Tag Archives: strategy

Jim Paulsen, CNBC

August 6, 2020 By in Strategy Tags: , Leave a comment

The eternal masochist, I turned on CNBC yesterday morning while I was having breakfast. I usually watch the crawl and try to tune out the talking head chatter. This time, though, I listened to an interview with Jim Paulsen, a veteran market strategist now at the Leuthold Group.

Paulsen, whose work I’ve known for many years, is, a lot like me, typically bullish, so arguably his real information value comes during the infrequent times he’s bearish. Yesterday wasn’t one of the latter times. Still, I found the interview interesting. My takeaways:

–his view is that many retail investors are still bearish and have lots of money on the sidelines, something that will lend continuing strength to the market as these funds are gradually reinvested

–the big reason to be bullish is that things are so bad now that there’s lots of good stuff that could conceivably happen

–the CNBC resident “strategist” opined that today’s stock market is risky because it is being driven higher mostly by the FAANGs, a small number of mega-cap growth names. Therefore, if any of them falter, the market could drop a lot. This is about as factually incorrect as one can get (what a surprise). Paulsen pointed out in as polite a way as he could that since the bottom in March a whole diverse group of indices–growth, value, small cap, large cap–have made 50%+ gains. More informed questions might have been about valuations, or about the runaway gains made by mid-sized tech names, or about signs of a possible market leadership shift from tech to consumer discretionary

(There are very substantial performance differences between growth (good) and value (pretty awful) over the past 12 months and year-to-date. But not since March 23rd, which five minutes looking at the S&P website would confirm)

–no thoughts about the decline of the dollar or the significance of the upcoming election. These are important stock market issues, particularly as US government indebtedness threatens to put us in Italy/Greece/Lebanon territory (thanks, ironically, to a Republican administration that led off with a budget-breaking tax cut). Given that the customer base is likely right of center, however, no one sees any percentage in pursuing this topic

the fight over unemployment benefits

August 5, 2020 By in administration economic strategy, currency markets, deprecating currency, macroeconomics, securities markets, Strategy Tags: , , , , Leave a comment

My cartoon version of US politics:

A generation ago the Democrats were the party of the working people and the Republicans the party of the wealthy, especially of inherited wealth.

The Democrats’ goal was to push for strong wage gains, to improve the lot of their supporters. They were also for wealth redistribution–taxing the rich to get the money for social welfare programs like Medicare or Social Security. High wage gains would also eventually create inflation, eroding the value of the assets supporting hereditary wealth–an added plus.

The aim of the Republicans was to defend the status quo, the value of their bonds and their industrial operations, by advocating low wages, low taxes (no redistribution) and low inflation.

Even though both parties have strayed far from their roots, this old picture has some relevance in explaining economic forces at work in the US today.

The Congressional Budget Office estimates that the federal budget deficit for 2020–the amount that government spending will exceed income–will come in at $3.7 trillion.

This is where the current debate on extension of unemployment benefits comes in. Democrats are calling for another $3 trillion in aid to out-of-work Americans; Republicans are arguing for $1 trillion. In simple terms, the difference is between continuing $600 a week in extra benefits vs. reducing that to $200.

In the former case, the federal deficit would come in at about $7 trillion and total government debt would rise to just under $30 trillion. This compares with GDP of about $19 trillion this year–with real GDP growth (even before the pandemic) reduced to close to zero due to Trump’s epic incompetence. That would put us higher than perennial poor soul Italy in terms of debt/GDP and into the same bracket with Greece and Lebanon. Only Japan, with debt of 2.5x GDP would be out of our reach–for now, anyway.

