Tax Mex

And I've got such a long way to go
To make it to the border of Mexico
--Christopher Cross

Last night President Trump announced that tariffs will be imposed on goods coming from Mexico until the Mexican government gains better control over migration to the southern US border. There is nothing smart about using tariffs as a policy tool, as these pages have frequently discussed.

On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,..

— Donald J. Trump (@realDonaldTrump) May 30, 2019

However, complaints from many of Trump's detractors are likely to be muted. Although his enemies may not like it when Trump taxes economic activity, they are generally not opposed to the idea of taxes themselves. If they point out the negative economic consequences of tariffs, then Trump's opponents leave themselves open to future criticism when they themselves propose taxes of some sort.

On the other hand, hypocrisy does not seem to bother political partisans.

Of course, many Trump opponents may silently welcome tariffs for another insidious reason. They know that by taxing economic activity, the president weakens his re-election potential.

Sovereign Debt Distortions

Watt: How's it feel to be carrying all that cash in your pocket?
Keith Nelson: Well, a little uncomfortable.
Watts: Want me to tell you one more time that I think you're crazy?
Keith Nelson: Nope.
Watts: Been hording that cash for years?
Keith Nelson: Yep.
Watts: How bad's your dad gonna ream you?
Keith: You won't be able to measure it with existing technology.
--Some Kind of Wonderful

On the back of yesterday's post about the inverting UST yield curve, some eyebrow-raising anomalies among sovereign debt yields worldwide help explain what we're seeing in Treasuries. Here are some rates on various 10 yr country bonds per WSJ as of this pm:

US   2.243%
UK  0.900
Sweden   0.005
Spain   0.765
Portugal  0.863
Netherlands   0.021
Japan   -0.081
Italy   2.651
Germany   -0.171
France   0.242
Belgium   0.320
Australia   1.543

Only two countries besides the US sport rates above 1% (!). Many are close to zero. In fact, yields on 10 yr German and Japanese bonds are negative, meaning that creditors are effectively paying debtors for the privilege of owning the paper.

What is going on? It's the global version of 'quantitative easing.' Central banks, namely the BOJ and ECB are buying sovereign debt in an effort to keep rates low. Interest rates on bonds go down when prices go up. As central bank buying programs bid up the prices of sovereign debt, yields shrink globally.

Although they may be difficult to measure with existing technology, the market distortions wrought by this activity help explain what is going on here in the US. If you are on the market for 10 yr sovereign bonds, which country offers the best risk:reward prospects?

As investors vote with their wallets, they are buying US tens in size, which is pushing their rates lower than would be the case in unhampered markets.

Curve Ball

Upside down
Boy you turn
Inside out
And round and round
--Diana Ross

Continued decline in 10 yr T-note yields has further inverted portions of the yield curve.

Three month T-bill yields currently stand at about 2.35% while 10 yr yields have fallen to about 2.26%. Negative 10 basis pts doesn't seem like much, but a year ago 3 month yields were ~1.9% while 10 yr yields were nearly 1% higher at 2.8%.

It is that relative change, along with the history of inverted yield curves being harbingers of recession, that is weighing on the collective psyche.

Market Cap

See the kids just getting out of school
They can't wait to hang out and be cool
--The Go-Go's

Recently we discussed valuation--the process of determining how much a security is worth. Once you estimate the security's 'fair value,' then you need to compare your estimate to the current market value to judge whether the security is fairly valued, overvalued, or undervalued.

How to obtain the current market value of a security? If that security is a stock, then current market value can be readily found by determining the stock's market capitalization, or 'market cap.' Market cap is calculated by multiplying the current share price by the number of shares outstanding (sometimes called 'float'):

market cap = price per share * number of shares outstanding

Let's use Target Corp (TGT) as an example. This morning, TGT shares are trading around $81.50. Currently, there are 512.3 billion TGT shares outstanding. TGT's market cap is:

$81.50/share * 512.3 billion shares = $41.8 billion

This is the value that the market currently places on the entire company. Suppose that you and I wanted to buy Target--not just a few shares but the entire company! To do so, we would theoretically have to write a check for $41.8 billion in order to take all shares off the market at the current price. (In reality, we'd probably have to pay more because shareholders, once they recognize that their company is a buy-out candidate, usually demand a premium over current market price before they are willing to part with their shares).

