Thursday, November 17, 2016

Bill Gross is Wrong, Trump’s Policy Right for America at this Time

In his most recent newsletter, Populism Takes A Wrong Turn, Bill Gross, Portfolio Manager-Global Macro Fixed Income, argues that President elect Donald Trump’s policies will not actually remedy America’s problems, and will actually lead to lower GDP growth and higher inflation.  His negative assessment is summed up in the following quote, which actually blames the “idiot electorate” in his opinion, for the result:

“The Trumpian Fox has entered the Populist Henhouse, not so much by stealth, but as a result of Middle America's misinterpretation of what will make America great again.”

His argument against the Trump economic plan is as follows:
“Trump’s policies of greater defense and infrastructure spending combined with lower corporate taxes to invigorate the private sector continue to favor capital versus labor, markets versus wages, and are a continuation of the status quo.”

His argument totally discounts any simultaneous actions to create “fair” trade pacts which Trump campaigned on.  He portrays this activity as “negative policies revolving around trade.”  I suppose the idiot electorate sees this issue a little differently from the ground level.

Bill Gross obviously gets what is happening from an economic and government standpoint; but, unlike Trump's outrageous statements on the campaign trail that were successful in tapping many supporters in America, Gross is not connecting with many in the investment community with his rants, and certainly not many Americans who voted for Trump.  Maybe he should get on-board and ride the wave that is about to be created, rather than complain so much that things are not fixable.

Thursday, November 3, 2016

Stock Market Risk Measure Hits Caution Zone – 2016 Election Driving Volatility

This blog is an update to the article I published on October 25th, 2016: How Worried Should You Be about Your Investments Now?  The update is based on a review of the Financial Relativity Index metrics at market close at the end of October.  The changing metrics are both interesting and potentially ominous given the breadth of historical data on which the model has been derived.

The Financial Relativity Index as of October 31st shows the following:

The two changes in the index since the end of September are an increase in market risk to cautionary from green light status, and a continued degradation of the credit market indicator.  I wrote at length in my previous article on the credit market signal and how the deterioration in this particular metric has forewarned many business cycle driven economic downturns, and usually is a good leading indicator of a stock market correction.

The focus of this update is on the sudden jump in market risk as measured by the Financial Relativity Index.  Given the downward pattern which has formed off a new all-time high of 2190 in the S&P500 (SPX) on August 15, 2016, less than 3 months ago, there is a very good chance that the market is about to roll over into a much deeper decline for a much longer time period than it has in the previous 7 years.  The perfect storm to bust the market bubble formed over the last seven years may now be in place.

Tuesday, October 25, 2016

How Worried Should You Be about Your Investments Now?

Climbing the ‘Wall of Worry’ is a not so favorite pass-time of most investors.  Currently there is plenty to worry about.  Deutsche Bank could spark an international financial crisis.  Middle East wars in Syria and Yemen could cause disruption in energy supplies.  Central Banks, including the Fed, can change course on monetary easing policies, pushing up interest rates sparking investors to sell over-leveraged assets.  Ultimately such factors could combine to push the U.S. into recession, which post the 2016 Presidential election would not be an unusual occurrence.  Is it a random market event that so many U.S. market downturns coincide with major elections?  And I don’t just refer to the years 2000 and 2008.  Look at 1972, 1980 or even 1946, to name a few.  The passing of the baton to a new party or President almost never happens without some market turmoil.

Financial Relativity Index shows subdued immediate Market Risk 


A technical model that I use to gauge the risk of a major market down-turn currently is not showing signs of an imminent market breakdown.  Although there are several risks highlighted by the model, overall the market currently reflects only subdued risk.

The model as of September 30, 2016 had a reading of 4 on a scale of 20.  The low reading based on the factors assessed historically dating back to 1956 (month end data-points) put the market in low risk until, of course, something happens.  In this model, the usual signal is a year over year collapse in returns to investors.  The big moves downward have typically occurred after a quick spike in the market to a new all-time high, followed within 2-3 months by a down move that puts year-over-year returns in negative territory.  This signature market phenomenon is explained in detail in my book, Theory of Financial Relativity.

Wednesday, October 5, 2016

Number 1 Issue in the Upcoming Election facing Americans – Taxes plus Trade

I was reading an article published on the CNBC website on October 5, 2016 entitled, This plan brings $2.5 trillion in corporate cash home, and creates jobs.  I was struck by how the economic issue which underlies the argument for this plan may be the single most important issue for several generations.  If left unaddressed by the next elected President, the U.S. will continue to left on a path of perpetual decline.

