Category: earnings

Housing Affordability

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August 14, 2022

by Stephen Stofka

The National Association of Realtors (2022) publishes a Housing Affordability Index (HAI) that measures median housing prices, mortgage rates and median family income to determine a ratio of housing costs to family income. June’s index was the lowest affordability since 1989. Since the Fed began raising rates this year, affordability has fallen by a third. In the notes I’ll include some comments on the methodology behind the HAI.

With technological progress, we expand our definition of what is a necessity. We argue whether government has a responsibility to ensure that each family has a certain level of sustenance – adequate housing, food, a source of income and access to educational resources. Those in neighborhoods with single family homes resist efforts to build affordable multi-family housing. A real estate developer earns a higher profit building expensive townhomes than affordable housing units. Should a developer be compensated if required to build affordable housing? City councils would prefer not to bring up the subject of using tax money to compensate a developer for doing less.

We disagree about who should pay, who should get and how much. Several decades ago, the homeless were less visible, a huddle of a human being lying under a tree or on a park bench, occupying about 18 square feet. In destination cities like Denver, Portland, L.A and other western states, encampments of homeless in colorful pop-up tents line downtown sidewalks and along streams and rivers that course through the town. Depending on the size of the tent each person may occupy up to 50 square feet. Like the rest of us, they are taking up more space per person. Are there more homeless or are they simply more visible?

The reasons why people are homeless are numerous and varied but the dynamics of housing supply and demand are key factors. Where demand for rental housing is low, landlords of affordable units may skip a criminal background or credit check. When demand is high, rents are higher and landlords are more discriminating. They may require higher security deposits as a tool to screen out renters. The annual change in rental costs was 6.3%, below the 7.3% increase in housing costs but workers’ wage increases have not kept pace in the past year. (I’ll put the series identifiers and index numbers in the notes at the end). Over a long time period, have earnings kept up with housing costs?

I began with 1973, the year that the U.S. and most of the world adopted floating exchange rates between currencies. This allowed capital more freedom to move around the world. Several economists mark that as a turning point when the returns to labor began to lag behind the returns to capital. Today’s workers make $612 for every $100 that workers made in 1973, a 6:1 ratio. Housing costs have risen even faster. The Bureau of Labor Statistics calculates that a person spends $888 for shelter today for each $100 spent in 1973. In computing the CPI, the Bureau of Labor Statistics (2022) and the Census Bureau include mortgage payments, taxes and insurance – PITI – to determine the cost of shelter itself (32% of income), about 5% for utilities and another 5% for maintenance and repairs. Together they make up more than 40% of a family’s income.

We measure things in order to compare qualities. An example might be measuring the width of a bookcase and the width of a space in the living room where we want to put the bookcase. Comparing total housing costs across five decades is difficult. We prefer to live in bigger spaces and in far greater comfort than we did 50 years ago. Today’s new homes average 2600 SF. The thirty year average is 1800 SF. Moura et al (2015) estimated that each of us has twice the space of a person living in 1900. Total housing costs may have grown almost 50% faster than wages but per capita housing space has grown at least as much. Adjusting for the larger personal space, we could conclude that wages have kept up with total housing costs. But that’s not how many of us perceive affordability. More space and comfort has become our standard.

Changing standards and expectations cause a shift in definitions and benchmarks. The BLS includes the cost of cell phones, computers and internet access under Information and Information Processing. Many families consider these to be utility expenses as necessary as the heating and electric bill. The BLS estimates a family spends 3.5% of their income on these modern day necessities – about $3000 a year. TV cable subscriptions add another 1%. Five decades ago, a family had a $0 monthly cost for these. Together that cost represents $320 per month that impacts housing affordability. The cars we drive today are safer, more mechanically reliable and more fuel efficient but we spend more of our income on transportation costs. In the post-war period, food and clothing were almost half of a typical family’s expenses. Today those items make up just 13% of a family’s spending (BLS, 2014). We live in bigger homes because other items that used to take up a lot of space in our budget have shrunk.

News media often puts current economic measures in historical context – the highest since and the lowest since – but these quantitative measures are not adjusted for improvements in the qualities of goods. On a hot summer’s day five decades ago, there might have been several overheated cars on the drive home from work. Changing a flat tire on the side of the road was common. Automobile deaths were far higher. Older people died from heat exhaustion in uncooled apartments and homes. Our standards and expectations have changed.

Each month economists measure thousands of data points – as numerous as the stars in the night sky. Economists and politicians connect those dots using different paths of reasoning, motivation and perspective. We may cling to a particular doctrine that clouds our interpretation of the data. In the end economic issues are personal. Have our earnings kept up with our housing costs?

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Photo by Tierra Mallorca on Unsplash

BLS. (2014, April). One Hundred Years of price change: The consumer price index and the American Inflation Experience : Monthly labor review. U.S. Bureau of Labor Statistics. Retrieved August 12, 2022, from https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm

BLS. (2022, February 11). Relative importance of components in the Consumer Price Indexes: U.S. city average, December 2021. U.S. Bureau of Labor Statistics. Retrieved June 17, 2022, from https://www.bls.gov/cpi/tables/relative-importance/2021.htm

Lautz, J. (2022, January 7). Tackling home financing and down payment misconceptions. http://www.nar.realtor. Retrieved August 12, 2022, from https://www.nar.realtor/blogs/economists-outlook/tackling-home-financing-and-down-payment-misconceptions

Moura, M. C., Smith, S. J., & Belzer, D. B. (2015). 120 years of U.S. residential housing stock and floor space. PLOS ONE, 10(8). https://doi.org/10.1371/journal.pone.0134135

National Association of Realtors (2022). Housing affordability index. http://www.nar.realtor. Retrieved August 12, 2022, from https://www.nar.realtor/research-and-statistics/housing-statistics/housing-affordability-index. As constructed, an affordability index of 100 should be affordable. However, the NAR calculates a mortgage payment that is not typical. They base their calculation on a 20% down payment. The average down payment is only 10%. First time buyers typically put down only 7% (Lautz, 2022). This raises the mortgage payment and lowers the affordability. After adjusting for this, an HAI reading of 140 is probably a better benchmark of affordability.

 U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Housing in U.S. City Average [CPIHOSSL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIHOSSL, August 13, 2022. July’s annualized increase was 7.3% and climbing.

U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average [CUUR0000SEHA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CUUR0000SEHA, August 13, 2022. July’s annualized increase was 6.3% and climbing.

U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Shelter in U.S. City Average [CUSR0000SAH1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CUSR0000SAH1, August 12, 2022. Note: Total cost of shelter was 39.90 in April 1973 and in 2022 it is 354.45, an 8.88 ratio.

U.S. Bureau of Labor Statistics, Average Weekly Earnings of Production and Nonsupervisory Employees, Total Private [CES0500000030], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CES0500000030, August 12, 2022. In July 1973 the index was 153.14. In July 2022 937.38. A 6.12 ratio.

The Sense and Cents of a College Education

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October 21, 2018

by Steve Stofka

Should a young person invest money in a college education? Let’s look at the question from a financial perspective. Building a higher educational degree is as much an asset as building a house. Let me begin with the hard numbers.

Employment: A person is more likely to be employed. Here is a comparison of those with a four-year degree or higher and those with a high school diploma. The difference in rates is 2% – 3% during good times and as much as 6% during bad times.

UnemployRateCollVsHS

Is the unemployment rate enough to justify an investment of $50K or more in a four-year degree? Maybe not. During the worst part of the financial crisis, ninety percent of HS graduates were working. Why should a diligent person with good work skills spend time in college? Most college students take six years to complete a four-year degree. They must spend four to six years of study in addition to the loss of work experience and earnings in those years. The unemployment rate is not a decision closer.

Earnings: In 1980, when those of the Boomer generation were taking their place in the workforce, college grads earned 41% more than HS grads. Today, college grads earn 80% more. That gap of $567 per week totals almost $30,000 in a year and is less than the monthly payment on a $50,000 loan (Note #1). Can a person expect to earn that much additional when they first graduate? No, and that’s why many students struggle with their loan payments in the decade after they graduate.

MedWklyEarnCollVsHS

Maybe that earnings difference is a temporary trend. The debt is permanent. Should a young person take on a lot of debt only to find out the earnings difference between college and high school graduates was temporary? Unfortunately, that’s not the case. The big shift came in the 1980s when the gap in earnings grew from 41% to 72% in twelve years.

EarnDiffPctCollVsHS

There were several reasons for the explosive growth in that earnuings gap. Many Boomers had gone to college to avoid the Vietnam War draft. As they crowded into the workforce in the late 1970s and 1980s, they wanted more money for that education.

During the 1980s, the composition of jobs changed. Steel manufacturing went overseas to smaller and more nimble plants which could adjust their outputs more economically than the behemoth steel plants that dominated the U.S.

Automobile companies in Michigan closed their old plants. Chrysler needed a government bailout. The manufacturing capacity of Asia and Europe that had been crippled by World War 2 took several decades to recover. The U.S. began to import these cheaper products from overseas. As high-paying blue-collar jobs diminished, the advantage of white-collar workers grew.

As more companies turned to computers and the processing of information, they wanted a more educated workforce that could understand and execute the growing complexity of information. Manufacturing today relies on computer programs that require a set of skills that are more technical than the manufacturing jobs of the past.

A oft-repeated story is that the signing of NAFTA in 1993 and the admittance of China into the World Trade Organization were chiefly responsible for the growing gap between white collar and blue collar workers. I have told that story as well, but it is incorrect and incomplete. As the graph above shows, that gap has grown modestly in the past twenty-five years. The big shift happened in the 1980s when the first of today’s Millennials were in diapers and grade school.

When we adjust weekly earnings for inflation, we can better understand the evolution of this earnings gap. In the past forty years, high school graduates have seen no change in median weekly earnings. From 1980 to 2000, their earnings declined. The 25% growth in the earnings of college graduates came in two spurts: in the mid to late 1980s, and during the dot-com boom of the late 1990s.

