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.

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Liberalism Fails Society and This Most in Need


Since the early 1960s liberals have promoted the narrative that people on the Left are more compassionate than those on the Right. This proposition was based on a motion, not empirical evidence. It emotionally seems right that the government should give to those in need. Conversely, those who would withhold government’s largess from the less fortunate lack compassion.

While a governmental safety net has been a part of American society since Franklin Delano Roosevelt’s Administration, it advanced significantly under President Lyndon Johnson. Given we are now a half-century into Johnson’s Great Society, it is reasonable to determine efficacy of the programs.

The Wall Street Journal’s Jason Riley recently published some important statistics since the initiation of the Great Society:

  • In 1962 the percentage of the Americans receiving government assistance in the form of cash transfers was about 12%. Today this has nearly doubled to 21%.
  • In 2012 over 48% of Americans resided in households receiving some form of government benefits. This number was only 30% in 1983.
  • By 2011 the US published property rate remained flat compared to 1965. During the same period, US governmental expenditures on poverty rose by 900% per receiving person (after inflation adjustments).
  • The Heritage Foundation marks 2014 as the 50th anniversary of Johnson’s Great Society. They calculated that federal government spending increased by 16 times, adjusted for inflation, for means tested welfare during this period.

Cause and effect are often difficult to prove. However, in the case of the Great Society Programs and their offspring, the evidence seems convincing that at the very least, much of the spending was wasteful and have not benefited those most in need over the long-term. At the same time, these programs significantly benefited certain industries that serve the programs and distributed their benefits. Those industries offer significant resistance to fundamentally changing governmental spending habits.

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Socialism has Ruined Venezuela

Since at least the 1960s, Socialism and its younger sibling, Communism, have been the darlings of Leftists elitists, especially those on college campuses. When these Progressives see perceived inequities in capitalist countries, they often look to utopian solutions with Socialism being a primary fallback. The amount of time that this neo-religion has been promoted is remarkable given the failure of Socialism to create prosperity for countries and their citizens.

With the recent passing of Fidel Castro, Leftists have created eulogies that include the false narrative that Castro was a champion of his people. How ludicrous! The Cuban people continue driving cars built in the 1950s. In addition, the travels of the boat people have been in one direction only; out of Cuba and to the United States. There is no better barometer than when people vote with their feet.

Cuba is not the only country in the Western Hemisphere ruined by Socialist economic policies. Venezuela is a poster child for the disastrous economic and human consequences of centrally controlled economies. Jeff Jacoby of The Boston Globe recently published an article highlighting the current tragedy in Venezuela. As he points out, Venezuela had long been an economic success in South America, even before becoming an energy powerhouse. Then, in 1998 Hugo Chavez came to power with not only an anti-America bent, but a disdain for capitalism. Continue reading

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Obamacare May Implode

The news media and Americans are focused on the upcoming presidential election.  Given the important role the president plays in the United States this is natural.  However, the focus on the election has been on the questionable personal traits of Donald Trump and Hillary Clinton.  This myopic focus masks serious issues that face the Country and the next president, irrespective of who is elected.

The significant challenges the Country faces include international relations, as well as economic issues.  The Middle East is devolving into chaos that will eliminate the artificial borders and countries created after World War I.  Russia is again adversarial and imperialistic.  Economic growth in the United States is tepid with the total debt soon to exceed $20 trillion.  Irrespective of whether Clinton or Trump become president, these issues will prove intractable.

Within the broader subject of economic challenges is the out of control medical costs.  This problem had its roots long before Barack Obama became president.  However, the President’s signature program, Obamacare, exasperated the problems and is showing signs of heading into a death spiral.

The President is aware of Obamacare failings writing in The Journal of the American Medical Association: “Too many Americans still strain to pay for their physician visits and prescriptions, cover their deductibles or pay their monthly insurance bills; struggle to navigate a complex, sometimes bewildering system; and remain uninsured.”  This is a far cry from the President’s promises to the American people that healthcare costs would decrease.  Obamacare not only added expensive mandates to the cost of medical insurance, but covered some 20 million people who previously did not have insurance.  For the President to have made this cost cutting promise indicates incompetence or dishonesty, there is no third option. Continue reading

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Incestuous Relationship Between Banks and Government

The greatest economic calamity of contemporary time occurred in 2008.  While there were complex issues behind the economic meltdown, main culprit was an overvalued housing market that became a bubble.  When housing valuations began to fall, the bubble popped, the catalyst for the overall economic meltdown.

