Volatility Index in the Danger Zone

Stock volatility is one “force” tracked by serious investors through the VIX.  Historically, low volatility indicates investor complacency, i.e. lack of concern for downside of equity valuations.  Low volatility has often foreshadowed a market downturn.

A VIX number below 10 indicates low volatility in historical terms, a rare event.  In fact, it is been reported that in the last 28 years there has only been 11 days when the VIX was below 10.  However, two of those days occurred this week, as per the chart below.  Statistically, that is quite improbable and should offer investors concern for equity valuations going forward.

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page

Education and Student Debt

Republicans and Democrats attempt to differentiate themselves via their views of the government’s role in the economy.  With close examination, it is hard to find real differences between them.

Those on the Right promote the benefits of “true” capitalism that allows markets to set prices via supply and demand.  Those on the Left share the view that capitalism is too harsh and that the government needs to step in and smooth out inequities created by markets.  At the extreme Left, socialism is promoted, irrespective of its history of failure.

At the macro-economic level there is little difference between Republicans and Democrats.  Crony capitalism is rampant within both parties.  Republicans typically support large industries and those in the military industrial complex.  Democrats promote social programs that benefit industries including education, social services, medical services, and trial lawyers.  The result of crony capitalism has been a significant increase in governmental spending and a surging United States’ debt over the past 50 years.  This debt is in part responsible for the economic malaise that has been inflicted on the country over the past decade.

An example of crony capitalism and the damage it has done is the educational industry.  Through the US Department of Education, as well as at the state and municipal levels, the funds spent on primary education have been skyrocketing as indicated by the charts below.

Total Educational Spending

However, the increased spending has not resulted in improved education.  The chart below shows how poorly our students are doing in basic reading comprehension.

The problem is more significant at the college level.  The educational industry, with support of the US government and its loan programs, has created the false narrative that all Americans require and deserve a college education, irrespective of whether or not it improves their economic well-being.  As a result, the amount of student debt now exceeds $1 trillion and a significant portion of college graduates cannot make an income level that would allow them to pay off the debt in a reasonable period of time.  Many have been forced to move back into their parents’ houses.Student Debt

While a market-based economy can be a cruel arbitrator of scarce resources, crony capitalism has proven to be catastrophic to those who have been cajoled into inappropriate economic decisions based on government programs.  It is a major cause of the growing wealth disparity between the ultra-rich and average Americans.

Yes, both Hillary Clinton and Donald Trump have prospered under crony capitalism.  The same cannot be said for most Americans.

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page

European Progressives Never Learn

Thomas Piketty , a renowned economist from France who posted an op-ed in the New York Times titled “A New Deal for Europe”.  While Piketty’s topic is important, his conclusions are misplaced.  His logic shows just how unapologetic Progressives are for the problems their policies have inflicted on the world.

Piketty expresses concern for the growth of the far Right in Europe.  This Blog has been concerned for some time with the potential for fascism to once again rear its head in Europe.  This concern stems from Europe’s unsustainable economic path that has led to the large sections of its population being negatively impacted, creating a breeding ground for discontent.  This path started long before the meltdown of 2008 that Piketty refers to.  Its roots stem from the Left’s Progressive policies that have dominated European politics for decades.

Piketty blames mismanagement by European governments for not only poorly creating the EU, but also managing their economic policies.  While true, the EU’s creation was so poorly done that it guaranteed the current result, as economist Milton Friedman predicted in 1997: Continue reading

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page

Economic Growth Anemic Despite Governmental Interventions

When the economic meltdown occurred eight years ago the government used the crisis as an excuse for interventions that included huge bailouts and significantly increased deficit spending.  These radical interventions were justified by the threat without them significantly greater economic damage would occur.  While even in hindsight it is difficult to determine the validity of those claims, there is enough history to understand that the interventions created long-term negative consequences to the economy.

A recent posting by Van R. Hoisington, Lacy H. Hunt, Ph.D. titled A Weak Finish to a Disappointing Year shares details about some of the consequences from the governmental and Federal Reserve’s interventions.  They include:

