Turning Toward

July 31, 2016

The Fourth Turning

A favorite historical device of the Western tradition is the timeline, running straight from the past to the future.  Cyclic models of history are less popular and circular models seem too formulaic, even primitive, for historical narrative.   Surely, Neil Howe and William Strauss, authors of the 1997 book “The Fourth Turning,” understood that their model might encounter a cool reception from the academic community.

Published a few years before the millennium and the Y2K scare, the book recounted the historical pattern of generations from 1500 through 2000, before taking on the ambitious task of predicting the pattern of events for the coming twenty years.  While researching a previous book “Generations,” the authors discovered a repeating pattern of responses to events.  They developed a model of four generational archetypes spanning the range of a human lifetime.  Every twenty years or so each generation passes into another phase of life, from childhood to adulthood, to middle age, then the elder years.  The authors called these passages “turnings.”

Every 80 years or so, every fourth generation, begins a period of crisis. The authors had projected this current fourth turning to last from approximately 2004 – 2026, understanding that these turnings are not fixed to a calendar. Although the authors trace the turnings back to 1500, previous crisis fourth turnings that we are familiar with are the American Revolution 1773-94, Civil War 1860-65, Depression and WW2 1929-46.

During a crisis period comes a pre-crisis strain that primes the scene for the main crisis.  Each crisis revolves around the social contract, the relationship between individuals and their government.  The resolution of the crisis occurs during the first turning in which a new version of the social contract is forged.  The leaders of these resolutions are the generation in middle age, approximately 42-62.  [So us Boomer parents better be nice to our kids 🙂 ]

In predicting the current crisis period, the authors pulled no punches.  Chapter Ten of the book is titled “A Fourth Turning Prophecy.” The time frames of these prophecies are approximate because they predict behavioral trends.   It has been almost twenty years since the book was published and it surprised me how well the authors understood the trends and ingredients of the crises that have occurred in the past decade.  Frankly, I hope that the authors are wrong about the coming decade when a generation of crisis intensifies and forces a resolution.

The authors predicted a financial crisis about 2005 and sketched a number of other plausible scenarios typical of a generation of crisis.  “The era will have left the financial world arbitraged and tentacled: Debtors won’t know who holds their notes, homeowners who owns their mortgages, and shareholders who runs their equities – and vice versa.” (p. 274 of the Broadway Books 1998 paperback edition)  Sound familiar?  Remember, this was written twelve years before the 2008 financial crisis.

The authors caution that these scenarios are archetypes, unlikely to happen in detail as written and yet the generalities are both scary and prescient. The hypothetical scenarios include terrorists blowing up an airplane, a government shutdown precipitated by a federal budget stalemate, the spread of a new communicable virus and an increasing aggression by Russia toward its former satellite countries. “All you know in advance is something about the molten ingredients of the climax,” the authors wrote.

Twenty years before the main crisis event, the nature of the crisis is difficult to see, the authors cautioned.  A series of crises weaken the social order and people’s expectations, creating tensions between groups in society.  We could use the analogy of tectonic plates to understand the economic and social frictions that build over time until the earthquake is finally triggered.  While a particular event is the catalyst for the main crisis, it is not the cause of the fracturing of the social contract.

The frictions can be promises made to one group that can not be kept.  Technological change may bring economic changes that favor one portion of a society and disadvantage others.  Political changes may pose constitutional challenges that are resolved with violence.  Long simmering military antagonisms may finally break out into war.  These are only a few frictions in a long list presented by the authors (p. 277).

The authors can be forgiven for a few incorrect predictions – that the government would hike taxes in response to a financial crisis or depression.  Perhaps they were misled by the economically conservative mood of the nation at the time when they wrote the book.  The authors did not anticipate that the Federal government would quadruple the Federal debt over fifteen years in response to 9-11 and the 2008 Financial Crisis.  They did not foresee that the Federal Reserve would add four trillion to its balance sheet to absorb the bad securitizations that contributed to the Financial Crisis.

Twenty years ago, the authors guesstimated the onset of the main crisis in the year 2020 followed by a six year period of resolution.  As I noted earlier, it is the middle aged generation that leads in the formation of solutions to these crises.  In this case, those leaders would be the children of the Boomers, the cohort labelled “Generation X” in sociological and popular literature.