EarnInflAdjCollVsHS

Since this trend has been in place for decades, college students can assume that it will likely stay in place for the following few decades. Like the mortgage on a home, the balance on a student loan doesn’t increase every year with inflation, but the earnings from that education do and they have increased more than inflation. The payoff to a four-year degree is the difference in earnings. That is the decision closer.

Notes:

  1. Using $50,000 loan for ten years at 6% interest rate at Bank Rate.

Post-Election Bounce

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January 1, 2017

Happy New Year!  How many days will it take before we remember to write the year correctly as 2017, not 2016? It is going to be an interesting year, I bet.  But let’s do a year end review.

Homeownership

The home ownership rate has fallen near the lows set in 1985 and the mid-1960s at about less than 64%. (Graph)  In 2004, the rate hit a high of 69%.  For the U.S., the sweet spot is probably around 2/3 or 66%.  Most other countries have higher rates of home ownership, including Cuba with a rate of 90%. (Wikipedia article)  Rents in some cities have been growing rapidly.  In the country as a whole, rents have increased almost 4%, about twice the growth in the CPI, the general rate of inflation for all goods and services. (Graph)

Earnings

Real, or inflation-adjusted, weekly earnings of full time workers spiked up during the recession as employers laid off lower paid and less productive workers.  By late 2013, weekly earnings had fallen to 2006 levels and have risen since, finally surpassing that 2009 peak this year.

Core Work Force

Almost every month I look at the changes in the core work force of those aged 25-54 who are in their prime working years, who buy homes for the first time and have families.  These are the formative years when people build their careers, and form product preferences, making them a prime target for advertisers.  The economy depends on this age group.  They fund the benefit systems of Social Security and Medicare by paying taxes without collecting a benefit.  In short, an economy dependent on intergenerational transfers of money needs this core work force to be employed.

For two decades, from 1988 to 2008, the labor participation rate of this age group remained steady at 82% – 83%. (BLS graph) By the summer of 2015, it had fallen to 80%.  A few percent might not seem like much but each percent is about a million workers.  For the past year it has climbed up from that trough, regaining about half of what was lost since the Great Recession.

Consumer Confidence

A post-election bounce in consumer confidence has put it near the levels of 2001, near the end of the dot-com boom and just before 9-11. (Conference Board)  In 2012, the confidence index was almost half what it is today.

Business Sentiment

Small business sentiment has improved significantly since the November election (NFIB Survey).  Almost a quarter of businesses surveyed expect to add more employees, a jump of 2-1/2 times the 9% of businesses who responded positively in the October survey.  In October, 4% of companies expected sales growth in the coming year.  After the election, 20% responded positively.  This jump in sentiment indicates the degree of hope – and expectation – that business owners have built on the election of Donald Trump.

Hope leads to investment and business investment growth has turned negative (Graph). Recession often, but not always, accompanies negative growth. Since 1960, investment growth has turned negative eleven times.  Eight downturns preceded or accompanied recessions.  Let’s hope this renewed hope and some policy changes reverses sentiment.

On the other hand, those expectations may present a challenge to the incoming administration, which has promised some tax reform and regulatory relief. Small business owners will lobby for different reforms than the executives of large businesses.  Regulations of all types hamper small business but large businesses may welcome some regulation which acts as a barrier to entry into a particular market by smaller firms.

Publicly held firms will continue to lobby for repeal or reform of Sarbane Oxley reporting provisions.  For six years, the Obama administration has wanted to roll back these regulations but has been unable to come up with a compromise between the SEC, which regulates publicly traded companies, and Congress.  A Trump administration may finally reform a law that was rushed into place by George Bush and a Republican Congress in response to the Enron scandal.  That scandal grew in part from the Bush administration’s push to deregulate the energy market.

Voters Veer From Side To Side

We have stumbled from an all Republican government in 2002 to an all Democratic government in 2008 and now come full circle again to an all Republican government. Once in power, neither party can resist using economic policy to pick winners and losers.  Every few years the voters throw out the guys in charge and bring the other guys in, hoping that the party that has been out of power will be chastened somewhat.  Within a few months of taking power, each party digs up their old bones and begins to gnaw on them again.  Tax reform, prison reform, justice and fairness for all, climate change, more regulation, less regulation – these bones are well chewed.

Still we keep trying.  The priests and prophets of long ago kingdoms could not govern.  Neither could the kings and queens of empires.  So we have tried government of the people, by the people and for the people and it has been the bloodiest two centuries in human history.  Still we keep hoping.

The Presidential Test

Most presidents are tested in their first year in office.  Kennedy had to grapple with the Soviet threat and Cuba almost as soon as he took office.   Johnson struggled with urban violence, social upheaval and the war in Vietnam.

Nixon confronted a newly resurgent Viet Cong army when he first took office.  His second term began with the Arab oil embargo.  Ford dealt with the aftermath of Watergate and Nixon’s resignation under the threat of impeachment.

Jimmy Carter began his term with the challenges of high inflation and unemployment, and an energy crisis to boot.  Ronald Reagan wrestled with sky-high interest rates and a back to back recession in his early years.  His successor, H.W. Bush, met a Soviet Union near the end of its 70 year history as Gorbachev loosened the reins of Soviet control of eastern European countries and the Berlin Wall collapsed.

After an unsuccessful attempt to reform health care in his first year of office, Clinton suffered in the off year election of 1994.  G. W. Bush had perhaps the worst first year of any modern President – the tragedy of 9-11.  Obama entered office under a full blown global financial crisis.

Despite Putin’s bargaining rhetoric regarding President-elect Donald Trump, every President has to learn the lesson anew – Russia is not our friend.  Trump will have to learn  the same lesson.  China’s territorial claims in the South China sea may prompt an international incident.  N. Korea could launch a missle at S. Korea and start a small war.  Iran, Afghanistan, Iraq and Syria, Israel’s settlements, Palestinian independence – the crises may come from any of these tinderboxes.  We wish the new President well as he hops into the fire.

Pickup and Letdown

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May 8, 2016

Based on ISM’s monthly survey of Purchasing Managers, the CWPI blends both service and manufacturing indexes and gives additional weight to a few components, new orders and employment.  Last month we were looking for an upward bend in the CWPI, to confirm a periodic U-shaped pattern that has marked this recovery. This month’s reading did swing up from the winter’s trough and we would expect to see further improvement in the coming few months to confirm the pattern. A break in this pattern would indicate some concern about a recession in the following six months. What is a break in the pattern? An extended trough or a continued decline toward the contraction zone below 50.

Since the services sectors constitutes most of the economy in the U.S., new orders and employment in services are key indicators of this survey.  A sluggish winter pulled down a composite of the two but a turn around in April has brought this back to the five year average.

Rising oil prices have certainly been a major contributor to the surge in the prices component of the manufacturing sector survey. The BLS monthly labor report (below) indicates some labor cost increases as well.  Each month the ISM publishes selected comments from their respondents.  An employer in the construction industry noted a severe shortage of non-skilled labor, a phenomenon we haven’t seen since 2006, at the height of the housing bubble.

Last week the BEA released a first estimate of almost zero growth in first quarter GDP, confirming expectations.  Oddly enough, the harsh winter of 2015 provided an even lower comparison point so that this year’s year over year growth, while still anemic, is almost 2%.

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Employment

April’s employment data from the BLS was a bit disheartening.  Earlier this week, the private payroll processor ADP reported job growth of 150,000 in April and lowered expectations for the BLS report released on Friday.  While the BLS estimate of private job growth was slightly better, the loss of about 10,000 government jobs, not included in the ADP estimate, left the total estimate of jobs gained at 160,000. The loss of government jobs is slight compared to the total of 22 million employed at all levels of government but this is the fourth time in the past eight months that government employment has declined.

A three month average of job growth is still above 200,000, a benchmark of labor market health that shows job growth that is more than the average 1% population growth  With a base of 145 million employees in the U.S, a similar 1% growth rate in employment would equal 1.5 million jobs gained each year, or about 125,000 per month.  To account for statistical sampling errors, the churn of businesses opening and closing, labor analysts add another 25,000 to get a total of 150,000 minimum monthly job gains just to keep up with population growth.  The 200,000 mark then shows real economic growth.  In March 2016, the growth of the work force minus the growth in population was 1.2%, indicating continued real labor market gains.

Job growth in the core work force aged 25 -54 remains above 1%, another good sign.  It last dipped briefly below 1% in October.  This core group of workers buys homes, cars, and other durable goods at a faster pace than other age groups; when this powerhouse of the economy weakens, the economy suffers. In the chart below, there is an almost seven year period, from June 2007 through January 2014 where growth in this core work force group was less than 1%.  From January 2008 through January 2012, growth was actually negative.  The official length of the recession was 17 months, from December 2007 through June 2009.  For the core work force, the heart of the economic engine, the recession lasted much longer.

In 2005, a BLS economist estimated that the core work force would number over 105 million in 2014.  In December 2014, the actual number was 96 million, a shortage of 9 million workers, or almost 10% of the workforce.  In April 2016, the number was almost 98 million, still far less than expectations.

Some economists and pundits mistakenly compare this recovery from a financial crisis with recoveries  from economic downturns in the late 20th century.  For an accurate comparison, we must look to a previous financial, not economic, crisis – the Great Depression of the 1930s.

The unemployment rate in April remained the same, but more than a half million people dropped out of the labor force, reversing a six month trend of declines.  It is puzzling that more people came back into the labor force during the winter even as GDP growth slowed.

Average hourly earnings increased for the second month in a row, upping the year over year increase above 2.5%.  For the past ten years, inflation-adjusted weekly earnings of production and non-supervisory workers have grown an anemic .75% per year.  In the sluggish winter of January and February 2015, earnings growth notched  a recovery high of 3%, leading some economists and market watchers to opine that lowered oil costs, on the decline since the summer of 2014, would finally spur worker’s pay growth in this long, subdued recovery.  A year later, earnings growth is about 1.2%, a historically kind of OK level, but one which causes much head scratching among economists at the Federal Reserve.  When will worker’s earnings begin to recover?

