Year End 2014

Stock Market
     December is always (with very few exceptions) a good month for the stock market.  Next month might not be as good (but you never know).  The Federal Reserve intends to keep interest rates low.  That means investors will continue to have an incentive to keep their money in stocks rather than in interest bearing accounts, for the simple reason that the dividend yield on stocks is much higher than the (practically non-existent) interest yields.
The Economy
     Rising stocks usually go together with a growing economy.  There are exceptions to that, too, but that is the usual rule of thumb.
     Low interest rates tend to boost the economy.  Business and consumer loans are cheaper, saving money for everyone.  The down side is that retired people who hoped to live on interest income are getting practically nothing.
     The fall in oil prices also saves money for consumers and businesses.  The result should be more disposable income, which should lead to more growth.
     Europe is once again a drag on the international economy.  Growth rates there are hovering around zero.  China's growth has slowed from its former double-digit pace.  Russia's economy is on the brink of a free-fall, because it depends so much on selling oil at high prices.
     The fact that the Federal Reserve is still keeping rates so low indicates that they are still concerned that our economy could relapse into recession.  One wonders what their approach will be if the fall in oil prices leads to falling prices in the economy in general.  They believe that falling prices indicate economic weakness.  However, it is possible for the supply of commodities to rise, and manufacturing efficiency to increase, even in a growing economy, leading to declining prices. Still it is true that there is plenty of economic weakness in the world.
     The continuing large Federal budget deficits and the spiraling national debt are causes for concern.  Most of us have been putting off thinking about them till later on down the line.  However, at some point the US economy will have to stand on its own and stop relying on deficit spending and interest rate subsidies.  The fact that those things are still going on indicates that the economic disruptions of the previous decade are not actually over yet, despite the growing economy.  The crisis will not really be over till the Fed's interest rate policies are back to normal and budget deficits are at least back to pre-crisis levels.
     Two things need to happen for that to occur:  (1) economic growth, and (2) the will to cut the deficit.
     Economic growth is occurring, but it is not strong, and it suffers from various drags and hinderences, many of which arise from policies of the current administration in Washington.  Of primary concern is the torrent of new red tape spewing out of various bureaucracies.  Included in the regulatory orgy are attempts to regulate carbon emissions and assaults on traditional sources of energy, especially coal and oil, which are basically regarded as evil.  We certainly want to find cleaner ways to fuel our economy, but probably cold-turkey is not the best way to do it.
     Tax policies, also, could be better, to say the least.
     There is a definite anti-business bias in the policies of the current administration.  Sometimes the administration seems to show signs of recognizing some economic realities, but its political base goes crazy every time that happens.
     In regard to cutting the deficit, that is a deep-seated problem.  It currently seems to be divided along party lines, but we have only to look back to the Bush administration, during which there were times when Republicans controlled both Congress and the White House, to see that the pressures to overspend are very pervasive.  However, we can hope that if the party that currently talks loudly about cutting the budget gets the power to do so, things will at least get a little better in that area.
     All-in-all, there is hope but continued need of caution.
   

Bull Session

[The following are hypothetical opinions of imaginary characters, for your amusement.]

               “With all your prating about democracy, you know full well that it is a bundle of lies.  Real democracy, full democracy, can never work,” said Fal Ban Oh, the Chinese sophomore.

                “Certainly it can work.  If the people are really empowered, they will make the right choices,” said Charles Orson, law student from Vermont.

                “Bullsh**,” said Sal Gregory, the business student from Ohio.  “’The people.’  What a crock.”

                “Oh, so you think we’d be better off if we were run by a communist politburo?”

                “It’s working well for us,” said Oh.

                “You can’t call them communists,” said Charles.  “They’re exploiting their own people, like the capitalists did here 100 years ago.”

                “So what are you then,” Sal said, jabbing an index finger towards Charles, “the true communist?”

                “No, I’m not a communist.  I believe people should be free, and if they are they will rise to their true potential.”

                “Ha!” Sal retorted.  “What a bunch of la-de-da pie in the sky.”

“Well, it’s never really been tried.”

“What?  What have we been doing here for the past 200 years?”

“You think they’ve been free?  They’ve been slaves to low-paying jobs.  They haven’t had health care, and the education they get is crap.”

“Who’s this ‘they’?  The people?  The masses.”

“No, not the masses.  Just regular people.  Like us.”

“Hey, I’m just a regular person as much as anybody else, but I know that if I want anything decent in life, I’ll have to work for it.”

“F*** everybody else?”

“No.  They can work, too.  They’re welcome to work as much as I am.”

“Flipping burgers? Picking grapes?”

