Friday, December 20, 2013

A "Space Oddity" for the Holiday Season

Year end is a great time to reflect on the past, consider the future and review many best of 2013 lists. 

"Space Oddity", filmed in the International Space Station, is one of my favorite 2013 videos and provides a unique perspective on our collective journey.  David Bowie said it was “possibly the most poignant version of the song ever created.”

Enjoy the video and have a great holiday season!

Sunday, December 15, 2013

Pope Francis and the Global Economy

When Pope Francis was named Time magazine’s “Person of the Year”, focus increased on his recent comments including:
  •  "Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting."
  • “While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.
  • Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power. To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide dimensions. The thirst for power and possessions knows no limits. In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule.”
  • Financial reform … would require a vigorous change of approach on the part of political leaders … Money must serve, not rule! The Pope loves everyone, rich and poor alike, but he is obliged … to remind all that the rich must help, respect and promote the poor. I exhort you to generous solidarity and to the return of economics and finance to an ethical approach which favours human beings.”
  • Full text of the Pope's comments are available here:
  • It is unlikely that Pope Francis is condemning capitalism or advocating socialism; but rather suggesting that a good idea can be taken to an extreme and unregulated “laissez faire” economics are problematic.
  • His comments may also be a tipping point in today’s era of big money in politics
  • However, change will require increased activism by individuals. Perhaps that is why he is also concerned about the “globalization of indifference.”

Sunday, December 8, 2013

Jobs, Technology and Bruce Springsteen's Advice

Last week, amid several positive economic reports in the U.S., thousands of fast-food workers protested their minimum wage pay - some chanted, “We can’t survive on $7.25” hoping for significant increases.  Note: while these workers are not unionized, the Service Employees International Union, with about 2 million members in the health care, janitorial and other industries, provided support for the protestor’s efforts. 
  • Separately, Amazon’s CEO Jeff Bezos announced on “60 Minutes” that the firm was researching how to use drones to deliver packages.  
  • Google announced that Andy Rubin, who previously led the firm’s Android smartphone efforts, is heading a project to create next generation robots to automate manually intensive manufacturing tasks such as those in electronics assembly. 
  • Apple announced it would use its iBeacon network technology at 254 U.S. retail stores to allow customers with iOS 7 devices to 1) learn about products in the store, 2) obtain updates on orders and 3) interact with sales staff.  
  • Regarding the restaurant industry – As workers seek higher wages, McDonalds and others continue to integrate technology into their processes (via kiosks, mobile devices apps and automated servicing).  The longer-term risk for these workers is not low wages but elimination of their jobs.
  • Regarding Apple, Amazon and Google – their efforts have the potential to improve both the customer experience and operational efficiency while reducing human involvement in many work tasks.
  • Note: while Amazon’s drone idea has been cited as impractical in the U.S. because of government restrictions and navigation challenges in densely populated areas, their use will likely continue to grow in many regions around the world.
  • Bottom linelacking initiatives by policy makers or activism by workers, technology will continue to change the market for both skilled and low skilled workers.  With this in mind, consider the guidance from Bruce Springsteen - “It's just winners and losers, and don't get caught on the wrong side of that line."

Friday, December 6, 2013

Bitcoin Tumbles after News from the China Government and Baidu

Bitcoin’s price fell sharply this week after the Chinese government said it would restrict its use by banks. This action also resulted in Baidu announcing it would no longer accept Bitcoins for payments.  The current price is $722, down from $1,207 last week. However, a Bank of America strategist said Bitcoin’s “fair value” is $1,300. 

  • Bitcoin's viability as a currency will remain challenged until the high volatility of its price swings diminish.

Monday, December 2, 2013

David Simon, creator of "The Wire", discusses the divide between rich and poor in America and how capitalism has lost sight of its social compact.

A thought provoking discussion about  some problems facing the U.S by David Simon, a journalist, author, and creator of The Wire,  Treme and other TV programs. 

David's presentation is about 30 minutes (which starts after a 2 minute introduction).  The presentation is followed by an interview and Q&A session . The event took place at the Sydney Opera House (Nov 2013).

Click here for text excerpts from the speech. 

Sunday, December 1, 2013

Diverse Market Views for Uncertain Times

The comments below are among the diverse views for investors to consider. 
  • Howard Marks – Chairman for Oaktree Capital (letter to clients) -  “Over the last 2-3 years, my motto for Oaktree has been consistent: "move forward, but with caution." I feel the outlook is not so bad, and asset prices are not so high, that it's time to apply maximum caution (or, as they said in The Godfather, "go to the mattresses"). But by the same token, the outlook is not so good, and asset prices are not so low, that we should be aggressive. That's the reason for my middling stance.  Having said that, however, there's no doubt in my mind that the trend is in the direction of increased risk, and I see no reason to think that trend will be arrested anytime soon. Risk is likely to reach extreme levels someday, it always does, eventually – and great caution will be called for. Just not yet.”
  • Alan Greenspan - Former Federal Reserve Chairman (Bloomberg interview) - “This does not have the characteristics, as far as I’m concerned, of a stock market bubble... It could come out that way but I don’t see it at this stage.”
  • David Stockman - Former Director of the U.S. Office of Management and Budget (CNBC interview) - "Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere…It's only a question of time before the central banks lose control, and a panic sets in when people realize that these values are massively overstated" 
  • Albert Edwards – Investment Strategist Societe Generale (research report) - "U.S. profits are now beginning to struggle. Once the profits cycle turns downwards, it tends not to recover. The die is cast … A full-blown profits and investment downturn is most likely to be triggered by Asian and EM (emerging market) devaluations releasing surplus capacity onto the West and crushing pricing power even further."