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Hungry

A reader sent me a link to a CNBC article  on food insecurity in the U.S. The problem is widespread and not always confined to those who fall below the poverty benchmark. Contrary to some perceptions, food insecurity is especially prevalent in rural areas, where food costs can be 50% higher than urban centers.  How does the government determine who is food insecure? The USDA publishes a guide with a history of the project, the guidelines and questions.  To point out the highlights, I’ll include the page links within the document. The guidelines have not been revised since this 1998 revision.

In surveys conducted by the Census Bureau, respondents are asked a series of questions.  The answers help determine the degree of household food insecurity.  The USDA repeatedly emphasizes that it is household, not individual, insecurity that they are measuring.  The ranking scale ranges from 0, no insecurity, to 10, severe insecurity and hunger. An informative graph of the scale, the categories and characteristics is helpful.

In 1995, a low .8 percent were ranked with severe food insecurity (page 14) . To be considered food insecure, a household must rank above 2.3 (household without children), or above 2 .8 (with children) on the scale.  Above that are varying degrees of insecurity and whether it is accompanied by hunger. (Table)

The USDA admits that measuring a complex issue like this one can provoke accusations that the measure either exaggerates or understates the number of households.  What are they measuring?  Page 6 contains a formal definition, while page 8 includes a list of conditions that the survey questions are trying to assess, and that a condition arose because of financial limitations like “toward the end of the month we don’t have enough money to eat well.”

Page 9 describes the rather ugly pattern of progressively worse food insecurity and hunger.  At first a household will buy cheaper foods that fill the belly.  Then the parents may cut back a little but spare the kids the sensation of hunger.  In its most severe stage, all the family members go hungry in a particular day.

Those of you wanting additional information or resources can click here.

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Earnings

Almost a month ago the giant aluminum manufacturer Alcoa kicked off the first quarter earnings season.  87% of companies in the SP500 have reported so far and FactSet calculates a 7% decline in earnings.  They note “the first quarter marks the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009.”  Automobile manufacturers have been particularly strong while the Energy, Materials and  Financial sectors declined.  Although the energy sector gets the headlines, there has also been a dramatic decrease in the mining sector.  The BLS reports almost 200,000 mining jobs lost since September 2014.

The bottom line for long term investors: the economic data supports an allocation that favors equities.  The continued decline in corporate earnings should caution an investor not to go too heavily toward the equity side of the stock/bond mix.

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(Edited May 11th in response to a reader’s request to clarify a few points.)

Still Worried

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November 1, 2015

Today is the day that U.S. readers fall back.  Let’s hope it’s the only thing that falls back!

Eight years ago, in October 2007, the SP500 index reached a pre-recession high of 1550. After this month’s 8% recovery the index stands at 2079, more than a third above that long ago high.  A decade long chart of the SP500 shows the inflection points of sentiment.  We can compare two averages to understand the shifts in investor confidence.  A three month average, one quarter of a year, captures short term concerns and hesitations.  A one year average reflects doubts or optimisms that have strengthened over time.  The crossing of one average above or below the other gives us a signal that a change may be coming.  Concerns may be temporary – or not.

After falling below the 12 month average, the 3 month average strained and groaned to pull its chin above that long average, notching five consecutive weekly gains.  Both China and the EU central banks have announced plans for lower interest rates or QE to spur their economies.  Oil prices continued to bounce around under the $50 mark.  OPEC suppliers announced they could not agree on production cuts.  Fearing a continuing oversupply of crude, oil prices fell 4 – 5%.  Then came the news that the number of oil rigs in the U.S. had fallen.  Prices went back up.

Commodities and mining stocks remain under pressure.  After falling over 18% in September, mining stocks gained back most of those losses in the first two weeks of October, then fell back in the last half of this month, closing the month with a 3% gain.  15 to 20% gains and losses in a sector during a month looks like so much scurrying and confusion.

Emerging market indexes lost ground this past week, slipping more than 4%.  Worries of a global recession continue to haunt various markets.  For large and medium U.S. companies, a slowdown in European and Asian markets is sure to have a negative effect on the bottom line.

The first estimate of 3rd quarter GDP growth was a paltry 1.5%, far below the 3.9% annual rate of the 2nd quarter.  Two-thirds of the SP500 companies have reported earnings for the 3rd quarter and FactSet estimates a decline of 2.2% for the quarter, the second consecutive quarter of earnings declines.

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The Causes of Depression

The economic kind, not the emotional and psychological variety.  Economics history buffs will enjoy David Stockman’s critique of the extraordinary amount of monetary easing under former Fed chairman Ben Bernanke.  As President Reagan’s budget director, Stockman was at the forefront of supply side economics, a theory which promised an answer to the stagflation of the 1970s that drove many to question the assumptions and conclusions of Keynesian economics.

At first a champion of this new approach to economic policy making, Stockman grew disillusioned and later coined the term “voodoo economics” to describe the contradictory thinking of his boss and others in the Republican Party who stuck by their beliefs in supply side economics in spite of the evidence that these policies generated large budget deficits and erratic economic cycles.

In 2010, Stockman penned an editorial  that held some in the Republican Party, his party, culpable for the 2008 fiscal crisis.  He understands that politicians and policy makers become welded to their ideological platforms, disregarding any input that might upset their model of the world.

For those who have a bit of time, an Atlantic magazine December 1981 an article acquainted readers with David Stockman in his first year as budget director.  The budget process seems as broken today as it was 35 years ago when Stockman assumed the task of constructing a Federal budget.

 These “internal mysteries” of the budget process were not dwelt upon by either side, for there was no point in confusing the clear lines of political debate with a much deeper and unanswerable question: Does anyone truly understand, much less control, the dynamics of the federal budget intertwined with the mysteries of the national economy?

Stockman understands the political gamesmanship that permeates Washington.  He criticizes Bernanke’s analysis of the 2008 Great Recession as well as the 1930s Great Depression. Faulty analysis produces faulty remedies. Stockman goes still further, finding fault with Milton Friedman’s monetary analysis of the causes of the Great Depression.  In a 1963 study titled A Monetary History of the United States Friedman and co-author Anna Schwartz found that monetary actions by the Federal Reserve deepened and lengthened the 1930s Depression.  Friedman became the leading spokesman of monetarism in the late 20th century, the thinking that governments can more effectively guide a national economy by adjusting the money supply rather than employing an ever changing regime of fiscal policies.

Students of the great debate of the past 100 years – bottom up or top down? – will enjoy Stockman’s take on the matter.

A Long Term Plan

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November 16, 2014

“Yaaaaay!” Charlie erupted as he kicked the pile of leaves in the backyard. Rusted orange, dried blood crimson and mustard yellow flew up into the air.  Rake in hand, George smiled at his grandson’s exuberance. “Hey, champ, let’s get these leaves in the bag.”  The little arms gathered up the colored leaves and swung to the trash can which was about the same height as the four year old boy.  Charlie threw the leaves up over the lip of the trash can.  Very few leaves made it into the can. Charlie tilted the black plastic can toward him so that he could look in the can. “Look, Ganpa!” he exclaimed, proudly showing the inside and the few leaves that had made it into the can.  “The kid’s a politician,” George remarked to his son Robbie sitting on the back deck. “Get’s very little accomplished with a lot of fanfare.”

Robbie held up his phone. “Let me get a shot of the two of you.”  George picked up Charlie and held him over the trash barrel.  Charlie clasped him around the neck and Robbie snapped the picture.  George set the child down and the boy once again gathered up a clump of leaves and threw them up into the air.  Robbie took another picture of his son.  George walked over to the deck.  “Let me see.”  Robbie showed him the two pictures then looked at the picture of his son tossing up the leaves.  He handed the phone to his dad.  “Looks like a scatterplot, doesn’t it?” Robbie asked. George looked.  “Wow, what have you been working on?  Most people don’t see a scatterplot in a cloud of leaves.” A scatterplot is a number of data observations plotted on a graph.

“Still working on pattern recognition for drones,” Robbie said, a bit of tiredness in his voice.  “A lot of tough problems to crack.”  George nodded toward Charlie. “I can remember when you were this age,” George said, a fondness in his voice. Robbie went on, “Charlie – any four year old – has better visual processing that the most sophisticated algorithms we write. The brain scientists plot the paths in our brains but we still sit around the lab wondering what is it that our brains are doing when we interpret the world.  Well, we just keep kicking at this mule…” His voice drifted as Charlie came over to them, leaves clenched in his little fists.  He slumped on Robbie’s knees.  “You need to rake more leaves, Ganpa,” he whined.  George looked up and saw that Charlie had leveled the pile of leaves.  “Ok, champ, let’s rake more leaves.”

Mabel opened the rear screen door.  “I need a potato peeling person!” she called out.  Robbie stood up.  “I’ll get it,” Robbie said, “you rake.”

As he raked, George thought back to that time when Robbie was the same age Charlie was.  At that time, thirty years had seemed like a lifetime because it was.  He and Mabel had been in their thirties.  George remembered some  meetings with their accountant at the time. She had given them the talk, one that she probably gave to other young families. “You need to keep some things in mind for your kids, and for your retirement.  I know it seems like a long time away now but your little boy will be in college before you know it.”  The accountant was only a few years older than they were but talked like a Solon.  George had supposed that the profession encouraged that kind of long term thinking.  Heck, his time horizon was about five years and this woman was stretching their imagination out twenty, thirty and forty years. “The choices you make now will limit or expand your choices in the future.”

Almost thirty years later, George and Mabel had done well by following her advice over the years.  George wanted to thank her but she had moved her business to Oregon or Washington and they had lost touch.  They had not bought the really big house although they had sometimes wished they had more room, especially when the kids were teenagers.  They had treated the two houses they had owned as a place to live, not as an investment vehicle or a store of wealth to borrow from.  The mild downturn in the residential market in the early 1990s had not worried them.  When the prices of homes crashed in 2007 and 2008, they lost little sleep because the mortgage was paid off.  George did take a hit on his 401K though.  He was close to retirement as the market tanked and both of them worried a lot through that 2008 – 2009 winter.