“They don’t have to settle for sh** like that.”

“Oh don’t they?  You think the economy is so great, they can just put on a tie and walk into corporate headquarters and get a $100,000 a year job?”

Sal pressed his lips together and blew a raspberry at him.

“I mean, the point is…” Charles paused and regrouped.  “There’s millions of unemployed people who would love to not have to settle for flipping burgers.”

“Tell ‘em to go to North Dakota.”

“Yeah, sure.  Just pack up and move to some crazy boom-town and live in a dormitory?”

“Life ain’t always easy or fun.”

“So, f*** ‘em?”

“Ahh, bullsh**.  So what are we supposed to do?  Just give everybody everything, then nobody will have to work if they don’t want to?”

“They’ll work if they can get a decent job.”

“Why should they if they have everything given to them?”

“Well, obviously they wouldn’t get everything.  Just enough to have a minimum standard of living.”

“Oh, sure, and how much is that?  And who’s going to pay for it?  Me, I suppose, with sky-high taxes!”

“Well, if you’re making good money, you could afford it.”

“Oh, yeah, and I’m working and slaving away, and half my income goes to people who are sitting on their asses.”

“They wouldn’t just sit there if they could get a decent job.”

“Wanna bet?”

“You have no faith in people, do you?  Ya gotta believe they would want to do better than a minimum standard of living.”

“Lots of people would.  Not everybody.”

“Most people.”

“So that leaves only a few million, I suppose, sitting on their asses.  Just a few billion dollars drained into their fat, lazy mouths.”  Charles sat back and took a few gulps of his beer.

“You Americans are so closed-minded” said Oh, who had been sitting back watching the two.  “You can’t see past your little political arguments.  In China we are looking towards the future of our country.  We are part of something greater than ourselves.”

“That’s nice,” said Sal.

“You should try it, you Americans.”

“We believe in America, of course,” said Sal.  “At least I do.”  He smirked and raised his beer can towards Charles, who gave him a half-hearted sneer.

“You say you believe in America.  First of all, I don’t know how you can, except that you don’t know any better.  You were born here, you were raised here and have been fed American myths all your lives.  You don’t appreciate the fact that from our viewpoint and that of most of the rest of the world, you have done terrible things.”

“Oh, and I suppose Mao tse tung and Stalin were your favorite philanthopists,” said Sal.

Oh ignored that and went on.  “And you say you believe in America, but you are all just ‘me, me, me.  What can America do for me, and why should I do anything for it?’ Both of you.  You don’t know what it means to serve a greater cause than yourselves.”

“Hmm, the greater good, and all that,” said Sal.  “Well, you know, in America we believe that if individuals follow what’s good for them, in the end it turns out that it benefits America as a whole.  Anyway, we are all about the individual—rights, freedoms, etc.”

“Me, me, me,” Said Oh.

“Well, you guys have been doing much better since you started going our way a little bit.  More free markets, free trade and all that.”

“Of course.  But we never stopped believing in our country.  We will always believe in it and that everything we do is for its greater glory.”

“Everything?  So people who move from the country to the cities don’t think about finding work to feed their families?”

“Listen, let me tell you something about all that,” said Oh.  He was sitting on the edge of a plain old wooden straight-backed chair.  He took a gulp of his Amstel Light.  “Whatever we do, we do for China.  What we were doing before was not working.  So we are doing something different.  Our leaders were smart enough to see that some of your cut-throat ways gave you great power.  We need power.  We need it to defend ourselves against you.”  He poked his finger towards Sal.  “And you, too.”  He poked it at Charles, who looked offended.

They all sat there a minute considering Oh’s comment.  Oh sat back in his chair, looking a bit uncomfortable with his outburst.

“Well,” said Charles, “it’s true we have offended you...”

“You have no idea!” said Oh.

“Wait a minute,” said Sal.  “It wasn’t us.  We fought the first revolution against colonialists.”

“Then you became just like them!”

“Listen,” said Sal.  “The world would be a much more f***ed-up place without America.  We’re like George Bailey—you know, in ‘It’s a Wonderful Life?’  What would the world be like without America?  The world might be shocked if they could find that out.”

“You are right about one thing: the world is f***ed up, and as a Chinese citizen I know that China cannot continue to be weak.  It has to become strong to keep from being a pawn in the game.  It is a great country with a great heritage, and it deserves to be great.”

“Cool, I’ll drink to that,” said Charles.

"Here, here,” said Sal, and drained his can.