Market cap offers a decent idea of what the market currently thinks the company is worth.

A close cousin of market cap is enterprise value. Enterprise value tweaks market cap by factoring in a company's current cash and debt levels. Here's how it's found:

enterprise value = market cap - cash + long term debt

Let's return to the TGT example. Target's most recent quarterly balance sheet indicates cash equivalents of $1.2 billion and long term debt of $11.3 billion. TGT's enterprise value, then, is:

$41.8 billion - $1.2 billion + $11.3 billion = $51.9 billion

Technically, enterprise value provides a more accurate estimate of current market value because it takes into account a company's net cash position. When a company is carrying more debt than cash like Target currently does (a very common situation in today's world, btw), then the check that we would have to write to purchase the entire company conceptually increases because we would have to assume the debt obligations currently on Target's books.

Which one to use--market cap or enterprise value? While enterprise value provides a more technically correct estimate, the practical differences can be pretty small. In everyday market machinations, market cap is the more popular metric. It is widely reported--probably because it is easier to calculate. I pay attention to both and like to have a general idea of where market cap and enterprise values stand for the companies that I follow.

In market lingo, companies with market caps of $10 billion or more are often referred to as 'large caps.' Those with market caps between $1 billion and $10 billion are called 'mid caps.' Companies with market caps of less than $1 billion are deemed 'small caps.'

For reference, here's a list of the 50 largest US companies by market cap. Quick quiz: What company currently holds the title as the largest US company by market cap?

position in TGT

Just vs Unjust War

"War is a continuation of politics by other means...Von Clausewitz."
--Captain Frank Ramsey (Crimson Tide)

A just war is fought purely in self defense. No provocation. No preemption.

Few wars fought by the United States satisfy this criterion. Instead they have mostly been fought to satisfy political objectives such as advancing democracy, generating economic stimulus, preserving the union, maintaining flow of critical economic resources, stopping communism.

The US has often engaged in war after provoking opponents. It has also engaged in preemptive strikes. Preemption defines aggressors, not defenders.

Today, pray for the millions of casualties of unjust war.

His Peace

I really wanna see You
Really wanna be with You
Really wanna see you, Lord
But it takes so long, my Lord
--George Harrison

In today's gospel (John 14:23-29), Jesus says, "Peace I leave with you; my peace I give to you." But he goes on to say, "Not as the world gives do I give it to you."

He is suggesting that peace as we think we know it here on earth is not necessarily peace in the heavenly sense.

The worldly definition of peace has to do with restfulness and absence of conflict. But it is hard to argue that Christ's time on earth reflected these concepts. His life was full of conflict and challenges to the status quo. Yet Jesus himself was the most peaceful person to walk the earth.

Jesus told us that He was leaving His peace with us. His peace came from his worldly actions--actions that were witnessed and recorded, and that we have come to know.

Through His actions Christ revealed to us that true peace is found not in the absence of pain or conflict, but in pursuing truth in the name of God.

What Follows Zero?

Maybe someday
Saved by zero
I'll be more together
--The Fixx

Some in the media appear to be catching on. WSJ feature article discusses central bank addiction to low interest rates--something these pages have discussed many times. The focus of the article is on European central banks but the idea applies to all.

The concept is simple. Central banks seek to stimulate economic activity during recessions by cutting rates. Cutting rates creates more credit. More credit creates more borrowing and leverage. Raising rates stresses the leveraged system.

Thus, central banks can never take rates back to where they used to be. Every cycle rates dip lower than before, and never reach the previous cycle's highs.

This is why interest rates have been in a multi-decade downtrend. Central banks can't take rates appreciably higher without breaking the system.

Now, after many cycles, rates are at or close to zero. What follows zero?