In the late 1980s, George had opted in for what was then a fairly new idea, a 401K plan, at work.  These were termed “defined contribution” plans.  The employee, not the employer, took the risk and the responsibilities for the investment allocations in the plan.  The employer made its contribution to the plan and had no long term liabilities for the results that the investments did or didn’t make.

When Mabel returned to teaching in the mid 1990s, she had taken a conventional defined benefit pension plan, the only one that the school offered.  In early 1999, as the Nasdaq climbed to nosebleed valuations, George had eased up on the stock allocation in his 401K.  He didn’t know a whole lot about investing, only that stocks were riskier than bonds.  As the market continued to climb, he sometimes regretted his decision but stuck with it as a matter of common sense. By the end of 2000, as stock prices continued to fall, he was glad he had been more conservative.  In late October 2014, the Nasdaq 100 had finally climbed above the level it reached in 1999, 15 years earlier.

They enjoyed a wonderful Sunday dinner with Robbie, his wife Gail, and their grandson Charlie.  Robbie asked about Emily, his sister, but no they hadn’t heard from her in almost a year.  Two kids grow up in the same house.  One of them is stable, has a good career, and a wonderful family.  The other leads a troubled life, and is consumed by some inner demon.  Emily was not a fit conversation for a dinner table so the talk moved onto other topics.  Robbie, Gail and Charlie drove back to Colorado Springs that evening.  There was a front moving down from Canada or Alaska so they declined the offer to stay in the guest room for the night.

There wasn’t a lot of economic news scheduled for the week so George was not expecting any strong moves in the market.  Much of the earnings season had come and gone.  According to FactSet  almost 80% of companies had reported above consensus estimate of earnings.  A more disturbing sign: three times as many companies had issued negative guidance for fourth quarter earnings as those that had indicated a more positive outlook.

The big news for the week was the Rosetta spacecraft.  Launched ten years earlier, it had rendezvoused with a comet 300 million away on its journey from the far reaches of the solar system to the sun.  As if that wasn’t spectacular enough, the spacecraft then launched a washing machine sized landing vehicle to sit down on the comet as it sped through space.  Talk about long term planning.

On Thursday, the spot price of a barrel of crude oil dropped below $75.  The Energy Information Agency (EIA) announced that the average price of a gallon of gasoline had fallen further to $2.94, the second week below $3.   Several analysts pegged the price range of $65 – $70 as a “make or break” benchmark for many fracking operations.  If oil were to stay down at that level for any length of time, many new drilling plans would be put on hold.  Operations at existing wells might be cut back.  The strong dollar meant that countries who were net exporters of oil would be paid in dollars, which could be traded for more of their own currency.  For these countries, the strong dollar was helping offset the impact of lowered prices.

On Thursday, the BLS released the September report of job openings and turnover, or JOLTS.  The number of employees quitting their jobs had risen to a recovery high of 2%.  Workers who were not confident of finding another job did not quit their current job.  Job quitters acted as a canary in a coal mine, where a relatively small part of an ecosystem or economy indicated the health of the entire system.  A rate of 2% or higher indicated a healthy confidence in the employment grapevine.

On Friday, George had lunch with a few former colleagues.  Four old guys sitting at a booth, drinking too much coffee. As usual, the discussion was lively.  Each of them had a take on the elections just past but the conversation got a bit heated when Stan said that there were just too many people who didn’t want to work.  Who was going to pay for all these people?  Who was going to pay for all the government programs?  He had just read a report from Pew Research that summarized the changing trends in the labor force participation rate and the sometimes contentious debates about those changes.  The participation rate was the number of people working or looking for work as a percentage of the adult population, the civilian non-institutional population, as it was called.  A 90 year old person could still work and was counted as part of that population of potential workers.

The core work force, those aged 25-54, showed a slightly declining participation.  The first boomers had grown out of this age group at the turn of the century.

George’s opinion, one echoed by the Congressional Budget Office, was that much of the reduction in the participation rate was due to changing demographics.  Since the mid-1990s, women, particularly white women, had had a historically high participation rate.

Some workers of earlier generations who had not needed a college education to earn a middle class wage found themselves less desirable in this more technological work environment.  During the recession, employers shed many workers with long term health problems.  As the economy improved employers were reluctant to hire these job seekers who may have had a good work ethic but possessed no above average skills or education.   Some applied for disability, or retired early if they could, or simply gave up trying.

Those with college level education and higher were more likely to be working.  The downtrend in the participation rate for both groups had started during the Clinton years, long before the Bush presidency, the 2008 recession or Obama’s presidency.

Full time workers as a percent of the total population were about the same level as the mid-1980s, when the economy was in a growth phase.  The 1990s and 2000s had been marked by unsustainable bubbles – the dot com boom and the housing debacle.

Older workers contributed to the high participation rates of the 1990s and 2000s.  A lot of people came to regard these abnormally high participation rates as normal.  They weren’t, George argued.

Sure, people are living longer, George argued, but the number of older workers can’t keep rising indefinitely.  Since the early 1990s, older workers had risen by 20 million, from 12% of the work force to 24% of the work force.  They were competing with younger workers for jobs.

27% of the entire population was older than 55.  Most of that population was past working age yet older workers made up 24% of the work force.

Workers who might have retired in decades past were continuing to work, clogging up the labor pipeline.

Stan thought the economy had still not recovered and was worried about the next recession.  Who’s gonna pay for all these people, he wondered again.  George reminded him that average weekly hours of all private workers – most of the work force – was now at the same level as before the recession.

The Civilian Labor Force was higher now than before the recession started.  The growth rate was lower but still growing.

But George agreed that there were persistent problems.  A third of those unemployed had been out of work for more than a half year.

Real weekly earnings were stagnant, neither growing or declining.

There were still a lot of people who were not counted in the labor force because they were not actively looking for work.  They wanted jobs but had given up.  As bad as it is now, George reminded Stan, discouraged job seekers are at the same level as they were in the mid-1990s.  Did you even notice back then?  George asked.  Stan admitted he hadn’t.

“A lot of us weren’t paying attention,” George told the group seated at the booth.  “Sure, it got bad sometimes, but we figured we would get through it.  This last recession was bad, bad, bad and there is a lot more information available now.  We can see how bad it was five years ago and there’s plenty more information to worry over as we look to the future.”

“So, you’re optimistic?” Stan challenged.  “Yeh, I am,” George replied. “Thirty years ago my accountant told me that by the time we retired, politicians would have to do one of three things:  increase taxes, cut benefits, or increase the retirement age.  She told Mabel and I that politicians would probably do a little of all three to spread the pain out and avoid getting thrown out of office.  I was doubtful.  How could she know what was going to happen so far in the future?  ‘It’s just math,’ she told us. ‘The largest generation of people is going to start turning 65 in twenty-five years and the system is not designed for it.  They’re gonna get sick and who’s gonna pay for it?  You think the little that you pay into Medicare is going to cover that?’  I look back now at her predictions.  They’ve raised the retirement age.  Check. The low inflation rate is helping to reduce the growth in Social Security benefits.  A half-check.  Medicare costs are growing at two to three times the rate of inflation.  They haven’t raised taxes yet but it’s coming.”

Stan said sardonically, “And you call yourself an optimist.”  George laughed.  “I guess I’m an optimist because she got Mabel and I planning for all of this a long time ago.  When they raised the retirement age, we weren’t surprised.  When they cut Social Security benefits in the future, we won’t be surprised.  When they raise taxes, we won’t be surprised.”

“Is this lady still your accountant?  She sounds pretty smart.” Stan asked.  “No,” George replied. “I think she and her husband moved to Oregon or Washington.  They wrote business and investment software but they gave up trying to defend their software from copying.  This was in the late 1980s and early 1990s.  Even their own clients were copying their software and giving it to their friends. ‘Smaller companies like ours just don’t have the time or resources to protect against theft,’ she told us.  ‘Eventually we’ll go to work as consultants for the larger companies.’  And several years later, that’s what they did.”

The waitress brought the check.  Normally they would split it four ways but Stan picked it up and handed it to George.  “Shouldn’t the optimist pay?”  George laughed.  “This one time,” he said, “but on one condition.  You all have to agree with me.  Isn’t that how they do it in politics?”  They all laughed, grunting as they straightened up after sitting so long.

The Flame of Fame

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On Monday, George finished a re-read of Nassim Taleb’s Fooled By Randomness, an examination of probability without the mathematics. Taleb wrote from the point of view of a market trader but the book contained apt lessons for many kinds of decision making.  Mabel went out with a few friends to see the movie Birdman.  She asked George if he wanted to go but he was happy to sit around and read.

Taleb told the story of a emerging market bond trader in the 1990s who made a quarter billion dollars for his firm by “buying on the dips.”  When the price of the bonds declined, the trader took a highly leveraged long position, betting that the price of the bonds would rally.  Each time they did.  The man became convinced that he knew this market well.  He believed in his own astute judgment.  Then came a dip with no subsequent rally.  Instead, prices continued to fall.  The trader had no stop loss set, a floor price where a trader closes his position to prevent further losses.  Instead the trader convinced his bosses at the firm that prices would soon rally.  He increased his position as prices fell further.  Eventually, prices fell so low that the firm, near bankruptcy, fired the trader and closed the position, losing almost 600 million.  George thought about that.  There had been one correction in April and May of 2012, a near correction in October and November of that same year.  Smaller dips had occurred in June and August of 2013, then in January, April and August of this year.  Finally, this month a 7% or so dip.  Like the bond trader in the 1990s, the winning strategy of the past few years had been to buy on these dips.  The subsequent rise in prices helped convince buyers that their particular view of the market, whether fundamental or technical, was a sound one.  Note to self, George thought, don’t confuse good luck with genius.

Earnings and sales reports would drive the market for a few days until Wednesday when the Fed was expected to end its bond buying program.  On Thursday, the first estimate of 3rd quarter GDP would be released.  After the close Monday, Amgen reported earnings that were 12% better than expected.  That would help set a positive mood for Tuesday’s open.

