Monday, February 12, 2018

The Future is Small. Really, REALLY small

While I see many challenges facing society in the automated world of tomorrow, some of the changes are going to be amazing.

If I were starting out as a youngster today and I had any inclination toward engineering, I'd focus on nanoscale projects because that is going to be a booming field in the future, in my opinion.

Consider this article which highlights one companies efforts to keep surfaces clean through the use of an electric signal or as they spell out in plain English, "resonance enhanced microscopic (di)electric coupling of polar mesogens to the electric field."

This might seem like a silly pursuit until you consider that as the world moves toward solar power keep all of those panels working at peak efficiency will be a key to their success.  Dust has been shown to reduce a solar panel's efficiency by up to 50%, so utilizing technology like this to "auto clean" panels could be very valuable.  

While we've had "robots you could swallow" for some time, this new nanobot really opens up an entirely new world to remote therapies.

The key to this innovation though lies in the fact that "it's a flexible, fabric-like robot that can walk, swim, and even carry cargo, despite having no mechanical elements or batteries.

Watch this video and try not to be impressed.

So while some want to stick their head in the sand and hope for better days down the road, I'm happy to know that someone is working hard in a lab to make tomorrow better for us all.


Weekend Reads

Quiz time!

If you remember, way, way back to the days just prior to the Great Recession, you'll recall that the global boom in housing was a primary driver of global debt growth.

In 2007, global debt (households, corporations and governments) totaled $142 trillion.  Ten years later, now that we've learned the error of our ways, where do you think global debt stands today?

A) $127 trillion
B) $150 trillion
C) $165 trillion
D) $217 trillion

The answer at the end of the post.

Things played out about as expected last week - a bounce then a swoon and some wild Friday trading to close out the week.  What concerns me is that the markets started their move higher Friday on the assumption that the central banks were going to step-in over the weekend.  While the Chinese basically said that selling is frowned upon there was very little chatter from the Fed and ECB.  My suspicion is that stocks are likely to get whipped around more here in the near-term.  Up and down 200 points on the Dow used to be a real move, but today that happens in 3 minutes (for example, the Dow was up almost 400 points when I started this post and it's now up just 200 in the blink of an eye).  I'm not offering any advice and I think we will see a number of 5-10% up and down moves in the market in the coming weeks.  Beyond that, the outlook is more muddy because interest rates remain an issue that the market is going to have to contend with soon.

I think it is incredibly foolish to make predictions on 10 year budgets for the Federal Government because so many of the inputs can change dramatically in a very short period of time.  Remember in the 1990's when we were forecasting budget surpluses for a decade?  Well, then 9/11 happened, we entered two decades of war, 2 recessions and poof we're $20 trillion in the hole.

Having said that, there are some things that are not subject to economic variances - these include changes to the tax law that was enacted last year.  I appreciate this article from the Wall Street Journal that highlights what the tax law means for the Federal Government based solely on the law.

One of the big flaws with this type of analysis is that it assumes companies maintain the status quo.  For example, if a company is structured like this and we make these changes to the law, their taxes go up or down.  However, companies are already scurrying like mad to reverse anything in their structure that will make their taxes go up and they have a lot more avenues for lowering their taxes, so you can guess how this will end up.

Okay, so there are a lot of flaws with this chart (namely, the focus on the Dow) but let's ignore that for a moment, because it raises a really important question --- What if the 40 year era of lower and lower interest rates in the US is finally coming to an end?  What does that mean for an economy built on low interest rates?  My biggest concern for some time is that we may enter a period where the Fed is unable to control interest rates as the bond market pushes them higher.

Answer to the previous question re: Global Debt - $217 trillion as of Jan 2017 (we should get an updated number for 2018 soon).  The bulk of the debt growth occurred in Governments and Corporations.  Importantly what did all that $75 trillion of extra debt buy us over the past 10 years?  Just a measly $18 trillion of GDP ($57 trillion to $75 trillion) because as I've pointed out before, this latest round of debt growth has done little to enhance the long-term operating outlook for the globe.