Criticisms, controversy and praise for the generational model presented by the authors can be found at a Wikipedia article, which has been flagged for its lack of neutrality. Should a decade pass with no crisis, we could rest assured that the theory is totally bonkers pseudoscience.  There are a few problems, however, that could precipitate a crisis: 1) a federal debt approaching $20 trillion; 2) terrorist acts in the news each week; 3) many trillions of dollars in Social Security and  public pension promises that 80 million Boomers are beginning to redeem; 4) immigration, tax and other  policy disputes over who is entitled to what and who pays what.  These are some of the groaning sounds of tectonic frictions in our country.

Californians live with the possibility of a “big one,” a monster earthquake unleashed at the San Andreas fault that runs along the mountain spine of the state.  Each person silently hopes that the inevitable doesn’t happen in their lifetime.  Count me among that bunch.

It’s Never Happened Before

July 24, 2016

It’s often been said that everyone is entitled to their own opinion but not to their own facts.  Repeated experiments have shown that, through a process of cognitive filtering, we do form our own set of facts. First we filter what we recognize, then we assign different degrees of importance to what we do recognize.  The world is a big lump of Play-Doh that we pull parts from then shape it into a personal ball that we call reality.

Several decades ago when computer development and design was still fairly primitive, computer scientists envisioned the develpment of algorithms that allowed computers to act with the mental versatility of human beings. Many hoped that this new technology, called artifical intelligence, or simply AI, would be implanted in robots which would handle menial or dangerous tasks, making our lives both safer and less tedious.  Soon robots were deployed on factory floors and were highly effective at repetitive tasks.  The deployment of AI was but a few years distant, it seemed.

The AI project soon ran into difficulties when robots tried to navigate a room with only a few obstacles.  What was a routine task for a two year old toddler was extremely difficult for a robot.  Programmers struggled to write algorithms to distinguish and describe just the shadows of objects, and were especially frustrated that a puppy a few weeks out of the womb could do a better job at navigating a room than the most beautifully complex algorithm they could devise.

A decade or so later, Google and other tech firms are test driving cars with autonomous navigation.  How have AI algorithms progressed from negotiating the obstacles in a room to navigating a highway at 65 MPH?  Working with behavioral scientists and psychologists, programmers began to uncover a rather unflattering but powerful model of human learning, one that philosopher David Hume had posited almost three hundred years ago.

Hume was just a teenager when Isaac Newton, perhaps the greatest scientist that ever lived, died in 1726.  Newton formulated the fundamental laws of motion and gravitation.  Hume, on the other hand, put forth the radical notion that we can not know cause and effect, only the correlation of events. We can imagine that Newton rolled over in his grave a few times at this proposal. Hume contended the forces of motion that Newton had proposed were highly probable correlations only.

Scientists dismissed Hume’s skepticism.  For all practical purposes, the universe was bounded by the laws of classical mechanics that Newton had devised.  Scientists went on to develop a model of a clockwork universe created by God that obeyed a set of rules invented by God and thank you very much.  There was apparently little more to discover until two scientists, Albert Michelson and Edward Morley, went to measure the aether, a fundamental component of the clockwork universe.  They couldn’t measure it.  This “undiscovery” rocked the world of physics because it undermined the theories of planetary motion, of gravitation, and the behavior of light.  Undiscoveries are as important as discoveries.  A hundred years before the Michelson-Morley experiment, chemists were unable to find phlogiston, the supposed fundamental cause of combustion, and caused a radical revision of chemical theory.

Twenty years after the Michelson-Morley experiment, Albert Einstein presented his Special Theory of Relativity but even that theory could not fully explain gravity.  A decade later and a hundred years ago, Einstein theorized that our perception of falling was an illusion based on our perspective, a vantage point as we were falling along the surface, or field, of space time.  The system of relative motion that he introduced has radically altered the science of physics since.  Einstein had introduced the same skepticism to the physical sciences that Hume had introduced to philosophical inquiry.

