Geopolitics, What is it good for? 9/25/17

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Did you know when lightning strikes it can reach up to 30,000 degrees Celsius (54,000 degrees Fahrenheit)?

Geopolitics, what is it good for? Absolutely nothin'!

In January, Robert Kahn of the Council on Foreign Relations wrote in Global Economics Monthly:

“Markets showed impressive resilience in the face of a range of geopolitical shocks in 2016, but recent market moves suggest this year could be different…It should be the year that global geopolitical risks provide the volatility in markets that I, and many other economists, have been predicting for some time.”

Kahn may share the bemusement of bond market prognosticators who have anticipated the end of the bull market in bonds for years and have yet to see their predictions prove out.

So far in 2017, investor confidence has remained impervious to geopolitical threats. Bloomberg reported, while diplomats at the United Nations stress over North Korea’s threat to drop a hydrogen bomb, Russia’s provocations along the borders of Eastern Europe, rising Middle East tensions, and conflict between the United States and China in the South China Sea, investors remain relatively sanguine.

The CBOE Volatility Index, or VIX, which measures market expectations for near-term volatility in the Standard & Poor’s 500 Index (S&P 500), finished below 10 on Friday. Historically, the VIX has finished below 10 on just a few days in its history. While the very low level of the VIX doesn’t tell us much about the future, Barron’s reports it indicates investors are not too concerned about “what’s happening now and what has happened.”

That contention appears to be supported by U.S. stock market performance. Despite hostile rhetoric between the United States and North Korea last week, the S&P 500 and Dow Jones Industrial Average both finished slightly higher.

It's The IG Nobel Awards!

On September 14, the 27th First Annual Ig Nobel Prize Ceremony kicked off with a flight of paper airplanes.

The winners were chosen by the publishers of the Annals of Improbable Research, which reviews, “Real research, about anything and everything, from everywhere. Research that's maybe good or bad, important or trivial, valuable or worthless.” The most important characteristic of the works published is they make people laugh and think.

The evening’s entertainment included ceremonial bows from returning Ig winners John Culvenor, who received the 2003 Physics Prize for analyzing the forces required to drag sheep across various surfaces, and Deborah Anderson, who received the 2008 Chemistry Prize for testing whether a dark cola is an effective spermicide.

This year’s winning research explored diverse and improbable ideas, including studies entitled:

• Didgeridoo Playing as Alternative Treatment for Obstructive Sleep Apnoea Syndrome: Randomised Controlled Trial, which discovered that, “Regular didgeridoo playing is an effective treatment alternative well accepted by patients with moderate obstructive sleep apnoea syndrome.”

• Never Smile at a Crocodile: Betting on Electronic Gaming Machines is Intensified by Reptile-Induced Arousal, which showed that, “At-risk gamblers with few self-reported negative emotions placed higher average bets at the EGM after having held the crocodile when compared to the control.”

• Is That Me or My Twin? Lack of Self-Face Recognition Advantage in Identical Twins concluded that, “identical twins cannot tell themselves apart, visually.”

• On the Rheology of Cats, which explored whether a cat can be both a solid and a liquid and determined, “much more work remains ahead, but cats are proving to be a rich model system for rheological research.”

Each of the 10 Ig Nobel winners was given 60 seconds to explain themselves before being awarded a bust replica of a human head with a question mark on top of it, a certificate signed by a Nobel Laureate, and one trillion Zimbabweans.

Russian-born physicist Andre Geim was the first scientist to win both awards. He received a 2000 Ig Nobel Prize for his work using magnets to levitate frogs, and a 2010 Nobel Prize for discovering graphene (a new form of carbon).

Weekly Focus – Think About It 

“Like a welcome summer rain, humor may suddenly cleanse and cool the earth, the air, and you.” 

--Langston Hughes, American poet

Debt Ceiling Jitters 8/28/17

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The Markets

Hope Floats

Optimism about possible pro-growth economic policies, including tax reform and deregulation, helped U.S. stock indices finish higher last week, reported Barron’s. It wasn’t all smooth sailing, though. Stocks bobbed up and down as investors’ optimism was weighted by concerns about a possible debt-ceiling battle and government shutdown.