Wednesday, February 07, 2018

Data is beautiful

I like to call this chart, The Product of A/C Proliferation....

This shows the population ranks of various states over the past 117 years.  Note the sudden uptick of various states that were previously almost uninhabitable (Nevada, Arizona) as retirees discovered the beauty of central air conditioning.

Okay, so I'm already bending the rules of the blog where I hope to focus on "Uplifting posts" by including this article, but it's my blog and I'll post if I want to.

Chinese transit police are using "google glasses-like" sunglasses to scan the crowd for criminals or people using false id's. While, I generally applaud the advances in technology like google glass (or their Chinese knockoffs), but this seems to be crossing a line of privacy that could get blurry very quickly.  China is moving incredibly fast on technology issues like AI/facial recognition because they are not burdened by having to follow privacy laws that we hold dear (or at least, we used to hold dear).  I worry that without proper checks in place this could go down a dark path very quickly. 

Exactly how?  I'm glad you asked.

Imagine a day in 2038 when you are unfortunately diagnosed with lung cancer despite being a non-smoker who has lived in a radon-free & smoke-free home.  Your insurer searches the database for your work travel and finds that you spent on average 30 days per year in Beijing for work which was previously undisclosed.  Your insurer views that as non-disclosure of a material risk and they deny coverage of your treatment.

Yeah, big data!

On a more positive note - Chocolate Beer is here.  As @Eric_VPSales will remember, I was the first proponent of this trend way back in the fall of 1992 on West 4th Street in NYC in a hole in the wall bar called "Down the Hatch".


Happy Days are Here Again (until those short vol trades unwind)

As I expected there was some follow through in the markets overnight yesterday, only to be completely erased by the morning in NY.  In case, I haven't mentioned it recently, the stock market is no longer a mechanism through which we value companies.  The stock market is a game simulation run on thousands of competing supercomputers and humans are just along for the ride.

Ignore those pictures on your evening newscast of guys in funny jackets looking up at a screen - this is what the stock market really looks like.....

Yesterday, in the morning there were cries from various pundits that the "Markets are broken, we can't let the machines kill our precious markets!!"

However, these same voices have been silent as the markets we all grew up trading have been transformed from actual platforms for investment into useful tools of those with the fastest quantum computers.  Most of Wall Street it when stocks move up every day because it validates their positions and makes them look smart.  I prefer to focus on real reason why you should invest in Company X vs. Company Y or why the global economy is growing or contracting.  These are antiquated ideas in today's world, I know.

Today there are more Exchange Traded Funds than there are public stocks available to go into those funds.  That's like saying you walk into a grocery store with 100,000 products for sale, but they have 200,000 carts sitting outside for you to use.  What's more valuable, the goods inside the store or the 200,000 carts sitting outside?  Well, for the past 10 years the markets have fallen in love with the carts because they are uniform, easy to trade, easy to manipulate and very easy to fit within an program trade.  Earlier this week one very popular trade, the short volatility trade (basically betting on calm markets) which had climbed in value of $10 to $144 in six years, went to $0 basically overnight.

This is just one small example of a greater problem with our markets, the speed of trading and the automated trading rules in place have created a market that acts like an escalator on the way up (climbing neatly 0.25% every day) but one that can fall like a broken elevator overnight.

No one has any clue what the next step for the machines will be (I suspect we bounce around quite a bit from here - maybe up 1-2% before down another 5% this week or next). However, I do believe two things remain a distinct possibility in 2018 -

1) another meaningful flash crash of 10% or more


2) The possibility that this kicks off the next move toward accurate valuations for stocks as a variety of overly complex financial products unwind.  This would imply that the market could fall as much as 40-50% from these levels because we have a toxic soup in the markets today - excessive valuations like in 1929, 2000 and 2008, mixed with exotic products like in 1987 and 2007.

* None of this is investment advice.  These are my own observations and opinions.

US Budget deficits heading back over $1 Trillion in 2019?

If you recall, after the great recession the Federal government took on a number of extraordinary measures to try to prevent a global economic meltdown.  I believe these measures were excessive and will ultimately lead to more pain in the future for our economy as our debt burden ballooned to $20 trillion, but hey, what do I know. 

Well, the combination of more spending by the government and declining tax revenues is projected to lead to trillion dollar deficits again in next six months.

"The Committee for a Responsible Federal Budget, a Washington fiscal watchdog, said the red ink may rise in fiscal 2019 to $1.12 trillion. If current policies continue, it said, the deficit could top a record-setting $2 trillion by 2027."

Washington addiction to overspending remains as strong today as it's ever been.


Monday, February 05, 2018

New Direction

One of the things I've struggled with a great deal over the past decade has been our cultural descent into the anti-knowledge abyss. What was once a nation that surged to the forefront of innovation by pushing boundaries and remaining forever curious has become a nation that is, at least partially, hostile to facts and intellectual curiosity.

While in the middle of a 10 mile run through the snow yesterday (BTW, thanks to the many who gave me space on the side of the road so I didn't have to run through 2" of slushy water) I heard a chorus that figuratively struck a chord with me:

"Don't be silent.
Stand up, speak out."

No, this is not a political rant but rather a pro-science, pro-innovation rave.  The US still has the greatest network of higher education in the world, but we managed to fall outside of the top 10 on the list of innovative countries for the first time in 2017.  If we don't turn the tide soon, it may be too late.

So, to that end, I am going to try to highlight positive & amazing breakthroughs that I read about every day.  Yes, I'll still talk about the economy and the markets when appropriate, but I think we all need a little good news in our lives and reminder that many people are working incredibly hard to make our lives and the lives of others around the world better.

I hope you enjoy these stories as much as I do!

Today's topic: Auto-correct

In much the same way that we have all forgotten how to spell as a result of the pervasive nature of auto-correct in our lives, scientists seem to be working on ways to make a wide variety of items in nature "auto-correct" in an effort to save time, money and improve the lives of those living outside of the first world.

1) Scientists are working on SELF-HEALING teeth!  By stimulating stem cells in teeth with certain drugs known to enhance molecule to molecule communication the researchers were able to coax teeth to regenerate completely in mice. Imagine the day in 2030 when you tell you grandchildren that the dentist used to fix cavities with a drill instead of telling you just chew a gummy vitamin.

2) Killing them (mosquitoes) softly.  Researchers identified a bacteria, which when present in male mosquitoes, makes the resulting eggs of the female die.  Thus, communities could reduce the population of mosquitoes carrying potentially dangerous diseases without the use of potentially harmful pesticides. 

3) Kids will never have to worry about breaking their mother's back - This research out of Binghamton University (Go NYS Public Education!) is really mind-boggling.  Researchers discovered a fungus which when mixed with concrete lies dormant.  However, when a crack appears in the concrete, water and air enter the crack and the fungus springs to life where it produces a byproduct - calcium carbonate - which is sufficient to fill in cracks.  It's very early stage, but the implications for the construction industry are tremendous!

Yeah science!

Kudos to those who see the status quo and ask how they can make the world a better place.


Welcome Back!

It's been nearly a year since my last post but frankly there was very little to talk about.  However, I got an alert from the host of the blog today that traffic was spiking despite the fact that I hadn't posted anything so I thought I should touch base.

Obviously, the markets are unraveling a bit so let's talk about what's going on.  First, despite all of the headlines screaming about the WORST POINT DROP IN HISTORY.... The reality is that this is only like the 100th worst day in the markets on a percentage basis.  Yes, when stocks have gone straight up for a year it can feel weird to have a couple of down days, but ignore that clickbait on you Facebook feed.

Since November 2016, the markets have been a one way street of buy everything and never sell.  So every day for the past year the markets became more and more boring, buy at 3am, sell at 4pm and try to avoid all of the nonsense talk about cryptocurrencies on the financial networks. 

However, 2 weeks ago I was struck by the increasing interest of "casual market observers" suddenly reaching out to me.

* "I keep hearing about the stock market, should I buy something?"
* "Can you believe this market?"

These are just anecdotes, but when a collection of these items hit my phone at the same time it's usually a sign that the last retail investors are finally getting ready to take the leap into stocks.  For reference the last time this happened was 2008 and before that is 1999-2000.

Around this same time, the bond market started to make some unprecedented moves (well, unprecedented relative to recent past).  I won't go through all of the machinations here, but suffice to say that the bond market is really the one to watch.  Combine spiking interest rates with a collapsing US dollar, a leveraged US consumer and corporate balance sheets flooded with debt and you have some very ominous signals hitting the market all at once.

Well, you might be saying, that's great to know now, but where were you last week to tell us this?  True, but we've had warning signals like this in the past (2011, 2013 and 2015 to be precise) and every time the Fed has stepped in to stop things from getting out of hand.  However, this time it feels different because it feels like the Fed is really boxed in a corner now.

The Fed has stated that they are beginning to unwind their balance sheet and attempting to tighten monetary conditions.  However, rates are rising and the US Dollar has fallen sharply this year which puts the Fed in a tough position -

1) Reverse their stated goals for 2018 and attempt to stop the rise of interest rates by buying bonds
and potentially throwing the US dollar into a real currency crisis or

2) Stick with the plan, allow rates to rise, the dollar to fall, and put the stock market at risk (where risk is a 30%+ decline, 50% decline if we enter recession). 

In the near-term, I suspect we'll get some dip buying in the markets, but beware, the fundamental analysts have left the building.  This is a market for the chart readers, of the chart readers and by the chart readers.  If you are not a skilled technician you may get run over in this market.  The after market trades look very ugly right now but that could just be a thin market. 

Try not to get too caught up in the day to day swings, but watch out for longer trends in the dollar, bonds and the stock market because together they tell a better story.


Monday, February 13, 2017

Back to basics

I joked a couple of weeks ago that the new Monday morning trading strategy seems to be -

1. Did we start World War III over the weekend?

2. If no, then buy every stock......

The bar is set incredibly low right now for the market's expectations for leadership in Washington so every day that the world doesn't explode seems to be a positive.  I'll spend a little time today reviewing just how silly the markets have become.  As a reminder, the argument that "well, it was worse in 2000" is crazy because those markets were so overstretched that comparison to them is laughable.  However, while this recent run to new highs has been accompanied by none of the normal hysteria, it is becoming nearly as extreme.

1. Apple:  This will be a consistent theme - notice how the stock has soared almost 50% (the green line), while earnings (you know the reason why you allegedly buy a stock) have tumbled by more than 15%.
Photo published for Apple Stock Soars Above Record Closing High  

2. This is sort of wonky but as the stock indexes are rising, fewer and fewer individual stocks are actually trading above their 50 day moving averages.  This means the advances are concentrated in a few names and the "new highs" are fragile. 

Another warning sign is the lack of trading.  Many traders are complaining that they could be sleeping in until 3:30pm because that's when the trading day actually seems to start. The number of shares traded on the NASDAQ is at its second lowest level in the past two years and is a sign of complacency that often proceeds a market top.

3. IRS receipts are signaling something.  While companies increasingly report "proforma" adjusted earnings, one area where they do not make up the data is on their tax returns.  Over the past 12 months corporate tax receipts are down almost 12%.  When tax receipts fall broadly it is an indication of weakness in the economy and when they fall on a 12 month rolling basis (as they did in January) it has signaled a recession every time going back to 1970.  But this time is definitely different, right?

While we are on the subject of recessions consider the following indicators -
a) Gross private domestic investment indicates we are in a recession right now.
b) Lending standards for small and medium sized businesses have tightened for 6 straight quarters.  that typically only occurs in recessions.
c) there has also been a tightening of lending standards for consumers
d) consumer bankruptcies rose year-over-year for consecutive months for the first time since 2010.
e) Oh, and gasoline demand is implying a 6% decline in consumer spending.  That's recessionary levels.

But it's definitely different this time.

4. Last February when the stock market was saved from collapse by a miraculous Central Bank meeting there were about 27% of investing gurus who were bullish.  Now, that stocks have jumped 28% in the past year, 63% of gurus are bullish.  Hmm, I'll let you draw your own conclusions.

One final observation on the speed of the markets today.  In 2000, Goldman Sachs employed roughly 600 equity traders who were buying and selling stocks for the firm's clients.  This human intervention slowed the decline of stocks while the dotcom bubble burst.  Today Goldman employs 2, yes 2, traders and a team of 200 computer engineers.  With 50% of trades today coming from computers, the speed of the next move, up or down, will be unlike anything we've experienced in the past.


* One final note - this isn't a political commentary.  I predicted back in the fall that no matter who won the Presidential election the US had a 40% chance of slipping into a recession in 2017.  I think those numbers still hold true today but I might increase the odds of recession slightly.

Friday, February 03, 2017

Jobs day

I'll offer up a bit of analysis that I've yet to hear anywhere re: the 227k jobs created in January.  A large portion of the "jobs" created in the report are "modeled jobs" based on samples.  Basically, they are a creation of someone working on an excel spreadsheet. 

Included in those models are seasonal adjustments which do things like add more jobs in the winter months even though the jobs don't exist because you want to smooth out the overall growth.

So while the real numbers might look like this:
Jan:     50
March: 75
June:     100
Sept:      80

When you multiply the data by your seasonal adjustments

Jan =     50 x 2      =    100
March =75 x 1.35 =    101.5
June =   100 x 1.03 =   103
Sept =    80 x 1.3 =      104

Ah, isn't that beautiful? Again, these aren't real numbers but they show the effect of seasonal smoothing. So, the seasonal factors have been built over many years where we have observed the impact on job growth change with the seasons.  However, we just had one of the warmest January's in 50 years and very little disruption to travel due to weather.  This probably made our January jobs data look a lot more like a March or April jobs number.  However, when you apply the January seasonal factor you get - boom!!! 227,000 jobs.  If and when we have numerous storms in a month, the jobs data is impacted and the first line out of everyone's mouth is "Well, the weather impacted the report...".  The truth is the weather can have a positive impact as well, but no one ever seems to complain about that.

I expect you'll see that number revised in the coming months but no one will notice if and when the revised numbers are released.


Wednesday, January 25, 2017

Woohoo!! Dow 20,000!! Do I hear 30,000? 40,000?

As you all know by now the Dow finally (after an agonizing 5 weeks of CNBC coverage) FINALLY closed above 20,000 today.  There will be a great deal of hoopla around that milestone, but remember

A) It's just a round number and it has no real significance
B) The Dow is a horrible measure of stock performance
C) Most of the Dow gain has come from the rocket-like performance of Goldman Sachs since the election.

Wait, that seems weird - didn't President Trump say "Goldman has TOTAL control of Hillary" 3 weeks before the election?  Why would Goldman be soaring after President Trump's victory?  Oh, that's right, he's stacked his cabinet with more Goldman insiders than Sec. Clinton could have ever imagined nominating.  Right or wrong, the belief is that what's good for Goldman will become gospel in DC over the next few years (well, even more so than it already is) and the belief is that will propel their earnings higher.

I struggle with all of the assumptions being made on Wall Street today.  It's no longer important that a company actually, you know, make money. 

However, if they can allude to the fact that in 2054 they might have a product that could sell 100,000,000 units at $10/unit the stock will soar $50 in 0.004 microseconds.  Obviously, that's an exaggeration but take the latest jump in stocks over the past two days.  It's been driven by the hope that maybe Congress in its eternal wisdom can identify the best way to spend $1 Trillion of your tax receipts (remember budget deficits which dominated the conversation 3 months ago??  Yeah, Congress seems to have forgotten as well). 

Again, with no clear understanding of who, what, where or when any of these projects would take hold, the stock market bid up every company even remotely associated with domestic construction. 

Caterpillar is a perfect example of this new paradigm.  Their earning expectations have fallen for 24 straight months.  Year over year sales have fallen for 49 straight months and yet.....their stock is basically at 6 year highs.  Why?  Hope that maybe, just maybe, they'll get some of that sweet government cheese disguised as "infrastructure spending".


So, here we sit - the Dow, S&P and NASDAQ all at record levels, while earnings flat-line.  This is the great untold story of the past 3 years.  Since 2014 earnings have effectively gone nowhere (companies have used a combination of aggressive tax strategies and debt to buyback shares to boost reported earnings, but income has fallen flat) but people are paying more for the pleasure of investing in stocks.  At times like this, driven by what's called "multiple expansion" you have to be very careful because if the trend reverses (and it always does) you'll get multiple contraction and earnings declines.  However, why be a Donnie Downer, tonight it's all about the party and our stock market is driven by Alternative Facts.  So pop some Dom, light a cigar and party like it's March 10, 2000 because that's what it feels like to me.


Friday, January 06, 2017

Sometimes math isn't hard but it scares people anyway

As you can probably tell, I've grown tired of tilting at windmills trying to get people to ignore the monthly jobs reports that come out from the Bureau of Labor Statistics because it is my opinion that when you start attempting to measure an economy as large as the US economy with statistical models, the models amplify measurement errors and the resulting headlines are usually just noise.

I'll go with my standard response when it comes to the unemployment rate - if the unemployment rate was really 4.7% do you think Bernie Sanders wins 20+ states in the primaries and Donald Trump wins the vote in the Electoral College?  Of course not, if unemployment was really 4.7% everyone would want the status quo (ie, Sec. Clinton) to continue on the path to prosperity.

However, since the Dow Jones has finally decided that today might be the fateful day to break through 20,000 I thought I should talk about the jobs report if only to highlight why it's so difficult to take the headlines seriously.

First a note on the Dow crossing 20,000 - it's just a round number and the Dow is a meaningless index that no one really cares about (except the guy talking to you on the evening news).  The Dow (and all stocks) have spiked since the election for a variety of reasons, none of which convince me that this is a good time to be buying into one of the most expensive markets in history.  Depending upon your choice of tools this is either the first, second or third most expensive stocks have ever been - only 1999/2000 and 1929 were worse.  Hey, but put on your 2017 hat and pop some champagne tonight because in 6-12 months you'll be longing for some good memories.

Okay, what's the big news today in the jobs report?  Whoa 2.9% wage growth!!! On the surface that sounds great, however, there's a little was a little fuzzy math that got to that number.  To get wage growth the BLS takes the average weekly paycheck and divides it by the average number of hours worked (again these are all basically numbers pulled from various surveys that are extrapolated).  When looking at the numerator in that equation - the weekly paycheck - I saw that it was roughly the same as in October so why is everyone getting so excited?

I'll use round numbers to demonstrate....

Let's say the average paycheck was $1,000 and the average number of hours worked was 40, you'd have an average hourly wage of $25.  However, let's say the average paycheck remained $1,000 but the avg hours worked fell to 39.5, then the average hourly wage JUMPS to $25.31/hour.  Wow, that's awesome!!!

Do you see how we magically increased the common man's pay? He's making an extra 31 cents an hour!!

However, the fictional common man, might say "Umm, thanks, but the if you'll notice my weekly pay is still $1,000 so while your model shows I got a pay increase, what I really got was the same pay for working 6 minutes less every day."

This is a simplification, but this is what drove about 25% of the "wage growth" reported in the December jobs report. The average number of hours worked fell while the weekly earnings grew slightly (about $20 for the yr).

So, in summary, this jobs report was much like all of those of the past 8 years - based on low-end jobs (retail, restaurants), freelancers and healthcare.  Not a lot to celebrate but go ahead and party like it's 1999 tonight.

I have a backlog of about 20 stories to cover - there are some really interesting things coming up.