Equity prices have increased in several markets, but business revenue growth trends remains weak.
Drivers of these price moves include:

  • stimulus by central bankers
  • cost-cutting that increases corporate profits and 
  • corporate stock buybacks that reduce the share count in earnings calculations.  
Improving economic fundamentals will likely require increased investment spending by both businesses and governments.  Until this occurs, deflation remains a risk.

Sunday, November 24, 2013

As the Price of Bitcoin moves up and Gold moves down

Last week, the digital currency Bitcoin continued its strong, but volatile, move upward as the U.S. Department of Justice said it was a “legal means of exchange”. The recent strong price move up began on October 2, when the operator of the Silk Road web siteRoss Ulbricht, was arrested by the Federal Bureau of Investigation for allowing illegal purchases of drugs, guns and other illegal items using Bitcoins – this event limited the supply of Bitcoins.  Other drivers include increasing global interest, particularly in China; and funding for Bitcoin and virtual currency related startups such as BitpayCoinbaseCircle and OpenCoin. 
  • On Friday, the price of Bitcoin was $775, up from $144 on October 1 and $13 at the beginning of the year. 
  • For those interested in space travel, Richard Branson announced that Virgin Galactic will accept payments with Bitcoin.  
  • Note: because Bitcoin is technology driven and not created by any government, it has been referred to as “gold for geeks”.  

Separately, as gold prices remain under pressure, consider the following insights: 
  • Janet Yellen from recent U.S. Senate hearing - “Well, I don’t think anybody has a very good model of what makes gold prices go up or down... it is an asset that people want to hold when they’re very fearful about potential financial market catastrophe or economic troubles and tail risks. And when there is financial market turbulence, often we see gold prices rise as people flee into them.” 
  • Paul Singer’s Elliott Management, as reported by Reuters - “the U.S. Federal Reserve's quantitative easing policy has caused stocks to rise, fueling a form of inflation. In the portfolio, Elliott is adding to its bullish gold option holdings that aim for limited downside risk with a large upside potential, saying it still feels that fundamentals are uniquely positive for gold, 
  • the World Gold Council - “Gold demand to the end of the third quarter was 12% lower than the corresponding period of 2012. This is almost entirely due to substantial outflows from ETFs, Conversely, at the consumer level, demand for gold jewelry, bars and coins for the first nine months of the year was at a historical record of 2,896.5t, well ahead of the levels seen in the first nine months of 2012.”

  • Regarding Bitcoin –   the recent broad price swings are likely increasing its attraction to speculators, but discouraging its use as a way to purchase products and services. If price volatility declines and market demand expands, the roles of regulators, central bankers, FX traders and service providers could undergo significant changes.
  • Regarding gold – with negative investor sentiment at a high level, it could be attractive to contrarian investors.  If gold stabilizes and begins to move higher, investor memories could be short.

Sunday, November 17, 2013

Views from Walmart, Cisco Systems and Janet Yellen's Confirmation Hearing

Last week, as weakness was reported in the Eurozone (economic growth), Japan (exports) and the New York region (manufacturing), firms continued to report corporate earnings.
  • Management comments included Wal-Mart’s U.S. Chief Executive Bill Simon saying the holiday shopping season "is going to be about as competitive of a market as we've ever seen…at the same time, some customers feel uncertainty about the economy, government, jobs stability and their need to take care of their families through the holidays."
  • In addition, after network equipment firm Cisco Systems reported poor results, CEO John Chambers said, “I do think we are seeing a slowdown in these emerging markets both in the decision making and their economies.” He also suggested that concerns about NSA surveillance activities might be affecting sales.
Separately, from a U.S. Congressional hearing to confirm Janet Yellen as Federal Reserve chief:
  • Senator Mike Johanns (Republican, Nebraska) said he was concerned about stock market and real estate bubbles - "Here's what I'm saying... I think the economy has gotten used to the sugar you've put out there. And I just worry you're on a sugar high." Yellen’s response - “We have to watch this very carefully, but I don't see this as an asset bubble" and believes positive price moves are a "logical response" to the Fed’s actions.
  • When Senator Charles Schumer (Democrat, New York) said he was concerned about income inequality and the struggling middle class, Yellen said income inequality "is a very serious problem" that goes back to the 1980s. She noted that contributing factors may include the nature of technological change, globalization and the decline of unions in the U.S., and said, "We can't change all of those trends. The solutions involve a multitude of things".
  • Regarding Walmart – Given the firm’s broad exposure to the U.S. economy, the CEO is another voice highlighting the challenges facing many Americans.
  • Regarding Cisco Systems - In addition to weak product demand and the impact of NSA issues, the firm is likely facing competitive challenges from Asian hardware manufacturers as well as software based network routers and switching solutions.
  • Regarding Janet Yellen – As stimulus efforts continue, improving employment and income inequality issues may remain significant challenges. Hopefully, her management of a potential bubble is better than Alan Greenspan.

