Portfolio Return as of 12/05/22:
2020: 25.65%
2021: 29.15%
YTD: +2.49% (SP500 -16.3%)

Tuesday, August 31, 2021

Pandemic Has Consequences on Markets and Economy

But is it really bad as it seems? While there seems to be an uptick in cases reported, and some hospitals are at capacity -- because most of them scaled back after the January peak -- are more people dying, as the media is reporting? 

No. Not at levels seen in January 2021. Data from the CDC and other sources say not. 



Saturday, August 28, 2021

Will There Ever Be a Top to the Market?

The S&P 500 is up 20% this year, without a single 5 percent pullback or correction. Last week, we saw between 2 to 3 percent pullback and I advised staying the course. This week, markets were up about 3 percent.

While there is no way to predict the future, at some point the market will correct. There's not a lot that the market seems troubled by: Afghanistan, Covid, or Inflation seems of little concern to investors right now. Actually, the economy is doing pretty well, all things considered, and business profits are looking OK. And ultimately, profits drive the market. 

The Fed is not going to do anything until later this year. So interest rates will continue to be low. But look for a change near the end of the year, first of next year. That may change market dynamics if the Fed allows interest rates to rise. 

Have a plan to exit the market if you're still fully invested. And not just equities. Watch bond prices. As the Fed tapers is bond purchases, the upward pressure on bond prices will abate. And follow that plan. Don't watch as things unravel. If you sell, you can always buy back in, most likely at lower prices. 

Here's a 12-month chart of the S&P 500. Just amazing. 




Tuesday, August 24, 2021

"Build America, Buy America" Is Bad Policy

By Allison Schrager
Bloomberg Opinion
Printed in Stars and Stripes

The infrastructure bill moving through the Senate takes more than 2,700 pages to lay out $1 trillion in spending. Many aspects of the plan will be popular. Americans love infrastructure; who doesn’t want nicer airports, roads, bridges, clean drinking water and access to cheap broadband? In theory at least, we not only enjoy better infrastructure, it’s an investment in our future — making the country safer, more resilient and boosting growth. But many of the potential economic benefits will be undermined by the nearly 60 pages of the bill dedicated to “Build America, Buy America.”

Buy America requirements have been around since the Great Depression and are often a feature in U.S. infrastructure plans. They require that government-funded projects use domestically produced materials and are completed by American firms with American workers. This latest incarnation is similar to others before it. There are, of course, many pages of exceptions: for instance, if it costs 25% more to use U.S. steel, foreign steel can be substituted. But there are costs to obtaining such an exception, and it can be an unpredictable, slow and expensive process.

Buy America has always been a bad policy, but if the goal is to modernize the American economy and its labor force, it’s even worse now.

First, the scale of this bill is enormous, the biggest infrastructure plan in more than 70 years. And the Buy America provisions make it even more expensive and complex. Each job saved or created through the Buy America rules is estimated to cost taxpayers between $250,000 and $1 million, and the jobs from the program may only last a few years until construction is finished. Work and materials that meet the requirements are often of lesser quality, and historically there have been instances of price gouging from U.S. suppliers.

Second, the world has changed since the 20th century. The economy, and manufacturing, is more technical and globally integrated. Buy America has always made infrastructure more expensive, but at least in the 1950s and ’60s, the U.S. had a large manufacturing base and there were fewer foreign alternatives. Take trains as just one example. The current bill would spend $66 billion updating freight and passenger rail service, in addition to another $39 billion for public transportation that will include modernizing and replacing subway cars.

Over the years, the U.S. has let its rail cars fall into disrepair while it’s become a small, peripheral player in the train-car manufacturing market, says Alon Levy, a fellow at New York University’s Maron Institute. More train-oriented countries, such as Japan and nations in Europe, have developed better modular technology. For example, European subways allow passengers to walk between cars, while U.S. manufacturers are only starting to experiment with this technology. And Levy estimates U.S. trains cost 35% to 60% more than those of foreign competitors.

We could justify the expense of Buy America as an investment in building a competitive manufacturing base that will provide good jobs for decades to come. But there have been various Buy America provisions for decades and they’ve never succeeded at this task. Manufacturing in America became a smaller part of the economy because Buy America ultimately isn’t enough to ward off a changing global marketplace. No matter how ambitious our infrastructure plans are, eventually U.S. manufacturing will have to compete with more productive firms while using top quality, cheaper (and often, foreign-made) inputs. Subsidies and restrictions might aim to protect American workers from competition, but they also take away the incentives to innovate, adopt the best technology and hire the best workers, even if they are foreign.

The desire to build America’s manufacturing capacity feels more pressing after a pandemic that disrupted trade and highlighted our reliance on China for so many of our supply chain’s most vital parts. The bill asserts that bringing back more domestic manufacturing will make the economy more resilient. Depending on any one country to make things you need is risky, but that also includes over-dependence on your own country. Shutdowns can happen here, too. Just because supply chains are global doesn’t mean they’re limited to one country — ideally, we’d have a diverse network of suppliers all over the world. Resilience comes from diversification, not concentration.

