tag:blogger.com,1999:blog-33905174145866243922024-03-19T04:21:55.020-06:00The Art of Finance and EconomicsA discussion of finance and economics concepts, principles and ideas which will also include exploring elements for writing and world building in science and fantasy fiction. BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.comBlogger43125tag:blogger.com,1999:blog-3390517414586624392.post-25088663821662466892024-01-29T17:04:00.004-07:002024-01-29T17:04:54.679-07:00Looking Through a Dark Glass - Old models rethought, New playing field<p> <span style="font-family: Calibri, sans-serif; line-height: 107%;"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left; margin-right: 1em; text-align: left;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilBiz9zL56fvswlyZwPQhhbMV9WqVc-XtSvMmT6ySnGawzVsXOdjVLx4wJ_Pcy3PGTlFn09AoKlI1Qyd4lx4ww5JaUBz7fcAnmUwfey5m0GlXpxpRtpXTeP6HyUHwg_Zk6mOBN56tjKrHzgfqovL1iJeuPgzeaN8_DiSA8BGkWAwNcCGKeZfbwgQaBjUw/s275/dark%20glass.jpg" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="183" data-original-width="275" height="183" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilBiz9zL56fvswlyZwPQhhbMV9WqVc-XtSvMmT6ySnGawzVsXOdjVLx4wJ_Pcy3PGTlFn09AoKlI1Qyd4lx4ww5JaUBz7fcAnmUwfey5m0GlXpxpRtpXTeP6HyUHwg_Zk6mOBN56tjKrHzgfqovL1iJeuPgzeaN8_DiSA8BGkWAwNcCGKeZfbwgQaBjUw/s1600/dark%20glass.jpg" width="275" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><span style="font-size: x-small;">Photo by Barbara Platek</span></td></tr></tbody></table><span style="font-size: medium;">I
have waited to write another blog on the economy because things have been
slowing down a bit lately. Slowing down is a relative term of course. Financial
news and gurus would like nothing better than to have massive activity or
perceived activity to generate something to write about. It doesn’t matter what
point they argue just that they can argue. I have found three articles
discussing topics that I think may be interesting and possibly somewhat informative.</span></span><br /></p><p><span style="font-family: Calibri, sans-serif; line-height: 107%;"></span></p><p class="MsoNormal"><span style="font-size: medium;">The first two articles are from the Financial Times and
CNBC, written in mid and late December. I like them because someone is asking
about how successful the various central banks have been in predicting and
handling the most recent recession and interest rate crisis. They have not been
particularly successful in either predicting or dealing with the crisis. The
article is pretty good about pointing out a couple of good thoughts. However,
the central banks only admit that they applied the wrong thinking to the
problem. They now know where they went wrong (or so they say) and the problem
won’t happen again. Don’t believe them. They haven’t got it right this time. We
will continue to have crisis and they will continue to make the wrong
corrections.</span><o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">Central bankers are rethinking
their approach to economic forecasting after their high-profile failures to
spot the most recent inflationary outburst, as officials argue for greater candour
with the markets about the uncertainties they are confronting. … “What we
should have learned is that we cannot just rely only on textbook cases and pure
models. We have to think with a broader horizon,” she said. (Christine
Lagarde) (a)<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: medium;">The second article discusses the difficult nature of
forecasting. If only the world were linear or bell curve shaped or predictable our
models would have performed just fine. But because the world is unpredictable
(who would have thought) we (the economists and central bankers) can’t be
expected to be able to make accurate forecasts. So we will continue to use the
old models with a few adjustments and expect the world to get in line and be
linear or bell curve shaped. Because if it does conform to our view of the
world then, of course, our models will get it right. Their models will not get
it right, trust me on this. <o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">Firstly, a “multi-polar world” and
an “increasingly fragmented global order” are leading to the “end of
hyper-globalization,” Little said. Secondly, fiscal policy will continue to be
more active, fueled by shifting political priorities in the “age of populism”,
environmental concerns and high levels in inequality. <span style="mso-spacerun: yes;"> </span>Thirdly, economic policy is increasingly geared
towards climate change and the transition to net zero carbon emissions. [More
so in Europe but the Biden administration is determined to drag the US into the
morass of massive spending, extreme regulation and ill-thought out initiatives.]<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">“Against this backdrop, we
anticipate greater supply side volatility, structurally higher inflation and
higher for longer interest rates.” Little said. “Meanwhile economic downturns
are likely to become more frequent as higher inflation restricts the ability of
central bands to stimulate economies.” (b)<o:p></o:p></span></p>
<p class="MsoNormal"><o:p><span style="font-size: medium;"> </span></o:p></p>
<p class="MsoNormal"><b><span style="font-size: medium;">New interest rate & inflation thinking<o:p></o:p></span></b></p>
<p class="MsoNormal"><span style="font-size: medium;">I like the below quoted Reuters article from early January. There
is still a lot of sentiment that the Fed will be successful in a soft landing.