  • “Surely the economy would be kick-started by: three rounds of quantitative easing and forward guidance; a record Federal Reserve balance sheet; and an unprecedented increase in federal debt from $9.99 trillion in 2008 to $18.63 trillion in 2015, a jump of 86%. Further, stock prices had gained sufficiently over the past several years, thus the so-called wealth effect would boost consumer spending.”
  • “The broadest and most reliable measure of economic performance – nominal GDP – decelerated. The 3% estimated gain registered in 2015, measured by the year ending quarter, was down from 3.9% and 4.1%, respectively, in 2014 and 2013.  In fact the gain in nominal GDP in 2015 was less than the gain for any year since the recession.”  ….. “All of the above economic measures were expanding at, or near, their weakest yearly growth rates in the final quarter of 2015, indicating that the economy possessed little forward momentum moving into 2016.”
  • “Personal consumption, the largest category of nominal GDP, decelerated to an estimated 3% rise in the latest twelve months, down from 4% at year-end 2014, the smallest year end annual increase since immediately after the 2008-09 recession.”
  • “The percentage of total auto loans in the subprime category hit a ten-year pre-crisis high in the third quarter, according to the New York Fed”
  • “Industrial production slumped 1.4% over the first eleven months of 2015, with a drop of 2% outside of the automotive sector.”
  • Real per capita GDP grew only 1.3% in the current expansion that began in mid-2009; this is less than one half the growth rate in the expansions since 1790.”

As Hoisington and Hunt point out, the evidence points to the failure of the massive spending, bailouts and other unconventional monetary policies including Quantitative Easing (QE).  QE has been used multiple times by the United States Europe and Japan. The failure of these policies is evident. Continue reading

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page

Greek Banks Close for a Week as Crisis Grows

The Wall Street Journal reported that Greece has ordered that its banks remain closed for the next week to the stem panicked cash withdrawals by depositors.  This drastic move indicates that the five year long Greek debt crisis is coming to an end game.

After the financial meltdown occurred in 2008, the economic folly of Europe’s single currency, the Euro, became apparent.  The European Union was created in an effort by Europeans to create a political climate that would lessen the likelihood of future wars on their continent.  This desire was a reaction to the carnage that inflicted on Europe during two world wars in the 20th century.  While the political idea was noble, little thought was given to the economic consequences that a central currency would lead to.  Those consequences are now playing out.

The Euro was destined to create an economic calamity because the political union was not accompanied by a truly economic union.  European countries maintain their own banking systems and Euro central bank was weak.

catharsisAfter the European Union and the Euro were created, the more efficient and stronger economies of North Europe, specifically Germany, obtained the lion share of benefit created by the Union. With nearly all European countries having a single currency, less efficient countries had their cost of labor increased in relation to more efficient ones.  As a result, the poorer countries had a artificially strong currency that enabled them to consume increased amounts of the more efficient countries’, i.e. Germany.  Through the Euro, Greece had to access to relatively cheap borrowing via an overall European credit rating that did not reflect the realities of individual countries.  As a result, Greece and other Southern European countries borrowed more funds than they could afford to pay back and use these funds to purchase imports from Germany and other exporting countries.

When the recession hit, Greece and other countries were unable to make payment on their debt.  This led to a battle between the creditor countries such as Germany and debtors like Greece.

For five years the Greece debt crisis has been a can kicked down the road.  Creditors including, Germany, have been unwilling to forgive Greece’s debt, even though Greece is not a position to repay it.  Had Greece continued to have its own currency, it would have devalued versus the German currency making its exports cheaper and more likely that it would have been able pay back its debt obligations.  The single currency has curtailed this natural rebalancing mechanism of sovereign debt. Continue reading

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page

Government Again Pushing Mortgages to Those Who Cannot Afford Them

In 2008 the world economies encountered the worst financial crisis since the Great Depression. In a supposedly effort to repair the economies, governments transformed them through huge stimulus spending, low interest rate policies and bailouts. These interventions have contributed to the ongoing weakness in economic recovery since.

The main cause of the 2008 meltdown was the subprime mortgage lending practices that led to loans being hustled to millions who could not afford to pay them back. When the housing market slowed leading to depreciated housing values, homeowners could no longer refinance, further eroding housing demand that led to many homeowners owing more on the homes than they were worth. Many walked away from the loans leading to the meltdown, putting at risk nearly most of the world’s largest financial institutions.

Given 2008 is only eight years ago, logic would dictate that we learned a lesson about imprudent financial behavior, at least for a generation. However, once governments intervene, logic and economic reality take a backseat. In fact, we are currently traveling down the same road, again fermented by governmental policies.

News.investors.com reported that the US government is again cajoling financial institutions to give mortgages to those that cannot afford them. Specifically, the Consumer Financial Protection Bureau warned (threatened) lenders that they would be investigated for discriminatory practices if they do not count government assistance payments to lower income individuals as real income. In announcing this policy, Bureau Director Richard Cordray used the following incredible logic:

“The bureau has become aware of one or more institutions excluding or refusing to consider income derived from the Section 8 HCV Homeownership Program during mortgage loan application and underwriting processes.” …. “Consumers should not be put at a disadvantage just because they receive public assistance.”