Tuesday’s gauge of consumer confidence from the Conference Board was almost 95, the highest since 2007.  Lower gasoline prices have put extra money in consumer pockets.  A 25% decrease in the price of gas ($4 – $3) puts about $800 in a consumer’s pocket, a “raise” of almost $20 a week.  The declining price of oil caused Chevron to revise its earnings guidance downward by 15-20% for 2014 and 2015 but that was not as bad as anticipated and the shares rose.

The Case Shiller index of home prices in 20 metropolitan areas showed a 5.6% year over year gain, the lowest yearly gain in two years.  After almost a decade, the housing market seemed to be returning to more normal patterns of price appreciation.

On the whole, this earnings season seemed positive but the cautionary tone of Taleb’s book reminded George to stay watchful.  On Sunday, the European Banking Authority had released the results of their 2014 stress tests on more than 120 European banks. Approximately 20% had failed the test, most of them in Italy, Greece, Cyprus and Spain. When a football game ends, fans leave their seats and move toward the exits in a loosely organized fashion.  When a larger bank or sovereign country seems to be in danger of failing or defaulting, investors rush toward the exits as though someone called “Fire!”  Still, George was feeling – well, vindicated – that he had seemed to catch this latest dip near the bottom.
 
The mild weather of late October continued.  In shorts and tee shirt, George raked leaves in the backyard on Wednesday morning.  Taking a break, he poured himself another cup of coffee, then glanced out the window overlooking the front yard.  “Oh, wow,” he muttered.  He went to the front door, commenting to Mabel as he opened it, “Must be a bad accident down the street.  There’s a Channel 3 van parked across the street.  I’m gonna check it out.”  If Mabel had a stopwatch, she would have clocked 14 seconds before George was rushing back inside, hurriedly closing the front door. “Geez,” he exclaimed.  “What’s wrong?” Mabel asked.  “Some woman from the TV station, she starts running across the street toward the house when she saw me!  She called my name, for Chrissake!”

George walked into the kitchen, then took up a position on the side of the fridge where he could look out the window onto the street without being seen.  “There’s some guy with a video camera with her!” He said, managing to fit anger, annoyance and exasperation into the tone of his voice.  Mabel got up from her chair, stood by the living room window, partly concealed by the drapes as she looked out at the street.  “What do you think they want, George?  Should we go out and talk to them?”  “No, that’s the problem.  I think that’s exactly what they want – to talk to us.  Weird!”  Mabel noticed that the rooftop mounted dish on the TV van had been raised up.  “I think they’re broadcasting, honey,” she told George in a loud whisper.  The woman outside stood on the sidewalk, her back to the house, gesturing, turning to the house, then turning back to the camera man who wielded a shoulder mounted video camera pointed at the woman and George and Mabel’s house.  “They wouldn’t come into our front yard, would they?” George wondered aloud. “Isn’t there some kinda law against that?”

Mabel switched channels from the weather to Channel 3. “Oh, no!  This is a live feed.” She turned up the volume.  The woman reporter standing out on their sidewalk was looking at Mabel from the TV screen. There seemed to be several seconds of delay so that George and Mabel could see the woman reporter gesturing on the front sidewalk, then seeing that same gesture shortly on the TV as though time had fractured.

Reliable source, the reporter said.   In advance of the mid-terms, President visited Liscombs, who have not demonstrated active role in politics for either party.  Speculation about election strategy in the hotly contested Senate and Governor’s races.  A man presumed to be Mr. Liscomb ran back into the house to avoid answering questions.  Supposedly independent political organizations spending a lot of money in Colorado.  Are the Liscombs bundlers for one of these organizations?  Just how independent are these organizations?  Why did the President visit this house, this couple?  Were campaign rules broken?

George had joined Mabel, standing beside her, staring dumbstruck at the TV.  “Are they saying we’re like some kind of political action group like the ones the Koch Brothers fund?” George asked Mabel.  “Oh, they’re not saying anything,” Mabel said with a touch of anger.  “They’re suggesting, provoking…” she stopped as the report concluded.  “Now here comes the tease before the commercial,” she said.  “More on the upcoming elections here in Colorado when we come back,” announced the lunchtime news host.  “You watch too much TV,” George kidded her.  “You’ve gotten hip to their tricks.”

Both of them turned to look outside the living room window.  The reporter now stood with the video tech near the rear of the van.  “I think they’re leaving,” George said.  “No, wait,” Mabel told him.  “The dish on the van is still elevated for upload.  Wait till they lower it.  Then we’ll know they’re leaving.”  “Where did you learn all this stuff?” George asked her.  “Remember when we had that knife fight at the school five years ago?” Mabel asked.  George nodded.  “Two kids went to the hospital.  The local stations covered it, of course.  Got to see the vans.  It’s amazing how much equipment they cram in a regular van.  There’s probably a third person in the van working all the computers and equipment.”

Eventually, the van pulled away from the curb.  George realized that he’d missed the announcement from the Fed on their bond buying program, switched channels to confirm that they had ended the program. Although the Fed had stopped adding to its balance sheet, it continued to hold a whopping $4.5 trillion in assets, the total of the past several years of printing money to support the economy as the country struggled to recover from the Great Recession.

The market closed at the about the same level as Tuesday.  Dreamworks, the studio that produced the How to Train Your Dragon movies,  reported better than expected earnings after the close, sending the stock up 5% in after hours trading.  Kraft also reported earnings slightly higher but the overall sales picture was tepid.  Samsung reported a huge 60% decline in profit, squeezed on the high end by Apple and under pressure from mid and low end competitors.  The giant insurer MetLife had a blow out quarter.  Visa reported better than expected earnings, sending the stock over 4% higher in after market trading.

If Thursday’s first estimate of 3rd quarter GDP growth had come in at 2.5%, below the consensus of 3%, the market could have dropped 2% or more, George thought.  Instead, the estimate was 3.5%.  The market opened up lower then climbed about 1% during the day.

In each earnings season, there are several stories.  One was Gilead Sciences, a small cap biotech firm, whose “killer app”  was a new hepatitis drug called Sovaldi. Gilead reported earnings of $1.79 for the past quarter.  This was about 10% above earlier guidance but in the crazy world of Wall St., investors had been expecting $1.92, a “whisper” earnings number based on anticipated higher sales of Sovaldi.  Instead, sales of the drug were 20% less than the previous quarter.  The stock dropped about 5% on Wednesday, before climbing to new highs on Thursday.  The stock had more than quadrupled since the beginning of 2012.

On Friday the market jumped 1% at the open.  Overnight, the Bank of Japan had announced a massive stimulus program to combat risks of deflation, the bugaboo of all modern economies.  If prices might be slightly lower next year, why buy this year?  As consumers postpone some purchases, the decline in sales leads to further price declines as companies compete more fiercely to get those fewer sales.  Japan’s core CPI, excluding food and energy prices, had risen above 1% in response to earlier stimulus programs but had now fallen in the past several months back toward 1%.

On the domestic front, personal income gains in September were positive, averaging about 2.4% annually and above inflation. Wages and salaries jumped .4%, double the overall income growth. Consumer spending remained tepid, declining to a 1.4% annual pace of growth.  Amazon had warned earlier that they expected the Christmas season to be subdued this year.  Some speculated that the low rate of inflation and consumer spending would further check any rise in interest rates before the middle of 2015 at the earliest.

The market closed just slightly above the level it had reached six weeks earlier.  George had to remind himself that it was just luck.  But he sure felt smart.  Then he noticed a disturbing sign, the dragonfly doji after a gap up, on the chart of SPY, the ETF that tracks the SP500 index. The doji are one of many candelestick patterns, a type of technical analysis that tries to understand the psychology of buyers and sellers in the market from price movements over one to three days. After a number of up days, such a pattern might signal that buying pressure has become exhausted. After reading Taleb’s book, George reminded himself once again to be skeptical of signals. The last dragonfly doji after a 1% gap up that George could find in the past few years occurred on April 28, 2012.  The market had turned down after that one, losing more than 10% over the following five weeks.  Of course, George could have missed some doji simply because the market had not turned after the occurrence of one.  As Taleb noted, our view of historical data suffers from hindsight bias, from knowing what happened after a particular event.  We can not see the future very well but it’s worse than that. We don’t see the past very well either.  George had laughed when he read that.

Next week was the first week of the month when several economic reports would capture the attention of investors.   The monthly labor report at the end of the week would get the most attention.  The ISM indexes of the manufacturing and service sectors would be closely watched for any signs of a slowdown.  The sluggish growth in Europe and the strong dollar would have a negative impact on exports, which would show up in the manufacturing index.  The CWPI, a composite of both of the ISM indexes, had probably peaked the previous month, and should be lower this month as a natural part of the cyclic pattern of the past several years.  Investors could react negatively though to this cyclic decline.  The VIX, the volatility indicator, had dropped into a more calm zone and below its 10 day average.

But investors had not abandoned the safety of long-term Treasuries.

If Republicans took control of the Senate in Tuesday’s election, the market would probably get a boost, George figured.  The results might not be known for days or weeks if there were recounts in some key senatorial races and that might drag the market down a bit in advance of the upcoming labor report.  Would the market go up or down?  George could definitely say yes!  He looked out the window Saturday afternoon and could tell the direction of one thing for sure – leaves.  They were calling to him, or was it his wife with a helpful reminder?

A Surprise Guest

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October 26, 2014

Shortly after Monday morning’s sunrise, George sat on the back deck, coffee in hand.  Some brilliant, utterly mad painter rushed around the neighborhood, dabbing the trees with what seemed like the entire palette of warm colors. Armies of invisible elves set up accent lights in the branches, highlighting the hues of rust-orange-yellow-gold.  As George absorbed the movie magic moment, a van from the local cable company pulled up on the grass alleyway behind the backyard fence. “Starting early,” George thought as he glanced at this watch.  7:30.

He opened the backyard gate to the alley, meaning to ask the service guy if repairs on the pole would interrupt his and Mabel’s service this morning.  A guy who looked too trim, too neat, and too fit to be a repairman opened the passenger door of the van and called out to him, “Sir, stay inside the yard.”  George took a step backward and looked up above.  Was there a loose wire or something dangerous?  Cable wire carried low voltage so what could be the problem?  He glanced back at the man and the van.

