Originally posted in the Daily Journal of Commerce, Portland OR

Published October 15, 2013
Just as his approval numbers reached an all-time low for his presidential term, Barack Obama was rescued again. He painted himself into a corner with his “red line” in Syria that he couldn’t or didn’t want to back up. Vladimir Putin bailed Obama out.

Now, with Obama’s approval rating at 49 percent, the Tea Party Republicans have contrived to make the president look good. With no apparent ability to count votes, or knowledge of how government works (clue to Tea Party: there are three branches of government, and you control none), the Tea Party blunders on, bringing the operation of government to a halt.

The Republicans, who had a shot at improving their numbers in the midterm elections, once again see defeat snatched from the jaws of victory. The Tea Party has stymied the Republican Party, and all Republicans will be tarred. Like Don Quixote, they see themselves on a great crusade, while in reality they are tilting at windmills.

The Tea Party wants Obama to concede to the loss of his signature legislation, the Affordable Care Act. No matter whether the legislation is good or bad, it is the law of the land; Obama is not going to give it up, and, as president, he has the power of veto. Of course, the Tea Party does not have the votes to send a bill to the president anyway. It is all a simple numbers game, and the Tea Party does not understand that it doesn’t have them.

The markets are generally down from their all-time highs since the government shutdown began, but […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published September 9, 2013

“It is hard to make predictions, especially about the future.” That quote has been attributed to a various number of folks – Winston Churchill, Will Rogers, Albert Einstein, Victor Borge and Groucho Marx, among others.

“It’s always something,” said Gilda Radner as a performer on “Saturday Night Live.” She later was diagnosed with ovarian cancer.

It appears that it’s always something with the U.S. economy and government. Often, it seems that the “somethings” are self-inflicted wounds.

Unemployment remains stubbornly high. Consumers are not spending. Bank bailouts did little for households, but a lot for bank executives as they paid themselves big bonuses for their fine work during the Great Recession. To defend themselves from the government and litigious former homeowners, the banks have had to pay more than $100 billion to their lawyers – more than they have paid out in dividends to shareholders.

Not just the United States, but other major powers have been supported by their central banks. The U.S. Federal Reserve struggles with the question of how and when to trim that support, and whether they can.

In another self-inflicted wound, it was not helpful that President Obama fired Fed Chairman Ben Bernanke while this debate was going on. Markets and CEOs are now confronted with a murky Fed policy with no knowledge of who the next Fed chairman will be and what her or his policies will be.

At this writing it appears that Obama’s favored candidate is Larry Summers. He would likely favor reducing Fed support of the economy and raising interest rates. The prospect is already having a chilling […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published August 9, 2013

In July the equity markets as measured by the S&P index were up 4.9 percent. This brings S&P returns for the year through Aug. 2 to 19.9 percent. Dow transports are up 22.67 percent through July 30, confirming the Dow industrial rise – a strong sign according to the Dow Theory of investing. Also through July 30, bond markets this year have had negative returns. Year to date through June 30, $80 billion flowed out of bond funds, in the great rotation.

After Fed Chairman Ben Bernanke’s testimony in June regarding quantitative easing, the markets threw a taper tantrum. The yield on 10-year bonds jumped from 1.6 percent to 2.5, the largest increase in such a short time in history. The value of 20-year-plus bonds fell 11 percent after Bernanke’s remarks.

PIMCO, the largest bond house in the world, saw outflows of $10 billion in June – the biggest outflow since tracking began in 1993. On a total return basis the fund’s returns were down 3.6 percent in the second quarter – the largest quarterly loss since inception. Investors are engaged in the “great rotation” from fixed income to equities.

The markets are beginning to trade on fundamentals, not just quantitative easing. Corporate profits are coming in slightly above forecast, but revenues are slack. The macro picture looks even better.

