunity to sit with you at the table again.

Bolshevik Politics

"You wanna know what my platform is? Here it is. I'm gonna soak the fat boys and spread it out thin."
--Willie Stark (All the King's Men)

What is Bolshevik politics? It is the narrative that rich people are selfish, corporations are bad, and wealth is too concentrated. All people beside the rich are victims of the system. To correct the injustices of the system, wealth must be confiscated from the few and redistributed to the rest.

The dirty secret of Bolshevik politics, though, is that, whatever you do, don't allow the masses to work hard and be successful. Political power comes from keeping people feeling afraid and downtrodden.

Successful people lose the victim mentality, which is the kiss of death for Bolshevik politics.

Money Spigot

Rain on my face
It hasn't stopped
Raining for days
My world is a flood
Slowly I become
One with the mud
--Jars of Clay

Credit creation is inherently deflationary. Credit money supply increases upon the creation of debt but it contracts when debt is repaid or defaulted on.

In past cycles central banks have countered the deflationary phases with lower interest rates that spark even more credit creation. But each cycle requires lower rates than before, and marginal bang for the credit buck gradually declines.

With lower interest rates waning in their effectiveness and approaching the 'zero bound,' central banks are now turning toward monetization. This involves printing money out of thin air to buy stocks, bonds, and other financial assets to prop up prices in the face of deflationary decline. Why must central banks do this? Well, the system has become so levered up from past credit creation that even small declines in prices threatens to render balance sheets insolvent.

The next logical step involves simply printing money and sending it to people directly. This is the endgame. Flooding the entire economic system--not just the narrow financial system--with freshly minted cash.

This is how all currencies collapse. First excess borrowing and debt. And then opening the money spigot to keep the system solvent, which morphs into a hyper-inflationary endgame.

Chinese Checkers

We got to install microwave ovens
Custom kitchen deliveries
We got to move these refrigerators
We got to move these color TVs
--Dire Straits

Graphical evolution of China's dominant position as a supplier of goods over the past decade. First, 2010:

Now, 2019:

Does this mean that China is getting richer at the expense of others? No. Trade is a two way street. When trade is voluntary, both sides benefit, lest exchange would not occur. Both sides get richer.

If China is creating more value for trading partners than it was ten years ago, then that is good for China...and good for the world.

Fallacy of We

Leo Getz: You hungry? I'll call for anything you want. See this silk robe? Free.
Sgt Roger Murtaugh: It's not free. 
Leo Getz: Yes it is.
Sgt Roger Murtaugh: It's taxpayer's money.
Leo Getz: Same thing.
--Lethal Weapon 2

Article discusses the absurd claim that federal debt is not a problem because it is money that we owe to ourselves. The 'we owe it to ourselves' crowd argues that because government debt can be passed on to future generations, the debt can persist into perpetuity so long as people are willing to lend and government is able to service the debt. Moreover, because federal debt is owned by domestic citizens, the money used to repay debt doesn't leave the economy.

But, as the article points out, about 1/3 of federal debt is in fact owned by outsiders. In other words, we don't owe a substantial portion of federal debt to ourselves. We owe it to others.

A larger problem can be called 'the fallacy of us, we, and our.'  Individuals lend and borrow, not collectives. Individuals who incur federal debt are different from individuals who bear the burden of repaying the debt. The beneficiaries are people today who enjoy the borrowed funds and what they can purchase. However, future taxpayers are hurt, as they must repay the debt borrowed by previous generations.

However, the most fundamental problem is one not directly addressed in the article. Government debt constitutes borrowing by force. Sovereign debt is a contract between governments and private lenders with the promise that bond principal and interest will be repaid by citizens under threat of force. Confiscating economic resources by force distorts how those resources would have been allocated by individuals engaging freely in production and trade.

Moreover, when government knows that it can take resources at gunpoint, it will surely 'borrow' more, which leads to lower saving and, ultimately, to capital consumption over time.

The result is fewer resources available for investment and productivity improvement down the road. Prosperity, consequently, is restrained.