Ten Trend

Words, playing me deja vu
Like a radio tune
I swear I've heard before
--Duran Duran

At ~ 2.3%, ten yr yields are marking levels last seen nearly two years ago. Current rates also constitute a near perfect 50% retracement of the range set between the all time lows of about 1.4% in July 2016 and recent highs of about 3.2% in late 2018.

What's going on? You pick the cause. Flight to quality. Risk aversion. Low inflation outlook. Anticipation of pending Fed rate cuts. Forecast of economic slowdown. Global bond yield arbitrage. Robo trend followers.

In the Fibo world, some 'rest' at current levels would not be surprising. If the downtrend continues, then it 'works' to ~ 2.0%.

no positions

Employer-Paid Health Insurance

She had two babies
One was six months, one was three
In the War of '44
Every telephone ringing
Every heartbeat stinging
When she thought it was God calling her
Oh, would her son grow to know his father?
--Paula Cole

Picking up on our previous thread on the history of US health insurance, World War II pulled 12 million working age men from an economy that was operating in overdrive to make wartime goods. Supply of labor was consequently low while demand was high.

Unfortunately, wartime wage and price controls prevented producers from competing for talent by offering higher pay. Instead, they competed using fringe benefits. Free health insurance became a popular fringe to attract wartime workers.

Subsequently the IRS ruled that the cost of employee health insurance was a tax-deductible expense. In addition, the National Labor Relations Board ruled that health benefits were subject to collective bargaining. Employer-paid health insurance was becoming institutionalized.

Company-paid health benefits further distanced consumers of medical care from purchasers of care. In unhampered markets, individuals who have to pay their own health insurance are incentivized to shop for the most cost-effective plan available. With the onset of employer-paid insurance in the 1940s, an increasing number of Americans had no motivation to comparison shop. They simply took the plans that their employers chose to provide.

Worsening the situation still was the fact that insurers could pick and choose among the most attractive employee pools for which to write policies. Employers with the highest community ratings got the best policies. To balance their risk, insurers raised the cost of insurance for everyone else.

The effects of this practice are clear today. Sixty five percent of workers without health insurance work for companies with 25 or fewer employees.

A final round of problems began to surface in the 1960s. We'll cover those in a future post.

Lowe Down

Well I do my best to understand dear
But you still mystify
And I want to know why
--Nick Lowe

A couple of days ago I stopped at my local Lowe's (LOW) to browse some plants. The garden center was a wreck. Flowers wilting from lack of water. Potted plants knocked over with dirt spilled in the aisle ways. Items in the wrong place. Long lines at only one open register.

Hard to imagine a retail store that appeared more poorly managed.

This week many retailers have been reporting their quarterly earnings. Ahead of retail earnings reports, many investment firms conduct 'channel checks'--on the ground observations of how things are moving thru the stores.

While the same size of my personal channel check on Lowe's was certainly tiny and unscientific, it did not project well to the corporation at large.

This morning LOW reported an ugly quarter and reduced guidance for the year. The stock is blowing up out of the gate.

No surprise here. Just wish I was short the name...

no position

Net Worth

Don't you try to pretend
It's my feeling we'll win in the end
--Simple Minds

"Where do I stand financially?" One way to answer that question is to periodically estimate your net worth. Simply defined, net worth is the difference between what you own and what you owe. The more you own and the less you owe, the greater your net worth.

In financial accounting, the instrument for measuring net worth is called a balance sheet. When companies report their financial results, they include a balance sheet so that shareholders can understand the capital structure of the business and their underlying net worth (a.k.a. shareholder equity). Individuals can similarly employ the balance sheet approach to get an idea of their net worth.

Assets

First comes what you own, a.k.a. 'assets.' Record them, then add them up. Here's a list of typical assets, beginning with the most liquid:

Cash and cash equivalents. Value of checking accounts, savings accounts, CDs held in banks. Don't worry about physical cash on hand unless it's substantial.

Investments. Value of brokerage accounts, mutual funds, IRAs, 401(k)'s.