You will notice that this discussion has been going on since early 2022 with an
ever changing end date. The discussion of the recession, regardless if it
crashes or is in fact a “soft landing” makes for good press so as long as it is
never resolved there is good storytelling. Expect to see much discussion even
after it is finally decided we are either in recession or had a soft landing <o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;"><span style="mso-spacerun: yes;"> </span>“[A] well-known economist and former Fed
official earlier this year argued the Fed has managed soft landings
more often than is generally believed. But many investors and executives think
the probability is low [for a soft landing at this point].<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">Investors are betting that the Fed
could cut rates by as much as 1.5% by the end of 2024, but that would still
leave policy rates at close to 4%, higher than where it has been for
most of the past two decades. At that level, monetary policy will still be a
drag on growth, as it would be above the so-called neutral rate at which the
economy neither expands nor contracts.” (c)<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: medium;">What does this mean for you and me? More uncertainty and
higher interest rates for quite some time and the likelihood of rollercoaster
inflation and less inflation. For the last 30 years we have had it fairly nice.
The central banks kept interest rates artificially low by pumping massive
amount of money into world economies. We all benefited from cheap money. We are
now, finally paying the price because the banks can’t kick the can down the
road anymore. There was so much excess money (the central banks have actually
been reducing their balance sheets some recently) that the whole world system
began to collapse. That was when the world banks finally panicked and slowed the
river of money. That is the catalyst for the current recession (starting in
early 2022) and why it is still hanging on. Most previous recessions lasted
from 4 to 10 months at the longest. We are still drying out from our massive,
massive binge and it is being slowly done. So expect to see recession /
inflation talk to continue (remember it makes for good press). See excerpts
from the Reuters article below to see a pretty good discussion of what can and
may very well happen and why. <o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">“Interest rates underpin
everything, from economic growth to the price of financial assets and how much
it costs to borrow to buy a car or a house.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">Higher rates make riskier assets,
such as technology stocks and cryptocurrencies less attractive, as investors
can earn a decent return without having to take on much risk.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">With money harder to come by,
riskier bets can fail and bubbles burst, leading to events such as the U.S.
regional banking crisis last March. As businesses struggle, they retrench.
People lose jobs and new ones get scarce.”<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">“While the Fed and other banks have
been raising rates for well over a year, the world is yet to complete the
transition from the time when money was free to a period when it no longer is.
2024 is likely to be the year when the effects of that transition manifest more
clearly.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">That means companies – and in some
cases, entire countries -- will have to restructure their debt liabilities, as
they can no longer afford to pay interest.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">For consumers, while savings would
yield more, higher borrowing costs will require an adjustment. Many U.S. adults
have only known low interest rates for their 30-year mortgages, for example.