Decline in Job Quality

Hey, I'm not complaining
'Cause I really need the work
Hitting up my buddy's 
Got me feeling like a jerk
--Huey Lewis & The News

Article indicates that, while unemployment is near record lows, quality of work has been declining. The Job Quality Index, a product of Cornell Law School, factors in hourly wage growth, hours worked (higher deemed better), labor force participation rate, and rates of core economic growth to reflect to find a ratio of 'high quality' to 'low quality' jobs. A number less than 100 indicates more low quality jobs.

Notice that the index has been trending down since its inception in 1991. Why might this be? The best jobs come from capital investment. But real capital investment has been dwindling as savings have declined. We are now engaging in capital consumption. High quality jobs are unlikely when there is little real capital to create them.

Until we borrow less and save more, job quality should continue to deteriorate.

Community

There is no greater value of community than during times of grief.

Shared sympathy. Hands, hugs, love.

The best of who we are.

Living the Deep State

"Listen, people, everyone knows where this is going. If this was a legit op, and I can't imagine how it could be, then so be it. But if this was someone's unilateral wet dream, then that someone is going to prison."
--Admiral Shaffer (Enemy of the State)

Meadows is correct. The chorus of bureaucrats testifying at the impeachment circus demonstrate the officials in various federal agencies are behaving as if they set foreign policy. This, of course, is not their job.

Unelected bureaucrats in Washington, D.C. work for the President.

Not the other way around. https://t.co/f840sN9CH6

— Oversight Committee Republicans (@GOPoversight) November 21, 2019

Their job is to execute foreign policy set by the president.

When unelected agency bureaucrats go off the reservation and act unilaterally on policy matters, they are living the Deep State.

False Alarm

You run, run, run away
It's your heart that you betray
--Scandal

Nice example of a head and shoulders pattern that turned out to be a 'false alarm.'

After wallowing around the H&S neckline, PAAS reversed higher and is now challenging previous highs.

position in PAAS

Since QE4

You see the signs
But you can't read
Your heart's running 
At a different speed
--Robert Palmer

Piggybacking on previous post, below chart shows performance of SPX since the Fed began 'QE4.'

As noted previously, there is little else you need to know about the causes of new market highs.

Monetized Markets

'Cause she's so high
High above me
She's so lovely
--Tal Bachman

Global 'liquidity' proxy is a sum of money that central banks worldwide have created out of thin air and poured into the system worldwide in various forms of 'quantitative easing,'--understood more simply as monetization.

This is really all you have to know about what is propelling stocks to all time highs.

Ulitimate Victory

When we pray to Our Lady of Victory, the victory that we sometimes hope and pray for is an earthly one. But Mary intercedes for our ultimate victory--victory over death.

Because victory over death means everlasting life, it is the only one that matters.

Historical Budget Deficit

"We have a crisis situation."
--Viper (Top Gun)

Historical budget surplus/deficit as % of GDP. This year it is 4.6%.

Save for wars, this level of deficit has typically been reserved for economic 'crisis situations.'

No Fed, No Debt

Isn't it ironic
Don't you think?
--Alanis Morissett

Earlier this week Fed chair Jerome Powell testified in front of Congress that he is worried about the federal budget deficit and called the level of federal debt 'unsustainable.'

Pot, meet kettle.

The Federal Reserve, through its low interest rate policies, is the enabler of big federal deficits and debt.

As noted here, this is the drug dealer lecturing to junkies about their habit.

Without the Federal Reserve (and other central banks), there would be no deficit or debt problems.

Kangaroo Court

But I know the neighborhood
And talk is cheap when the story is good
And the tales grow taller on down the line
--REO Speedwagon

Previously we've noted the Left's increasing preference for hearsay, particularly as a tool for running Donald Trump out of office (here, here, here). Leftist use of hearsay and supposition reached crescendo levels this week during the House Democrat's sham impeachment hearings this week.

The progression of witnesses producing nothing but second, third, fouth-hand testimony, often led on by Democrat facilitators became so absurd that GOP onlookers ridiculed the proceedings by evoking 1980s REO Speedwagon lyrics.