On the surface, the plan explained in the article nails a good U.S. tax policy response which can potentially unravel the mess we are currently in as a country. But, the cash being hoarded overseas by multi-national companies has a couple of more elements than just the tax rate in the U.S. for corporations. Elements which oddly may not be remedied by a tax code change alone.

The economic issue the U.S. faces is structural, and caused by trade agreements which place the U.S. in the position of exporting jobs for the purpose of importing investment dollars for the U.S. debt. Not a good trade for average American workers who deserve to be able to make a living, but an excellent way for crafty U.S. politicians to try to rule the world.

The historical data clearly show this issue began to manifest itself in uncontrollable fashion post the signing of NAFTA, a hallmark Clinton agreement. Little wonder that the Clinton Foundation is so beloved by so many foreign governments and billionaires such a George Soros and media moguls with International, not American best interest in mind. Many of these "VIPs" can be found to have been given special access to the Clinton State Department as a part of this appeasement foreign policy strategy; not to mention that the Clinton's have scampered off with over a $100M in the process over the past 4 years through the Clinton Foundation, speaking fees, etc..

A change in tax policy may unravel the mess, but could create, at least in the short-term, nothing more than a run on the U.S. debt as the $2.5T in overseas dollar based cash, currently parked primarily in U.S. Treasuries, is sold to take advantage of a tax break windfall. The reason I am skeptical is because the tax policy did not create the problem in the first place, the trade agreements did.  Changing the tax policy only changes the financial flow of capital. Without a solid basis for investment in a U.S. economy which would remain severely disadvantaged by poorly structured trade agreements, the end result would very likely not provide the intended result.

I look for a Clinton Presidency, just like the Obama administration, to stand in the way of any move to unleash these overseas dollars. The basis for the Clinton campaign dollar largess is heavily indebted to those with an interest in the perpetuation of the fleecing of the average American citizen, and pushing the U.S. even more into debt. And, these campaign contributions want pay-back in the form of jobs for foreign, not American workers.  In addition, don’t look for any of these foreign interests to pay a dime of the multi-trillion dollar tax increases proposed in the Clinton economic plan.

My book, Theory of Financial Relativity, published in 2013, provides in-depth research in how and when the U.S. debt expansion became a serious threat to the growth and prosperity of the U.S. economy, and ultimately the wealth manifested in the value of the U.S. stock market.  Please consider reading the book if you want to understand why the tax and trade issue, in my opinion, is the single most important issue facing America in the upcoming election.

Daniel Moore is the author of the book Theory of Financial Relativity: Unlocking Market Mysteries that will Make You a Better Investor.  All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell.

Thursday, May 5, 2016

Puerto Rico Needs Restructuring, not a Bail-out

According to an article published by the Cable, Puerto Rico is nearing the Brink of Bankruptcy, the Puerto Rico commonwealth has $72B in debt, some of which it claims it can no longer service, and therefore will default as early as May 2, 2016.  The Island government is asking creditors to forgive up to 45% of the principal on certain loans so that it can recover financially.  The U.S. Congress is now intervening in the crisis with legislation being reviewed which would give added power to the Puerto Rico government to restructure its debts to the detriment of existing creditors.  The public airwaves are currently buzzing with “tell Congress no bail-out for Puerto Rico” ads.

Although a 45% haircut to lenders this large is unlikely, many of the Puerto Rico Financial Development Authority General Obligation bonds are trading for $0.20 on the dollar out of fear about what the outcome will eventually be in the current crisis.  Just why is Puerto Rico in so much financial trouble?  There is a combination of factors which have led up to the current circumstances in which the current government is very likely to run out of cash.  First, the country never really recovered from the 2008 recession.  Unemployment on the island is remains high at 11.6%, and the labor participation rate is less than 40%.  In other words, Puerto Rico’s 1.1M labor force is not big enough or growing fast enough to service the loans.  Adding insult to injury, the island population base is shrinking at a rate of -0.6% per year.

Why has the Puerto Rico economy been shrinking?  One of the major culprits has been the expiration of a federal IRS statue section 936.  The section established tax exemption for U.S. corporations that settled in Puerto Rico, such as large pharmaceutical firms, to allow its subsidiaries operating on the island to send money to the parent company federal income tax free.  The island economy has been in persistent decline since this statute was repealed by the Clinton administration in 1996.  As the manufacturing jobs have vacated the island, new job creating industries have not been forthcoming.

