@theMarket: Does the Fed Know Something We Don't?
Sometimes too much good news can be interpreted badly. Take the U.S. central bank's about face on monetary policy late last year. That was good news and investors responded by bidding the stock market up by 20 percent. But this week we may have received even better news, or did we?
The Fed did more than met investors' expectation this week at the central bank's monthly Federal Open Market Committee meeting. Chairman Jerome Powell indicated that there would be no more interest rate hikes for the remainder of the year (after saying back in December that two rate hikes were on the table for 2019). There was even some discussion that a rate cut might be possible, if conditions merited such a move.
One would have thought that would send the markets flying, and they did, at least on Thursday. Friday, however, the opposite occurred. Granted, the reaction could simply be dismissed as a "sell on the news" moment or algos playing their daily games. If so, nothing more needs to be said. But I ask myself — why would Powell and the Fed be contemplating a rate cut?
The news startled some analysts and left them asking questions. Is the economy weaker than most suspect? Has the slow-down in the global economy infected the U.S. as well? Afterall, the Fed did lower their forecast for GDP growth this year from 2.3 percent to 2.1 percent, but it is still growing, or is it?
As most economists know, the economy is getting a little long in the tooth; we call it a "late cycle" market. One of the reasons you might want to cut rates at this point would be if you expected the economy to slip into recession fairly soon.
There is certainly a huge discrepancy between the Fed's forecast and that of the Trump administration. In his budget for 2020, Donald Trump is forecasting 3.2 percent GDP growth this year. Given his tweets about the Fed, that is understandable. He believes that the only problem with the economy is the Fed. He does not believe they are in touch with the market or understand things like trade wars and a strong dollar. Investors are hoping that he is right. Time will tell if the Fed knows more than we do.
In the meantime, stocks continue to climb. As I wrote last week, with the world's central banks in an easing mode, stocks are benefiting from all this monetary stimulus just like they have for the past decade. Investor sentiment continues to move higher as well with the latest readings indicating 53.9 percent of investors bullish — the highest level since Oct. 1, 2018. That is the fifth straight reading above 50 percent, which is usually a sign that some caution is called for in investing.
However, the percentage of bulls are still much lower than the 61.8 percent bullish level that was registered when the stock market hit record highs back in September of last year. As a contrarian indicator, sentiment is a useful tool, but only one in my bag of tricks. Clearly, we have had a great run since the lows in December with hardly a pullback to speak of. We could easily decline a couple of percent at any time
As long as we held the 2,800 level, any sell-off would set us up to make a run at the 2,900 level on the S&P 500 Index. If that were the case, it would mean that we not only erased all of the losses of 2018 but would be looking at an almost double-digit return for the stock market year to date. That's quite impressive, given that we are not even in the second quarter of 2019 yet.
But I don't want to get ahead of myself. Just be grateful you hung in there through the fourth quarter of last year, and by all means, ignore the noise and negativity. Stay invested.
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The Independent Investor: Will Pot Stocks Go Up in Smoke?
Today, medical marijuana is legal in 33 states, while recreational marijuana is legal in 10 states, plus the District of Columbia. Although there has been progress, little of the recent enthusiasm and hype over pot stocks will come to naught unless the federal government does a major about face and legalizes the substance. What are the chances of that?
Billions of dollars' worth of investment, stock market gains, and federal, state, and local taxes are at stake. Predicting the outcome of such a change in federal legislation is, for now, like betting all your chips on red or black in a roulette game. Nonetheless, a growing number of retail investors want to "get in" on pot stocks.
The calls and emails I get today are reminiscent of two years ago. Back then it was all about Bitcoin or some other cryptocurrency. As Bitcoin climbed (from a few hundred dollars to $20,000), the interest and demand to "get in" was almost hysterical. As you might imagine, most of those calls were made as Bitcoin hit new highs.
Fast-forward to today and, while no one has called about a cryptocurrency in over a year with Bitcoin now around $4,000, pot stocks are all the rage. And like Bitcoin, few callers know anything about the marijuana industry.
"What do I need to know?" said one client (an ancient hippie like me). "You put it your mouth, inhale, and bingo. You are high."