During the past two hundred years mathematicians have developed a number of statistical tools to measure not only the correlation between events, but the correlation of our past predictions based on correlation. As processors became more powerful and memory storage more compact, programmers turned to those statistical tools to enrich their AI algorithms. A baby can not find its own hands at first.  Through trial and error the baby develops a sensory system called proprioception that is not confused by the conflicting data from the baby’s eyes.  When the baby moves both hands in opposite directions to the center of her vision, the hands have more of a chance of colliding together.  The sense of touch confirms the contact of the two hands.  There may be a slight sound. The brain learns the coincidence, the correlation of these phenomena and forms a learning model of cause and effect.

Shortly after the financial crisis in 2008, the former head of the Federal Reserve, Alan Greenspan, testified before Congress about his personal set of beliefs of cause and effect in finance. Because this set of circumstances had not happened before, Mr. Greenspan thought that it could not happen.  Didn’t he see the dangers of 30-1 leverage ratios by major banks in the U.S.?, Greenspan was asked.  Yes, he saw them but did not fully appeciate the degree of danger.  The rash stupidity of bank officers, the disregard for their own welfare, surprised and disturbed him most.  He could not understand that intelligent people could act with such utter disregard for their own self-interest.  Of course, the bankers didn’t have to look our for themselves.  They paid politicians in Washington to do that for them.

Greenspan is a very smart man, as are most of the economists and financial wizards who did not understand the dangers of the synthethic debt instruments that were being created and traded.  Why?  Because it had not happened before.  We are all subject to this fault in judgment.  We are so guided by past experience that it skews our judgment, our ability to assess both risk and opportunity.

 It has been seven years since the market low in March 2009, seven years since the official end of the recession that began in December 2007 and ended in June 2009.  The Shiller price earnings ratio of the SP500 index is very much higher than average.  Even the conventional P/E ratio, the TTM or Trailing Twelve Months ratio, is about 23; the historical average is less than 17. Here is an excellent recent review of P/E ratios.  Low oil prices have helped cripple earnings growth for the SP500 index as a whole but even when excluding energy stocks, both revenue and earnings growth has shrunk.  Yardeni Research has put together several graphs to illustrate the trend.

The Money Flow Index (MFI) is an oscillating measure of buying and selling pressures based on both volume and price.  This index usually ranges from 20 to 80 on a scale of 0 to 100.  This month, the 12 month reading of the SP500 fell below 40.  Such a low reading has been associated with a long period of a rather flat market as happened in 1994-1995.  More often, a low reading is associated with subsequent falls in equity prices, as in early 2000 and late 2007.  Toward the end of 2008, this index fell below 20, indicating extreme selling pressure.  We only have past correlations to guide us.

Bond prices are high.  Vanguard’s ETF of intermediate term bonds, those with maturities of five to ten years, are now yielding less than 2%.  As bond and stock valuations have climbed, have we adjusted our portfolio allocation to stay within our guidelines?  Oops, did we kind of forget to even look anymore?  Did we get lulled into a sense of security?

Saving money is a gamble on the fact that we will get older.  Most of us will experience some reduction in our physical abilities, and a corresponding decrease in the amount of income we earn from our labor.  Saving money therefore seems like a really safe bet.  Once the money is saved, though, another series of gambles begins and these bets are far less certain.  Where to put those savings so that we can get a reasonable balance of return and risk?

 For a short time both the stock and bond markets can experience a surge in selling as they did in 2008. When investors are scared, they run like deer into the safety of cash. After the initial reaction, one or the other of these asset groups will continue to feel selling pressure.  This is why most advisors recommend some balance of stocks and bonds. If the stock market were to drop 50%, or the bond market drop 20%, and stay down for five years, would we be able to meet our income needs?  Such a downturn might be welcome to a 35 year old who can buy equities at a lower price.  For seniors near or in retirement who might have planned to convert some of those higher valuations into income, such a downturn can be devastating.  If such a scenario would be a crisis for you, then it is time to assess your situation and perhaps make changes.

All Aboard!

July 17, 2016

I have changed the blogger template to make it easier to read on a mobile phone. On my Android phone, the dynamic template defaulted to classic view without all the widgets on the side and was easier to read. The graphs are easier to see in landscape mode, when the long part of the phone is horizontal to the ground. Perhaps some readers can give me some feedback if there are problems viewing on an Apple phone.  Now on to this week’s business!