CNN offered some insight to the historic economic impact of government shutdowns on productivity:

“The last time the government was forced to close up shop – for 16 days in late 2013 – it cost taxpayers $2 billion in lost productivity, according to the Office of Management and Budget. Two earlier ones – in late 1995 and early 1996 – cost the country $1.4 billion.”

For investors, it’s important to distinguish between a shutdown’s potential effect on the U.S. economy and its possible impact on U.S. stock markets. A source cited by The New York Times reported:

“…during all 18 government shutdowns, starting in 1976…the Standard & Poor’s 500-stock index averaged just a 0.6 percent loss over the course of those closures. Early on in shutdown history, investors reacted very negatively. Closures in 1976 and 1977 coincided with 3 percent declines in the [S&P 500].

As investors grew more accustomed to shutdowns, they seemed to become more blasé about them. During the mid-1990s and the 2013 closure, for instance, stocks actually rose. They gained 3.1 percent during the 2013 stoppage.”

Bond investors were relatively calm last week, according to Financial Times. Although, there were signs of “debt ceiling jitters.” Yields on U.S. Treasuries that mature in October (when a shutdown may occur) rose on concerns investors might not be repaid in a timely way.

No matter what happens in September and October, keep your eyes on the horizon and your long-term goals.

Millennials Are Killing It!

A recent article in Buzzfeed listed headlines announcing the various things Millennials have “killed” or are “killing.” The list included Big Oil, the NFL, the workday, the cereal industry, and bar soap.

Here’s another industry that is being undermined by millennials’ preferences: cable and satellite television. Millennials are leading a viewing revolution. They are unwilling to ante up for cable and satellite subscriptions, preferring less expensive Internet and streaming services that provide content via the World Wide Web.

A 2017 survey from Videology found more than half of millennial men (ages 18 to 34) have stopped paying for cable, and Forbes reported:

“…on average, the 30-and-under crowd's primary means of consuming content is through mobile devices, streaming, and online. That's in sharp contrast to the over-30 crowd who still rely on television for an average of more than 80 percent of their film and TV show viewing.”

The waning popularity of cable and satellite TV appears to have a lot to do with cost. The typical household paid more than $1,200 a year, on average, for cable and satellite television in 2016, according to Nerdwallet – and the cost increased in 2017. Consumer Reports wrote, “Most pay TV companies have announced modest price hikes, but there are also new hidden fees.”

Budget-minded millennials may be having an influence on older generations whose preferences appear to be changing, too. GfK, a market research company, reported:

“New findings…show that U.S. TV households are embracing alternatives to cable and satellite reception. Levels of broadcast-only reception [a.k.a. antenna reception] and Internet-only video subscriptions have both risen over the past year, with fully one-quarter (25 percent) of all U.S. TV households now going without cable and satellite reception.”

So, what kind of savings can be generated when you cut the cable? It all depends on what you currently pay, but it may be worth crunching the numbers.

Weekly Focus – Think About It 

“I find television very educating. Every time somebody turns on the set, I go into the other room and read a book.”

--Groucho Marx, American comedian

Here, There, And Everywhere 8/21/17

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Did you know an ostrich's eye is bigger than its brain?

The Markets

Here, there, and everywhere… 

Markets around the world appear to be benefiting from global economic recovery. 

After pointing out the United States’ economy is the heart of the global financial system, Barron’s reported:

“The Standard & Poor’s 500 index has tirelessly amassed 30 record closes this year, but is up just 1.2 percent since March 1. Meanwhile, nearly every foreign stock market has sprinted ahead…We wrote on March 25 about how a global recovery should goose smaller, fresher bull markets abroad. By now, it is firmly becoming the consensus view – metals are rallying, with copper up 18 percent this year; the MSCI All Worlds Index has risen for eight straight months.”