But smoking it is a lot different than investing in it.
There is now a bewildering array of investment vehicles (and more coming every day) that confronts the up-and-coming pot investor. There are over 80 exchange-listed pot stocks. Most are Canadian companies (where all pot is legal), which have a listing here in the U.S. Since the federal government still deems marijuana illegal, most big major stock exchanges won't touch them. In addition, there are well over 200 over-the-counter (OTC) securities that trade outside of the big exchanges. The question you should ask is which of those stocks will be a winner and how do I avoid the losers?
The short answer is you need to do your homework. Most investors I talk to are woefully uninformed when it comes to understanding this sector. They fail to realize that most (if not all) companies who engage in this business make no money at all. Part of the reason for this is their inability to borrow or obtain any kind of credit from the U.S. banking system. Until the federal government legalizes marijuana, it is a purely cash business.
To compound the problem, few investors do little more than read market research reports that project global spending on legal cannabis will grow by 230 percent and reach $32 billion by next year. Of that amount, $23 billion is expected to come from U.S. sales. But that forecast assumes that more states will legalize the drug this year and next. That's a big "if."
Clearly, there is a bull case for the pot industry. Readers may be aware that over 200 million Americans reside in those states that have already legalized marijuana for medical or recreational use. And over 2/3rds of Americans support its legalization, according to Gallup polls.
What investors ignore is that the medical market for cannabis and the recreational market are vastly different animals. To muddy the waters further, there is the hemp industry. Hemp is another form of the versatile cannabis plant that has been used in textile production, foods and other home products for decades. There is also a growing use of cannabidiol or CBD. CBD is a non-psychoactive cannabis compound that is being infused in products as diverse as skin care, coffee and even dog biscuits. Titus, our 9-year-old chocolate Lab, who suffers from arthritis, for example, is now munching on CBD cookies several times a week. Over 40 states have already passed some kind of CBD legislation.
Each sub-sector of this marijuana industry has a different profile, profitability, and future. But in the rush to make money, these realities are all but by neophyte speculators. Does that mean that pot stocks will go the way of Bitcoin in a year or two?
Some will, and some won't. Like all fledgling industries with promise, there will be some companies that make it and a whole lot that won't. Next week we will discuss what kind of companies and what trends to look for in the months and years ahead.
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The Independent Investor: Does Our Debt Really Matter?
The country's national debt hovers at historically record highs, as the nation's budget battle begins. It's a pretty safe bet to expect another budget-busting compromise as well as a hefty increase to our already-overwhelming debt load.
At times like this I wonder whether Americans are facing the prospect that someday the United States could be the world's largest impoverished nation, and if so, does it really matter?
Last week's column examined the subject of debt, both private and domestic, and how large it has become. This week, I begin by asking why debt matters at all? On a personal level, we know the answer, but what about the nation?
Debt has been a popular whipping boy for economists and politicians in this country for decades. At times, one or the other political party has found it expedient to become a champion of economic sobriety. Of course, once they recapture control of the government purse strings, they pretend amnesia.
The Republicans, for example, spent eight years fighting the Democrats under President Obama on every dollar of proposed spending, except defense. Their argument back then was that any spending would increase the public debt and make it impossible to balance the budget. Republicans even refused to approve funding for our national debt limit and actually shut down the government in defense of what they called fiscal responsibility.
Fast forward to 2016-2018, when the same party (and the exact same politicians) added more debt to the country than at any time in our history, while throwing the budget into the red by trillions of dollars. The president's recent budget proposal only adds more fuel to our fiscal fire.
According to the Office of Management and Budget (OMB), debt under the President's budget would rise from 77 percent of Gross Domestic Product (GDP) in 2017 to 82 percent in 2022 before falling to 73 percent of GDP by 2028. OMB also projects the deficit will rise from 3.5 percent of GDP ($665 billion) in 2017 to 4.7 percent of GDP ($984 billion) by 2019, and then decline to 1.1 percent of GDP ($363 billion) by 2028.
Given that the supposed "fiscally conservative party" has thrown in the towel on spending and debt, is it too much to hope that the liberals (read Democrats) might have a sudden attack of conscience and discover fiscal responsibility? Don't hold your breath.