From the rear of the van, two men hopped out.  Like the guy in front, they were both dressed in black windbreakers over blue polo shirts, black slacks.  It was like a SWAT team of rugged fashion models.  One of the men came to the rear gate.  George stepped back another step.  The man scanned the yard to the left and right of George, looked past George at the rear of the house.  George noticed that the other two men scanned the alley, the nearby houses.  The man at the gate glanced at a phone in the palm of his hand, then looked at George.  “George Liscomb?” he asked in the commanding tone of one who routinely asks questions and expects answers.  George nodded.  “Is there a Mabel Liscomb living here?”  George nodded again.  “Is she here?” Another nod.  “Your wife?”  One more nod. “Any other residents inside the house?”  George shook his head.  The man turned his head sideways, keeping one eye on George.  “Bravo,” he called to the two other men.

From the side door another man emerged, dressed much like the others. George felt a numbness inside like he was on a movie set.  “Move back a few feet, please.”  Finally a slim figure emerged from the side of the van. The ears were the dead giveaway.  George forgot that he was still holding his coffee cup as he instinctively jerked his hand to his face.  The coffee cup clipped his lower jaw.  “Ouhhhhh,” George barked. The sudden grunt drew everyone’s gaze.  “You OK?” President Obama called out to him. The lukewarm coffee had spilled on George’s shirt but he was hardly mindful.  “Uh, yeh,” George replied.

Like four points of a compass, the four men surrounded the President as the group seemed to flow through the backyard gate.  The front man stood aside and the President held out his hand to George. “Great morning here in Denver, isn’t it,” the President said, an upbeat easygoing smile on his face. George paused briefly to figure out the coffee cup thing.  He put the coffee cup in his left hand then held out his right hand to shake the President’s hand.  What does one say to the President, George wondered.  “Good morning, President.”  Ok, that worked.  “George, is it?” the President asked? “Yeh,” George replied in a monotone.  “I was wondering if Mabel – that’s your wife? – is she here?  Is she available?”  “Uh, yeh,” George replied, “she’s in the living room.”  “May we go in?” the President asked politely. “Uh, sure.”  George had barely drunk his first coffee before spilling it.  Maybe that’s why his brain seemed to be stuck in monosyllabic mode.

The front man strode to the house.  “Maybe George should go with you and we’ll wait a moment on the deck,” the President called out.  George joined the man, who opened the rear door and glanced inside before allowing George to go through the doorway.  “Hey, Mabel,” George called out.   “Are you decent?  We’ve got company.”  He could hear her get up from her easy chair.  “Be right there,” she called back.  She appeared at the far end of the kitchen, saw the man next to George and asked, “What’s the matter, dear?”  “You’re not going to believe this,” George replied.  Already the man was moving toward Mabel.  George forewarned her.  “This guy needs to ask you a few questions.”

The man went through the same procedure with Mabel.  She answered curtly as though she were about to throw this impudent intruder out of her house.  “You have a holstered weapon.  Are you with the police?”  she asked after answering the first two questions.  From a few incidents at the high school, she recognized the bulge at the man’s side.   “Secret Service, ma’am,” the man answered. “Secret what?” Mabel asked and the man opened his windbreaker enough to see the ID badge hanging from his neck.  She looked past the man and spoke to George, “What the hell is going on, George?”  He could tell she was upset.  “It’s OK, just answer the questions,” George called back to her.  No, there was no one in the house.  Yes, she was Mabel Liscomb.  She leveled her gaze directly at the man when he asked her birthdate.  She responded quickly but in a slightly menacing tone.  “You have the audacity to ask me to identify myself in my own home!”  Then the man’s voice softened as though he were an actual human being.  “Sorry, ma’am.  Have to do my job.”  He stepped back to where George stood at the rear door.   The man opened the screen door and nodded, “It’s allright.”

George joined Mabel in the kitchen as the group on the deck flowed through the rear doorway, keeping the President protected.  “Mrs. Liscomb,” the President greeted her with a warm smile, “good to meet you.  You wrote me a letter a few months back, didn’t you.”  Mabel stuttered.  Had he ever hear Mabel stutter, George wondered.  “I-I-I-I-did I?  I can’t muh-member,” Mabel answered.  “You had some good ideas that I’d like to talk to you about, if you have time?”  Mabel nodded.  George could see that she was recovering quickly from her shock.  She was good at that.  The habits of a high school principal asserted themselves and Mabel told the President, “I’m flattered that you are interested, of course.  Why couldn’t your staff make an appointment?”  Geez, George thought, she’s using the command voice with the damn President of the U.S.  He noticed that each member of the security detail had moved to a window.  George glanced to his right and saw that one had gone into the living room.  The fourth guy – had he gone up the stairs to check the bedrooms?

“I was supposed to be golfing with your Senator Udall but he had to cancel,” the President explained.  “I offered to appear at a fundraiser with Diana DeGette but her staff said she’d have to get back to us.  I don’t seem to be too popular for this election.”  Mabel made a brushing gesture.  “Don’t worry about it.  Same thing happened to Eisenhower ,Reagan and Bush at the midterm of their second terms,” Mabel told him.  “With a recession still going on, Mamie Eisenhower was a lot more popular on the political circuit leading up to the ’58 mid-terms.”  “Oh, Michelle is on everyone’s dance ticket,” the President replied.  “Me, not so much.  The quarterback takes the blame when things go wrong.  When things go right, it’s the offensive line that gets the credit.  Just part of the game, I suppose.”

“Well, come on in and sit down,” Mabel turned toward the living room.  In a brief exchange, Mabel and the President had become buddies of a sort.  George still wasn’t sure how it happened but each of them had recognized something in the other that they both had in common.  Mabel sat down in her favorite chair, then motioned the President to sit on the couch nearby.  She turned to George and said, “Do you want to make some coffee? I think I took the last of the first pot.”  George nodded. “Yeh, I haven’t even had my first cup.”

The President was different in person.  When interviewed on 60 Minutes, he had showed a casual aloofness that George didn’t like. The folded legs, the studied composure didn’t ring true for George.  Now, here in this living room, he sat, legs unfolded, leaning slightly forward in an attentive pose, earnestly having a conversation with Mabel.

For the next hour Mabel discussed education policies with the President. She didn’t like the implementation of educational standards. Yes, she understood the desire for uniformity.  No federal department can understand local educational needs. Too much politics in education already.  Washington makes it worse.   “How did you come to read my letter?” she asked.  “Kind of a mistake,” the President replied. “It should have gone to Arne’s people but it got in my pile by mistake. I left it on the table and Michelle saw it.  She told me, ‘you need to hear this.  This woman’s been there her whole life.  She understands.  You’re not hearing this in Washington.’  And, to tell you the truth, it’s just been sitting in the policy pile for months.  The first thing I found out as President – probably every President faces this quickly – is that there is never enough time to get to everything on his plate.”

George stayed out of the living room for much of the time, preferring to give Mabel the opportunity to discuss her ideas with the President.  He actually served coffee to the President. The kids wouldn’t believe it when they told them. There was a woman out on the deck, talking into the air.  “Do you want some coffee,” George asked. Had she been there all along?  “No, thanks.  You’re Mr. Liscomb?” she asked.  “George,” George nodded.  “Sherry, personal assistant,” she shook his hand.  George started to invite her in but she held up her hand and started talking to the air again.

After too short a time, the assistant came in, excused herself, leaned over and whispered something in the President’s ear.  The President stood up. “I’ll have to go.  It was wonderful meeting you and talking with you, Mrs. Liscomb,” he said and bowed slightly.  Mabel rose up from her chair, “A great pleasure, Mr. President, and thank you for your insights,” Mabel responded and – you gotta be kidding me, George thought – did a slight curtsy.  The President laughed.  George shook hands with the President, then they were gone.  “Holy mackeral,” George said as he sat down on the couch. “I’m sitting in the same seat as the President of the United States.  It’s still warm.”  Mabel gave him a look.  “Oh, damn!” George remembered.  “We forgot to take a picture!”  They both laughed.  George ran out on the back deck, hoping that they had not driven away yet but the van was gone.  The story of a lifetime and no picture to prove it.

Then George remembered that he had hit the buy button the past Friday.  He sat down at the computer. The market had opened up that morning slightly lower but several earnings reports were positive.  Apple and IBM were scheduled to announce earnings after the close.  Later that day, Apple’s earnings and sales were above consensus estimates. To offset Apple’s upbeat numbers, IBM announced a chilling quarterly report. For the 10th consecutive quarter, revenue at the technology giant had declined.  The death blow: earnings for 2014 were projected to be less than 2013’s earnings, something that hadn’t happened since 2002.  This stalwart of so many institutional portfolios was continuing to stumble.  If September’s Existing Home Sales, due to be released the following morning, declined any further, Tuesday could be a seriously down day.

George woke up again before sunrise on Tuesday.  Mabel was already awake as usual.  Thankfully, sales of existing homes  showed a bounce back in September to an annual pace of close to 5.2 million homes, the benchmark for a healthy churn.

George checked earnings stats at Zacks.  Before the opening bell, the staffing giant Manpower, announced better than expected earnings.  Although sales declined in some areas, McDonald’s earnings were 10% more than expectations.  Aircraft giant Northrup Grumman reported better than expected earnings as well. Yahoo reported earnings that were more than double the consensus.  Most of the extra profits came from the sale of shares that it owned in Alibaba’s IPO.  The market opened up sharply, closing the day with a 2% gain.  Their son, Robbie, called that evening and they told him all about the visit from the President. “How many pics did you get?  You should put them up on Facebook,” he told them. “We forgot,” George informed Robbie. “Daaaad,” came the exasperated reply.  “Well, we’re old people. We’re not used to recording every event in our lives, I guess.”

On Wednesday, the Bureau of Labor Statistics announced that inflation had grown 1.7% in the past year, in line with expectations.  The Federal government closes its fiscal year at the end of each September.  Each October, the Social Security Administration sets the inflation adjustment to Social Security checks for the coming calendar year.  A 1.7% increase meant an average $20 increase in monthly benefits.  For too many seniors depending on Social Security as their primary source of income, the low annual increases in payments did not keep up with increases in drug and food costs.  Retired folks on the lower rungs of the economic ladder then had to apply for food stamps to make up for the low yearly increases in benefits.