Emerging markets haven’t performed too shabbily either. Through the end of last week, the MSCI Emerging Markets Index was up 22.88 percent year-to-date. Franklin Templeton’s Mark Mobius wrote improved performance in emerging markets is the result of “…encouraging economic data in China, investor inflows, and corporate earnings growth.”

So, global stock markets have been delivering relatively robust performance this year. 

What have bonds been up to? They’ve gained value year-to-date, too.

Bond markets continue to tell a different story than stock markets. The Federal Reserve raised its benchmark interest rate for the third time in June. In theory, interest rates should be moving higher, yet the yield on 10-year Treasury bonds was lower (2.19 percent) at the end of last week than it was at the start of the year (2.45 percent).

Have You Tried Taco Mode?

In March, the Harvard Business Review (HBR) offered some ideas about innovation in America. It’s a topic that deserves some attention as “…recent data suggests that innovation is getting harder and the pace of growth is slowing down. A major challenge in business and policy spheres is to understand the environments that are most conducive to innovation.”

One place to look for examples of innovation is the sharing economy where innovations often echo the late 1800s. Back then, according to HBR, innovation primarily occurred outside of companies. In contrast, today, the majority of patents go to inventors who are associated with companies.

Let’s take a look at a couple recent ideas that may or may not gain traction:

• Taco Mode. Ridesharing – arranging for a ride via an app – has changed transportation and become one of the industry’s fastest growing market segments, according to data from Statista reported by TechCrunch.com.

The latest rideshare innovation is Taco Mode. Hungry passengers can request rides that include stops at a fast food chain drive-throughs. One company executive described the option as ‘inverse delivery.’ The hungry are delivered to the food rather than vice versa.

• Just-in-time watch rentals. The demand for Swiss watches has fallen off in the United States. The Federation of the Swiss Watch Industry reported exports to the United States dropped steadily (-9.6 percent) between 2015 and June 2017.

Could the culprit be luxury watch rentals? Barron’s Penta reported luxury watch rentals are a relatively recent sharing-economy innovation. For a monthly membership fee of $149 to $999, watch lovers have opportunities to “…access experiences and embark on journeys otherwise unattainable – without having to spend a major chunk of their savings.”

• Neighborhood networks. It’s a straightforward concept: A social network that connects neighbors so they can share tools, leftovers, playgroups, and more. It’s big in Brazil, according to Forbes. One company has more than 140,000 registered users across 3,800 cities.

But, anyone who has ever watched Homer Simpson borrow Ned Flanders’ tools and not return them understands why some aspects of this idea may not catch on. 

What innovations would you like to see in the sharing economy?

Weekly Focus – Think About It 

“One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.”

--Warren Buffett, Oracle of Omaha

Churning Up Big Trouble 8/14/17

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Weekly Market Commentary

August 14, 2017

The Markets

North Korea may be a little country, but it can churn up big trouble.

The possibility that verbal hostilities between the United States and North Korea could trigger geopolitical conflict had investors on the run last week. In the United States, the Standard & Poor's 500 Index fell by 1.4 percent, the Dow Jones Industrial Average lost 1.1 percent, and the NASDAQ Composite finished 1.5 percent lower.

Financial Times explained:

"The sell-off came as U.S. President Donald Trump escalated the war of words against the North Korean regime's accelerated [program] of nuclear testing. Mr. Trump tweeted on Friday, "military solutions are now fully in place, locked and loaded, should North Korea act unwisely."

While major U.S. indices headed south, the CBOE Volatility Index (VIX) - also known as Wall Street's fear gauge - headed north. The VIX, which has been flirting with historic lows for much of the year, rose 44 percent in a single day, reported CNBC.

Stock markets in Europe and Asia were also affected by the saber rattling. National indices across Europe suffered weekly losses of 2.2 percent (Sweden) to 3.5 percent (Spain), according to Barron's. In the Asia-Pacific region, India's Sensex 30 lost 3.4 percent and South Korea's Kospi was down 3.2 percent for the week.