In fact, over the past few weeks, Modern Monetary Theory (MMT) has once again caught the attention of certain politicians in Congress and on the 2020 campaign trail. What exactly is MMT?
It is an old economic idea that periodically comes to the forefront and has, from time to time, attracted the attention of mostly liberal politicians. It does so, in my opinion, because some of its tenets fit their vision of what government and the economy should be all about.
In essence, MMT argues that if you have borrowed money (increased your debt) in your domestic currency (in this case the dollar), which is the currency that you as a government create, then you can always pay back your claims. How? By simply printing more money. Sounds simple, right?
The problem is that the United States, or any other country, does not exist in a vacuum. For every action, there is a reaction There are ramifications for piling on more and more debt and printing vast mountains of money to pay for it. The Weimar Republic tried that back before WWII, and so did Zimbabwe less than a decade ago. It resulted in hyperinflation, destitution and political unrest.
Nonetheless, if you believe government has the right and the responsibility to provide health care for all, or full employment through a federally-mandated jobs program, or any other big government spending program, then MMT has some appealing features. The MMT proponents argue that the country's central bank would be the locomotive for such programs by simply printing more money, and raising more debt, which, in turn, would finance such programs.
If, as critics argue, that causes our debt to skyrocket and inflation to explode upward someday, then it would be up to Congress to deal with it by raising taxes (to pay down debt), while tightening fiscal policy (to put a lid on inflation by slowing the economy). It would, in essence, turn our economic and financial world upside down, while leaving it to the politicians to make the hard, politically unpopular choices when necessary. Raise your hand if you would have confidence in such a system.
MMT, which has never been proven, nor completely understood as an economic theory, continues to look for a home among politicians and others. It is now being used in some quarters as economic justification for the financial expansion of a new welfare state. Does that surprise you?
In a country where partisan politics, extreme income inequality, and increasingly radical attitudes and ideas (fostered and fueled by our elected officials) are in every headline and tweet, is it any wonder that ideas like this would find increased backing by a polarized society?
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@theMarket: Pick Your Poison
Investors were greeted on Friday with two nasty surprises. Both occurred in February. Chinese exports dropped by 20.7 percent, while in the U.S., the nation added a dismal 20,000 jobs. As you might expect, the stock market did not take the news well.
What really spooked traders was how far apart these numbers were to expectations. Over here, we were expecting 180,000 jobs to be added to the payroll number. In China, where the economy had been expected to weaken, exports had been forecasted to decline by 6 percent, versus the prior year.
Before the ink had dried on the jobs data, the administration was already sending their point man on the economy, Larry Kudlow, the director of the National Economic Council, on television to assure Wall Street that the February data was "fluky" and should be ignored.
As for China, investors there took the Shanghai Composite down by 4.4 percent overnight. Japan dropped half of that (minus-2 percent), even after the government said its economy grew by 1.9 percent in the fourth quarter of last year. It also didn't help that the European Central Bank lowered its forecasts Thursday for growth in the Eurozone and announced more stimulus measures to support the economy.
Over the last two weeks, I have been warning readers to expect a pullback in the markets, nothing too serious, but maybe a 3-5 percent decline. If I were to take a guess, we could see the S&P 500 Index hit 2,700 or so, before we mellow out. From there, it depends on how low those crazy algo trading machines decide to take us. Where is John Connor when you need him?
By now you should expect these consolidations especially after watching the indices free fall in the last quarter of 2018 and then climb by almost 20 percent from their December lows.
There has also been a growing skepticism over the China/U.S. trade deal. Despite my own skepticism, investors were happy to drink the White House "Kool-Aid" on the timing of a breakthrough announcement. It was first thought the deal would be announced three weeks ago. It was then pushed back after the Chinese team of negotiators returned to Beijing with nothing done. Last week, negotiations were "moving along very nicely," according to the president.
On Thursday, The New York Times reported that negotiators were still trying to lock down details and that Chinese officials "were wary about the final terms" because of Trump's penchant for making last-minute changes over the heads of his negotiators. But, of course, they would say that.