The goal of this infrastructure bill is to bring the U.S. economy fully into the 21st century with the same kind of gleaming infrastructure we see abroad. Unfortunately, the Buy America restrictions will leave the American economy back in the 20th century.

Bloomberg Opinion columnist Allison Schrager is a senior fellow at the Manhattan Institute and author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”

Sunday, August 22, 2021

Market Review: What Should You Do?

In my opinion, there is nothing to do. If you're a long-term investor and you have a plan, and the plan is still valid, I wouldn't change a thing. Based on a chart of the NASDAQ, there is no indication of a change of trend. The DJIA and SP500 look similar.  

My portfolio allocation is: 40% Bonds, 30% Energy Stocks and MLPs, 18% Percent Large Cap Stocks; 10% REIT, and 2% Cash. The portfolio earns about 5.2% of market value in dividends. 

Note: My portfolio is heavy in energy because 1) I know the industry, 2) there is good potential on the upside in the next three years, and 3) the dividend earnings are between 4% and 5%. I do not recommend this for everyone. Know what you invest in. 



Wednesday, August 18, 2021

Market Pauses, But For How Long?

Stocks slipped on Tuesday and Wednesday morning following a drop in retail sales, which fell 1.1% in June, driven largely by a slump in car sales. Earnings reports from Home Depot (HD) and Walmart (WMT) didn't help investing sentiment either amid flattening revenue growth and slowing e-commerce trends. The retail bonanza continues this morning with earnings from Target (TGT), Lowe's (LOW) and TJX Companies (TJX).

Fed minutes: Not a day goes by that there isn't some action, with the catalyst today being the Fed's most recent policy meeting. The minutes may show discussions about tapering monthly bond purchases, or just how divided FOMC officials are on the debate. Yesterday, Fed Chair Jerome Powell said the pandemic is "still casting a shadow on economic activity," and stock futures wavered around the flatline overnight as investors continued to size up the market.

The bulls: "We remain bullish on stocks (particularly cyclicals/value) thanks to a strong earnings season, signs of receding risk from the Delta variant and normalization of bond-equity correlation," wrote analysts at J.P. Morgan.

The bears: "The stock market is way overdue for a correction," said Jim Paulsen, chief investment strategist at Leuthold Group. "COVID cases continue to spike higher darkening economic reopenings, consumer data shockingly has collapsed recently - including consumer confidence last Friday and retail sales and homebuilders' sentiment. Several stocks have also stopped reacting positively to good earnings, inflation reports remain hot and Federal Reserve taper talk is everywhere."

Speaking of inflation, the key question regarding the surge in inflation recently, is whether this is a temporary spike – “transitory,” as President Biden assures us – or whether it is more structural and longer-term in nature.

As they did last month, the Biden administration assured us this big jump in July inflation was only “transitory” (temporary) as the economy continues to recover from the COVID lockdowns last year. Yet the fact is, the Biden administration does NOT know if it is temporary, and neither does anyone else. Only time will tell.

What we do know is that inflation was so low during the spring and summer of last year, largely due to the COVID recession and widespread lockdowns, and it is much higher this year. So the 12-month inflation comparisons are going to remain high, perhaps until the end of this year. This is referred to as the “base effect.”

While the base effect – with higher current monthly inflation figures replacing lower ones from last year – will be dissipating in the months to come, it is important to note that even if price growth is slower over the next few months, reported 12-month inflation rates will still be high. Headline CPI is already up enough in the first seven months of the year that if price increases were to drop to zero on a monthly basis, headline inflation would still be 4.1% for the year.

However, not all commodities have continue there rise. Some are down, such as oil and lumber. Investors should pay close attention to what happens during the next few months. A correction to the market will not be a surprise.




Sources: Seeking Alpha and Gary D. Halbert.

Friday, August 13, 2021

Biden Urges OPEC to Pump More, But Not American Producers


While the administration begs overseas adversaries to ramp up oil production with jobs and development to the benefit of foreign citizens, Americans remain handicapped by Democrats’ zealous animosity towards fossil fuel extraction on domestic land.

Just after assuming office, Biden announced last week a range of executive orders aimed at addressing climate change and starting the process of phasing out fossil fuels, a promise he made on the campaign trail.

As part of the orders, all new oil and gas leasing on public lands was indefinitely paused to allow time for a “comprehensive review and reconsideration of oil and gas permitting and leasing practices.”

The review will also consider adjusting royalty fees for oil and gas, which are about $2 an acre and haven’t been updated for decades. The order does not apply to tribal lands. 

Underneath the tundra surface of Alaska’s North Slope sits an estimated 4.3 t0 11.8 billion barrels of untouched recoverable oil located within the flat wetland boundary of the Arctic National Wildlife Refuge (ANWR). Then-President Donald Trump opened ANWR’s 1.6 million acres of the 19.6 million-acre refuge for drilling in the 2017 Tax Cuts and Jobs Act, with leases approved since then now in jeopardy under the new administration.