Geopolitical concerns overshadowed some important economic news in the United States. Inflation, as measured by the U.S. Consumer Price Index, rose very little in July. In fact, consumer prices have been soft for five straight months, reported MarketWatch. Persistently low inflation could affect the Federal Reserve's plan to raise interest rates this year. The Fed's goal is 2 percent inflation.

Are electric engines the tortoise competing with the combustion engine's hare?

In the late 1800s, the Paris-Rouen race for horseless carriages included 102 vehicles fueled by steam, petrol, electricity, compressed air, and hydraulics, reports The Economist. Not a single electric engine made it to the starting blocks. (The internal combustion engine won.)

Oh, how times have changed!

The International Energy Agency's Global EV Outlook 2017 reported:

"New registrations of electric cars hit a new record in 2016, with over 750 thousand sales worldwide. With a 29 percent market share, Norway has incontestably achieved the most successful deployment of electric cars in terms of market share, globally. It is followed by the Netherlands, with a 6.4 percent electric car market share, and Sweden with 3.4 percent. The People's Republic of China (hereafter, "China"), France, and the United Kingdom all have electric car market shares close to 1.5 percent. In 2016, China was by far the largest electric car market, accounting for more than 40 percent of the electric cars sold in the world and more than double the amount sold in the United States."

Financial Times reported the UBS analysis suggests the market may be at an inflection point as the total cost of ownership for electric vehicles may become comparable to that of combustion engine vehicles as early as 2018 in Europe, 2023 in China, and 2025 in the United States.

Even though their popularity is growing, electric cars comprise a small portion of the market today. UBS expects electric cars to account for 14 percent of the global market, and more than one-third of the European auto market, by 2025.

Weekly Focus - Think About It

"Though most of them sit idle, America's car and [truck] engines can produce ten times as much energy as its power stations. The internal combustion engine is the mightiest motor in history."

--The Economist, August 12, 2017

Start of the Bull Market 8/7/17

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August 7, 2017

The Markets

Who's been buying shares of company stock?

Since the start of the bull market in 2009, U.S. companies have been buying their own stock. Stock buybacks peaked during the first three quarters of 2016 and have dropped off sharply since then, reports Financial Times citing a report from Goldman Sachs.

Companies participate in stock buyback (a.k.a. share repurchase) programs to improve shareholder value. For example, if company management believes a company's shares are undervalued, it can buy shares on the stock market or offer shareholders a fixed price to purchase their shares. This reduces the number of shares in the marketplace and increases earnings per share, which has the potential to boost the company's stock price.

The slowdown in stock buybacks hasn't hurt stock markets. Financial Times reported:

"The slowing pace of companies buying back their own shares has certainly not halted Wall Street's stellar run so far this year. While there is a reduced tail wind of buybacks helping boost earnings per share via a lower share count, U.S. companies have reported robust year-on-year sales and earnings growth for the recent quarter. That has helped offset the decline in buyback activity, but some warn that the clock is ticking for Wall Street bulls."

There was no sign of a slowdown in the bull market last week, though. The Department of Labor reported the United States added more new jobs than anyone had expected during July, and the unemployment rate fell to 4.3 percent - the same level as May 2017, which was the lowest in 16 years, according to Barron's.

Jobs growth was music to many investors' ears. 

Financial Times reported, "U.S. equity indices hovered near record highs - with the Dow Jones Industrial Average touching an all-time peak of 22,089.05 in early trade - with financials bolstered by the rise in yields. European [markets] ended the week on a strong note, helped by a sharp retreat for the euro against the dollar."

Saving is as Easy as Riding a Bike!

If you would like to save more money - for retirement, college tuition, healthcare costs, or some other financial priority - hop on your bike and ride. 

As it turns out, riding your bike may help boost your savings. Whether you commute to work on two wheels or cycle around town doing errands, opting for manpower instead of horsepower can help generate some additional savings, according to a source cited by Bankrate.com:

"The average American household spends over $9,000 a year on transportation, making it the second-largest expense after housing...Many families simply take for granted the two-car, driving-to-work arrangement that's the norm for American households and often don't consider alternatives like public transportation, carpooling, or biking...That's a shame, because its status as a major household cost means cutting transportation can radically cut your overall costs and, potentially, increase your ability to save..."

If you are serious about saving, imagine what your finances would look like if you:

* Drove less. AAA reported owning a small car costs about $6,600 a year, while rumbling around in an SUV costs more than $10,000 annually. (The estimate includes fuel, insurance, depreciation, maintenance, fees and licensing, finance charges, and tires.) Eliminating a car could significantly improve your ability to save.

* Cycled more. Not everyone can get by without a car; however, if you bike shorter distances or when the weather is good, then you could qualify for a low mileage discount on your auto insurance.

* Didn't go to the gym. If you're riding a bike to work or to run errands, then you probably don't need spin class. The average gym membership runs $54 a month or almost $650 a year.

* Bought less stuff. Impulse purchases are less tempting when you're cycling because bike baskets and saddlebags have limited storage space. Who knows how much that could help you save? 

In addition to saving money, two-wheeled travel options are likely to improve your fitness and reduce the stress of rush hour driving. Cycling may even eliminate the need for dieting and some medications. Here's an added bonus: If biking improves your longevity, you may have more time to spend the money you save!

Weekly Focus - Think About It

"Life is like a 10-speed bicycle. Most of us have gears we never use." 

--Charles M. Schultz, Cartoonist

Now, the Bad News 7/31/17

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July 31, 2017

The Markets

There was some good news and some bad news last week.

First, the good news: Thanks to consumer spending and an upturn in federal government spending, the U.S. economy grew faster from April through June this year. Gross domestic product (GDP) grew by 2.6 percent during the period, according to the advance estimate for economic growth. This was an improvement over growth from January through March, when GDP increased by 1.2 percent.

Now, the bad news: Personal income did not grow as fast from April through June as it did from January through March. Wages and salaries grew at a slower pace, as did government social benefits and other sources of income. The New York Times wrote:

"Wage growth, however, decelerated despite an unemployment rate that averaged 4.4 percent in the second quarter. Inflation also retreated, appearing to weaken the case for the Federal Reserve to raise interest rates again this year.

'Although growth is solid, the lack of wage pressure buys the Fed plenty of time, and works with a very 'gradual' tightening cycle,' said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank in New York. 'There is more here for the Fed doves than the hawks.'"

The Federal Reserve Open Market Committee left rates unchanged at its meeting last week, commenting, "The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation."

The Standard & Poor's 500 Index finished the week flat. Yields on 10-year Treasury bonds moved slightly higher.

Cooking Illiteracy Could Improve Happiness

What does heavy cream become when you whip it? If you answered 'whipped cream,' try this one: What does whipped cream become when you whip it a little longer? If you said, 'butter,' congratulations! You may possess above average knowledge of cooking.

You may have heard about the death of the culinary arts. According to various surveys and news reports, few people today possess the skills required to boil an egg. In 2014, The Seattle Times reported:

"As cooking has been rendered optional - the victim of rising restaurant culture, myriad takeout options, and supermarket sections packed with pre-cut vegetables, shredded cheese, and prepared foods - [cooking instructors] say cooks are increasingly losing touch with skills considered basic, or even essential, just a generation or two ago. And that is changing the way...recipes are developed and written."

It's also changing the restaurant industry. An April 2017 survey from Morgan Stanley found demand for online order and delivery from restaurants is growing rapidly. By 2020, digital food delivery may comprise "...40 percent of total restaurant sales - or $220 billion...compared with current sales of around $30 billion."

Before you lament the ignorance of today's youth, consider the results of seven surveys, completed by Harvard University and the University of British Columbia, encompassing more than 6,000 respondents in four countries. The Washington Post reported:

"Across all surveys, life satisfaction was typically higher for people who regularly spend money to save time. This was true regardless of household income, hours worked per week, marital status, and number of children living at home...working adults in the United States reported higher life satisfaction if they regularly paid to outsource household tasks such as cooking, shopping, and general maintenance."