On Friday, Trump, when asked about the deal on the South Lawn, sounded a little less certain. He predicted "a very big spike" in the stock market "as soon as these trade deals are done, if they get done, and we're working with China. We'll see what happens."
Whether we actually do see a spike in the stock market (and for how long) depends on what happens next. Readers might recall that I believed that much of any potential upside for stocks based on a breakthrough trade deal was already discounted by market participants. When announced, it would likely be a "sell on the news" event.
If, on the other hand, the markets continue to pullback here by several percent, and then a really good deal is announced (as opposed to something which simply saves face), then the president might be right. So how do you play it? Simple: do nothing, stay invested, and strap in. The ride should be bumpy.
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The Independent Investor: A Nation United in Debt
About a month ago, the national debt topped $22 trillion for the first time. What's more, it only took a year to tack on another $1 trillion. Unless we do something soon, we could see those kinds of yearly borrowing double within the next decade.
Let's define U.S. debt as the sum of all outstanding debt owed by the federal government. Two-thirds of this debt is held by you and me. It is called public debt, while one-third is held by various inter-governmental departments and agencies such as Social Security and other trust funds.
We have the distinction of being the world's largest debtor, although the European Union is a close second. We now have more debt on our books than we produce in goods and services in a year. If you and I were in the same boat (and most of us are), we might have a problem repaying that debt in the future. If interest rates begin to rise, we might need to cut back on our spending just to make the monthly payments. As you might imagine, your debt and the government's have a lot in common.
Using the nation's debt practices as our model, we find that more and more Americans are accumulating debt. And, what's more, we are dying with that debt on our books. About 73 percent of Americans who die have unpaid debt that totals much more than their funeral expenses, according to Experian PLC, a large credit card reporting bureau; the average amount of that debt is about $62,000.
As you might expect, unpaid mortgages account for 37 percent of those liabilities, followed by student loans (in many cases), while credit card debt is relatively small (after personal and auto loans). But if you ask the typical American if they believe they will be in debt their entire lives, only 30 percent would answer in the affirmative.
And like the nation, there are common threads between the causes of our personal debt and that of the nation. Most of us borrow when we have nowhere else to go in order to make ends meet. God forbid we stop spending. In the case of the nation, we borrow when the economy gets into trouble and keep borrowing until things are good again.
Historically, the largest percentage increase in our debt occurred under President Franklin Delano Roosevelt back in the 1930s and '40s to combat the Great Depression and the onset of World War II. It was President Obama who ran up the largest deficit dollar-wise in our history (in order to deal with the Financial Crisis). His predecessor, George W. Bush, came in second. Bush's spending can also be attributed to the Financial Crisis since it was his administration that spawned and presided over that calamity.
A second cause of our government indebtedness has been our borrowing from the Social Security Trust Fund. The politicians have been using the revenue from that fund to spend more and more for decades. To them, it has functioned as an interest-free loan, although at some point (2035) that situation is going to reverse, and those borrowings will have to be paid back to retirees.
Personally, many of us do the same thing with our credit cards. Many of us look at it as free money, although our borrowings are by no means interest-free, which ultimately ends up in so many of us going bankrupt.
America also has its equivalent credit lenders. China and Japan, for example, have been happy to lend to us, so we can keep buying their exports year after year. And like credit card companies, they will be receiving more and more interest in return for their loans to us. And like consumers, at some point, we could end up never paying off more than the monthly payments. Where will that stop? Unlike us, the federal government can always vote to raise the debt ceiling and borrow more and more, while if we borrow too much our credit is curtailed.
None of this should be news to readers. You hear about the out-of-control national debt all the time. But If you are anything like me, when economists throw around numbers like one and two trillion dollars, I lose interest. I simply can't wrap my head around figures that large.
As such, is it any wonder that there is a growing movement of ultra-liberal legislators who argue that we can continue to borrow as a nation like this, no matter how high the debt goes? It's "all-good," they say, as long as we can continue meeting our monthly payments, while keeping economic growth moderately strong and inflation low. Unfortunately, that is a pipe dream, in my opinion, and in my next column, I will tell you why.
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