The housing bubble did not occur by chance or natural economic activity.  The fuel that fed this fire included:

  • Irresponsible Federal Reserve monetary policy that left interest rates too low for too long. This not only helped promote cheaper mortgages, but also cajoled investors into investing in mortgage-backed securities, seeking yield in very products.
  • Inappropriate lending practices were forced on commercial banks by the government in its pursuit of a social agenda, which included the Community Reinvestment Act of 1977. Through Fannie Mae and Freddie Mac, the government forced banks to lower lending standards so that individuals who could not afford mortgages received them.
  • The government also has an in incestuous relationship with banks. For example, it created legislation enabling commercial banks to become involved with very risky financial products that risked systemic damage to the economy; i.e. repeal of the Glass-Steagall Act late in the Clinton administration,  In addition, the Commodity Futures Modernization Act of 2000 allowed banks to become involved in the ultra-high-risk derivatives market.

Most economists agree that actions of the Fed, government legislation and banker greed were responsible for creating the housing bubble and subsequent banking crisis.  Significant lip-service was offered by politicians for corrective action, including the massive Dodd-Frank legislation of 2010.  However, this legislation is causing more problems in the banking system.  The crisis was caused by banks supposedly being too big to fail.  With Dodd-Frank, the largest banks have gotten bigger. Continue reading

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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.

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After Brexit Vote, Markets Reach New Highs

The weeks leading up to Britain’s vote on whether to remain in European Union included cataclysmic claims by economic “experts” as to what would happen to the world economy should Britain choose to leave the EU.  In the few days after the vote to leave, the US equity markets and others dropped.  However, within days the US market came roaring back and has since hit record highs.

Did the economic experts get it wrong?  Did they purposely mislead?  The answer is possibly both.  Equities’ valuations are now more influenced by central bank action then market fundamentals.  This type of perverse relationship governing economic activity is a classic warning sign of bubble creation, which ultimately always end badly.

David Stockman is a well-respected economist from the Reagan administration who then infamously questioned Reagan’s policies.  He is written an article titled “This “Market” Discounts Nothing Except Monetary Cocaine, which is a worthy read.  His comments include:

  • “The outlook for economic growth or corporate profits haven’t improved since the market’s post-Brexit low. The market’s new highs are just another party in the casino after the latest batch of monetary cocaine — helicopter money — was passed all around.”
  • “That has been exactly the pattern of multiple rounds of QE and the unending invention of excuses to prolong ZIRP into its 90th month. The resulting rises in the stock averages, of course, were the result of fresh liquidity injections and the associated monetary high, not the discounting of new information about economics and profits.”
  • “The reality of rapidly swelling deficits even before enactment of a massive helicopter money fiscal stimulus program will scare the wits out of conservative politicians, and much of the electorate, too. And the prospect that the resulting huge issuance of Treasury bonds will be purchased directly by the Fed will only compound the fright.”
  • “In short, the market is not trading on a rebound in GDP, revenue growth or a breakout of already elevated profit margins. It’s just high on one more dose of monetary cocaine that in short order will prove to have been not even that.”

It is impossible to determine how much longer it will continue, or how high the equities bubble will go.  But like all other bull markets, this one too will end irrespective of central bank interventions.  If their actions to date have indeed created a bold, the downside will be significant, quick and come as a surprise to central bankers.

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Brexit Consequences to Come

The political elites and many in the economic community warned of dire consequences should Britain vote to leave the European Union.  Immediately following the announcement of the vote equity markets worldwide drop significantly.  However, one week later they have rebounded and are about back to where they started.

The action of the equities markets suggest either the predicted dire consequences were severely exaggerated, or as an alternative, equity markets with the assistance of continuous central banker interventions no longer believe that stock valuations can go down.  Neither is very comforting.

How the UK’s exit from the EU will affect the world economy remains to be seen.  The Daily Reckoning suggests that political elite Progressives will take a play out of Obama associate Rahm Emanuel strategy book, who infamously said: “You never want a serious crisis to go to waste.”  Using this strategy, they will use the Brexit vote as an excuse for more central bank spending and interventions into the economy.  Why not, that strategy has failed for the last eight years so let’s double up on it.

The Daily Reckoning reports that since 2009 central banks have printed over $12 trillion.  In addition, they have made 654 interest cuts worldwide.  This has succeeded in creating equity bottles that have made the wealthy wealthier.