In Asia, China recorded unexpectedly strong factory activity. In Europe, where European Central Bank President Mario Draghi has promised easy money for the indefinite future, the Eurozone Purchasing Managers’ Indexes showed expansion. The U.K. expanded at the fastest pace in more than two […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published March 11, 2013

When the early returns of the Italian election for prime minister came in on Feb. 25, the markets took a steep dive. Voters were asked to prolong the policies of Mario Monti, prime minister since 2011.

Monti was considered a technocrat; he had led Italy into a policy of austerity. This financial approach was considered a road map for Spain, Portugal and perhaps France. Greece had already reluctantly stated down this path.

The Italian people were not happy with this austerity even though the financial markets, the Eurozone and the Euro had found comfort with this policy. Under Monti, Italian bonds found a bid, with lower interest rates, and the Eurozone had taken a respite from an extremely volatile period. Europe – Italy specifically – seemed on the mend.

The election featured an array of candidates, including a professional comedian and political buffoon, former Prime Minister Silvio Berlusconi. Already convicted of tax fraud, sentenced to four years in jail and under indictment for sex crimes involving minors, Berlusconi ran on a campaign of a repeal of austerity and Laissez les bons temps rouler (Let the good times roll). For instance, he pledged to return all property taxes paid in the prior year, among other giveaways.

Given the choice between austerity and good times, Italians chose “La Dolce Vita;” they tossed Monti, and placed Berlusconi in a position to win the prime minister’s job again. Bond markets and equity markets were shocked and tumbled. Investors, already discouraged by Europe, pulled to the sidelines and dumped stocks. The U.S. equity market suffered its biggest drop of the […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published January 14, 2013

The  long awaited and dreaded “fiscal cliff” finally arrived. In a previous column I described it as more of a fiscal slope than a cliff. We received a mixed bag of laws, which could have been better, but also could have been worse. It did provide clarity (not always welcome) for some stakeholders, but left many decisions to be made.

President Obama, after winning re-election, played a tough hand. Tax increases were on his mind, and he believed that he had a mandate to raise taxes because he campaigned on a policy of higher taxes. Describing his tax increases as “fairness,” he called for higher rates for higher-income taxpayers. He insisted that Congress deal with tax rates, and declined to offer any spending cuts.

With the power of his pen, and the Senate on his side, Obama’s only obstacle was the Republican-controlled House. While Congress and Obama knew that we had revenue and spending problems and a large budget deficit, the approaches of the president and the Republicans were vastly different. The president was not interested in spending cuts, but rather only more revenue. The Republicans believed that more revenue would come from a government more favorable to business and therefore the economy, and that spending reductions were needed.

The Democrats baited the Republicans by offering up no cuts, forcing the Republicans to name which entitlement programs they would cut, and by how much. Recognizing that putting a price tag on “sacred cows” was a losing hand, Republicans folded. The deal disappointed many people, but it extended the “Bush tax cuts” for some and […]

Published December 10, 2012
U.S. equity markets suffered more volatility this past month as headlines veered from optimism to pessimism over “fiscal cliff” negotiations. Investors have become accustomed, if not comfortable, to extreme volatility over the past few years as the economy and policy makers in Europe and the U.S. have provided a litany of mostly negative surprises.

Investors have sought refuge in bonds during this time to avoid risk, but in so doing they have bid bonds to a risky level – perhaps even a bubble. They also have forfeited returns. As long as investors are as worried about the equity market as they are now, the appeal of bonds will continue. However, at some point we can expect that trend to unwind with investors returning to equities.

With bonds returning low yields and possessing little upside potential, there is definitely a possibility that investors will run to the other side of the boat. When that happens, we can expect a sell-off in bonds and an increase in equity prices. The catalyst for such a move could be a resolution of the “fiscal cliff” disagreement, or a solution to the various European crises.

The U.S. is probably closer than Europe to reaching an agreement. While one does not appear imminent in the U.S., it is still likely that some sort of agreement will be reached, even if it is only to “kick the can down the road” – a real possibility.

As bad a job that the legislative and executive branches have done, and are doing, neither side wants a calamity. The impetus for a deal is strong. What they are trying to gain now is bargaining […]