As I noted last week, things can get a bit ugly when both stocks and Treasuries surge upward at the same time, as they have in the past few weeks following the sharp downward response to the Brexit vote in the U.K.  The buying of stocks signals that investors have more of an appetite for risk.  The buying of Treasuries and gold signal a desire for safety.  At the beginning of the week the world woke up to the news that the Japanese central bank was going to provide a lot of stimulus to goose economic growth.  This gave a boost to Asian stocks and the rally in equities was on.  By the end of the week, the Japanese stock market had risen 8% during the week and it’s currency, the yen, had fallen the most since 1999.

Economist Paul Krugman has called on Japanese policy makers to set higher inflation targets and provide even more stimulus to spur an economy now lethargic for two decades.  According to Krugman’s own textbook, the roles of an economist are 1) to describe the economic and market mechanisms; and 2) form predictions of how the economy and market would react if certain policy actions were adopted.

However, Krugman has a lot of visibility as an op-ed writer in the NY Times.  In this role, he often offers prescriptive solutions, and this week’s call is yet another prescription from Dr. Krugman.  Japan has been basing their policies on Krugman’s predictions for a decade with mixed or muted results. More stimulus seems to be the eternal cry from Krugman, a smart man who seems to have but one or two solutions for the majority of social and economic problems.

Most economists are rather circumspect, arguing among themselves the mechanisms and validation of varied predictions.  But there are a few stand outs who reach out to the general public, ready and willing to engage in the political debate.  The subfield of economics called macroeconomics forms a beautiful mud pit for the struggle of political policies, for politicians often cite macroeconomic rationale when championing a set of policies.  For thirty years, Nobel winner Milton Friedman espoused a more conservative and monetary model of the economy, emphasizing montetary, not fiscal, policy by the central bank as the chief intervention in the market economy.  Search YouTube and you will find many of his talks and lectures and they are both informative and entertaining.

Krugman is one of the more vocal macroeconomists who diagnose economic maladies, build a predictive model based on policy or monetary fixes, then diagnose their model when their predictions are in error.  The patient didn’t take enough of the medicine or there is some response lag or the full extent of the problem was not known or was disguised by something or other.  The descriptive aspect of macroeconomics doesn’t seem to help develop a predictive model.  Perhaps the study of economic phenomenon on a national and international scale is just too difficult to have much predictive ability. Let’s hope not.  For the past decade, so many really smart people have been wrong.

Once again this week, central bankers signalled that they were ready to adopt what are called accommodative policies to reassure markets.  If stock markets were an athlete with a knee injury, central bankers would be the good doctor who drains the knee then injects a bit of pain medication and cortisone into the joint before sending the athlete back onto the field.


Retail Sales

Wildlife scientists may study herds of grazing animals to gain insight into both the seasonal behaviors of the herd and its response to conditions that alter the animals’ environment.  These include drought, war, or the burning of forests for farmland.  Economists follow a different kind of herd – people.

Macroeconomists focus on the behavior of the entire herd; microeconomists analyze the behavior of individuals acting within the herd.   Two telltale signs of human behavior are paycheck stubs and sales receipts, which act in tandem like entangled particles in a quantum dance.  In this consumerist economy, retail sales are fueled by the earnings of 140 million workers; the monthly reports on each activity guide the analysis of economists.

Each month a sample of paycheck stubs is gathered and reported by the Bureau of Labor Statistics.  The Census Bureau produces an estimate of retail sales based on a survey of almost 5000 companies.  (For those interested in the methodology.) Year-over-year growth in real, or inflation adjusted, sales fell below 1% in March this year and spurred some concern that consumption power was being eroded by slow income growth. Following the extraordinary labor report a week ago, the monthly retail sales report, released this past Friday, was stronger than the consensus.  Inflation adjusted sales rose 1.67% over last year, rising up a 1/2% from May’s year-over-year reading.  2% real growth would be ideal but anything over 1.5% is a sign of a growing economy. Why the 1.52% threshold?  1% of each year’s growth can be discounted as simply population growth.
On a sobering note, the year-over-year growth in retail sales is gradually declining as we can see in the graph below.