So, using the government’s logic, individuals who need governmental payment assistance are worthy of obtaining mortgages. Continue reading

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page

New Consumer Credit Scores Promote Risky Lending

The Wall Street Journal reported the most often used creator of consumer credit scores, Fair Isaac Corporation (FICO), is introducing a new metric for rating consumer credit worthiness.  These metrics will use consumers’ payment history for items like utility bills and how often they have changed their address.  Previously, FICO scores have been created from information obtained by the major credit reporting firms.

In making the announcement, FICO indicated that over 50 million Americans who currently do not have acceptable FICO lending scores would be able to obtain them under the new system.  This fact alone should raise significant concern as to the motivation behind FICO’s change.  However, for those that need more convincing, the FICO’s rating changes come as a result of significant pressure from lending institutions and the real estate industry.  These self-interest groups do not seek change for any other reason than a desire for greater profits.  In the past, relaxing lending standards has resulted in significant economic damage to the greater society.

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page

Subprime Loans are Back Again

It was just six years ago that the world was at the brink of economic Armageddon.  The crisis was brought on by the cheap loans made available to borrowers including those rated as subprime with credit scores below 640.  The cheap mortgages to those with limited assets helped create a huge bubble in the housing market.  When the economy slowed down and home values began to depreciate, many borrowers began to default on the mortgages, which placed at risk major financial institutions worldwide that invested in these bundled mortgages.

Banks and others that owned the collateralized mortgages then required bailouts from the government to stave off failure.  This did not eliminate the debt, but merely moved it from the private sector to governments; i.e. taxpayers.  In addition, the bailouts inordinately benefited companies and their shareholders who made the imprudent loans.  Without the bailouts they would have encountered substantial financial losses.

There is also been a more incipient result of the bailouts of investors who made imprudent loans in the subprime market.  Without suffering losses investors have had short memories and in fact they are back at it again in the subprime financing business, once again supported by low interest rate central-bank policies with interest rates worldwide remaining at artificially and historic lows.

Last month, the Wall Street Journal highlighted the growth of subprime loans in an article titled Borrowers Flock to Subprime Loans.  Today, subprime loans are not in the housing market, but in consumer goods.  The Journal published the following:

  • Subprime loans are at the highest level since before the 2008 financial meltdown.
  • Approximately 4 out of every 10 loans for autos, credit cards and other personal borrowing in 2014 were in the subprime category.
  • During the fourth quarter of 2014, total US household debt increased by over $300 billion.

Continue reading

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page

Fed’s Yellen Primes Pump

Federal Reserve Chairperson, Janet Yellen, today announced that Fed will continue its low interest rate policy for some time into the future. Many had expected Yellen to indicate that with the improving economy, the Fed would begin a slow rise in interest rates. Yellen’s commitment of more gin in the punch bowl had an immediate effect with the Dow Jones Industrial Average, S&P 500, and the UK’s flagship FTSE 100 all hitting recordYellen highs.

Generally, rising stock markets are positive signs if the rise is based on appropriate economic fundamentals.   The lengthy drive-up of equity values are instead being driven by the Fed’s low interest rates and Quantitative Easing. This is problematic at various levels. First, should there be an economic slowdown, as there inevitably will, the Fed would have no ammo left to juice up the economy. In addition, when interest rates eventually rise, overvalued equities will show a rapid decline in value causing significant economic pain.

Perhaps the most problematic aspect of the Federal Reserve’s low interest rate policies is who benefits from them. While some on mainstream benefit as equity values rise, especially in 401(k) plans, the greatest benefit goes to the highest income brackets, the people who have the most to invest. This has led to the large increase in the income disparity in the United States. The Fed’s continuation of its policies will further increase the disparity.

Finally, the Fed’s low interest rate policies have cajoled investors into higher risk investments in search of yield. This places further upward pressure on equity values as the bubble builds and guarantees that the next downturn will be exasperated by these interventionist policies.

For many months government publish statistics has shown a significantly improving economy. In addition, by the classical definition, the recession ended years ago. These two items seem in conflict with Janet Yellen’s announcement today that the economy is still fragile. Either the government’s published figures or Yellen’s comments of earlier today relating to the economy need to be questioned.

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page

Venezuelan Economy Ruined by Socialism

J ChavezVenezuelan strongman Hugo Chavez passed away a year and a half ago.  The Venezuelan economy is not too far behind Chavez’s demise.

The Wall Street Journal reported that Venezuela has joined the failed economies of North Korea and Cuban rationing food and other basic necessities of life.  However, unlike North Korea and Cuba, Venezuela is a resource rich country that exported nearly $115 billion worth of oil in 2013.  Irrespective of this export wealth, the Journal reported that basic necessities of life including cooking oil, Mel and toilet paper are being rationed with shortages we consumers waiting in line for hours to make less than desired purchases.  Even basic public services are now being rationed with some homes having their water shut off for over 100 hours per week. Continue reading

share the knowledge...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditEmail this to someonePrint this page