They'd need to come to terms with rates that are more than twice as high and
make the math work for their budgets.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 0.2in;"><span style="font-size: medium;">Bottom line: investors' convictions
will likely get tested, as everyone will have to figure out how to live with
higher interest rates.” (c)<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: medium;">So, hang in there. Us old timers (me included and my
generation) lived through this kind of uncertainty and massive upheaval in the
70’s and 80’s. We survived. We had to be more frugal and things cost more
including anything that required borrowing or debt. Because the costs were
higher we had to scale back on our expectations and it did impact our ability
to spend and save. When we came out of that time period the world governments
opened the money spigots to keep inflation low because they were so afraid of
inflation that they would do anything to avoid it again. It appeared to work
for 30+ years. Now it doesn’t work and you (the younger generations) are paying
the price as are we. My generation went from tight money to loose money and we
loved it. This younger generation is going from loose money to tight money and
it is painful and will be so for a while. Good luck. Remember what is important
and it <u>isn’t</u> easy money. It’s family, friends, neighbors and your spiritual
wellbeing. Not what the world would have you believe.</span></p><p class="MsoNormal"><span style="font-family: inherit;">Articles quoted:</span></p><p class="MsoNormal"><span style="font-family: inherit; font-size: medium;">‘</span><span style="font-family: inherit;">(a) Financial Times, “Central banks rethink forecasting after failures on inflation”</span></p><p class="MsoNormal"><span style="font-family: inherit;">Sam Fleming in London, Martin Arnold in Frankfurt and Colby Smith in Washington </span></p><p class="MsoNormal"><span style="font-family: inherit;">December 27 2023 </span><span style="font-family: inherit;">https://www.ft.com/content/5d7851f3-ef7c-4599-8a5c-c34cecb83511</span></p><p class="MsoNormal"><span style="font-family: inherit;">‘(b) CNBC ‘Bonds are back’ as markets enter a ‘new paradigm,’ says HSBC Asset Management</span></p><p class="MsoNormal"><span style="font-family: inherit;">Published Thu, Dec 14 2023 2:45 am EST </span><span style="font-family: inherit;">https://www.cnbc.com/2023/12/14/bonds-are-back-as-markets-face-new-paradigm-hsbc-asset-management.html</span></p><p class="MsoNormal"><span style="font-family: inherit;">‘(c) REUTERS, “For investors, 2024 is year of transition to a new economic order”, By Paritosh Bansal, January 2, 202410:07 am MST </span><span style="font-family: inherit;">https://www.reuters.com/markets/investors-2024-is-year-transition-new-economic-order-2024-01-02/</span></p><div><br /></div><br /><p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-36093551344554091462023-11-16T17:38:00.000-07:002023-11-16T17:38:15.016-07:00The Year of More of the Same<p> </p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyB0lkYWWmQnjchNIHOlDA-GuWHl5T0vwFUFY7cxQNJw33jTNljGl6surWI-AYQX8JmNH1dySyOmdRTDiHHLFIqiwWYauKUsEqH1iRRxbiCDeLjdWQlsnbLgM_wp-QuRTxHXyogb9PXmQFclKrQmbF28wZ2E1JKSVxtbgtV6LdokTg7zws7q8vwsqfbZM/s450/Future-Past%20looking.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="368" data-original-width="450" height="179" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyB0lkYWWmQnjchNIHOlDA-GuWHl5T0vwFUFY7cxQNJw33jTNljGl6surWI-AYQX8JmNH1dySyOmdRTDiHHLFIqiwWYauKUsEqH1iRRxbiCDeLjdWQlsnbLgM_wp-QuRTxHXyogb9PXmQFclKrQmbF28wZ2E1JKSVxtbgtV6LdokTg7zws7q8vwsqfbZM/w218-h179/Future-Past%20looking.jpg" width="218" /></a><span style="font-family: arial;"><span style="text-indent: 0.5in;"><span> </span><span> </span>I have two pieces of information
before me on my desk. One is from Winters & Co. Advisors, LLC, an
investment agent who I have worked with over the years. The Winters document
contains a chart showing the swap yield curve for the last 4 years based on
today’s date (swap rates tend to closely follow same maturity treasuries). The
most recent 2 years shows an inverted yield curve in the 4% to 6% range. The
curves for 2020 and 2021 show normal sloping curves in the range of 0% to
1.95%. The second document is a short story from the Wall Street Journal of
today with the headline, “As inflation cools, economists see soft landing for
US”. What a ride we have had for the last two plus years. We have been riding
the Fed induced rollercoaster since mid-2021 when inflation started its climb from
the benchmark of 2% (4.2% - Apr 2021) to its high of 9.1% in June of 2022. It
slowly trended downward through the balance of 2022 and finally was back down
to 3% in June of this year. The rate trended up to 3.7% through September and
is 3.2% for October according to US inflation Calculator
(usinflationcalculatior.com/inflation/current-inflation-rates/). Remember, the
Fed moved the goal posts last year when it said that they would be happy if
long term inflation would stay in the 3.0% range as opposed to its 30 year
target range of 2.0%. The Wall Street article states “Economists continue to
see the US economy approaching a soft landing as inflation data comes in better
than expected, with little signs of impending recession. This would mark the
first time in 80 years the Federal Reserve has brought down inflation without
triggering a recession.” Not bad if it does happen, i.e. no recession triggered.
However, the Fed doesn’t have a very good track record and they did move the
goal posts to make it easier to claim success. So, change the rules, take 2 ½
years to do something that many times (one can’t say normally in economic
situations) takes 6 to 8 months and declare victory at the new levels, maybe. I
see that the Wall Street group is the first on the soft landing band wagon in
this current time period. Do you remember the movie </span><i style="text-indent: 0.5in;">Those Magnificent Men in
Their Flying Machines</i><span style="text-indent: 0.5in;"> (1965 comedy). It goes on to say </span><span style="text-indent: 0.5in;">something like, they go uppity up up, they go
downdity down down. I am afraid we have been doing the up down routine along
the bottom of the economic landscape for the last 2 ½ years.</span></span></p><p class="MsoNormal" style="text-indent: .5in;"><span style="font-family: arial;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: arial;"><span style="mso-tab-count: 1;"> </span>No, we
haven’t had an official recession yet but we haven’t had much growth in the
economy either. We have a very high Federal Fund rate that looks to stay high for
some time to come according to Chairman Powell. In the Associated Press article
of November 1, 2023, “Federal Reserve leaves its key rate unchanged but keeps
open possibility of a future hike” I quote;<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: .2in;"><span style="font-family: arial;">The central bank’s latest statement
noted that the economy “expanded at a strong pace” in the July-September
quarter and that job gains “remain strong.” And it reiterated that future
rate hikes, if the Fed finds them necessary, remain under consideration.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: .2in;"><span style="font-family: arial;">But it also acknowledged that
recent tumult in the financial markets has sent interest rates on 10-year
Treasury notes to near 16-year highs and contributed to higher loan rates
across the economy — a trend that helps serve the Fed’s goal of cooling the economy
and inflation pressures.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: .2in;"><span style="font-family: arial;">Powell himself suggested that Fed
officials remain unsure about whether further rate increases might still be
needed to defeat inflation. That stance marks a shift from earlier this year,
when the policymakers had made clear that they leaned toward pushing rates
higher.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-indent: .2in;"><span style="font-family: arial;">I am curious to see if the Fed will
consider inflation beaten at a 2% rate or the newer Fed suggested 3% rate. It
sounds like the Fed is watching and ready to hike the Fed Funds rate more if
necessary. Not a strong sign of reduced volatility as the higher rate tends to
make other aspects of the economy volatile and unpredictable. The good
news is the Fed hasn’t forgotten about the huge balance sheet problem which is
and was one of the primary driving forces for the inflation explosion in the
first place. Remember the huge balance sheet was fueled by artificially low
borrowing rates for so very, very long. In a Reuters article of October 31,
2023 I again quote;<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: .2in;"><span style="font-family: arial;">The eventual end of the Federal
Reserve’s efforts to reduce its vast bond holdings increasingly appears tied to
what happens with the central bank's "reverse repo" operations.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: .2in;"><span style="font-family: arial;">The program, launched nearly a
decade ago, grew rapidly starting in the spring of 2021 and by June 2022 was
consistently taking in more than $2 trillion a day in what was seen as clear
evidence of the amount of excess cash sloshing around the financial system.