What negative signs should an ordinary investor watch for?  Where is the herd going?  Investors should get cautious when year-over-year growth in real retail sales consistently falls below 1.5%.  After December 2006, growth remained below this threshold and did not cross back above it till March 2010 – a period of 3-1/4 years that darkened the lives and hopes of many Americans.  During that period January 2007 through March 2010, the SP500 index fell from about 1440 to 1170, a decline of 19%.  We are part of the herd but with some observant caution we may be able to move some of our savings to the fringes of the herd movement and avoid getting trampled.



Earlier this year the U.S. Treasury introduced a Roth IRA tool called myRA for employees who work at a company that does not offer a retirement savings account.  This is a fully guaranteed account similar to a savings account that grows tax free.  The maximum one can save in this kind of account is $15,000 and part of the contribution amount is entitled to a tax credit.  This can be a good way to get started with retirement savings.  The Federal Reserve has an article on the subject here.


Amtrak Train Trance

On vacation in California recently, I rode Amtrak’s Pacific Surfliner several times on day trips from Los Angeles.  Unlike the east-west Amtrak routes, these north south routes along the coast are more frequent, running several times a day sometimes only two hours apart. Part of the route is along the beach, part along a highway, and part travels the urban backcountry – the backyards of businesses, farms and homes that most of us do not see from a car.  The experience was a sightseeing delight, a meditative trance of motion.

Most of Amtrak’s lines do not make money and rely on government subsidies.  Like so much of our transportation infrastructure in this country, railroad infrastructure needs upgrade and repair.  Opponents of government subsidies often don’t realize how much of what they personally use is subsidized.  Here is a link to a Business Insider article on Amtrak’s operations and the political debate over federal subsidies for Amtrak.  The debate crosses party lines because rural politicians of both parties tend to support subsidies for Amtrak when the rail service crosses through their geographic region.

Air travel, the most frequent mode of long distance transporation, is heavily subsidized by the federal government.  Here is a USA Today article on that subject and the $2 billion in subsidy for one airport alone, LaGuardia airport in New York City.  Likewise are the massive amount of indirect subsidies for automobile transporation, which rely on roads maintained by federal, state and local tax dollars.  These repairs are only partially paid for with dedicated gasoline tax dollars; state and local taxes must make up the difference.  Let us also include the multi-billion dollar bailouts of the industry that arise every few decades because of poor planning by industry executives in response to market demand or foreign competition.

Amtrak subsidies look miniscule in comparison. The railroad suffers from a chicken and egg problem of investment and revenue.  Which comes first?  Without more investment the railroad can only offer once a day service on east-west routes, which does not attract strong ridership.  Without a show of rider demand, there is little incentive to provide investment. The California Zephyr leaves a major city like Denver enroute to the west coast at 8 A.M. only once a day.

Boarding times in a particular region may be inconvenient.  Barstow, CA is a city of 23,000 north of Los Angeles that is serviced by the southern east-west Amtrak route called the Southwest Chief.  Like the Zephyr, this train starts in Chicago but heads southwest through Kansas, Colorado and New Mexico before heading west through northern Arizona to the west coast.  The Barstow railroad station, if it can be called that, consists of a bench and a slight overhang typical of urban bus stops.  There is no bathroom or other facilities.  The 4-1/2 hour trip to Union Station in Los Angeles arrives and departs once a day in Barstow at 3:40 AM, a unwelcoming time for a train jaunt into the big city.  The large city of San Bernadino, CA has a slightly more hospitable departure time of 5:30 AM.

In the early 19th century, before the refinement of petroleum deposits into gasoline, railroads were developed and built in Britain, then spread to Europe.  Early investment in rail transportation both for goods and people embedded the concept and the technology in European politics, its economies and cultures.

Many decades ago, this country chose to subsidize the movement of people by car, reserving the rails for the transportation of goods.  The land was big, and population centers west of the Mississippi were distant.  Steam locomotives run on wood,  a precious commodity west of the 100th meridian (central Nebraska), where there was not enough rainfall for trees to grow on the vast plains.  Oil deposits were plentiful in several regions within the country and gasoline is portable and a rich source of energy, packing a lot of BTUs per volume.

We love our cars, the hum of tires on blacktop as we run down the highway. But a train has another quality that is difficult to get in a car – a reduced sense of movement, a trance like floating through space while staring out the picture window of a rail car at a movie in motion.  If you have a few days and you are not in a rush, take a seat and let the landscape unroll before you.

Small Hope Amid Tragedy

July 10, 2016

The horrific news from Dallas on Thursday night and Friday morning understandably drowned out this month’s extraordinary employment report. No one anticipated job gains of 287,000 that were far above the consensus average estimate of 170,000.  Like last month, the BLS numbers are way off from those from the private payroll processor ADP, which reported gains of 172,000.

The strike at Verizon that started in May and ended in June involved 38,000 workers and skewed the BLS numbers down in May, then reversed back up again in June.  BLS methodology does not adjust for a strike involving so many workers, leading some to criticize such a widely followed methodology.  Because these estimates are prone to error, I think we get a more reliable picture by averaging the two estimates from the BLS and ADP.  As we can see in the graph below, economic growth during the past five years has been strong enough to stay ahead of the 150,000 monthly gains needed to keep up with population growth.

Those working part time because they couldn’t find full time work have dropped by 1.4 million in the past year – a positive sign. Although the supposed recovery is seven years old, it is only since the spring of 2014 that the ranks of involuntary part timers have consistently decreased.  Today’s level is almost 7 million less than it was two years ago but is still 2/3rds more than pre-Crisis levels.

This month’s 1/10th uptick in the participation rate was a welcome sign that more people are coming back into the workforce.  Although the unemployment rate ticked up two notches to 4.9% this was probably due to more people actively looking for work. An important component of the economy is the core work force aged 25 – 54, which continued to show annual growth in excess of 1%, a healthy sign.


CWPI (Constant Weighted Purchasing Index)

Earlier in the week, the monthly survey of Purchasing Managers (PMI) foreshadowed a positive employment report. A surge in new orders in the services sector and some healthy growth in employment helped lift up the non-manufacturing PMI to strong growth.  The Manufacturing index grew as well.  The CWPI composite of both surveys has a reading of almost 58, indicating strong growth.  The familiar peak and trough pattern that has continued during the recovery has changed to a steadier level.  New Export Orders in both manufacturing and services reversed direction this month.  The strong dollar makes American made products more expensive to buyers in other countries and presents a significant obstacle to companies who rely on exports.

Last month’s survey of purchasing managers in the services sector indicated some worrying weakness in employment.  This month’s reading suggests that a surge in new orders has reversed the decline in employment, a trend confirmed by the BLS report later released at the end of the week.

A few months ago I was concerned that the familiar trough that had developed in the spring might continue to weaken.  This month’s survey put those fears to rest.


Housing Bubble?

Soaring home prices in some cities has led to speculation that, ten years after the last peak in the housing market, we are again approaching unaffordable price levels.  Heavy migration into the Denver metro area has made it the third hottest housing market in the U.S., just behind San Francisco and Vallejo (northeast of SF) in California (Source). Despite bubble indications in these hot markets, the Case Shiller composite of the twenty largest metropolitan areas does not indicate that we are at excessive levels.

In the period 2000 through mid-2006 when housing prices peaked, annual growth was more than 10%.  Ten years have passed since then.  In the 16.5 years since the start of 2000, annual growth has averaged 4%.  While this is almost twice the 2% rate of inflation, it is approximately the same as the rate of growth during the past century.


In the past two weeks following the Brexit vote in the U.K. the S&P500 has rebounded 6%, recovering all the ground lost and then some. It is near all time highs BUT so are Treasuries.  When both “risk on” (stocks) and “risk off” (Treasuries) both rise to new highs, it creates a tension that usually resolves in a rather ugly fashion as the market chooses one or the other.


July 3, 2016

A week after crash-go-boom in the stock market following Brexit, the British vote to leave the European Union, the market recovered most of the 5 – 6% lost in the two days following the vote.  The reaction was a bit too intense, inappropriate to an exogenous shock, the vote, whose consequences would take several years to develop. In last week’s blog I had suggested that the market drop was a good time to put some IRA money to work for 2016.  This was not some kind of magic insight.  Each year’s IRA contribution amount is a small percentage of our accumulated  retirement portfolio.