Sunday, November 10, 2013

Thoughts on Twitter and Tesla Motors

On Wednesday, social media firm Twitter sold shares of its stock for $26 in an initial public offering.
On the same day, Securities and Exchange Commission Chairman May Jo White said, while not specifically mentioning Twitter, “Consider a company that correctly claims it has a hundred million users, and that the rate of user growth is expected to continue to grow at double digit rates. That certainly sounds good and it would seem to bode well for the prospects of the company – information that certainly could influence an investment decision. But what if only a fraction of those users are paying customers? What does that mean for future financial results? What if the bulk of the growth in the number of users is in an area where the company has not yet figured out how to turn those users into paying customers? What does that then say about the meaning of user growth rates?”

On Thursday, Twitter’s stock began trading at $46 (up 76% from Wednesday’s IPO price) and finished the week at $41. Because Twitter is not profitable, some investors use a price to sales ratio to compare its value to other internet firms.

On Friday, Twitter was valued at 44 times its revenue, while LinkedIn was 17, Facebook 17, Yelp 20, Pandora 8 and Google 6.
Highlighting the opportunities and challenges of momentum stock investing, Tesla Motors announced its quarterly earnings results last week. Since the beginning of 2013, the stock rose about 475% until September 30, and has since declined by about 30%. On Friday, Tesla Motors’ price to sales ratio was 9.5; Ford Motors was 0.4, General Motors 0.3 and Harley-Davidson 2.4.

  • Regarding Twitter - its IPO provided a significant transfer of wealth to the firm and its investors and provides funding to build out its business franchise – likely through acquisitions. Significant work is needed to move the firm toward profitability and sustained growth.
  • Regarding Tesla Motors – CEO Elon Musk is a leading industrial innovator and the firm’s electric cars are state-of-the-art. However, there are limits to maintaining the upward trajectory of momentum stocks. Factors influencing Tesla’s recent decline include: 1) its CEO’s said he thought the stock had become overvalued, 2) three Tesla Model S cars caught fire, although the customers may have be at fault and 3) constraints the firm is encountering as it expands its production capabilities.
  • Bottom line – technology investing can be exciting, but momentum can move in both positive and negative directions.

Sunday, November 3, 2013

Is the Market Overvalued?

Last week, Larry Fink, CEO of BlackRock, the world’s largest money manager with $4.1 trillion in assets, said, “we’ve seen real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically”, “We have issues of an overzealous market again” and referencing the U.S. Federal Reserve stimulus efforts, he said, “It’s imperative that the Fed begins to taper.” 

In addition, Bill Gross, co-CIO at PIMCO, the world’s largest bond fund with $1.9 trillion in assets, said during a CNBC interview "All asset prices are bubbly, bond prices, stock prices" and addressing the Federal Reserve’s efforts, "to the extent that any of them can be sustained is the ultimate test in terms of tapering.” 

Investor Warren Buffett, during a September 10, 2013 CNBC interview, said stocks have "moved a long way" in the past five years, they seem "more of less fairly priced now" and "we don't find bargains around but we don't think things are way overvalued either. We're having a hard time finding things to buy." 

Note: in a December 10, 2001 Fortune Magazine interview, Warren Buffet highlighted a favorite market measure saying” the market value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of GNP… has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.” As of Friday, the value of U.S equities was slightly higher than recent GDP, suggesting that the U.S. equity market is slightly overvalued. 


With the investment landscape made up of many markets, asset classes and geographic regions; “is the market overvalued?” seems like too simplistic of a question. Today, investors are wondering 

  1. how will reduced stimulus efforts affect global markets
  2. are record high profit margins sustainable
  3. will technology continue to help drive profit growth and 
  4. will globalization trends remain stable
U.S. equities may be fairly valued, but seeking selected ideas at a company and stock level may provide opportunities. In addition, not all global markets are overvalued.  Patience, research, managing risk and hard work are critical for investment success.   

Sunday, October 27, 2013

Crowd Funding: As the Market Evolves

Last week, the U.S. Securities and Exchange Commission (SEC) unanimously voted on proposed rules allowing a broader set of investors to buy equity in small private companies through crowd funding exchanges. SEC Chairman Mary Jo White said, "There is a great deal of excitement in the marketplace about the crowd funding exemption" and “we want this market to thrive, in a safe manner for investors." NOTE: The process of finalizing the SEC’s rules may take until the summer of 2014.

While interest in crowd funding has grown significantly in recent years, regulatory restrictions have limited many small businesses to promoting and selling products, services and events that were still in development. In this process, the crowd funding exchanges provide a forum for small business to present videos and business plans about themselves and their efforts in the hope of connecting with new customers and investors.

Prominent Crowd funding exchanges include Kickstarter, Indiegogo and Fundable; with market leader Kickstarter raising $844 million for 50,623 projects since it started in 2009. In addition, while some technology and video game projects have raised over $1 million, the overall funding success rate is 43.9% for projects promoted on Kickstarter, with the highest success rates in the areas of music, theater and dance.