Dow Chemical surprised to the upside as did industrial manufacturers Graco and General Dynamics.  The positive mood on Wall Street was interrupted by the news of an attack on the Canadian Parliament.  George was cleaning leaves out of the front gutter when Mabel opened the door to tell him the news.  The market reacted negatively to the news but did not give up all of Tuesday’s gains, a positive sign.

On Thursday, the BLS reported that new claims for unemployment had risen slightly the previous week but that the four week average had fallen to the lowest level in 14 years.  Positive earnings reports from 3M and Caterpillar, both of whom had a large international customer base, propelled the market higher, trading above the range of Tuesday’s rally.

On Friday, September’s new home sales of 467,000 were the best of the recovery.  August’s robust sales figures were reduced by almost 50,000 to a revised 466,000, giving George a WTF frown.  A 10% revision?  The drug manufacturer Bristol Meyers and consumer giant Colgate reported higher than expected earnings.  Ford surprised with significantly higher than expected earnings but the details in the report were not encouraging.  Revenues in both North and South America had declined and Ford expected flat earnings growth for the full year.  The market gained almost 1%.  In the past seven trading days, it had gained back all the ground lost the six days prior, closing near the level of October 8th.

For 2-1/2 years, each decline had been followed by a sharp upturn.  “Buying on the dip” had become a often used phrase.  Anticipating a bounce with each dip, investors had been coming back into the market after a short decline.  Since mid-September, investors who had bought in on the bounce had been disappointed when the market continued to decline.

Despite all the positive earnings reports, George was still concerned that stock valuations were just a bit on the high side.  Earnings gains, as well as the growth in profit margins, were becoming slower.  There had been two brief fallbacks in 2013, and already three fallbacks and a correction of more than 5% in 2014.  Frequent small fallbacks were healthy for the market, shaking out excess optimism.  The last real correction – a 10% decline in price – had last occurred in May 2012.  The market of the mid-2000s had gone for several years without a 10% correction and that did not end well.  George worried that the Feds low interest policy, kept in place for almost six years, gave investors too few choices and herded them into the riskier stock market. Gotta stay watchful, he thought.

Wild Ride

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October 19, 2014

On Monday, Mabel met for lunch with several friends, both active and retired teachers, to celebrate a new inductee into the Million Mistake Club.  Mabel had once explained it to George, “It started a few decades ago when Mr. Densmore – he taught trigonometry at the school – commented one day in the break room that he had passed the two million mark.  He was probably in his late fifties, early sixties at that time. I had only a few years of teaching under my belt at that time and was still trying to get comfortable in the job.  Mr. Densmore – funny, I don’t think I ever called him by his first name and I can’t remember what it is right now – anyhow, he just seemed to flow so easily into the job.  It was like he wore the job as easily as he wore those old suit jackets he had.  Students that I had discipline problems with in my class behaved well in his class.  I was still trying to figure out the quiet command thing that can make or break a teacher.  He just seemed to make it all look so easy.  I asked him what the two million mark was.  He said it was the number of mistakes he had made in his lifetime.  It didn’t seem possible because it just seemed to me, being fairly new to the job, that he didn’t make any mistakes.  Well, except for his taste in clothes.  He would sometimes wear brown pants with a gray jacket which seemed to emphasize his age.  Mr. Densmore calculated that he made at least a hundred mistakes a day.  Joan – she taught sociology – said that no adult could survive if they made that many mistakes in a day.  Gary, the biology teacher, said that at the cellular level, our bodies probably made at least that many mistakes a day but we correct most of them before the mistakes turn into cancer or we get sick.”

Mabel had paused then, a catch in her throat. “Anyway, on my 28th birthday, several of the teachers, including Mr. Densmore, chipped in for a catered lunch.  Roast beef, some wonderful Italian pastries, potato salad, ice cream.” Mabel paused on her trip down memory lane.  “Security in the schools today.  Probably couldn’t have caterers come in without some planning weeks in advance.”  She went on with her story.  “Instead of wishing me a happy birthday, they inducted me into the million mistake club.  For the first time in my short career at the point, I felt like I was going to make it.  It changed how I taught.  I was no longer trying so hard to get everything just right.  I would discuss the wrong answers on tests with the students.  Why was it wrong?  No, Lee was not the general of the union army that won the battle at Gettysburg.  But what if Lee had been the general of the union army?  How did each army differ and so on.  The A students who were good at memorization stretched their imaginations, their analytical skills.  The C students started taking more interest in the class, participated more in discussion.  The stigma of wrong answers was less.  It became more about learning from our wrong answers.  I would occasionally take time to review episodes in the history of wrong answers, like phlogiston.”

“What’s that?” George asked.  “For a long time people speculated that it was the substance that caused things to burn,” Mabel responded.  “Wow,” George nodded.  “They didn’t know about oxygen yet.  You know, that’s the heart of risk assessment.  Learn from our mistakes.  The insurance business is just one long rocky path through mistakes in figuring out where the risk is, the degree of risk and how to reduce the risk.”

Monday was the Columbus Day holiday and there wasn’t much good economic news to stem the deepening pessimism in the market. Fears over the spread of Ebola just added to the darkening mood.  Mabel would be furious with him if they lost any more money so George sold the two remaining ETFs he hadn’t sold a week or so before.  If he had anticipated this pessimism, why hadn’t he bought an ETF that shorted the market?  The really good employment report in the beginning of October had made him less sure about his earlier forecast of lower prices.  Then he considered – again – buying the 20 Year Treasury ETF but everyone else had been doing that for the past ten days or so and the price was near $121 a share, up about 6% – 7% in the past few week.  Geez, George thought. The buying demand for safety has gotta slow down pretty soon.

Tuesday dawned brighter than Monday’s close but then came the release of a report  from the International Energy Agency forecasting that oil demand in 2014 would be 22% less than previously forecast.  Industrial production in the Eurozone was tepid.  George was surprised that the market finished near Monday’s close.  Maybe this was the end of the downturn in prices.  Like so many retail investors, George had probably sold at the bottom on the previous day.  Of little note to the world that day was the fact that George finally cleaned up the wasp nests above the door to the shed.  There were only two wasps buzzing around so George didn’t feel like a mass murderer.  Where did wasps go for the winter?

On Wednesday morning, George forgot to check the market or economic news before going out to clean up the rock garden.  With all of their money now in cash, George had turned his attention to his seasonal chores.  The climbing vine had shed most of it’s leaves.  The ash tree nearby had shed half of its leaves as well.  As George picked leaves out of the ground cover and other perennials in the garden, he wondered whether he should cut down the climbing vines.  He had planted them years ago to prevent the neighbor’s dog from jumping the fence during lightning storms in the summer.  The dog had died and the vines had spread.  Before lunch, Mabel came out onto the back deck. “George, honey.  The market is going crazy.”  “It’s OK,” George replied, assuring her, “we’re out of the market.”  “Oh,” the worry in her voice evaporated. “Well, just thought you’d want to know.”  Yeh, just wanted to let me know, George thought wryly. He wondered how many money managers had been fielding calls from clients who were worried about a meltdown like the fall of 2008. “Mrs. Jones, the SP500 is only down about 5 or 6 percent from its September peak,” they might tell their clients.  “But I heard that the Dow had dropped 200 points yesterday,” the client might say.  To older clients, anything more than 100 points was big. “Yes, but 200 points is just a bit more than 1%.  And remember, the Dow is only a part of the stock market.”  Yes, the firm is taking prudent care of your money, Mrs. Jones.   Put phone down.  Next phone call from another worried client.

Employment and retail sales are the top two economic reports that consistently set the tone of the market.  When the mood is pessimistic, it doesn’t take much negative news to send things into a tailspin. Wednesday’s retail sales report wasn’t bad but it wasn’t good.  Strong auto sales in August had led to expectations that total retail sales would decline in September.  The decline was just a teeny tiny more than expected, contributing to the wave of selling.  The core retail market without auto sales showed 3% year on year growth.

Part of the decline was because gas prices had been falling, producing less revenue.  What the market wanted to see was that the American consumer was taking that money saved on gas and spending it on back-to-school items, or a fall wardrobe.

The Census Bureau released manufacturing and trade sales data for August that showed a 4.5% year-over-year increase in sales but a 5.7% increase in inventories.  People were not buying as much as distributors were anticipating.  This only seemed to confirm fears that growth in consumer spending might be slowing down.  As though being routed by an opposing army, traders ran for the rear lines.  The SP500 dropped 4% by midday.  As George checked quotes on the SP500 ETF, SPY, he saw that it had climbed up from a bottom near 182.  He was tempted to put a buy order in, taking advantage of an afternoon rally.  Transportation stocks were bouncing up as well.  IYT, the iShares ETF, was bouncing off a midday bottom, indicating that money managers were buying in after the 14% decline from the mid-September highs.  Then George remembered that he had already tried his hand at these really short term trades.  From genius to dunce in a day, he had found that it was not good for him temperamentally.  Plus it took an hourly vigilance that he wasn’t willing to give.  One more report of Ebola in the U.S. could send this market into a dive within a few minutes. He closed the lid of his laptop.  By the end of the day, the Dow Jones had swung more than 600 points. After dropping about 4% during the day, the SP500 closed down only .7% from its previous day close.  Fresh troops in the rear had rallied at the end of the day.

Thursday’s release of October’s Housing Market Index from the National Assn. of Homebuilders showed a reversal of six months of rising sentiment.  More data from the Eurozone indicated that the entire region might be headed back into recession.  Sound the retreat alarm!  The market opened up about 1.5% lower.  Once again the troops in the rear pressed forward to the battle line as attention turned to several positive reports.