Buying on market dips can be an alternative strategy to regular dollar cost averaging since the market recovers within a few months after most dips, although the recovery is at a slower pace than the fall.  Fear can cause stampedes out of equities; confidence grows slowly.  As an example of an abrupt price decline, the SP500 index fell almost 7% in five days last August, then took more than two months to regain the price level before the fall.  The 12% price drop at the beginning of this year was more gradual, occurring over six weeks.  The recovery to regain that lost ground also took two months, from mid-February to mid-April. In the latter quarter of 2012, the market also took two months to erase a 7% price decline from mid-October to mid-November.

The price level of the SP500 is near the high mark set in May 2015, more than a year earlier.  Only in the past year has the inflation-adjusted price of the SP500 surpassed its summer 2000 level (Chart and table).  Nope, I’m not making that up. The stock market has just barely kept up with inflation for the past 15 years. The inability of the stock market to move higher indicates that buyers are not attracted to the market at current price levels.  The absurdly low interest yields on bonds makes this caution especially puzzling.  As stock prices recovered this past week, prices on long term Treasury bonds should have fallen as traders moved into more risky assets.  Instead, bond prices have risen.  As the price of long term Treasuries (ETF: TLT) broke through its January 2015 high  on Friday, the last day of June, traders began betting against treasuries (ETF: TBF).

Those who are concerned about the return OF their money, the safety searchers buying bonds, are competing against those seeking a return ON their money.  VIG is a Vanguard ETF that focuses on company stocks with dividend appreciation, and is favored by those seeking some safety while investing in stocks. TLT is an ETF of Treasury bonds for those seeking safety and, as expected, pays more in dividends than VIG.  Rarely do we see a broad stock ETF like VIG have a yield, or interest rate, that is close to what a long term Treasury bond ETF like TLT has.  At the end of this week, VIG had a dividend yield of 2.15%, just slightly below TLT.  Why are investors/traders bidding up the price of Treasury bonds?  Some 10 year government bonds in the Eurozone have recently crossed a dividing line and now have negative interest rates.  The low, but positive, interest rates of U.S. Treasury bonds look like big open flowers to the busy bees of institutional investors around the world.

In a large group of investors, buy and sell decisions tend to counterbalance each other.  Occasionally there are periods when such decisions reinforce each other and create a precarious imbalance that all too often rights itself in an abrupt fashion.  Bubbles and – what’s the opposite of a bubble? – are iconic examples of this kind of self-reinforcing behavior.

In another week we will mark the middle of the summer season.  The All-Star game on July 12th occurs near the halfway mark in the baseball season and advises parents in many states that there are still five to six weeks before the kids head back to school.  Our mid-40s is about the midpoint of our working years, a reminder that we need to start saving for retirement if we have not done so already.  It has been seven years since the market trough in March 2009.  Let’s hope that this is the midpoint of a 14 year bull market but I don’t think so.

Next week will be chock full of data before the start of earnings season for the second quarter. We will get the June employment report as well as the Purchasing Managers Index.  In this time of short, sharp reactions to news events, we can expect continued volatility.



Pew Research just released a comparison of earnings by racial group and sex that is based on Census Bureau surveys, the same data that the BLS compiles into their monthly employment reports.  My initial criticism of the Pew Research comparison was that they used the earnings of full and part time workers.  Women tend to work more part time jobs so that would skew the earnings comparison, I thought. Thinking that a comparison of full time workers only would show different results, I pulled up the BLS report which groups the data by sex, only to find out that the differences between the earnings of men and women was about the same.  At the median, women earn 82% of men.

An even more depressing feature of the BLS report is that median weekly earnings have barely kept ahead of inflation during the past decade.  This wage stagnation provides a base of support for the criticisms voiced by former Presidential contender Bernie Sanders in a recent NY Times editorial.
Like a truck stuck in the mud, households are spinning their wheels without making much progress.  In the coming months, Donald Trump and Hillary Clinton will try to sell themselves as the tow truck that can pull average American families out of the mud. Well, it would be nice if they would conduct their campaigns in such a positive light.  The truth is that each candidate will try to convince voters that voting for the other candidate will get American families stuck deeper in the mud.  The conventions of both parties are later this month.  Expect the mud to start flying soon after they are over.  By election day in November, we will all be buried in mud.