The SEC’s changes should permit small companies to sell equity stakes to non-accredited investors with less than $100,000 of annual net. Companies using crowd funding exchanges to sell equity will be limited to raising $1 million in funds every 12 months.

  • Historically, funding for startup businesses came from friends and family, angel investors and venture capital firms - that may provide business guidance and connections. The SEC’s proposed rules could significantly expand the funding sources for these businesses.
  • While the SEC’s changes may increase the flow of “dumb money” into the market, it is unlikely that crowd funding’s “dumb money” track record will differ from other investment markets.
  • Finally, while funding sources may increase, crowd funding is not a short cut to business success – which still requires a lot of planning and execution.

Sunday, October 20, 2013

Views on Apple, Google and IBM

With a budget disaster averted by the U.S. Congress last week, investors increased their focus on the actions and performance of various companies. The following are selected views from the technology sector.
  • Apple, Inc. announced that Angela Ahrendts, formerly CEO of luxury retailer Burberry, is joining the senior management team to reshape its physical and online stores. Apple’s CEO Tim Cook said, “I have wanted one person to lead both of these teams for some time because I believe it will better serve our customers, but I had never met anyone whom I felt confident could lead both until I met Angela.” Ms. Ahrendts, during a 2010 Wall Street Journal interview said, "If I look to any company as a model, it's Apple…they're a brilliant design company working to create a lifestyle, and that's the way I see us."
  • When Google reported better than expected quarterly results, its stock hit an all-time high of $1015 driven by signs that its efforts in mobile advertising are gaining traction. Google CEO Larry Page said, “We are closing in on our goal of a beautiful, simple, and intuitive experience regardless of your device”. He also said “about two years ago, when I became CEO again, my goal was to make sure Google maintains the passion and soul of a startup as we grow,” and “Great is just never good enough.”
  • IBM Corp. had a sixth consecutive quarter of declining revenue. Software sales increased 1%, services revenue declined 3% and hardware sales fell 17%. As investors sought growth from cloud computing, mobile services, “big data” analytics and data security, CEO Virginia Rometty said, “[we] fell short on revenue”, “'we clearly need to do better” and "ours is a pay for performance culture and we must all be committed to taking action to address our performance gaps."

  • Regarding Apple – While Steve Jobs was inspirational; CEO Cook is a hard-core operations person. Hopefully Ms. Ahrendth can increase the cool factor as the firm seeks to increase its presence in Asia and other regions and compete with Google and others. Investor are focusing on this week’s product announcements.
  • Regarding Google – As a technology leader, momentum begets momentum. Investors will need to track weakening per-click revenue trends.
  • Regarding IBM – This is another firm with a relatively new CEO confronting management transition challenges. It is likely that additional staffing changes will be required to get the firm back on track.

Sunday, October 13, 2013

Assessing Global Skills: An OECD Report on Adult Literacy and Problem-solving Skills

The Paris based think tank Organization for Economic Co-operation and Development (OECD) released a report on adult literacy and problem-solving skills based on surveying about 166,000 adults aged 16-65 in 24 countries. Adults with low literacy skills are 1) twice as likely to be unemployed, 2) likely to have poor health, 3) believe they have little impact on political process and 3) less likely to trust others. In addition, communities with large proportions of adults that have limited literacy skills face challenges when introducing productivity-improving technologies.

Top performing countries were Finland and Japan, while Italy and Spain where the worst. The New York Times highlighted that ”the skill level of the American labor force is not merely slipping in comparison to that of its peers around the world… it has fallen dangerously behind” with younger U.S. students having far fewer skills than adults ages 50 to 65.  The following video is an overview of the report.


Given the report’s 461-page length, there is much data to analyze and interpret. However, declining skills in countries such as the U.S. should be a wake-up call to policy makers, educators and business leaders.

Influencing a Government Shutdown

After several days of a partial U.S. Federal government shutdown, political leaders suggested that progress was made in their budget negotiations and that Obamacare was less of an issue in the process. Notably, the improved tone occurred after the October 9 release of a letter from Koch Industries to selected members of Congress stating that “Koch believes that Obamacare will increase deficits, lead to an overall lowering of the standard of health care in America, and raise taxes. However, Koch has not taken a position on the legislative tactic of tying the continuing resolution to defunding Obamacare nor have we lobbied on legislative provisions defunding Obamacare.”


The swift reversal in the political tone after the release of the Koch letter is another indication of the influence the Koch brothers and other wealthy powerbrokers have on the U.S. political process. While some uncertainty has been removed in the budget/debt ceiling negotiations, recent actions could simply be more “can kicking”. Market volatility may continue as the October 17 budget deadline approaches.

Sunday, October 6, 2013

A Shutdown, a Showdown and Global Transitions

After the U.S. Congress failed to pass a budget, many “non-essential” government services were shut down.  A core issue tied to the budget showdown is the Affordable Care Act (aka Obamacare) which was passed by Congress during 2010 and ruled constitutional by the U.S. Supreme Court on June 28, 2012.
  • President Obama said "I'm happy to have negotiations… but we can't do it with a gun held to the head of the American people”
  • Congressman John Boehner said “when we have a crisis like we're in the middle of this week, the American people expect their leaders to sit down and try to resolve their differences."
(Note: There have been 17 Federal government shutdowns since 1976. The most recent, during 1995-96, lasted 28 days.)