Some hope

                Although our current political scene is the cause of much despair for many, one can visualize it as (hopefully) a temporary phenomenon which may improve as we continue to recover from the financial and economic traumas of the last few years.  There is a passion on both sides of the political debate which may be fueled in part by a fear of what the future may hold.  If the traumatic events and the dangers continue to recede in our rear-view mirrors, the passion and fears may subside. 

                On the other hand, we cannot be so sure, and we have to be ready to defend common sense, the rule of law, basic rights, human decency and all the things that make us (somewhat) civilized.  And let’s do it in a civil and communicative way.  Let’s not believe rumors we may hear about how bad the other side is.  Listening to rumors is a sure road to mayhem.

Speculation

                Pressure from shareholders seeking dividends and capital gains is a potentially troublesome thing that seems to be at the heart of many of the difficulties with capitalism.  Shareholders want dividends, or they want stock price appreciation, and many of them do not care what companies’ managers have to do to deliver it.  If they have to keep employees skittering along the precipice of poverty, that’s what it takes.  Many shareholders don’t even know what is going on.  They just want their dividends and capital gains. 

                Of the various ways of financing a company, selling shares of stock is not even the most cost-effective method.  It is generally more expensive than selling bonds or simply getting a loan from a bank, especially in today's low-interest environment.  It is also fraught with peril.  The shares go onto markets, where they go out of the control of the company itself.  If somebody with deep pockets wants to go on a campaign of buying up a controlling interest in the company’s stock, he can do it.

The long history of capitalism is littered with examples of stock being sold based on nothing but blue sky.  Today, stock offerings must by law be accompanied by endless disclosures and proofs of its reality.  Nevertheless, scams are still perpetrated.

                Despite all these problems, stock is still a legitimate mode of financing.  It has advantages for the company that sells it.  For example, there is no set time by which the shareholders have to be paid back, whereas a loan or a bond must be paid back on a specified schedule.  It is a proven way of raising lots of capital for expansion and for other purposes (including enriching the company’s founders or its venture capitalists.)

                Unfortunately, for many people buying and owning stocks is like gambling, like the lottery, like playing the horses.  It represents the hope of getting something for nothing—easy money.  Investing in a sensible manner in the expectation of growth and profits of a company is one thing.  Investing in desperation to save oneself from poverty is quite another thing.  There are always people around who will take advantage of someone’s desperation or greed. 

                There are always a few people who can “beat the market.”  They can make a lot of money by “playing” stocks.  It raises false expectations for the rest of us whose only role in the game is to lose money at the expense of the few winners in a speculative game.  For despite all the efforts of governments to regulate the markets, there is always room for manipulation, for empty hype and for playing on greed and desperation.  The many become the prey of the few who know the game.  It happens on a broad scale once in a while, but it happens on a small, single-stock scale all the time.

The Great Depression and the recent “Great Recession” were preceded by periods of excessive speculation.  In the 1920’s, it was stocks.  In the years leading up to 2007, it was real estate.  The mentality develops that prices can only go up, never down.  Until the market proves us wrong.  Whether the speculative excesses actually were the fundamental cause of the hard times that followed is not certain, especially in the case of the 1930’s Depression, but they were a factor.

                The only real way to make money, in the words of the old commercial (ironically, a commercial about investing in stocks), is the old-fashioned way: to earn it.  Once it is earned it can be invested in assets that you hope will not become victim to speculative cycles, and you can take precautions against that happening.  If you want to “play” the market, just be sure you play it with money you can afford to lose.

                The assets you invest in can include stocks if the intention is to invest in the growth and profits of individual companies.  Even then you have to beware of speculative forces and cycles, as well as other potential mishaps that could thwart your intention and turn your investment into a loser.

                Despite all the books and systems about investing in stocks, the best thing to do is just do what you do to make and save money, then let a good investment advisor invest it for you.  (The trick, of course, is finding a good investment advisor.)  And don’t expect him to make you rich; just expect him to get you a reasonable return on your investments.

               An investment advisor cannot ignor speculative patterns if they present an opportunity for profit, but they can carry considerable risk. 

Gettysburg, Part II

                The phrase “all men are created equal” raises certain expectations, among them the expectation that all people will have, eventually, about the same amount of material possessions.  Or at least that there will not be a terrible disparity between haves and have-nots.

                Unfortunately there are all kinds of people, and there are differences among them in their abilities to have, their abilities to handle life, their abilities to lead (or follow) and their capacities to be in charge of things.  The tendency is always for some people to accumulate more than others.

                This is not to say that it must always be that some have things at the expense of others.  Nor does it mean that those who have a lot of material things can’t help those who have less.  It does not mean that the haves are actively trying to prevent the have-nots from having. 