Alternative assets held in physical form. Precious metals, collectibles, other real estate besides personal dwelling. Value of alternative assets can be harder to estimate because they are less liquid. Be conservative with your estimates.

Home. If you own a house, include the property's estimated value. A conservative reference is often the county assessment done every few years for property tax purposes.

Car. Estimated selling price of a car if you have one. Remember that car values depreciate quickly, so be conservative.

Other personal property. For the most part, ignore possessions like clothes, electronics, etc. They usually have little 'salvage value' if you have to sell them.

Liabilities

Next comes what you owe, a.k.a. 'liabilities.' For the most part liabilities are various forms of debt. Record them, then add them up. Here's a list of typical liabilities.

Credit card debt if balance not paid off monthly.

Student loan debt--remaining balance that you owe.

Car loan debt--remaining balance.

Home mortgage debt--remaining balance.

Other debt. Rare but could include personal loans (money you've borrowed from another person) and other unusual obligations.

Don't include monthly bills like phone, cable, gas and electric as long as they are paid when due.

Net Worth

Once you've summed up your assets and liabilities, find the difference:

Net Worth = Assets - Liabilities

You want the number to be positive and growing over time. When you are just starting out, you net worth will be small. It may even be negative. The way to stay out of negative territory is to avoid debt. Stated differently, owning tons of assets matters little from a net worth standpoint if those assets have been funded by a mountain of debt.

The smaller your debt load, the quicker that you can build your financial net worth.

Personally, I estimate my net worth quarterly using a spreadsheet. Nothing to obsess over. Just a way to track progress along the way.

Slanted Media Requires Slanted Demand

"It will happen again because people like you and me like to be lied to. We like bedtime stories."
--Jacob Moore (Wall Street: Money Never Sleeps)

It's easy to emphasize the supply-side of media of bias. Politically interested journalists slant their work because they simply can't help themselves from expressing their bias.

However, active markets for bias require both supply and demand. Journalists spewing politically biased drivel could not flourish unless people were willing to pay to consume it.

In fact, if you subscribe to the idea that supply follows demand, then it is the consumer's taste preference for biased information that finds media sources scrambling to satisfy the craving for slant.

1/ A writer for the NY Times once told me that the problem with the newspaper is that the readers are deluded. "If you write something that opposes the far-left party line, even if it's true, they punish you---through things like online comments and subscription cancellations."

— Tim Groseclose (@Tim_Groseclose) May 18, 2019

Tim Groseclose demonstrates with the above tweet. His NYT source implies that if the paper published content that opposed leftist doctrine, then readers would sanction the Gray Lady by reducing consumption. This is classic resource dependence theory in motion.

One could easily insert Fox News and the political right in the above narrative and get a similar logic.

While much is made about media bias, don't forget that sellers of slant can't get far without willing buyers.

Acts

"Jesus spoke to us of death, the night He faced His own--the night they took Him before Pilate. It was our last supper together. After we had risen from the table, He washed our feet. And then He spoke. He told us that in His Father's house there are many mansions, that He went to prepare a place for us there. That, "Where I am," He said, "there you may be also." Our friends are in our Father's house. Some day we'll walk that same road, and at its end we'll find them, and find our Master, and His everlasting love."
--Peter (Demetrius and the Gladiators)

No book in the bible is more prominent during the Easter season than Acts of the Apostles. The first reading, which during most of the Church year is sourced from the Old Testament, is comprised exclusively of excerpts from Acts during the seven weeks of Easter.

Acts is unlike any other book in scripture. It is not a gospel or a letter. Instead, Luke, the author of Acts, describes how the apostles, after the Ascension, set out to do God's work and build the Lord's Church.

What is striking about this description is how changed the apostles were. When Jesus was alive, and during the early days following His death and resurrection, this group could hardly get out of its own way. Awkward, confused, afraid. This hardly seemed like an all star cast of church builders.

Acts testifies to the apostles' transformation--how they got to it.

No longer confused, the twelve set out on focused on the mission that Christ had prepared them for. They acted confidently while understanding the enormity of their task. As noted in today's reading (Acts 14:21-27), Paul and Barnabas told people that, "It is necessary for us to undergo many hardships to enter the kingdom of God."

The apostles faithfully endured that hardship--many of them to the death.

And so it can be for us. The Easter season demonstrates how a fumbling, weak, sinful people can dramatically change course and endure all hardship thrown their way for the love of God.

Silver vs Gold

You got me runnin'
Goin' out of my mind
You got me thinkin'
That I'm wastin' my time
--Electric Light Orchestra

Much hand wringing recently over the weak price of silver. Even in relationship to gold, silver can't get traction.

Silver's under-performance vs gold is not a short term phenomenon, however. Since silver's apex in 2011, it has been weaker vs the yellow metal.

Silver's weakness vs gold in down markets should not be surprising. Silver has more upside when things are going well. It should also have more downside when things are less well. Risk:reward.

position in gold, silver

Emerging Risk

We thought just for an instant
We could see the future
We thought for once we knew
What really was important
--Til Tuesday

Interesting juncture for the emerging markets ETF (EEM). Recent weakness finds it in a long term support band ranging from about 39ish to 42ish.

Should it break below the band, then the implications for broad markets could be significant. Old market saw says that riskiest sectors show weakness first. Emerging markets are high on the risk scale.

no positions

Polar Opposites

Ellsworth Toohey: Mr Roark, we're alone here. Why don't you tell me what you think of me in any words you wish.
Howard Roark: But I don't think of you.
--The Fountainhead

Nice observation made here. America in general is not polarized. Many if not most Americans are apolitical.

Excellent interview with Morris Fiorina, maybe the greatest political scientist ever. One snippet: "One of the interesting findings from my book is that the more involved in politics you are ... the less accurate you are about the other side." https://t.co/vC89u75SBf

— Tim Groseclose (@Tim_Groseclose) May 14, 2019

Those who are polarized tend to be the activists. And, as political scientist Morris Fiorina of Stanford observes, the more active in politics that a person is, the more likely that the person mis-characterizes people on the other side.

While Fiorina believes this to be an interesting finding of his research, it is predictable from social identity theory. The stronger your affinity to a group, the greater your bias against other groups.

Unequal Cake

Kinman Tau: It's good business for everyone.
Antonio Serano: Better for you.
--Rapid Fire

Statists like to use asymmetric trade arguments to justify forcible intervention in the trade process. The current one, of course, is that a tariff war with China hurts the US less. Thus the tariffs are ok.

Because consistency is not their strong suit, statists have been known to flip their argument to favor less asymmetry and more equity. For example, if statists believe that one party gains more from trade than the other, then it is ok to tax the transaction more in the spirit of 'fairness' and 'equity.'

When you get down to it, both arguments are a variation of the juvenile claims about cake slices. "No fair, he got more than me!"

Both arguments fail to acknowledge the reality that, when two parties voluntarily engage in trade, they do so because each believes they will be better off than if they did not engage in trade.

Who gets more is immaterial and, when you think about it, immeasurable when you take into account the marginal utilities unique to each party.

The reality is this. When trade is hampered, both sides lose. When trade is hampered, both sides win.

Valuation

I'd pay any price just to get you
I'd work all my life and I will
To win you I'd stand naked, stoned, and stabbed
I'd call that a bargain
The best I've ever had
--The Who

This morning Intel Corp stock (INTC) is trading at about $45/share. Is that an attractive price? At what price would INTC be a good buy? These questions relate to valuation. Valuation is the process of determining how much a security (or any financial asset for that matter) is worth.

Valuation is important because, to be a successful investor, you need to have an idea of what price represents good value for securities that you're interested in. To achieve high returns on investment (a.k.a. ROI), you want your outlays to be low and the cash you get back from your investments to be high. Overpaying for securities reduces your ROI.

A security can be viewed as a money machine with capacity to dispense cash. Some money machines spit out cash at regular intervals; other machines surrender cash sporadically.

The theoretical problem of valuation involves estimating the size and timing of all those future cash flows from the money machine, and then discounting them back to the present to estimate the 'net present value' of all those distributions. That net present value is what the security is worth today.

The essential valuation question is: how much should I pay today for all of those future cash flows?

If that sounds complicated and inexact, well, it is. One problem that you can probably sense involves peering into the future to predict those future cash flows. The future is uncertain. That uncertainty means forecasts are wrought with error. Moreover, the farther out into the future that you gaze, the more error prone your forecast becomes.

Although volumes have been written about valuation theory, it turns out that valuation in practice is often more art than science. To make things more practical, investors have developed various shortcuts and rules of thumb to estimate the 'fair value' of securities. We'll discuss several of these in posts to come.

Meanwhile, when studying stocks or other securities, get into the habit of asking valuation-oriented questions. What is the 'fair value' of that stock? At what price would that security be a bargain?

This habit will serve you well.

position in INTC

Sentimental Journey

Seven, that's the time we leave, at seven
I'll be waiting up for heaven
Counting every mile of railroad track
That takes me back
--Doris Day

Doris Day died today at the age of 97. Am sure Mom was first in line to welcome her friend thru Heaven's gate and show her around.

RIP Doris. It's been a sentimental journey.

Happy Mother's Day

And Mary said, "My soul glorifies the Lord, and my spirit rejoices in God my Savior."
--Luke 1:46-47

To all who said 'yes' to God's invitation to bear and nurture human life.

Happy Mother's Day.

Less Worse Off

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

Protectionists suggest that the escalating trade war with China does not affect each side evenly. Some, including the president, argue that the US actually gains. Domestic jobs will beneift, plus the US will take in billion$ in tariff revenues.

Others point to recent market performance as 'proof' of the asymmetry. Because US stocks have only declined by a fraction of Chinese stock losses, that means the US comes out relatively ahead in a trade war.

This is sheer economic ignorance. People trade freely because they perceive benefit. Both sides gain. When trade is restricted, they both lose. Both sides are worse off.

The argument is over who is less worse off.

Trade Jitter Bug

Wake me up before you go-go
Don't leave me hanging on like a yo-yo
--Wham

After dipping below its 50 day moving avg yesterday, SPX rallied intraday to close just above it. With the SPX once again opening in the hole this am on account of a severe case of the trade jitter bug, we'll see whether the bulls can pull another technical save today.

If not, then intuitive support lies below in tranches. First at 2800 and next at 2700.

We should also note that the further the SPX falls away from its recent all time high, the louder bears will yell that in actuality those highs were necessary to trace out a classic double top.

Investing Reference Page

"The most valuable commodity I know of is information. Wouldn't you agree?"
--Gordon Gekko (Wall Street)

Reference page to catalog posts on investing. Will be updated as new missives appear.

Personal Finance
Income, Saving, and Investing
Debt Reduces Freedom
Net Worth
Determining Portfolio Yield
Taxable or Tax-Deferred?
Emergency Fund
Situational Awareness of Markets
Pensions
Inflation and Purchasing Power
Taking the Buyout
New Year's AA 

Investment Strategy
Primary Asset Classes
Asset Allocation
Capital Gains vs Dividends
Dividend Stocks I
Dividend Stocks II
Starting With Diversification
Anchor Positions
Beginner's Portfolio Template
Buying Small, Scaling In
Raising Cash
Working Orders

Valuing Securities
Valuation
Market Cap
Moats
Income Statements
Fortune 500
Cash Flow Statements
Balance Sheets
Price-to-Earnings Ratios
Discount Rates

Market Structure
Prices
Interest Rates
Ten Year Yields
Money
Central Banks
Underfunded Pensions and Systemic Risk

Technical Analysis
Uptrends and Downtrends
Support and Resistance

Behavioral Finance
Sentiment and Investing
Bulls and Bears
Loss Aversion

Trade Theory Hypocrisy

All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

Renewed trade tensions between the US and China are raising concerns about the negative impact of tariffs on prosperity. This concern is warranted.