New claims for unemployment were near historic lows, prompting a discussion that had been missing for several years: when would unemployment get low enough to generate some wage growth?  George remembered Mabel’s Million Mistake Club earlier in the week.  Decades ago, unemployment levels below 5 or 5-1/2% were thought to be inflationary. This target level was called NAIRU, the Non-Accelerating Inflation Rate of Unemployment. At low levels of unemployment, workers could bargain for higher wages which pushed up the cost of products which pushed up prices which led workers to demand more wages, ad infinitum.  Like the “law” of gravity, this theory of unemployment and inflation had been regarded as solid by both investors and policy makers.  Theories are tested in the passage of time.  During the 1990s, unemployment dropped and did not spark inflation.  Economists scrambled to explain the phenomenon with global trade adjustments to their models. In the 2000s, unemployment fell below 5% and inflation remained tame by historic standards.  More adjustments to the models, more explanations of how the theory was still true. It is still a controversial topic.  (1998 article on NAIRU by Nouriel Roubini )

In addition to the positive employment news, Industrial Production grew in September, notching a 1% monthly gain, and rising back into the sustainable growth zone of 4 – 5%, year-over-year.

“Fix Bayonets, men!” came the call as the greenies beat back the morning onslaught from the reds. Greenies were days when the market closed higher than it opened, red the opposite.  George wondered if some set or prop designer for CNBC would come up with a Civil War soldier set for the talking heads to play with on camera when the market clash over valuation was particularly intense. As a kid, he’d been so disappointed that all the great battles like the Alamo had already been fought.  Santayana’s Mexican legions had rushed forward on the plains of Texas as the small band of brave Texans like Davey Crockett and Jim Bowie prepared for the onslaught.  The good ole days when life was exciting – and much shorter.

Friday was the last day of October option trading. The release of new Housing Starts for September, and strong earnings from G.E. and Morgan Stanley prompted a flood of buy orders at the opening bell on Friday.  The previous months housing starts had been volatile, rising up strongly in July, then falling a lot in August, and now up more than 6% in September.  On a year-over-year basis, September’s starts were up almost 18%.

George was not as awed by the housing data.  The declining peaks of year-over-year percent gains in new housing starts would probably continue.  Friday’s upswing continued shortly after the open when the latest consumer confidence numbers revealed a rising sentiment based on  improvements in employment and lower gas prices.  The price had crossed above both the open and closing prices for the past two days.  Could be a fake out but George hit the buy button. The earnings season would be in full swing next week.  

Employment, Income and GDP

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May 4th, 2014

Employment

Private payroll processor ADP estimated job gains of 220K in April and revised March’s estimate 10% higher, indicating an economy that is picking up some steam.  Of course, we have seen this, done that, as the saying goes.  Good job gains in the early months of 2012 and 2013 sparked hopes of a strong resurgence of economic growth followed by OK growth.

New unemployment claims this week were pushing 350K, a bit surprising.  The weekly numbers are a bit volatile and the 4 week average is still rather low at 320K.  In a period of resurgent growth, that four week average should continue to drift downward, not reverse direction. Given the strong corporate profit growth expectations in the second half of the year, there is a curious wariness in the market.  Conflicting data like this keeps buyers on the sidelines, waiting for some confirmation.  CALPERS, the California Employees Pension Fund with almost $200 billion in assets, expressed some difficulty finding value in U.S. equities and is looking abroad to invest new dollars.

On Friday, the Bureau of Labor Statistics reported job gains of 288K in April, including 15K government jobs.  Most sectors of the economy reported gains but there are several surprises in this report.  The unemployment rate dropped to 6.3% from 6.7% the previous month, but the decline owes much to a huge drop in labor force participation.  After poking through the 156 million mark recently, the labor force shrank more than 800,000 in April, more than wiping out the 500,000 increase in March.

To give recent history some context notice the steady rise in the labor force since the end of World War 2, followed by a flattening of growth in the past six years.

The core work force, those aged 25 – 54 years, finally broke through the 95 million level in January and rose incrementally in February and March.  It was a bit disappointing that employment in this age group dropped slightly this month.

To give this some perspective, look at the employment rate for this age group. Was the strong growth of employment in the core work force largely a Boomer phenomenon unlikely to repeat?  Perhaps this is why the Fed indicated this week that we may have to lower our expectations of growth in the future.

Discouraged job seekers and involuntary part timers saw little change in this latest report.  On the positive side, there was no increase.  On the negative side, these should decline in a growing economy.  There simply isn’t enough growth.  Was the strong pickup in jobs this past month a sign of a resurgent economy?  Was it simply a make up for growth hampered by the exceptional winter?  The answers to these and other questions will become clearer in the future.  My time machine is in the shop.

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GDP

Go back with me now to those days of yesteryear – actually, it was last year.  Real GDP growth crossed the 4% line in mid year.  The crowd cheered.  Then the economic engine began to slow down. The initial estimate of fourth quarter growth a few months ago was 3.2%.  The second estimate for that period was revised down to 2.4%, far below a half century’s average of 3%.  This week the final estimate was nudged up a bit to 2.6%, but still below the long term average.

Earlier in the week, the Federal Reserve announced that it will continue its steady tapering of bond buying and that it may have to adjust long term policy to a slower growth model.  The harsh winter makes any analysis rather tentative so we can guess the Fed doesn’t want to get it wrong?

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Manufacturing – ISM

ISM reported an upswing in manufacturing activity in April, approaching the level of strong growth.  The focus will be on the service sector which has been expanding at a modest clip.  I’ll update the CWPI when the ISM Service sector report comes out next week.

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Income – Spending

Consumer income and spending showed respectable annual gains of 3.4% and 4.0%.  The BLS reported that earnings have increased 1.9% in the past twelve months. CPI annual growth is a bit over 1% so workers are keeping ahead of inflation, but not by much.   Auto sales remain very strong and the percentage of truck sales is rising toward 60%, a sign of growing confidence by those in the construction and service trades.  Construction spending rose in March .2% and is up over 8% year over year but the leveling off of the residential housing market has clearly had an effect on this sector in the past six months.

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Conservative and Liberals

While this blog focuses mainly on investing and economics, public policy is becoming an ever increasing part of each family’s economic heatlh, both now and particularly in the future.
Some conservatives say that they endorse policies which strengthen the family yet are against rent control, minimum wage and family leave laws, all of which do support families.  How to explain this apparent contradiction?  A feature of philosophies, be they political, social or economic, is that they have a set of rules.  Some rules may be common to competing philosophies but what distinguishes a conceptual framework or viewpoint is the difference in the ordering of those rules.  The prolific author Isaac Asimov, biologist and science fiction writer, proposed a set of three rules programmed into each robot to safeguard humans.  A robot could not obey the second law if it conflicted with the first.  Robots are rigid; humans are not.  Yet we do construct some ordering of our rules.

A conservative, then, might have a rule that policies that protect the family are good.  But conservatives also have two higher priority rules which honor the sanctity of contract and private property: 1) that government should not interfere in voluntary private contracts, and 2) that private property is not to be taken from private individuals or companies without some compensation, either money or an exchange of a good or service. Through rent control policies, governments interfere in a private contract between landlord and tenant and essentially take money from a landlord and give it to a tenant, a violation of both rules 1 and 2.  Minimum wage and mandatory family leave laws enable a government to interfere in a private contract between employer and employee and essentially transfer money from one to the other, another violation of both rules.

In my state, Colorado, there is no rent control.  Instead, landlords receive a prevailing market price and low income tenants receive housing subsidies and energy assistance.  Under rent control, money is taken from a specific subset of the population, landlords, and given to tenants.  Under housing subsidies, money is taken from general tax revenues of one sort or another and given to tenants.  Of the two systems, housing subsidies seems the fairer but many conservatives object to either policy because the government takes from individuals or companies without any exchange, a violation of rule #2.  All policies like housing subsidies which involve transfers of income from one person to another, are mandatory charity, and violate rule #2.

Liberals want to support families as well but they have a different set of rules that prioritizes the sanctity of the social contract: 1) individuals living in a society have an obligation to the well being of other members of that society, and 2) those with greater means have a greater obligation to the well being of the society.  A government which is representative of the individuals of that society has the responsibility to facilitate the movement of wealth and income among those individuals in order to achieve a more equitable balance of happiness within the society.  Flat tax policies espoused by more conservative individuals violate rule #2.  Libertarian proposals for a much smaller regulatory role for government violate rule #1.

For liberals, both of the above rules are subservient to the prime rule: humans have a greater priority than things.  When the preservation of property rights violates the prime rule, property rights are diminished in preference to the preservation of human well-being.  On the other hand, conservatives view property rights as an integral aspect of being human; to diminish property rights is to diminish an individual’s humanity.

In the centuries old dynamic tension between the individual and the group, the liberal view is more tribal, focusing on the well being of the group.  Liberals sometimes ridicule some tax policies espoused by conservatives as “trickle down economics.”  In a touch of irony, it is liberals who truly believe in a trickle down approach in social and economic policies.  The liberal philosophy seeks to protect society from the natural and sometimes reckless self-interest of the individuals within that society. The conservative viewpoint is concerned more with the protection of the individual from the group, believing that the group will achieve a greater degree of well-being if the individuals are secure in their contracts and property. Conservatives then favor what could be called a bottom up approach to organizing society.

Conservatives honor the social contract but give it a lower priority than private contracts.  Liberals honor private contracts but not if they conflict with the social contract. Most people probably fall somewhere on the scale between the two ends of these philosophies and arguments about which approach is “right” will never resolve the fundamental discord between these two philosophies.

In the coming years, we are going to have to learn to negotiate between these two philosophies or public policy will have little direction or effectiveness.  Negotiating between the two will require an understanding of the ordering of priorities of each ideological camp.

Before the 1970s political candidates were picked by the party bosses in each state, who picked those candidates they thought would appeal to the most party voters in the district.   The present system of promoting political candidates by a primary system within each state has favored candidates who are fervent advocates of a strictly conservative or liberal philosophy, chosen by a small group of equally fervent voters in each state.  The middle has mostly deserted each party, leading to a growing polarization.  Survey after survey reveals that the views of most voters are not as polarized as the candidates who are elected to represent them. A graph from the Brookings Institution shows the increasing polarity of the Congress, while repeated surveys indicate that voters are rather evenly divided.