This may be the new math. Spending money to increase 'free' time equals improved happiness. 

Weekly Focus - Think About It 

"Cooking with kids is not just about ingredients, recipes, and cooking...it's about harnessing imagination, empowerment, and creativity."

--Guy Fieri, Founder of Cooking with Kids Foundation

Thanks Central Banks 7/24/17

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July 24, 2017

The Markets

Do we have central banks to thank?

Low interest rates, accommodative monetary policy, and improving economic growth have helped stock markets around the world reach record highs, reports Barron's:

"...a look around the globe shows the surge of the U.S. market to new peaks to be anything but unique. Major [markets] in Europe and Asia also have been setting records. Even in South Korea, the Kospi closed at a new peak and is up 25 percent from its 52-week low last year, as the global technology rally has proved to be more powerful than the threat of a nuclear-missile launch from North Korea. Last week also saw a record close in the S&P BSE Sensex in India. Japan's Nikkei is up 25 percent from last August and near a 52-week high (albeit still down 48 percent from its 1989 bubble peak). The Shanghai Composite is a relative laggard, with a 9.6 percent gain from its August lows, bolstered by a 3.7 percent jump over the past five weeks."

Eventually, central banks are expected to tighten monetary policy by raising interest rates and reducing the size of their balance sheets and that could affect markets. The U.S. Federal Reserve released its Policy Normalization Principles and Plans back in 2014. Last month, Chair Janet Yellen indicated the Fed currently intends to begin normalizing policy during 2017.

U.S. monetary policy isn't the only phenomenon investors may want to keep an eye on. 

Fiscal policy (the steps a government takes to influence its country's economy) deserves some attention, too. The United States will, once again, hit its legal spending limit (the debt ceiling) this fall. U.S. News reported, "Were the United States to hit its borrowing limit - and thus have to start missing payments and stiffing creditors - there's no telling the exact consequences, but they wouldn't be good."

The bond market does not appear to be confident fiscal policy will proceed smoothly. Barron's reported, "Yields on T-bills that mature in mid-to-late October jumped relative to surrounding maturities, a sign that the money market saw a risk - however slight - of not getting paid on time."

So, Here's Another College Conundrum: College is a Hot Topic.

College is a hot topic. In recent years, pundits have debated whether students should attend college or skip it and start their own companies. The Thiel Fellowship, founded by tech entrepreneur Peter Thiel, offers students $100,000 to do just that.

For students who choose college, much has been made about which degrees will pay off. Some argue liberal arts degrees lack value, and technical instruction is the real ticket to success. Meanwhile, technology company leaders have reported liberal arts are essential because "they train students to thrive in subjectivity and ambiguity, a necessary skill in the tech world where few things are black and white."

College is also known for changing the way students think. A new survey indicates it may alter their culinary perspectives. The Economist commissioned a poll to see if residence, income, education, or political affiliation has an effect on food preferences and, guess what? College and post graduate work may expand students' gustatory preferences and change their eating habits! No, they don't develop an unhealthy obsession with ramen noodles, boxed mac and cheese, or free food (usually). The survey found:

* People with post graduate degrees dine out more frequently - often weekly - than people with high school diplomas. 

* Post grads also tend to eat Indian foods, like curries, more often than people with high school diplomas. 

* College grads are more likely than non-college grads to have eaten sushi within the past year. 

* College grads are also more likely than non-college grads to know what prosciutto is and to have eaten it recently. 

As it turns out, the great equalizer was Mexican food. A majority of Americans have eaten Mexican food during the past year, regardless of educational attainment.

Weekly Focus - Think About It 

"Peanut butter and jelly in the same jar. I don't understand that. I mean, I'm lazy but I'd like to meet the guy that needs that. This guy must be thinking, "I could go for a sandwich, but I'm not gonna open TWO jars. I can't be opening and closing all kinds of jars and cleaning WHO KNOWS how many knives."

--Brian Regan, American comedian