Separately, Managing Director Christine Lagarde of the International Monetary Fund (IMF) said, during a presentation at George Washington University,”Five years ago, the global economy avoided a second Great Depression. Five years on, the journey is not yet complete, but the fog of crisis is lifting—and we can see that its aftermath leaves us with multiple new transitions….Two in particular stand out: a transition in the patterns of economic growth, and a transition toward a different kind of financial sector. In each of the two major transitions…the international community faces a common challenge: to make sure that all can gain from globalization and prosper in our increasingly interconnected world….The global financial crisis has shaken the faith of many in the virtues of being open and engaged with the world. Managing these transitions well is the best way to demonstrate the benefits of interconnectedness—through trade, well-regulated finance, and more equitable growth.”

  • Regarding the U.S. shutdown – While pundits suggest that shutdowns are a part of the political process, the economy remains fragile, political polarization is high and satisfaction with Congress is low. As some power brokers may seek to “break the back” of the Federal Government, such a process would trigger significant collateral damage. Hopefully, a resolution occurs before the U.S. hits its debt limit on October 17.
  • Regarding Christine Lagarde’s comments – as she seeks a more moderate role for the IMF, her presentation highlights that economic recovery will be accompanied by challenges and uncertainty. An example is the U.S. canceling trips to trade talks with the European Union and Asian nations as a result of the government shutdown.

Sunday, September 29, 2013

As the Climate Change Debate Continues, the UN Releases a Report for Policymakers

Last week, the United Nations released its “Climate Change 2013: The Physical Science Basis: Summary for Policymakers” report. The study’s co- chairperson Qin Dahe said, “Our assessment of the science finds that the atmosphere and ocean have warmed, the amount of snow and ice has diminished, the global mean sea level has risen and the concentrations of greenhouse gases have increased.” Co-chairperson Thomas Stocker said, “Continued emissions of greenhouse gases will cause further warming and changes in all components of the climate system. Limiting climate change will require substantial and sustained reductions of greenhouse gas emissions.” Observations from the report include:
  • the atmospheric concentrations of carbon dioxide (CO2), methane, and nitrous oxide have increased to levels unprecedented in at least the last 800,000 years. CO2 concentrations have increased by 40% since pre-industrial times, primarily from fossil fuel emissions and secondarily from net land use change emissions.”
  • each ofthe last three decades has been successively warmer at the Earth’s surface than any preceding decade since 1850,
  • it is virtually certain that the upper ocean warmed from 1971 to 2010, and it likely warmed between the 1870s and 1971,
  • over the last two decades, the Greenland and Antarctic ice sheets have been losing mass, glaciers have continued to shrink almost worldwide, and Arctic sea ice and Northern Hemisphere spring snow cover have continued to decrease in extent and
  • Climate change discussions have been hampered by mistakes and misrepresentation of facts by proponents on many sides of the debate. These discussions have often been framed in terms of job growth/destruction, energy independence/security and economic development/growth
  • The UN report does not cover much new ground but it does reinforce the view of significant environmental impacts.  
  • While progress may be slow, increased actions by governments and awareness by consumers will likely drive demand for solutions
  • Success solutions will require an understanding of technological innovation, public policy dynamics and business fundamentals

Friday, September 27, 2013

"How the Economic Machine Works" by Ray Dalio of Bridgewater Associates

This video (posted Sept. 22, 2013)  focuses on three economic drivers: 1) productivity growth, 2) the short term debt cycle and 3) the long term debt cycle.

Bridgewater Associates is the largest hedge fund in the world and manages about $150 billion.  Ray Dalio’s net worth is about $13 billion

While other topics may be more engaging, this one has more impact than many others.  Dalio  does a good job presenting the material.   Toward the end of his presentation, Dalio concedes that some policy makers do not understand this material very well.

Sunday, September 22, 2013

On the Wealth Effect, Monetary Morphine and Transitional Issues

When the U.S. Federal Reserve said it would not reduce its stimulus efforts, at least in the short term, many investors were very surprised.  This news triggered strong positive moves in equities, commodities and interest rate sensitive assets, while driving a strong move down in the value of the U.S. dollar on Wednesday (markets pulled back by Friday).  Note: These stimulus efforts, called Quantitative Easing, have been controversial and have expanded the Federal Reserve’s balance sheet from less than $1 trillion before the Great Recession to over $3.6 trillion today (some people refer to this process as printing money).  This stimulus activity sought to stabilize the economy and create a “Wealth Effect” - where people would feel richer, increase their spending and drive economic growth.

While real estate and stock prices have improved in recent years, data released by the U.S. Census Department last week revealed that the Wealth Effect is likely benefiting only a small portion of U.S. citizens.  For example, median household income was stable during 2012 at $51,017, but this amount is down 8.3% since 2007, and slightly lower than what households made in 1989 ($51,681 in current dollars).  Also during 2012, 15% of the population (46.5 million people) was at or below the poverty level.  This is an increase of 2.5% since 2007.

Reacting to the news, Congressman Kevin Brady, Chairman of Congress’ Joint Economic Committee said, “Those [Federal Reserve asset] purchases may have helped juice profits on Wall Street, but they have done little, if anything, to help struggling families on Main Street. In fact, this heavy dose of ‘monetary morphine’ may have actually slowed the economy’s healing process.”
  • During October 2010, Chairman Ben Bernanke said, “there are clearly many challenges in communicating and conducting monetary policy in a low-inflation environment, including the uncertainties associated with the use of nonconventional policy tools."  While these tools have provided some economic value, the recovery process has taken longer than expected.
  • With the Federal Reserve's leadership in transition, Janet Yellen may be the front-runner but a smooth transition is not assured.
  • Given weaker than expected economic fundamentals, the investment environment may encounter increased volatility.

Sunday, September 15, 2013

On Retail Sales, Income Disparity, Big Banks and More

U.S. retail sales (reported by the Commerce Department) last week increased by a lower than expected 0.2% in August. Also, the Thomson Reuters/University of Michigan consumer confidence index dropped to 76.8 from 82.1, the lowest in 5 months.

The New York Times reported that income disparity in the U.S. during 2012 was at its highest level in over 100 years, with over 50% of U.S. personal income concentrated within the top 10% of earners, according to economists Emmanuel Saez and Thomas Piketty. They also found that from 2009 to 2012, while average U.S family incomes increased 6%, the top 1% incomes grew by 31.4%, but the bottom 99% incomes grew by only 0.4%.

In China, factory output increased by 10.4% from last year (9.9% was expected).

In addition, high profile investor/trader Stanley Druckenmiller commented in a Bloomberg interview that: “I believe the [equity] market is topping” and “I probably have the smallest positions I’ve had” and “right now, I am lost. I don’t play when I am lost. I know in the future I won’t be lost.”

Finally, as the fifth anniversary of the Lehman Brothers collapse approaches, Richard Fisher, Federal Reserve Bank of Dallas CEO and Harvey Rosenblum, executive vice president and senior policy adviser wrote, “We have learned that the largest financial institutions are a dagger pointed at the heart of our economy. A recent New York Times editorial noted that, regarding the controversies surrounding JPMorgan Chase, “the underlying problem is not only this or that violation, but the fact that the sheer size and scope and complexity of the banking behemoths defy controls, encouraging speculation and bad behavior….We would add undermining free-market capitalism and nearly bankrupting the United States. But we would note that it is unfair to single out JPMorgan Chase. Several other megabanks nearly brought down our economic and financial system five years ago and might easily do it again.”

  • Regarding the U.S. economy – With consumers facing higher payroll taxes, limited job opportunities and muted income growth, the decline in consumer confidence is disappointing but not surprising.
  • Regarding income disparity - improvements from these extreme levels may occur at a slow pace, which could lead to increased social friction.
  • Regarding China – the better than expected factory output suggest that global economic trends may be improving.
  • Regarding Druckenmiller’s comments – with conflicting economic data and uncertainty about economic policy, it is likely that other investors share his short-term caution as well.
  • Regarding Fisher’s comments – with megabanks now larger than before the financial crisis, it seems that Dodd-Frank is a poor piece of legislation and that leading politicians and regulators have limited capacity and/or interest in addressing the broad set of financial sector issues that remain.

Sunday, September 8, 2013

"Where Have All the Good Jobs Gone?"

Last Friday, the U.S. Bureau of Bureau of Labor Statistics said 169,000 jobs were added during August (economists expected 180,000), with growth primarily in part-time and lower paying jobs. In addition, the unemployment rate fell to 7.3%, down from 7.4% in July, with the decline mostly a result of 312,000 people dropping out of the workforce. Notably, the labor-force participation rate declined to 63.2%, the lowest since August 1978. (This rate measures Americans employed or looking for work).

After these results, the following comments from “Where have all the good jobs gone?”, a July 2012 report from the Center for Economic and Policy Research, are worth considering:
  • “The U.S. workforce is substantially older and better educated than it was at the end of the 1970s … we would have expected the share of good jobs to have increased in line with improvements in quality of the workforce. Instead, the share of good jobs in the U.S. economy has actually fallen… at every age level, workers with four years or more of college are actually less likely to have a good job now than three decades ago. This development is even more surprising because the economy also has almost twice as many workers with advanced degrees today as it did in 1979.
  • We believe that the decline in the economy’s ability to create good jobs is related to deterioration in the bargaining power of workers, especially those at the middle and the bottom of the income scale. The main cause of the loss of bargaining power is the large-scale restructuring of the labor market that began at the end of the 1970s and continues to the present.
  • The share of private-sector workers who are unionized has fallen…
  • Many jobs in state and local government have been privatized and outsourced.
  • Trade policy has put low- and middle-wage workers in the United States in direct competition with typically much lower-wage workers in the rest of the world.
  • A dysfunctional immigration system has left a growing share of our immigrant population at the mercy of their employers, while increasing competitive pressures on low-wage workers born in the United States.”

As the U.S. economy continues to heal (although in an uneven fashion), Friday’s employment report suggests that challenges remain. The observations from the Center for Economic Research should be included along with other factors contributing to a potential long-term structural change. Based on the weakness of the jobs report, speculation about a continuation of the U.S. Federal Reserve's stimulus efforts may increase. Expect more market swings.

U.S. Labor Participation Rate

Sunday, September 1, 2013

Syria's Crisis is the Focus

Since the 2011 Arab Spring uprising that increased instability in the Middle East, various rebel groups in Syria have been fighting to overthrow President Bashar al-Assad‘s regime. This violence has resulted in over 100,000 deaths and millions of Syrians fleeing to refugee camps in Turkey, Lebanon, Jordan and Iraq.

On August 21, 2013, it was reported that chemical weapon attacks took place in Ghouta, a suburb northeast of Damascus, Syria.  While United Nations investigators have had limited access to the area, death toll estimates range from 322 to 1,729, with U.S. intelligence reporting 1,429.  Doctors without Borders reported about 3,600 patients at local hospitals had “neurotoxic symptoms” from the attack.

Responses from political leaders include:
  • U.S. President Barack Obama – he is considering a “limited, narrow act... we're not considering any open ended commitment. We're not considering any boots on the ground approach",
  • French President François Hollande -”France is ready”,
  • British Prime Minister David Cameron - "I understand the deep skepticism that my colleagues in parliament and many members of the public have about British involvement in Syria. I hope this doesn't become the moment where we turn our back on the world's problems",
  • a representative for German Chancellor Angela Merkel - "there has been no request to us for a military commitment, and a German military commitment has never been considered by the government” and
  • Russian President Vladimir Putin - “"we have to remember what has happened in the last decades, how many times the United States has been the initiator of armed conflict in different regions of the world … did this resolve even one problem?"
Note: During an October 2011 interview with the U.K’s Sunday Telegraph, Syrian President Assad said “Syria is different in every respect from Egypt, Tunisia, Yemen. The history is different. The politics is different…Syria is the hub now in this region. It is the fault line, and if you play with the ground you will cause an earthquake … any problem in Syria will burn the whole region. If the plan is to divide Syria, that is to divide the whole region."

While military intervention into Syria is controversial, questions to consider include:
  • how will a U.S. military strike change the Syrian President’s tactics?
  • could violence expand into other countries?
  • how would a destabilized Syria change Middle East dynamics?
As political leaders, the media and investors focus on Syria, global market will likely be choppy until clarity improves.

Sunday, August 25, 2013

As NSA Internet Security Issues Continue

Last week, a report by John D. Bates, Chief Judge of the U.S. Foreign Intelligence Surveillance Court from Oct. 2011 was declassified and said “for the first time, the government has now advised the court that the volume and nature of the information it has been collecting is fundamentally different from what the court had been led to believe” and “the court is troubled that the government’s revelations regarding NSA’s acquisition of Internet transactions mark the third instance in less than three years in which the government has disclosed a substantial misrepresentation regarding the scope of a major collection program.”

While the continuing issues at the NSA are unfortunate, the fact that these issues are becoming known is somewhat reassuring. In the post-Edward Snowden world, the phrase popularized by Ronald Reagan “Trust, but Verify” seems applicable to the oversight of the intelligence community as well. As organization such as the Internet Engineering Task Force seek standards for better data encryption, the demand for protection of digital content continues to increase.

Thoughts on On-Line Education: Georgia Tech, Udacity, etc.

The Georgia Institute of Technology announced a partnership with Udacity, a 15-month-old Silicon Valley firm, to offer an online Masters Degree in Computer Science for $7,000 (this is 80% less than the $40,000 cost for its on-campus program). The partners will split the revenue from the on-line program, 60% - George Tech and 40% - Udacity.

Separately, when U.S. President Obama announced a plan to link college financial aid to student performance, he also said, “universities like Carnegie Mellon, Arizona State, they’re starting to show that online learning can help students master the same material in less time and often at lower cost. Georgia Tech, which is a national leader in computer science, just announced it will begin offering an online master’s degree in computer science at a fraction of the cost of a traditional class, but it’s just as rigorous and it’s producing engineers who are just as good.”


With educational costs increasingly unmanageable for many students, on-line solutions may provide an attractive alternative. While some early results have been mixed, this market is still at an early stage of development. While some one-size fits approaches may be successful, it is likely that as the needs and expectations of schools, faculty and student are better understood, a broad diversity of more localized and hybrid solutions may emerge.

Sunday, August 18, 2013

Several Business Leaders are Concerned about the Economy

As companies continue to report their quarterly financial results and discuss their business opportunities, the following observations from the retail sector, are worth considering:
  • Wal-Mart International ‘s CEO C. Douglas McMillon said “We’ve seen customers both in mature and emerging markets curb their spending “and “we believe that environment is going to remain through the end of the year”
  • Wal-Mart’s chief financial officer Charles M. Holley Jr., said there is “a general reluctance of customers to spend on discretionary items right now”,
  • Macy’s chief financial officer Karen Hoguet said, “We believe that much of our weakness is due to the health of the consumer” and
  • Nordstrom’s CEO Blake Nordstrom said, “overall, our sales trends in the second quarter and throughout the first half of the year weren't as strong as we expected.“
Also, John Chambers, CEO of networking equipment provider Cisco Systems (a firm considered to be an economic bell weather), said” we delivered the strong performance in what continues to be a challenging and inconsistent global macroeconomic environment…with economic challenges impacting several of our top five emerging markets” and “this recovery is more mixed and inconsistent than others I've seen.”