Biden has been yanking permits and demanding new environmental assessments in an effort to cancel projects altogether. Last week, the Interior Department tossed out the analysis completed under the National Environmental Policy Act (NEPA), long held as the gold standard of assessing environmental impacts, and ordered a new supplemental review for leases in the Arctic refuge two months after they were suspended.

The Biden administration called the earlier review insufficient in a routine attack on projects it merely aims to cancel with the new assessment ordered to “identify the significant issues, including any legal deficiencies in the Final EIS [Environmental Impact Statement].”

“Everything we want to do, they want to stop,” Alaska’s frustrated Republican Gov. Mike Dunleavy told The Federalist of the new administration. “We went from having a president who was all about creating opportunity to an administration that is all about cancelling opportunity.”

Meanwhile, current operations in neighboring Prudhoe Bay show oil and gas extraction can be done cleaner in the United States than in any other country with no harm to wildlife.

Oil and gas producers have been drilling the flat surface of Alaska’s Arctic coast 60 miles west of proposed sites in ANWR since the late 1970s. Objections to the project at the time were the same ones wielded by environmental leftists today that such operations would put the caribou in danger.

Contrary to the doomsday prophesies, the caribou have thrived, rising to peak population of 70,000 in 2010, according to the U.S. Fish and Wildlife Service. They have since fallen back down to 22,000 in 2016, consistent with their herd’s natural cycle, with still a higher population than the fewer than 20,000 estimated in 1997.

The new administration staking out its opposition to drilling on environmental concerns while it welcomes extraction abroad with lower standards at first appears a classic case of NIMBYism. A look in ANWR’s backyard, though, will find the IƱupiat people as the sole tribe within the boundaries of the proposed area for drilling. They have demanded the right to develop their own land. Instead, Biden has kept operations in ANWR frozen, along with the development dreams of local villagers and Americans as a whole.

The chart below shows American oil production over the last four years, which reached a peak of nearly 13 million barrels a day in 2019, but now sits around 11.3 million barrels a day.



Consumer Sentiment Collapses, More Details on Inflation

In a stunning reversal of optimism amid growing fears of the Delta variant hitting the economy, the Reuters/University of Michigan Consumer Sentiment Index plunged 11.0 points in August to 70.2, far below the consensus of 81.3. It was the lowest reading since December 2011, blowing past the pandemic low of 71.8 reached in April of last year. Excluding the pandemic, this was the biggest monthly drop since October 2008. 

In fact, there have been only four other instances since 1978 of declines of at least this magnitude: December 1980, August 1990, September 2005, and October 2008. Except for the 2005 case, all were associated with recession. This doesn’t mean that the economy is headed in the same direction today, but it does raise the risk of consumers disengaging from the economy for fear of the virus which would reduce the momentum of the broader expansion. On a y/y basis, Sentiment is off 5.3%, also historically consistent with a moderation in growth.

Inflation expectations remained elevated. The one-year inflation outlook edged down modestly to 4.6% from 4.7% in the previous month, but that was still close to its highest level since August 2008. The five-year outlook picked up to 3.0% from 2.8% before, matching its highest level since 2011. Still, this is lower than the one-year outlook, which implies that consumers expect the current inflation spike to be mostly transitory.

The inflation report published by the Bureau of Labor Statistics provides details over several pages worth of categories. I scanned the report looking for items that were up more than 10% from July 2020 to July 2021. Here are several that caught my eye. 

  • Beef Steaks: 10.7%
  • Bacon and related products: 11.1%
  • Some pork products: 13.7%
  • Energy: 23.8%
  • Major appliances: 12.3%
  • Men's pants: 11.2%
  • Women's dresses: 18.8%
  • Transportation less motor fuel: 19.8%
  • Used cars and trucks: 41.7%
  • Lodging away from home: 21.5%
  • Moving, storage and freight expenses: 13.3%
  • Car and truck rental: 73.5%
  • Airline fares: 19%

Below, a couple of charts with inflation data. See the full report here.



The Poor Performance of Education, Part 2

I previously broached the subject of school performance a couple of days ago here. While funding per student has gone up five times from 1970 to 2010, test scores remain stagnant.

Ironically, despite the United States having the second-best education system globally based on number of students who graduate and go on to higher education, it consistently scores lower than many other countries in benchmarks such as math and science. According to the Business Insider report in 2018, its education ranking was 38th in math scores and 24th in science. The United States' education rankings have been falling by international standards over the past three decades.

It's not just math and science that are victims to our public school system. 

Recent surveys show that young Americans know little about their own country, other than they hate it. 

A new YouGov poll asked more than 1,000 people aged 14 and up about their knowledge of the country's history and institutions, and their patriotic feelings toward the U.S. The nationwide survey, sponsored by the Foundation for Liberty and American Greatness, produced some alarming results.

Basically, it found younger generations — millennials (age 22-27) and Gen Z (age 14-21) — are less likely to love and respect the country. And they're less informed about American history, and way more likely to embrace socialism. Is that just evidence of youthful ignorance? Or is it the result of a school system that indoctrinates children in leftist ideology?

At the same time schools are filling kids' heads with leftist propaganda, they're failing to teach young people much about U.S. history.