The ability of the island to generate cash for loan servicing is indeed dire, but the island government is not a total victim in this situation.  There are major inefficiency problems in collecting the Puerto Rico Sales and Use Tax, with estimates showing the Treasury is incapable of collecting up to 44% of the tax.  Additionally, public salaries are much higher than the private sector on the island.  Per capita income on the island is $28,850, and public workers generally are paid more than average with legislative advisors for instance making $74,000.

The island economy could also be much more resilient if public policy took better advantage of its natural resources, and depended less on imported goods.  Puerto Rico imports 85% of its food even though 94% of its land is fertile.  The islands geography has many rivers which could be used for hydroelectric power, and yet the island must import all its fuel (coal, natural gas, oil) in order to produce energy.  Renewable energy sources are also heavily under-utilized even though Puerto Ricans enjoy 65% sunshine on average every day, and wind rates average 22 mph.  From an energy standpoint, island residents pay $0.26 per kilowatt hour for electricity compared to $0.11 per kwh in the U.S.

Puerto Rico needs a long-term plan, not a Washington bail-out.  Creditors are very likely more than willing to work with the island government if it truly wants to address the structural issues which are making its financial situation worse by the day.  However, the role of Washington in this situation should be minimal.  The island doesn’t need major loan haircuts which destroy the capital investment process, it needs a long-term economic plan and new direction, neither of which is being put forward currently.  If Washington intervenes as desired by the Puerto Rico government, then who will be next in line – Illinois?

Daniel Moore is the author of the book Theory of Financial Relativity.  All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell.

Thursday, April 28, 2016

Trump Appeal Growing on Realization of “Globalization” False Promises

Having started my working career in the mid 1980s, I can truly say I have witnessed from the ground level the destruction of the American working class economy described in the recent CNN Money article - Yes, China has won big from U.S. trade.  Back in the late 1980s, good jobs were plentiful as the tech and telecom sector were booming and Americans were the beneficiaries.  Income growth was likewise very strong.  And the internet as we know it today was not available.

But something happened after the Berlin Wall fell in 1988, and Bush I was elected as President.  The U.S. foreign policy began to emphasize, more than ever before, the concept of “Globalization.”  Simply put, the term is used to describe the processes by which people of the world are incorporated into a single world society.  Bush I use of the term “New World Order” remains vividly etched in my mind to describe the opening of trade relations with the developing economic countries known as the BRICs – Brazil, Russia, India and China in the early 1990s.

The “New World Order” is now rapidly turning into disorder for the U.S. economically, and Donald Trump is capitalizing on the discontent.  The “establishments” in both the Republican and Democratic parties have no intention of changing U.S. direction on this policy.  They were commenced under Bush I, the Republican establishment, and perpetuated under Clinton and Obama, the Democrat establishment.  In fact, the two parties are blatantly promoting the rules of their nomination process to favor candidates that will perpetuate the process.  A growing number of American voters are now getting suspicious about what is actually happening, as 50% of voters are now saying the nomination process is rigged.  The money trail into the campaigns is a likely at the root of voter suspicion, as international, not American interest are behind establishment candidates more than ever before, whether it is through the “Clinton Foundation” in the democratic race, or the large multinational business PAC money behind Cruz and Kasich.

What is the false promise of globalization? Simply put, there is no such thing as “free trade”, just as there is no “free lunch” in economics.  The whole process being under-taken by the establishment in both political parties at the expense of the American people has a cost.  And that cost has a price tag that is easily measured – it is the U.S. budget deficit of over $19.2T dollars, and a debt to GDP ratio of over 106%.  In 1988 the U.S. budget deficit was $2.4T and the debt to GDP ratio was a reasonable 49.8%.  And to top it off, it is foreign governments and multinational companies that are financing the tearing down of the U.S. middle class.  In 1988 foreign direct ownership of the U.S. publicly traded debt was only 16.7% of market traded Treasuries (TLT) (SHY).  Today foreign ownership of marketable U.S. Treasury debt is $6.2T, or 45.1% of the debt outstanding! (see graph)

The U.S. deficit, driven by large trade imbalances between the U.S. and its world trading partners, is only possible to correct if U.S. policies structurally defend the U.S. workers who pay taxes rather than continuing to finance the false promises of “free trade” on the backs of the U.S. taxpayer.  Multinational corporations are expertly dodging their responsibility to pay their share and foreign governments assume no responsibility for U.S. financial problems.  It is time for the U.S. represent its own interest in the global economy.  Otherwise, the U.S. goes bankrupt and globalization dies a more horrible death.

Daniel Moore is the author of the book Theory of Financial Relativity: Unlocking Market Mysteries that will Make You a Better Investor.  All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell.