Archive for August, 2011

Right vs. Wrong

Wednesday, August 31st, 2011

Many of you may recall hearing then Defense Secretary Donald Rumsfeld say, “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”  I may be a bit hasty here, but for my money that should qualify him as an amateur economist for sure.  The entire field, when it is brought down to the level of actual application, simply reeks of ultimately unquantifiable options.  Every investment decision is made in a dark forest of uncertainty wherein lurks a wolf pack of variables bent on having someone’s dinner or someone for dinner.  Alas.

Here at Atlas we are well aware that we can never be right all of the time.  What we most hope for is to be right at the right time.  Certainly it makes some sense that, when such an outcome proves impossible, we would prefer to be wrong at the wrong time.  There may be scant reward in being right at the wrong time but who wouldn’t prefer that to being wrong at the right time?  Still, while few things are truly certain, I can guarantee from personal experience that being right at the wrong time will get your face slapped just as quickly as its opposite, and being wrong at the wrong time presents consequences even more dire.  Yet life is about soldiering on despite the inability to know the future or sometimes even to summarize accurately the past.

In part this quandary explains the moral behind one of Aesop’s tales: Don’t put all your eggs in one basket.  The professionals at Atlas combine this thought with a tactical investment approach utilizing momentum and, specifically because uncertainty unquestionably is a permanent fixture in the investment landscape, relative strength between asset classes.  Such conditions of relativity might prod me to drag out a pithy observation by Einstein but, having never really understood just exactly what the man was driving at, allow me instead to draw from another economist, John Maynard Keynes, to summarize the argument.  “Markets can remain irrational longer than you can remain solvent.”   I may be wrong but that’s alright.

What a Deal

Tuesday, August 30th, 2011

Kudos to Congress!  In the twelfth hour they were finally able to cobble together legislation to avert what Obama and Geithner suggested would be a debt default by America, resulting in another global Armageddon.  Whew!

Nobody is saying it’s perfect.  In fact, it’s pretty hard to determine exactly what all the new law contains.  Apparently it will, at least for the next year or so, raise our nation’s debt ceiling by over $900 billion while reducing spending by something less than $25 billion.  Now that’s a sure-fire way to tackle our deficit, eh?

In a rush to congratulate all the parties involved, China’s official newspaper, the People’s Daily, recently commented, “Although the United States has basically avoided default, its sovereign debt problems remain unresolved.  They have merely been pushed off, and there is a tendency for them to grow.  This has cast a cloud over U.S. economic recovery, and also increased the risks and perils facing the world economy.”

Okay, so maybe that statement doesn’t just ooze with confidence, especially when it comes from our biggest lender.  Don’t they realize we will vigorously attack the issue by assembling a crack team of twelve appointees selected in teams of three by each of those four stalwarts who led Congress to this most recent resolution?

On second thought, maybe they do realize something even more profound.  It just won’t work.  Such a committee will not be able to provide an acceptable and effective solution.  Why?  Consider these words attributed to Einstein, “The significant problems we have cannot be solved at the same level of thinking with which we created them.”  Judging from recent action, it appears the world’s financial exchanges are coming to the same conclusion.

July Retail Sales

Monday, August 29th, 2011

Retail sales strengthened in July according to the latest tally from the U.S. Census Bureau.  The 0.5 percent increase brings the month’s figure to $390.4 billion after June’s 0.3 percent uptick.  The year-over-year change is 8.5 percent.  This is a statistic that needs to continue to improve for the economy to strengthen as retail sales account for about a third of personal consumption expenditures which is the largest component of GDP.
 
It is interesting to see what consumers spent their retail dollars on for the month.  After collapsing in May, cars are regaining traction by growing 0.3 percent and putting in the second consecutive month of growth.  Gasoline also helped fuel the monthly gain by growing 1.6 percent and almost making up for the loss suffered in June.  Petrol purchases have grown 23.6 percent year-over-year, but gas is more expensive than last year.  Even the less volatile areas of retail sales were mostly positive, but one decrease was surprising.  It is summer time, so to see sales in the “sporting goods, hobby & book stores” fall 1.5 percent seems odd, but with video games and electronic readers, the real thing may not be wanted.

While virtual recreation may be in vogue, real consumption will continue to be an important indicator for our economy.  Consumption is still growing even as consumers consistently express pessimism when asked.  Like many other indicators, the growth trend has slowed lately and is putting even more pressure on an already stressed situation.  Here at Atlas we look forward to seeing the pace of retail sales reaccelerate over the coming months.  Since other indicators we follow aren’t looking very favorable, such an increase, if we get it, will be a welcome surprise.

Pick Your Friends

Friday, August 26th, 2011

Listen, we are all adults here so we should be able to discuss certain anatomical issues without getting all embarrassed.  Forewarned is forearmed.  I almost hesitate to apply this example since I fear it may prove overused in your own daily conversations and therefore a touch hackneyed, but here goes.  I am, of course, talking about that monosynaptic reflex which results from an artificial stretching of the patellar tendon when the doctor taps your knee with his little red rubber hammer.

Some things just can’t be helped.  That’s why we call them reflexive.  Like jerking your leg in the aforementioned example.  Or like Ben Bernanke and the strong likelihood (in our humble opinion) that he will soon embark on a third round of stimulus which the press will inevitably dub QE3.  He will have to do it because he sees no other choice.  His economic philosophy demands it.  It’s called cognitive bias.  No doubt, when he was initially picked for the position by then President Bush, no one anticipated dire events such as those currently presenting themselves to us would unfold.  We won’t be surprised if he announces some program later this month at Jackson Hole.   In fact, there may even be a coordinated intervention by major central bankers in an attempt to avoid a deflationary spiral which could then soon culminate in a global recession or worse.

Proprioception is the term given to our ability to know just how our body is positioned.  It’s also why we have a knee-jerk response when that particular tendon is stretched, activating a reflexive response by the quadricep muscle group. Consider this: picking your nose in public is not generally considered respectable, even around friends.  Now if you turn out the lights so your friends can’t see you, your search for a troublesome rhinolith can prove rewarding precisely because of proprioception.  Obviously, since you are in the dark, attempting the same maneuver on someone else is likely destined to damage and fail.  This illustrates why we feel you may pick both your nose and your friends, but not your friend’s nose.  Or Mr. Bernanke’s either.

July Federal Deficit

Thursday, August 25th, 2011

The U.S. Treasury Department said our government overspent by $129.4 billion in July.  Sounds like a lot to me, but this actually represents an improvement over the $165 billion shortfall experienced in July of last year.  Small comfort.

Our government uses a fiscal year which means they start over the beginning of every October instead of January like most of us.  Thus, their total year-to-date deficit is currently at $1.1 trillion.  That sounds like a lot to me as well, but again the spin-meisters are quick to point out this figure is running some 5.9% below that seen same time last year.  This is attributed to your paying more in income tax, thank you very much.  Receipts at the federal level are up 8% YTD while spending has increased just 2.4%, pushed up by increased interest expenses on our ballooning debt.

Estimates suggest our deficit will ultimately top last year’s total although it should fall short of the $1.41 trillion total recorded in 2009.  Still, we have now exceeded $1 trillion three years running, and concerns continue to mount globally about the growing pace of our excesses.  Congress assures us, with the formation of a super committee which will soon recommend changes in our ways, that the fix is in.  Given the composition of this group is a mirror of the greater body’s polarized political agendas, it will be interesting to see who gets out of that conference room alive.

Springtime in Arabia

Wednesday, August 24th, 2011

The second decade of this current century certainly has started with a bang, and I mean literally.  Bullets and Bombs.  It’s being called The Arab Spring, marked by protests and revolution throughout the Arab world.  We have been seeing it every night on the evening news: protesters in the streets of Cairo, Damascus, Tel Aviv….  Tel Aviv?  Hardly an Arab state.  Surely those protests can’t be related.  I suppose we can ignore the same occurring in Athens, Chile, England, and China too.

There is a parallel between these events which suggests they may not be random, and it is ignored at our own peril.  People everywhere seem to be expressing outrage at a lack of control over their own lives.  The politicians seem to be ignoring them.  The rich are pulling ever further away, deeper into their gated, guarded compounds.  Now the majorities are turning to violence as a way of getting the attention of their governments.

Will it work?  As such events spread from country to country the world at large becomes unable to deal with all the issues simultaneously.  Western governments promoted the internet’s use to facilitate events in Cairo.  Now that protesters are burning cities across England, Parliament is discussing how to shut down Facebook and Twitter.  I won’t argue the need to reestablish order, but I question whether they will seek solutions to social problems as quickly as they attack social media.

Can it happen here?  The U.S. Census places the total net worth of Americans at some $58 trillion with over half of that (56%) held by the top 10% of our population.  If you have a net worth above $600,000 then you are in that group.  If you are one of the lucky few, be aware that nine people are outside your window looking in.  Even as income and employment deteriorate, the cost of living is rising, and it probably hurts them more than you.  So, again, can it happen here?  Economic history suggests such a tipping point is inevitable once any monetary system begins to be perceived by the vast majority as grossly unfair.

June Trade Balance

Tuesday, August 23rd, 2011

In June, according to the Commerce Department, our balance of trade took an unexpectedly large hit.  The consensus had expected a decline to $48 billion from the $50.2 billion reported for June.  Instead, we got a leap to $53.1 billion on top of an upward revision which brought June to a $50.8 billion shortfall.

The old whipping boy for this turn of events was missing as lower prices were posted for both oil and some other commodities.  The main culprit was a substantial drop in international customers.  Exports, which declined 2.3%, added much less to our gross receipts than imports subtracted from the same with a scant 0.8% drop.

Our trading partners bought substantially fewer industrial supplies and capital goods from us in July, suggesting that the slowdown we are experiencing is becoming one of our exports in its own right.  That’s not good.  With increased third-quarter GDP estimates tentative at best, this decline could put further downward pressure on our growth rate, to the world’s detriment.