The survey found that 87% of high school students flunked a five-question test of basic knowledge about American history, the worst of any age group.

High school students were also least likely to know who is on Mount Rushmore. Only 35% of them got it right, compared with 71% of boomers. Only 11% could name the rights enumerated in the First Amendment. And more than half of today's high schoolers believe Barack Obama was a more consequential president than George Washington.

A new poll shows that only a little over a third of Americans would pass a basic multiple choice U.S. citizenship test, modeled after the one taken by immigrants in the process of naturalization.

The survey, released Oct. 3 by the Woodrow Wilson National Fellowship Foundation with the research firm Lincoln Park Strategies, sampled 1,000 American adults. It showed that only 36 percent actually passed the test.

Respondents 65 and older scored the best (74 percent), while only 19 percent of test-takers 45 and younger passed.

Only nine states and the District of Columbia require one year of U.S. government or statistics.

Our nation is experiencing a crisis in civic education. A 2016 American Council of Trustees and Alumni report showed that, even though nearly all twelfth-grade students took a course in civics, less than a quarter of them passed a basic examination at “proficient” or above. The crisis extends to higher education as well. In a survey of over 1,000 liberal-arts colleges, only 18 percent include a course in U.S. history or government as part of their graduation requirements. Even at George Washington University, you don’t have to take a course in U.S. history to graduate.

While the 2016 election brought a renewed interest in engagement among youth, only 23 percent of eighth-graders performed at or above the proficient level on the National Assessment of Educational Progress (NAEP) civics exam, and achievement levels have virtually stagnated since 1998. In addition, the increased focus on math and reading in K-12 education—while critical to prepare all students for success—has pushed out civics and other important subjects.

The statistics in the ACTA report come after 15 years of concerted investment in civic education. As such appalling numbers show, this investment made little difference: Most Americans fail not only to retain basic facts but also to grasp why understanding these things even matters.

As a nation, we have fallen prey to the impossible expectation Jefferson counseled against over 200 years ago. A government by the people, for the people, and of the people is only as wise, as just, and as free as the people themselves. Ignorance and indifference inevitably erode our freedoms and destroy our republic. It is not without cause that our national discourse in recent years has been so histrionic and hateful.

Indeed, the sheer growth and spread of the federal government shows that we have lost the trail the Founders blazed. The Department of Education exemplifies both this problem and its results. At its core, true education is more than facts and figures. It engages and enriches the soul. It rightly orients one to understand his or her place in the world, to pursue truth and beauty, and, perhaps most important, to understand why the pursuit of these things matters — not just for occupational production, but to know how to live.

Over the course of the past century, the role of education in government and the role of government in education have become increasingly muddled. Our current education system little resembles the intent of the Founders. For these men, education was a responsibility delegated to the people, not a right provided by the government. When George Washington petitioned for the creation of a national university, his request was denied on the grounds that education was not a power outlined in the Constitution. Our current Department of Education, with its expansive regulations and reach, would be incomprehensible and insupportable to the Framers of our Constitution.

When I was in school in the 1960s, I don't remember a semester where a  class in civics, government or history was not required. In college, I had to have government to graduate. Now, many colleges do not require history to graduate, why most students don't know which century the civil war was fought. Harvard does not require a class on the Constitution for a law degree. 

But Gender and Diversity studies abound. K-12 students are steeped in critical race theory -- if not by that name -- and other leftist points of view, including that the U.S. was created for the purpose of allowing rich white men to own slaves, the U.S. is systemically racist, and inherently bad. 

And yet, millions from around the world still want to come here. 

Hospitals Overwhelmed? Why? Data Shows They Should Not Be

Recent reports of hospitals once again being overwhelmed or stressed because of Covid-19 cases are somewhat suspicious. Data from the CDC as of Aug 7 show that this should not be the case. But the devil is in the details. 

Only 9 percent of hospitals are under high or extreme stress, according to NPR. 

While hospitalizations have been rising in recent weeks, they are no where near the level of last winter. (CDC Data).

Many hospitals trimmed staff and costs this year in an effort to remain profitable, according to the Wall Street Journal. 

The mainstream media are not painting an honest or accurate picture of what's going on. 



Thursday, August 12, 2021

The Poor Performance of Education in the United States

Forget Critical Race Theory. U.S. Public Schools are an abject failure. In spite of more and more money, results have not improved. 

Oregon Gov. Kate Brown privately signed a bill last month ending the requirement for high school students to prove proficiency in reading, writing, and arithmetic before graduation. Brown, a Democrat, did not hold a public signing or issue a press release regarding the passing of Senate Bill 744..., an unusually quiet approach to enacting legislation, according to the Oregonian. ...The bill, which suspends the proficiency requirements for students for three years, has attracted controversy for at least temporarily suspending academic standards... Backers argued...the new standards for graduation would aid Oregon's "Black, Latino, Latinx, Indigenous, Asian, Pacific Islander, Tribal, and students of color." ...Republicans criticized the proposal for lowering academic standards. "I worry that by adopting this bill, we're giving up on our kids," House Republican Leader Christine Drazan said.