People are more productive, i.e., produce more goods per hour, when they specialize in a particular output. However, specialized producers are, by definition, not self-sufficient. They are co-dependent. Specialists must trade with each other to acquire the resources that they desire. When specialists do engage in trade, then the benefits of specialization are realized by all and general prosperity improves.

To maximize prosperity improvement, trade must occur in a free, unhampered manner. Any intervention that impairs free trade will cause producers to diversify rather than specialize so that they can create the variety resources that they require.

A tariff is a tax on imports. When imports are taxed, their cost goes up, thereby negating the productivity gains from specialization. Consequently, people buy less imported goods and then must resort to more diversified/less specialized production to generate the variety that they need. Productivity falls and, with it, so does prosperity.

This is Trade Theory 101 and it seems that people are generally getting it in the case of Chinese tariffs.

Curiously, though, many of the same people who seem to be grasping Trade Theory 101 with respect to international trade seem to be oblivious about the theory's identical application to domestic trade. It does not matter whether trading partners span oceans or street corners. Any regulation that impairs trade motivates less specialization and more diversification...and lower prosperity.

If you oppose taxes on imports, then to be intellectually consistent you should oppose all interventions that effectively tax domestic production and trade. Otherwise you are engaging in trade theory hypocrisy.

Ten Year Yields

The years run too short and the days too fast
The things you lean on are the things that don't last
Well it's just now and then my line gets cast
Into these time passages
--Al Stewart

Last time we suggested that interest rates are among the most important prices in markets. Of the myriad interest rates shaping markets on an everyday basis, there is one in particular that you'll want to pay attention to: the interest rate (or yield) on ten year US Treasury bonds. People often refer to this interest rate as '10 year yields.'

Ten year yields are important because they influence a goodly share of other interest rates on the planet. Interest rates on mortgages, car loans, student loans, and credit card balances are all linked to 10 year yields. Why this is so is largely beyond the scope of this post. Let's just say that America's status as the world's premier borrower carries lots of weight when it comes to setting interest rates.

Smart investors tend to know where 10 year yields currently are and how they've been trending. So where are they currently? The most popular data series of 10 year yields is known as the TNX, which for some strange reason requires you to divide TNX values by 10 to get the actual interest rate. First, let's look how 10 year yields have been behaving on a daily basis for the past few months:

Note that the most recent value of TNX reported on the graph sits at 24.67. When we divide by ten, this translates into a 10 year yield of about 2.5%. Note also that 10 year yields have been in a downtrend since late last year. In fact, they have fallen 20% or so since November.

Now, let's elongate the time horizon and examine the past few years on a weekly basis:

Note that prior to the recent downtrend, 10 year yields had been in a multi-year uptrend during which time yields more than doubled. The low point in mid 2016 of about 1.4% was an important one because it constituted an all time low in 10 year yields.

One more time frame--the big picture. Going back as far as my charting app permits, here's a graph of monthly 10 year yields since 1980:

The general direction is obvious. Ten year yields have been grinding lower from highs above 15% (!) in the early 1980s to present levels over the course of nearly 40 years. That maths out to an 80-90% decline. Now that's a downtrend!

In true, unhampered markets, such a pattern is unlikely. Interest rates should fluctuate with such factors as supply and demand for savings and people's preference for living larger in the here and now.

This prompts several important questions. If interests rates haven't been free to fluctuate naturally, then who/what has been forcing them lower over time? What are the possible motivations for wanting to force them lower? And, what are the potential adverse consequences of manipulating interest rates lower for such an extended period of time?

We'll surely discuss these questions going forward. Meanwhile, try to maintain a regular sense of the levels and trends of 10 year yields. This will help you as an investor.

Fake Capitalism

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

A favorite rhetorical tool of progressives is the positive substitute symbol. Take a concept that people find distasteful, like socialism, and employ words representing concepts that this group views as positive, such as 'America' and 'capitalism,' and you might trick some minds.

Thus a Democratic candidate for president can write a piece proposing that he wants to save 'American capitalism' by instituting various socialist programs and not get laughed off the platform.

Capitalism involves free, unhampered markets of buyers and sellers engaged in voluntary exchange. Property is privately owned. Consumers, not producers, drive the system.

Any proposal that forcibly intervenes in some aspect of this peaceful system is not capitalism. It is fake capitalism. It is socialism.

Do not be fooled by propagandists trying to sneak a positive substitute symbol past you.

Lagging Unemployment

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

Following up on a recent post, below is a graph of the headline number which now marks a 50 yr low.

The unemployment rate fell to 3.6 percent in April – the lowest it has been in nearly half a century. This also marks the 14th consecutive month where the unemployment rate has been at or below 4%. #BLSData #jobsday pic.twitter.com/pYxMVu6Xf9

— CEA (@WhiteHouseCEA) May 3, 2019

Keeping up the tradition of previous administrations, this White House enjoys noting (and taking credit for) positive jobs data--particularly as elections approach.

Beyond the manipulative energy applied to this series, remember that jobs and unemployment are lagging indicators. Note the pattern. Lows in unemployment commonly precede recessions.

You Like 'em, I Hate 'em.

He's got a brand new car
Looks like a Jaguar
It's got leather seats
It's got a CD player, player, player
--Feeder

'The enemy of my enemy is my friend' is a well known strategic posture. In politics, the antithesis--'the friend of my enemy is my enemy--is also popular. If you like 'em, then I must hate 'em.

Had a long and very good conversation with President Putin of Russia. As I have always said, long before the Witch Hunt started, getting along with Russia, China, and everyone is a good thing, not a bad thing....

— Donald J. Trump (@realDonaldTrump) May 3, 2019

During the previous administration, President Obama's friendly overtures toward Cuba and Irann increased opposition animosity toward those countries. During the current administration, President Trump's friendly overtures to (insert foreign country name) has drawn similar ire from political opponents.

Once again, social identity theory in motion.

Does make one wonder how world peace can come about when in two party, winner take all democratic systems. It is politically expedience to detest the friends of your enemies.

Jobs and Gold

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

This morning the monthly jobs number printed higher than expected and the headline unemployment rate fell to 3.6%--the lowest since December 1969. This has bulls lathering once again with stocks closing back in on their highs set earlier this week.

A mystery to me over the past few months has been the performance of gold. One would think that the Fed's walk back from its tightening program after letting $trillions out of the barn would have stoked gold higher. Yet, the metal continues to work its way lower.

Yes, reported 'inflation' has been on the low side but people generally understand how detached from reality these figures are. The key thing to consider is that $trillions have been printed and are being left in the system. Those $trillions are a source of disorder waiting to wreak havoc. Gold is a bet on such disorder.

Now, with measured employment marking historic levels, how long will it take to hypothesize the effects of $trillions of printed money combined with more people getting paychecks?

position in gold

Inflation and Price Declines

Rain keeps falling
Rain keeps falling
Down, down, down
--Simple Minds

Peter Boockvar presents a case for why inflation is not dead. Among his many salient points, I wanted to discuss his first one here. Classically defined, inflation is expansion of the supply of money and credit by bureaucratic edict. Although people commonly associate inflation with increases in general prices, this is not necessarily true.

If the newly minted cash flows into creating capacity for more consumer goods, then it is possible that expansion of the money supply can drive declines in general prices. When producers are primary early users of cheap money and credit, they will be prone to build more capacity than they otherwise would. Consequently, that newly created supply potential goes underutilized, putting downward pressure on prices.

This is precisely what we see in the data. Capacity utilization has been declining for decades and is coincident with the long term downtrend in interest rates promoted by the Fed's easy money policies. As Boockvar observes, current utilization rates remain significantly below the long term average.

When the supply of goods and services is goosed by inflationary monetary policy, prices are prone to go lower, not higher.

Virgin Territory

So take that look out of here
It doesn't fit you
Because it's happened
Doesn't mean you've been discarded
--Big Country

Might have to squint to see it, but the SPX is now in virgin territory--even on an intraday basis.

Bulls feeling invincible. Bears feeling distraught.