(An aside: hard to believe one man could do so much damage so quickly–and that’s not considering his white racism, environmental recklessness, the secret police roaming Democratic cities…)

Anyway, the question wealthy Republican backers seem to be asking is at what point will creditors balk at continuing to fund the Federal government. Their answer can be seen in the Republican negotiating stance–we’re already there. In my view, a lot depends on whether Trump is reelected despite his devastation of US aspirations and value. I think we’re already seeing the first indications of the world’s worries in the decline of the dollar vs the euro. For wealthy holders of dollar-denominated assets–real estate, industrial plants, fixed income securities–losses could be very large.

debasing the currency

July 30, 2020 By in administration economic strategy, economics, government economic policy, Strategy Tags: , , , , Leave a comment

what debasing is

“Debasing” is goldbug-speak. In past centuries, when gold was actually used as money everywhere, when countries minted gold coins and kept reserves of the yellow metal as symbols of their ability to repay borrowings, governments in trouble would sometimes dilute their gold by blending in inexpensive base metals. So they would repay creditors substantially less than they’d borrowed. That’s debasing.

The modern equivalent of physical debasement is running a highly stimulative money policy, the idea being to create lots of inflation, which would allow a government to repay borrowings in inflation-debased currency.

A report from Goldman Sachs strategists came out this week suggesting that this process is at work in Washington right now, as a consequence, intended or not, of pandemic-fighting fiscal and monetary stimulus. Its conclusion: buy gold.

relevance for us as investors

I haven’t seen the report itself. I’ve only seen coverage in the financial press. (I’m not a Goldman client. For what it’s worth, I think the firm does top-notch factual research but struggles to find interesting investment conclusions from what it unearths. For you and me, Merrill Edge is the best I’ve found.)

I wrote about the gold issue in May. Except for China and India, where gold is still money, I don’t think holding gold achieves much of anything. The fact that a major brokerage house, typically a stronghold of Republican political sentiment, is willing to suggest–and seek publicity for–this idea, with its implied criticism of Trump’s dumpster-fire handling of the economy, is the most interesting aspect of its publication.

I think inflation is the least of our worries. Last year the federal government took in $3.5 trillion in taxes. Pre-pandemic, Washington was thought to be on course to spend about $1 trillion more than in 2020, due in large part to Trump’s failure to offset tax cuts with removal of special interest tax breaks for politically connected swamp creatures. The actual deficit will more likely be around $8 trillion. This would mean a total federal debt of, say, $28 trillion, or about 135% of GDP. That would place us up there with Italy among the most indebted nations in the world.

Yes, debt this high creates worries about devaluation as a way of not paying creditors back in full. Historically, however, such high levels of government debt are also associated with much slower GDP growth and emigration of the best and the brightest to make a life where economic opportunities are greater.

From a purely financial point of view, Trump’s threats to renege on government debt held by foreigners (basically making us look like Argentina) and his use of the banking system to attack political enemies are also giving new impetus to the search for alternatives to the dollar as the go-to currency for international trade and as a store of value.

I could go on about the other ways Trump continues to severely damage the US, while failing to provide any support for the left-behind rural citizens who support him. But I think the key question for the rest of the world is whether the US electing a white racist incompetent was a disastrous mistake or whether he really represents what the country stands for. If the latter proves true in November, the currency and securities markets reaction will likely be strongly negative.

playing cyclical recovery

July 17, 2020 By in administration economic strategy, economics, Strategy Tags: , , Leave a comment

Yet another slow-motion human catastrophe seems to be starting to play itself out in the US. Yes, Trump’s strange attempt to undermine the finances of the American university system, one of our crown jewels, by barring its highest-paying students from attending, disappeared almost as soon as it was unveiled (to be fair, my guess is Trump had no idea what he was doing; he just wanted to burnish his xenophobe credentials). But the real economic/social issue is the rolling start to the national school year next month. Just as with mask wearing, Trump appears to be insisting on resuming school in person and on schedule, which seems to me to be a recipe for another surge in coronavirus cases, similar to the one resulting from Trump’s urging southern and western states to reopen too early.

I think the stock market reaction to this will be twofold: to stop the rotation away from secular growth to domestic cyclicals, and to reconsider whether or not the latter’s current prices are too high.

What I have tended to forget is that, possibly ex the UK, the US response to the coronavirus has been by a mile the worst in the world. Europe and Asia are already starting to rebound at the same time equity investors are coming to grips with the fact that Washington–and a number of state governors–are about to inflict another round of damage to GDP.

Anyway, my thought is to reduce my exposure to what I see as very expensive tech names and build up cyclical exposure–in the EU and Asia.