America First

"If he was thinking he could scare us with the sound of a dog barking, that's really a dog dream" North Korean Foreign Minister Ri Yong-ho told reporters in New York adding that Trump’s warnings are just a nonsensical “dog dream."

You know I've been openly critical of Trump and his policies here. My fondest hope has been that he accidentally gets some things right.

I do acknowledge that when one of his policies both aligns with reality, and it moves us towards a better world, we should applaud it. He probably doesn't understand why it works, though .

America First seems to be one of those policies. I believe that a good government is a selfish one. I've never liked the idea of "president as leader of the free world". Screw that. We have enough trouble managing our own affairs. I totally endorse the idea that we shouldn't have to carry any water for Japan, Saudi Arabia, or East Timor. Trump's job is to preserve the interests of the USA. Period. The more these other countries do for themselves, the better for everyone. America First, if it really is policy, is good policy, because it puts our resources where they belong: in the defense of our best interest. Nothing more, nothing less.

What leads me to believe that the Donald does not really believe it himself, though, is this insane sabre rattling he is engaged in with  "Little Rocket Man". If he believes in America First, what good does it do to take pot shots at Pyongyang? That is, unless he happens to think that the interests of the USA are met by using up expensive ordinance, to the benefit of the military industrial complex.

America is not served when we spend blood and treasure for another country. We might loudly proclaim that it's better to fight in the Iraqi desert than in our own backyards. But it's impossible to justify fighting over a piece of Iraqi desert, if you stop to think about it.

Similarly, America First is not being served when we conduct trade wars. Sanctions, embargoes, tariffs, and restrictions hurt all of us, and our trading partners. Our only weapon is the dollar's status as the world's reserve currency, and the only two outcomes are higher prices and accelerating de-dollarization. The end result is less strength for America. We should be kicking down barriers to trade, not putting up new ones.

Finally, America is not served by building arbitrary walls either. Attracting new blood is our best hope of working through a demographic malaise the likes of which has already afflicted Japan and will slowly strangle us. No, we don't have to invite over thousands of new dependents, but we do have to put some real taxpayers back into the system, if for no other reason than to start covering LBJ's bad bets.

So, the Donald is still light years away from restoring a decent economy. What he proposes will have an opposite effect of what he promises. In that sense his results will be like that of most politicians. "If you like your doctor", for example, or "peace in our time". America First should be America First, and that means we should stop fighting other countries' wars, and figure out how to improve their lives (and ours); through free trade, and sensible immigration. 

What Actually Happened?

I'd like someone to write a book about how we all were once able to ignore misguided, petulant, dishonest, obnoxious, and noisy people; and now all of a sudden we have to pick one of them to be president? What happened, indeed?

Ask the Wizer, Summer edition

So a good friend asked why I had not been updating this blog recently. I replied that I had already closed the book on the Donald, that the national debt was still 20T and the stock market was in a bubble. What more was there to say?

His response: "What Bubble?". I now see that my work here is not yet done.

I recently spent some coin, sweat, and tears learning all about finance, including the workings of capital markets, and have formed some persistent opinions about asset values. Basically, this is an area I feel at least nominally qualified to comment on. I will spare the usual policy indictments and accusations of malfeasance at the Fed and at the treasury; to arrive at a reasonable estimate of what the market is worth, just as sort of a reality check.

First, most of the known methods of calculating the objective worth of the market try to determine the relationship between Asset prices and Gross Domestic Product. Below is one such chart. Yes, it is possible to "game" a chart like this, but I wanted to get it out there just to get your attention. When the market is high relative to GDP, then it becomes harder to see where the growth is going to come from.






This next chart shows the relationship between Fed money printing and the stock market. The recent news is that the Fed is going to start retiring the bonds created with this money, so the balance sheet reduction will likely have a negative effect on the stock market.



For exhibit "C", I'd like to point out the CAPE market indicator, which prices a stock based on ten years worth of earnings, Has now blown past 30. This means, among other things, that it will take over 30 years to return your money and that likely earnings going forward are at best in the 2 to 2-1/4% range. That is, unless you see the market decline to more normal ratios. Then you might see some growth....after losing 40% of your principal.

The thesis for continued upward trajectory of the S&P from here is that historic growth and productivity improvements will continue into the future. The trends that make that a troublesome expectation are:

1.  Higher interest rates, stemming from the return of bonds to the market.
2.  Higher interest rates, stemming from the FOMC target rate increases.
3.  Reduction in spending by the unemployed, the retired, and the dislocated.
4.  Earnings shortfalls in a growing number of industries.
5. Government spending shortfalls due to rising interest on the 20 Trillion debt.

In addition, the speculative jump in stock prices will reverse when it becomes apparent that the Trump repatriation of overseas funds, the tax reform, and the Obamacare spending reductions are not going to happen.

Want some more charts?

Here's one of my favorites. While there might be 2% to be had in the market today, there might not be 2% available over the next 12 years. Unless you're talking about -2%



Finally, every good bubble needs a pin to pop it. I nominate thois one:

For more info on that, look up the subprime auto loan market.

A great many indicators are flashing red today, and this is the high priced market even Warren Buffet wouldn't want to buy into. The risk of a serious drop in the S&P should be viewed as extremely likely.

I call that a bubble.