I don't know which part of the story is more reprehensible. Should we be more outraged that state politicians want to eliminate standards, or should we be more outraged that supporters are implicitly (at the very least) racist in thinking that minority students can't perform?

This is equivalent to breaking your bathroom scale because you don't like your weight.

The performance of American teenagers in reading and math has been stagnant since 2000, according to the latest results of a rigorous international exam, despite a decades-long effort to raise standards and help students compete with peers across the globe. …The disappointing results from the exam, the Program for International Student Assessment, …follow those from the National Assessment of Educational Progress, an American test that recently showed that two-thirds of children were not proficient readers. …Low-performing students have been the focus of decades of bipartisan education overhaul efforts, costing many billions of dollars, that have resulted in a string of national programs — No Child Left Behind, Race to the Top, the Common Core State Standards, the Every Student Succeeds Act — but uneven results.

By the way, we haven’t had a “decades-long effort to raise standards.”

What we really had is a decades-long effort to appease teacher unions by pouring more money into the existing school monopoly.

That was the real purpose of failed schemes like Bush’s No Child Left Behind (I call it No Bureaucrat Left Behind) and Obama’s Common Core.

The real problem is the structure of our education system. We have a very inefficient monopoly that has been captured by the teacher unions, which means mediocre results.

It doesn’t matter that most teachers are well meaning and it doesn’t matter that most parents are well meaning. Until we replace the monopoly with school choice, things won’t get any better.

And the woke crowd doesn't make it any better. 

Ethan Chaplin, a Glen Meadow Middle School student, told News 12 last week that while he was twirling a pencil with a pen cap on in math class, a student who bullied him earlier in the day yelled "He's making gun motions, send him to juvie." He was suspended for two days and then underwent five hours of a physical and mental exam at Riverview Medical Center's crisis unit, his father told NJ.com.

Meet 8-year-old Asher Palmer, who was tossed out of his special-needs Manhattan school for threatening other kids with a toy “gun’’ — which he made out of rolled-up paper. ...[His mom] was incensed that Principal Micaela Bracamonte told other staffers in an email that Asher “had a model for physically aggressive behavior in his immediate family.’’ Spadone thinks Bracamonte was referring to her husband because he served in the military during the Kuwait war. If that was the reason for the comment, she said, “I find it offensive and inappropriate.’’ As far as the toy gun is concerned, she said Asher, a first-year student, made it out of a piece of paper after discussing military weapons with his dad.

This is not an isolated incident. 
  • A Rhode Island boy offended the PC nanny-staters by bringing toy soldiers to school.
  • A student in San Diego got in trouble for making a motion detector for a science project, simply because someone decided it resembled a bomb.
  • A Florida student was expelled for having a toy gun on school property.
  • There was a serious proposal to prevent children from watching Olympic shooting events.
Seems like the United States wins this contest for government stupidity.

Glad I graduated High School in 1970.



Signs of Inflation Peaking, But Still Highest Since 2008.


I love the way the U.S. government reports inflation. Its core numbers leave out energy and food, which have to be large budget items in the average person's budget. Let's look through the numbers for the Consumer Price Index, which were reported yesterday, Aug 11, 2021.

The Consumer Price Index (CPI) increased 0.5% in July, in line with the consensus, and the smallest gain in five months, as broad price growth moderated. Food prices rose 0.7%, the second most since April 2020. Food away from home spiked 0.8%, the most since February 1981, as greater demand for dining out strained the capacity in the restaurant industry which has been dealing with labor shortages and rising costs, including wages. Energy prices picked up 1.6%

Core CPI, which excludes food and energy, increased 0.3%, the least in four months, and below the consensus of 0.4%. Shelter prices rose 0.4%, accounting for over half of the increase in the core. It was led by another near-record surge of 6.0% in lodging away from home. But rent and owners’ equivalent rent posted moderate gains of 0.2% and 0.3%, respectively, partly due to the temporary eviction moratorium. New vehicle prices continued to ascend, up 1.7%, the second most since October 2009. But used car and truck prices rose only 0.2%, following an average monthly gain of 9.3% over the prior three months, a clear indication that conditions in that market are beginning to normalize. There were moderate increases in recreation, medical care services, and personal care. In contrast, vehicle insurance, air fares, and prescription drug prices fell.

On a year-to-year (y/y) basis, the CPI increased a steady 5.4%, the highest inflation rate since August 2008. Core CPI rose 4.3% y/y, off modestly from the 4.5% y/y pace in the previous month, but still near the highest core inflation since December 1991. The slight deceleration is a positive sign that inflation is peaking, as the base effect dissipates and the demand/supply dynamics begin to normalize. 

Wholesales Prices Soar by 1%

Inflation at the wholesale level jumped a higher-than-expected 1% in July, dimming hopes for a slowdown in price increases. The July gain in the producer price index, which measures price pressures before they reach consumers, matched the June increase with both months advancing by the highest amount since a 1.2% rise in January, the Labor Department reported Thursday.

Over the past 12 months, prices at the wholesale level are up a record 7.8%, surpassing the old record of a 7.3% gain set for the 12 months ending in June.

Jared Dillion at Mauldin Economics writes in the 10th Man newsletter today (I encourage you to read the entire article): 

Inflation rips society apart; deflation bands people together. Japan, despite decades of deflation, is a peaceful and prosperous society with its values intact. Inflation creates political instability, which can lead to democracy… disappearing.

Which would you prefer?

This is not an anti-Fed newsletter, but this is what the Fed gets wrong. The dangers of high inflation are not strictly economic—they’re cultural and political.


Tuesday, August 10, 2021

SEC Approves Diversity Proposal

 From National Law Review

SEC Approves NASDAQ Board Diversity Proposal Over Significant Dissent


The SEC recently approved two proposals by NASDAQ concerning board diversity. Specifically, the proposals would "require each Nasdaq listed company, subject to certain exceptions, to publicly disclose . . . information on the voluntary self-identified gender and racial characteristics and LGTQ+ status . . . of the company's board" and to "require each Nasdaq-listed company, subject to certain exceptions, to have, or explain why it does not have, at least two members of its board of directors who are Diverse." The proposal would also "provide certain Nasdaq-listed companies with one year of complimentary access for two users to a board recruiting service, which would provide access to a network of board-ready diverse candidates for companies to identify and evaluate." (https://www.sec.gov/rules/sro/nasdaq/2021/34-92590.pdf)

The three Democratic-appointed SEC commissioners approved of these proposals (https://www.sec.gov/news/public-statement/statement-nasdaq-diversity-080... https://www.sec.gov/news/public-statement/gensler-statement-nasdaq-propo...), while the two Republican-appoint SEC commissioners opposed the requirement for board diversity (https://www.sec.gov/news/public-statement/peirce-nasdaq-diversity-statem... https://www.sec.gov/news/public-statement/roisman-board-diversity).

This 3-2 split on the SEC reflects a broad and deepening divide concerning recent SEC moves in the ESG space, including disclosures related to climate risk. The significant dissent among the SEC commissioners suggests there will be substantial opposition to any new disclosure requirements focusing on ESG, and that efforts may be made by the regulated industries to delay any rule-making in the expectation of a different political balance on the SEC within a few years.
Today, the Commission voted to approve Nasdaq’s proposed rule changes requiring issuers to disclose certain information about the diversity of the company’s board and to offer certain companies access to a complimentary board recruiting service.[1] These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders. 
As the order discusses, the rules are consistent with the requirements of the Exchange Act. These rules reflect calls from investors for greater transparency about the people who lead public companies, and a broad cross-section of commenters supported the proposed board diversity disclosure rule. Investors are looking for consistent and comparable data when making decisions about their investments. I believe that our markets work best when investors have access to such information.
©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume 

Sunday, August 8, 2021

A Tax By Any Other Name: How Inflation Is Robbing You Blind

by E.J. Antoni
Texas Public Policy Foundation

CNBC recently published an article whose original title demonstrated a fundamental misunderstanding about inflation. The wording was so misinformed that it prompted intense criticism and CNBC changed the article’s title.

It originally read “The upside to inflation: rising wages” and was changed to “It’s not certain rising wages will be enough to outpace inflation.” Ironically, after posting a critique of the CNBC headline, Fox Business posted its own article with an equally misinformed headline: “Inflation inflicting near-term pain, but promises long-term gain for seniors.”

These headlines misconstrue the fundamental mechanism that causes inflation.

As Milton Friedman frequently said, inflation is always and everywhere a monetary phenomenon. Inflation occurs when the amount of money in an economy grows faster than the growth of goods and services in that economy. The ultimate power to create fiat money lies with America’s central bank—the Federal Reserve (the Fed).

The Fed is aided by two other entities: Congress and the Treasury.

Congress is spending money at a breakneck pace, and the Treasury must write those checks. When there is not enough money from tax receipts, the Treasury borrows the rest by selling bonds at an auction. When the public buys those bonds, the money is merely changing hands. But when the Fed buys those bonds, the money comes from somewhere else—nowhere.

Put simply, the Fed has the authority to create money out of nothing for the purpose of buying government debt.

When new money is created, it diminishes the value of the existing money because there is now more of it. The Fed has purchased so many bonds in recent months that it has doubled its total debt holdings. The result is much more money in the economy.

When additional money is trying to purchase the same amount of goods and services, prices rise.

Whether most people realize it or not, every segment of the economy fundamentally functions like an auction house and prices are constantly being bid up or down. If everyone shouting out their bids has more money to spend, then bids naturally go higher.

People often interpret the initial effects of inflation as being beneficial. Consumers have more money to spend, and producers have higher sales. But as consumers compete over limited goods and services and as producers compete over limited inputs, the bidding wars begin. All in all, prices rise, and no one is better off.

But there is one more thing to consider: inflation is fundamentally a tax.

It is a transfer of wealth from anyone on a fixed income, or any creditor, or anyone with a dollar in their pocket or a savings account, to the government. That brings the conversation back to the recent news articles. It is simply incorrect to say that employees benefit from inflation through higher wages.

That is like saying a person benefits from an accident which totals his or her vehicle because the insurance company pays the claim. The person still must go through the hassles of finding a new vehicle, dealing with any long-term injuries from the accident, and paying the deductible. The person is not better off after the accident—the insurance coverage can only diminish the harm. Similarly, higher wages can only lessen the real cost of inflation, but employees are still worse off compared to before the inflationary wave.

Likewise, people on Social Security and other programs with cost-of-living adjustments (COLAs) are not better off because of inflation, neither in the short term or the long term.

In the short term, those people are stuck paying today’s higher prices out of an income that was determined using last year’s lower prices. Even after their incomes have risen, they still cannot purchase more goods and services than before the inflation. Worse yet, the real value of their savings has diminished, being subtly taxed away.

The headlines espousing the virtues of inflation are plain wrong. A more accurate headline would be: “A Tax by Any Other Name: How Inflation is Robbing You Blind.”

E. J. Antoni, Ph.D., is an economist at the Texas Public Policy Foundation whose research focuses on fiscal and monetary policy. Antoni’s research has been featured with the Daily Caller, Fox Business, the Wall Street Journal, National Review, the Show-Me Institute, the Heartland Institute, the Arizona Chamber Foundation, FreedomWorks, and the Committee to Unleash Prosperity, where he is a visiting fellow. He has taught courses ranging from labor economics to money and banking.

Antoni earned his master’s and doctorate in economics from Northern Illinois University.

A Short Primer on How Capitalism Works

By Dan Mitchell

People who want more government spending generally have both a short-term and a long-term argument.
  • In the short-term, they assert that more government spending can stimulate a weak economy. This is typically known as Keynesian economics and it means temporary borrowing and spending. While Keynesian economics may look good on paper, it is rarely practiced in the manner proscribed. During times of economic expansion, it calls for government reduction of spending and borrowing (actually, paying off debt). This never happens.
  • In the long term, they claim that big government is an investment that leads to better economic performance. This is the "Nordic Model" and it means permanent increases in taxes and spending.
In many ways, the debate about short-term Keynesianism is different than the debate about the appropriate long-term size of government.

But there is one common thread, which is that proponents of more government pay too much attention to consumption and too little attention to production.

From the Wall Street Journal

Here’s how capitalism works—pay attention if you took the social-justice version of Econ 101. SIPPC: Save. Invest. Produce. Profit. Consume. Save means postponing consumption, money and time. Only then you can invest, especially your human capital, in something productive. Usually this means doing more with less, being efficient and effective. This is when innovation happens. Wealth comes only from productivity, not from giving away money. ...Supply first and then consume..., creating incentives to put money into the hands of entrepreneurs and clearing a path for them to innovate by getting government out of the way.

There are no shortcuts. You can’t induce demand without supply. Didn’t the lockdowns prove that? Stimulus checks did little good given that there were few places to spend them until businesses were allowed to reopen. We’re now perversely sitting on almost $3 trillion in excess savings and even more new government debt. Yet the government stimulus mentality continues in Congress. ...Through taxes and currency depreciation, demand-side spending steals savings needed to invest in future supply, which is why it never works. It is why the Great Depression lasted so long, why Japan lost two decades, and why 2009-16 saw subpar U.S. economic growth. When demand drops, government spending and giveaways make things worse. The only solution to kickstart production is to increase investment and make jobs more plentiful by cutting taxes and easing regulation. ..Price signals tell entrepreneurs what to supply. But price signals are only as good as their inputs. Minimum-wage laws mess up labor price signals. Tariffs mess up trade price signals. The Federal Reserve’s bond-buying blowouts mess up interest-rate price signals.

...Modern Monetary Theory, known as MMT—what economist John Christensen called the “Magic Money Tree”—is the worst of demand-side nonsense. MMT believers think that to boost aggregate demand we can have government print money and spend, spend, spend. We tried this in the 1960s and ’70s with Great Society programs

Amen. We know the policies that lead to more prosperity, but politicians constantly throw sand in the gears.

Simply stated, bigger government diverts resources from the productive sector of the economy. And that makes it more difficult to get the innovation and investment that are necessary for rising wages.

To be sure, there are some types of government spending that arguably help a private economy function.

But that's not what we get from much of the federal government.

Larger government, more spending, does not spur economic growth. In fact, It's worth noting that the World Bank, OECD, and IMF have all published research showing the benefits of smaller government.

Federal Reserve Maintains Status Quo; Jobs Report

The Federal Reserve wants to see “substantial progress” in the economy before it makes any move towards removing accommodation. They haven't specifically defined what that is, but they'll know it when they see it.

But if Fed Chairman Jerome Powell has used his press conferences for anything, it's to hammer home the point that he's still very concerned about the labor market, one-half of the Fed's dual mandate. “I'd say we have some ground to cover on the labor market side,” Powell said after July's decision dropped. “I think we're some ways away from having had substantial further progress toward the maximum employment goal.”

Jobs Report

U.S. nonfarm payrolls added 943,000 jobs in July after a gain of 938,000 in June. The July gain is the seventh in a row and 14th in the last 15 months, bringing the seven-month gain to 4.318 million and the 15-month post-plunge recovery to 16.660 million. This is still well below the 22.362 million combined loss from March and April of 2020, leaving nonfarm payrolls 5.702 million below the February 2020 peak. If payrolls continue to grow at the average over the last seven months (616,857), it may take another nine months to fully recoup all of the job losses.

However, the headline gain was boosted by a large jump of 230,000 in state payrolls. Private payrolls posted a less impressive though still strong 703,000 jobs gain in July after a 769,000 gain in June. The July rise in private payrolls is also the seventh in a row and 14th in the last 15 months. The July addition brings the seven-month gain to 3.721 million and the 15-month recovery to 16.433 million versus a combined loss of 21.353 million in March and April of 2020, leaving private payrolls 4.92 million below the February 2020 peak. If private payrolls continue to grow at the average over the last seven months (531,571), it would also take about nine months to fully recoup all of the job losses.

The breadth of gains was positive again in July. Within the 703,000 gain in private payrolls, private services added 659,000 while goods-producing industries added 44,000. For private service-producing industries, the gains were again led by a surge in leisure and hospitality, adding 380,000, accounting for more than half of the total gain in private payrolls, an 87,000 gain in education and health care services, a 60,000 rise in business and professional services, and 50,000 new jobs in transportation and warehousing. Retail continued to be somewhat volatile, losing 6,000 jobs in July, the second decline in the last four months.

Within the 44,000 gain in goods-producing industries, construction was up 11,000, durable-goods manufacturing increased by 20,000, nondurable-goods manufacturing added 7,000, and mining and logging industries increased by 6,000.

Bottom Line: After 15 months of recovery, all the major private industry groups still have fewer employees than before the government lockdowns. Three industries – Leisure and hospitality (down 1.737 million jobs), education and health services (down 953,000), and professional and business services (off 556,000) – are down more than half a million jobs each.

Other measures of economic activity generally suggest the economic recovery from the government lockdowns in 2020 is continuing as the restrictions on consumers and businesses are lifted. However, the damage done by the lockdowns was severe. The inability of supply to recover as quickly as demand is resulting in shortages in some areas of the economy and putting significant upward pressure on prices. Furthermore, the rising number of new Covid cases from the Delta variant is a growing risk to the recovery. The overall outlook is tilted to the upside, but challenges remain, and risks are growing.

Monday, August 2, 2021

Eviction Moratorium Has Expired. Oops. Not Yet.

Update on Aug 5: The moratorium was extended by the CDC, against a ruling by the U.S. Supreme Court. 

Landlord Group Sues CDC Over Eviction Ban Extension 

The eviction moratorium expired on Saturday, July 31. There has been plenty of speculation about what will happen now, but I don't think anyone is absolutely sure. It could spark an economic nightmare, but is getting little to no coverage in the mainstream media. 

In March of 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act (the so-called “CARES” Act) which included an eviction moratorium preventing landlords from evicting tenants who were delinquent in paying their rent.

The national moratorium has been challenged in several courts and its expiration date has been extended four times. It currently expired last Saturday, July 31, and federal officials (including President Biden) have indicated there are no plans to extend it again, though there are those in Congress who wished to have it extended (AOC, for example). 

Throughout the moratorium, there has been confusion among renters and landlords regarding federal rent assistance. Landlords complain that some tenants have abused the moratorium by not paying rent, even if they have the money to do so. Tenants complain about the complicated paperwork and the long wait to receive rent assistance funds.

More than 11 million Americans — 16% of renters — are still behind on their rent payments, according to analysis by the Center on Budget Policy and Priorities. Some believe the numbers are far higher. And the moratorium has ended.

Congress approved more than $46 billion in rental assistance between last December and March for both tenants and landlords, but getting the money into their hands has proved hard for both the federal government and state and local agencies.

Exact amounts of assistance renters and landlords can receive depend on their income and where they live, but renters could get enough to cover rent from as far back as March 13, 2020, unpaid utilities and even, in some cases, future rent. The problem is, the assistance is just not getting to where it needs to go.

The Treasury Department claims that more than $1.5 billion in assistance was delivered to eligible households in the month of June alone — nearly triple the amount distributed since April. Administration officials point to this as a pivotal sign of progress in the program and an indication that once local communities establish a system for handling the money, they will be able to distribute it quickly. That’s good news but, again, the eviction moratorium has already ended.

Bottom line: There is a definite risk that millions of renters could be evicted and put on the street just ahead. Now I understand the eviction process is a complicated one, including in most cases going through courts. So, it’s not going to happen immediately after the deadline last Saturday. Yet this could be an economic nightmare over the next several months.

Finally, given the economic magnitude of the start of mass evictions for millions of delinquent renters, and the psychological impacts it would have on the country at large, I could see this throwing stocks into a correction just ahead.

Hopefully, federal and state agencies can get up to speed quickly (which I doubt) and assure landlords that the money is coming and convince most not to initiate the eviction process a few weeks longer.






Freddie Mac Mortgage Report

Interactive Chart here .