The Daily Reckoning expects more Quantitative Easing, QE 4, and an even more radical policy called “helicopter money” where the Fed basically froze money to the masses.  These radical steps are not taken out of stupidity.  Instead, they are an acknowledgment by central banks that we are reaching the end game.  Without continuous and more aggressive interventions, the rebalancing of the economy will begin and it will be painful.  Irrespective of the central banks’ actions, that rebalancing will occur.  It is only a matter of time.

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UK Says “Yes” to Brexit

Flag United KingdomYesterday the United Kingdom held its referendum as to whether it would stay or exit the European Union.  The vote is in and the British decided to leave the EU.

Today, markets throughout the world have experienced turmoil, seemingly surprised by Brits’ decision.  This reaction is curious given that the various indicators, except the polls, pointed towards a British exit.

The British electorate’s decision to leave the EU is part of a broader worldwide phenomenon.  Governments and bureaucracies in many countries have been growing at increasing rates over the decades.  This has enriched and given additional power to ruling elites.  The masses accepted this until recent years when their standard of living stagnated.  Two changes affected the mentality of the masses:

  • A growing number of middle class in Western Europe and the United States have seen decreasing living standards.
  • Bureaucracies, unelected shadow governments, have exerted more influence through regulations.

Born of dissatisfaction, is a new type of revolution enhanced by social media and the Internet is occurring.  In the United States the phenomena is epitomized by the popularity of Donald Trump and Bernie Sanders.  Their popularity is resounding “no” vote for the status quo, irrespective of the potential consequences of electing untested populists.

Similarly, Britain’s decision to leave the EU is a resounding vote against the status quo.  The British people no longer will allow unelected bureaucrats in Brussels to create laws and regulations for the UK.  They also indicated their desire for stronger border controls.

The European Union was a mismanaged creation of the political class.  The goal was to create a United States of Europe increase economic activity and lessen the likelihood of armed conflicts, as so often happened in Europe.  Unlike the United States with a powerful central bank, European countries still control much of their monetary policies, irrespective of the single currency.  Also unlike the United States where the central government is elected by the people, Europeans have no vote concerning the bureaucracy in Brussels that creates laws and regulations that member states must abide by.  The British say “no more”, irrespective of the consequences of leaving the EU.

Since World War II the world has traveled through two different periods.

  • The Cold War between the United States and the Soviet Union for all practical purposes divided the world into two spheres. This period effectively ended in 1991.
  • Since the end of the Cold War, the political class worked to create a new world order where sovereign borders would be made moot. The beginning of the end of this period started in 2008 with the great financial meltdown.  This meltdown exposed the weakness of this new order that in part was built on flawed policies and excessive debt.

We are in the early stages of the next phase that involves rejection of the political elites’ vision for the world since 1991.  It is likely that the UK’s Brexit vote will be viewed historically as the start of this next phase.  It is difficult to visualize what this new reality actually means, other than significant change.  Progressives overreached in a power grab for themselves and their bureaucracies.  History has shown that this type of action generally leads to overreaction from the other side.

This Blog has repeatedly written of the illogic of the European Union from an economic standpoint.  One posting in October 2013 titled Noble Peace Prize Awarded to European Union reviewed rather incredulously of the European Union being the Nobel Peace Prize.  The turn of events since helps show just how far out of touch the political elites are, including those that award the Nobel Peace Prize.

 

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April’s Employment Numbers Miserable, Yet Unemployment Rate Drops

The April jobs report has been released by the US Department of Labor and it is not pretty.  According to CCNMoney, a mere 38,000 jobs were created in the US, the lowest monthly rate in six years. To put this into perspective, in the past two years the monthly increased averaged about 200,000 new jobs and the number required just to keep up with new entrants into the job market is in excess of 200,000 monthly.

Commenting on the job’s number, Curt Long, chief economist at the National Association of Federal Credit Unions, correctly said, “It’s a pretty gloomy report, hard to find a silver lining in this one“.  Contrast this realistic assessment with the Department of Labor’s unemployment number released indicating that the unemployment rate dropped to 4.7%, the lowest level in 9 years.  How does the Labor Department come up with such rubbish?  They merely stop counting those Americans who have given up the job search for lack of success.  Now that’s banjo accounting!

There are many reasons behind the US economy’s poor performance with government being a major factor.  Included in this list is the government’s willingness to create false reports to further its own political and bureaucratic agendas that often in conflict with those of the American people.

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