While significant attention on “better than expected” data has supported the economic recovery, it seems that too much of the focus may be on the quantity rather than the quality of results.
  • For example, while unemployment rates are declining, this has often been driven by low-paying jobs in retail, temporary employment and health care.
  • In housing, as prices have risen, the participation of first time home buyers remains muted, with many sales pursued by a mix of speculators and institutional investors.
  • With stocks, as prices have risen is some markets, the primary drivers have been stimulus efforts by central bankers and cost cutting by business managers.
It remains to be seem if the much discussed “wealth effect” can translate into fundamental economic growth.

Sunday, August 11, 2013

A Summer Spy Thriller Continues

Although intelligence leaker Edward Snowden has secured asylum within Russia, the controversy about U.S. National Security Agency (NSA) surveillance actions continue. Last week, NSA spokesperson Judith Emmel said, "in carrying out its signals intelligence mission, NSA collects only what it is explicitly authorized to collect. ... Moreover, the agency's activities are deployed only in response to requirements for information to protect the country and its interests”.

In addition, a White House report defended the NSA’s actions citing the U.S. Patriot Act, which provides “enhanced law enforcement investigatory tools” and permits “an order requiring the production of any tangible things (including books, records, papers, documents, and other items) for an investigation to protect against international terrorism or clandestine intelligence. “ NOTE: this act remains controversial because the U.S. Constitution’s Fourth Amendment provides “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated”.

Adam Curtis, a popular blogger at the UK’s BBC provides another perspective: “The recent revelations by the whistleblower Edward Snowden were fascinating. But they - and all the reactions to them - had one enormous assumption at their heart - That the spies know what they are doing. It doesn't matter whether you hate the spies and believe they are corroding democracy, or if you think they are the noble guardians of the state….the assumption is that the secret agents know more than we do. But the strange fact is that often when you look into the history of spies what you discover is something very different. It is not the story of men and women who have a better and deeper understanding of the world than we do. In fact in many cases it is the story of weirdos who have created a completely mad version of the world that they then impose on the rest of us.”

Had Snowden not released the NSA documents, it is likely that the business of surveillance at the agency today would be “business as usual”. Within the whirlwind of constitutional issues, security is big business. As acres of computing and communication technology support social media, search, cloud computing and Internet commerce services, there is a broad set of services and technologies used in the surveillance business, both in accessing, mining and analyzing data, as well as attempting to protect against intrusion and security breaches. After the congressional reviews of the NSA actions have concluded, it is likely that the demand for high performance security offerings will remain robust.

Sunday, August 4, 2013

Richmond, CA: A Landmark Clash between Wall Street and Main Street

Last week, the City of Richmond, CA, in an effort to deal with 624 homes with “underwater” mortgages, notified loan service providers and trustees that the city wants to 1) buy the homes at today’s depressed value and,2) if needed, pursue an eminent domain legal strategy to stop home foreclosures. While eminent domain is generally used by governments to force homeowners to sell their property in order to pursue new developments such as highways, railroads and parks, Richmond could become the first U.S. city to apply this approach for the benefit of homeowners.
  • Richmond Mayor Gayle McLaughlin said her residents "have been suffering for years thanks to the housing crisis Wall Street created and which Wall Street refuses to fix."
  • David Stevens, President/CEO of the Mortgage Bankers Association said, “The program is a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city….the program is ill-advised and likely unconstitutional and will add to Richmond’s problems rather than solve them.”
NOTE: the broader issue is how a positive outcome for Richmond would affect the +$13 trillion U.S. mortgage market.

Background on Richmond, CA and its legal strategy: 1) about half of the city’s homeowners are “underwater”, 2) it is located on the San Francisco Bay, 3) its unemployment rate is 17%, 4) its 106,500 residents are mostly black or Hispanic and 5) the city’s largest employer is Chevron Corp. with 1,900 workers. Richmond legal strategy is based on the U.S. Supreme Court Ruling in 2005, Kelo v. City of New London (Connecticut), which said the city could seize private property if its future use would have a positive economic impact on the community. The city of New London wanted to condemn Kelo’s land and give it the Pfizer Corporation, which would build a research and development facility as part of an economic development project. Note: ironically, Kelo’s home was condemned, but the research facility was never built.


While Richmond and its supporters hope their strategy will favor David rather than Goliath, some loan providers and investors are concerned that if this strategy gains momentum, it could have a negative impact on the U.S. mortgage and housing markets. As both Wall Street and Main Street watch Richmond’s efforts, other cities are considering similar eminent domain action.  Because of the potential impact on investors, homeowners and government entities, Richmond’s process will likely encounter several legal and legislative challenges..