                There are all kinds of people, and this also means that at the highest and lowest levels there are good people and bad people.  It is not healthy for people to think that goodness is represented only in their own social stratum and badness is in some other. 

                It is not true that the so-called rich and powerful are trying to screw everyone else.  (Certainly not all of them!)  Nevertheless it is true that some people amongst the highest social strata are not always acting in the best interests of people other than themselves.  In other words, there are good and bad people amongst the rich, just as there are amongst the poor and the middle-class.

                Finding out who is good and who is bad is among the hardest things in life.  The belief here is that most people are good, and we want to trust people.  The danger we constantly face is that of trusting someone who does not deserve to be trusted. 

                People who can create or run a business are useful because they can create and maintain jobs that enable other people to earn a living.  Some people who have those jobs blame their bosses for not being more generous with their money.  They want higher pay.  There is a fine balance between profitability and generosity.  The survival of a business requires a certain amount of profitability.  Pressure from many quarters puts pressure on the bottom line, among them pressure from competitors, government regulations, taxes and pressure from employees seeking higher pay.  There is also pressure from shareholders seeking dividends in exchange for continued and/or new investment in the company.  This last group will be the subject of our next post.

Gettysburg Redux

                The anniversary of the Gettysburg Address whizzed by us again on Nov 19.  Feeling a bit grandiose, we wanted to start this post off with a tip of the hat to it.

                Two hundred and thirty-seven years ago, our forefathers brought forth on this continent a new nation conceived in liberty and dedicated to the proposition that all men are created equal. 

                (It is a time so far away that our interest in it sometimes verges into the archeological.  A few years ago in Boston someone accidentally dug up some old bottles and such that dated from colonial times.  Scholars carefully combed through the site, wondering what life was like for people back then.)

We are now engaged in a great struggle testing whether that nation, or any nation so conceived, can long endure.

                That struggle is not just about terrorism, and terrorism may or may not be connected to what the basic struggle actually is. 

                The big picture is the worry that Plato might have been correct when he said that the cycle of government goes, in descending order, from monarchy to oligarchy to democracy to tyranny.

                The smaller picture (although still a rather large one) is that, although there are many things required to maintain a society’s health, among the most important is economic growth.  In fact it is something without which we are in deep trouble.  We saw in the mid-twentieth century what happened when growth was reversed during the worldwide Great Depression: the globe convulsed in the violence of World War Two.

                Economic growth is vital for the maintenance of our civic order.  It maintains the hope, for those who want a better life, that they or their children can have it.  Without that hope, there is blame and the impulse to want what others have, to the point of taking it from them.

                For that growth to occur, there are certain basics that must be in place.  Many of these basics boil down to freedom: the freedom of individuals to operate as they see fit, in business as well as in their personal lives.

                Our economic system, besides being labeled capitalist, is also called free enterprise.  The basics of its operation were observed and written down nearly three centuries ago by Adam Smith in The Wealth of Nations.  He spoke of the “invisible hand”—the marketplace--that would automatically regulate business and commerce for the benefit of everyone. 

The question of whether his system should be applied in its total purity is still a matter of debate.  It is generally agreed that its opposite, a total command economy, does not work.  No government is smart enough to know what and how much is needed at all times.  (As a matter of fact, no government is smart, period. Only individuals are smart, and they generally do not think well in group situations.  Especially governments.)  Conversely, a functioning free market will result in needed and wanted things being produced and delivered.

                (To be continued.)

Thumbnail Update

     "The Economist" opined recently that the US is once again coming into the position of being the most healthy major economy in the world, and as such could be an engine of growth for everyone.
     Being "the most healthy" might be rephrased as "the least unhealthy."  Clearly there are still major difficulties.  However, many of the horrible effects of the "great recession" have been worked out of the economy and the financial system.  The US economy has more flexibility in it than most other major economies.  Innovation is not as stifled, entrepreneurship is more healthy and innovation is somewhat easier or less frowned upon.
     Europe is still bogged down pretty heavily, though it looks now as though the Euro area may survive intact.  One of their major problems is that their labor markets are much more rigid than in the US.  For example there are laws that make hiring and firing more difficult for most Euro area employers as compared to the US.  Such rules are a drag on growth, productivity and profitability.
     The "fracking" revolution in the US is the prime example of the fruits of greater flexibility.  The US leads the world by far in this new way of extracting natural gas and oil from the ground.  It has provided previously almost unimaginable quantities of energy; it is projected to so radically reduce our dependence on foreign oil as to re-order world power politics in the energy sphere.  This is big.  How did it happen?  Entrepreneurship, innovation and the freedom to use private property without overbearing government supervision: these are the keys.