“I heard it from a friend, who heard it from a friend, who heard it from another…” https://t.co/mCdCPC4Uh5

— Rep. Jeff Duncan (@RepJeffDuncan) November 13, 2019

Were this a real courtroom, any disinterested judge would have run the Democrats out the door by their ears. But this is not a real courtroom, of course. It is the Democrat's kangaroo court.

In Sight, In Mind

Confusion that never stops
The closing walls
And ticking clocks
--Coldplay

Federal debt has now marked north of $23 trillion. Congressman Chip Roy proposes that debt clocks be posted various rooms in the Capitol building to keep the numbers in front of policymakers.

Last week we surpassed $23 trillion in debt. Neither party in DC seems bothered enough to stop it - so I introduced the “Know Debt Resolution,” which would place debt clocks in the main meeting rooms of the House Budget & House Appropriations Committees. #KnowDebt #HRes868

— Chip Roy (@chiproytx) November 12, 2019

The opposite of 'out of sight, out of mind' is 'in sight, in mind.'

Flashpoint Approaching

Patrick O'Malley: You know, I only made one real mistake.
Eve Tozier: What was that?
Patrick O'Malley: I should have sold you when I had the chance.
--High Road to China

If you're not keeping an eye on the escalating tensions in Hong Kong, then you're ignoring due diligence. Flashpoint seems near. Chinese hardliners are undoubtedly anxious to take control of the situation with an iron hand.

CPC heads may feel that they have to intervene. After all, if they cut slack to Hong Kong protesters, then Mainland citizens will demand similar treatment.

Liberty is not part of the central plan.

Offending Freedom

Miyagi: Karate for defense only.
Daniel LaRusso: That's not what these guys are taught.
Miyagi: Hai...can see.
--The Karate Kid

A free state does not lift its military on a pedestal. It views military action as a last resort--as a failure to establish voluntary cooperation with others. Past wars should be seen as tragedies, not as glories.

Force is valid only when used as defense against aggression. Preemptive force is not defensive. It is offensive. When troops are stationed in other lands to 'keep the peace,' this is not self-defense. It is aggression.

When a country raises resources for military action thru acts of force (e.g., taxes, conscription), then it is not 'defending freedom.'

It is offending freedom.

Stupid Compromise

The middle of the road
Is trying to find me
I'm standing in the middle of life
With my plans behind me
--Pretenders

Well done by Scott Adams.

Compromise is usually stupid.

Negative Productivity Trends

Gonna pack my lunch in the morning
And go to work each day
And when the evening rolls around
I'll go home and lay my body down
And when the morning light comes streaming in
I'll get up and do it again
--Jackson Browne

These pages have observed downtrends in productivity growth--particularly over the past ten years. After the Q3 number printed at -0.3% earlier this week, people are once again wondering what is going on.

Let's look at the productivity series. Below we see the annual percentage change in productivity (i.e., output per hour worked) in 'non-farm business' (i.e., manufacturing and service sectors excluding agriculture).

Ignoring measurement challenges (e.g., how to accurately capture all hours worked?), it is clear that productivity has been declining over time--with perhaps some pushback inspired by the productivity-boosting info tech movement in the late 20th century. Although I don't have statistical capability right this moment, I would bet that a linear regression model fitted to these data would find a negative and significant slope.

What is grabbing people's attention is that the variation that accompanies the data points in this downtrend is beginning to touch, or cross zero with increasing regularity.

What is driving the decline? While many theories are being advanced, it seems to me that the central cause is this: dwindling savings.

To improve productivity, humans need tools that they can combine with labor to produce more output per hour. In order for some people to produce those tools, however, they must forego producing food, clothing, and other vital resources necessary for their own survival. The toolmakers live off of resources that others have set aside (i.e., savings).

Savings that fund tool production are often referred to as capital. When people save less and consume more, there is less capital. Less capital means less tool production. Less tool production means lower propensity for productivity improvement.

When people consume everything they make and dip into past savings to fund their immediate lifestyles, then they are engaging in capital consumption. When government debt is factored into the mix, savings rates in the US have been increasingly negative for some time.

Negative savings rates are driving productivity decline--a decline which will surely compromise standard of living if it continues to persist.