Inflows have dropped sharply in recent months to around $1 trillion in the face
of the Fed's aggressive policy tightening underway since last year.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: .2in;"><span style="font-family: arial;">Lou Crandall, chief economist with
Wrightson ICAP, a research firm … <span style="mso-spacerun: yes;"> </span>reckons the Fed still has time in this
process, and speaking earlier this month, Cleveland Fed President Loretta
Mester agreed.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: .2in;"><span style="font-family: arial;">"We still have a very large
balance sheet" so the balance sheet cuts can likely continue over the next
year and half to two years, she said, adding when it comes to getting to the
finish line, "it's going to take a while."<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: arial;"><span style="mso-tab-count: 1;"> </span></span><span style="font-family: arial;">So,
what might we see regarding inflation, economic growth, and a return to normal
(whatever normal may be 😊)? Well, that’s just it. I suspect more of
the same which is a fair amount of uncertainty and ambiguity plus a large dose
of prevarication by the various economic gurus, and financial and governmental leaders.
I am afraid we aren’t going to know until we know. Or at the very earliest
after the fact (yup, after the fact). Not much comfort. However what you can do
is stay conservative in your investments. Don’t concentrate your holdings
but spread things out. Don’t go for financial or investing fads. Save as you
can, spend less, and find ways to enjoy things more like family, friends, the
beauties around us. Don’t worry to much about the economy. It has survived
several other difficult times regardless of what people, institutions and
governments do to it. Things will of course certainly, almost without fail, very
likely, probably, in most cases solve themselves, we think. (But don’t quote us on that.)</span></p><p></p>
<p class="MsoNormal"><span style="font-family: arial;">Articles cited.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: arial;">Federal Reserve leaves its key rate unchanged but keeps open
possibility of a future hike<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: arial;"><a href="https://apnews.com/article/inflation-interest-rates-prices-economy-federal-reserve-63f5a7ed041d6b55c7aa773d071a05fb">https://apnews.com/article/inflation-interest-rates-prices-economy-federal-reserve-63f5a7ed041d6b55c7aa773d071a05fb</a><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: arial;">Fed’s reverse repo facility drawdown looms large in balance
sheet debate <o:p></o:p></span></p>
<p class="MsoNormal"><a href="https://www.reuters.com/markets/us/feds-reverse-repo-facility-drawdown-looms-large-balance-sheet-debate-2023-10-31/"><span style="font-family: arial;">https://www.reuters.com/markets/us/feds-reverse-repo-facility-drawdown-looms-large-balance-sheet-debate-2023-10-31/</span></a><o:p></o:p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-2538670865547318042023-05-25T15:42:00.003-06:002023-05-25T15:53:58.608-06:00Recession, Banks, Debt Ceiling – You Must Believe Me Now<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEh7NSNyz9DGQMiEEpdxrIiwLBjjwucBiKVDUF_U6NJNDP731CXpd7cjf7Aj4ui36Mrf4maU3zSoDZh2Zitf0NiWUEqWT9yqTSs--2jF9gDTfUf3iO7IreMuzQQScyefAsuizRk1vJaY3rpJftpaPXuPNiG8lUjdrw4uU9LDDWvvBsoCU-KtELvFDgf1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="" data-original-height="309" data-original-width="294" height="138" src="https://blogger.googleusercontent.com/img/a/AVvXsEh7NSNyz9DGQMiEEpdxrIiwLBjjwucBiKVDUF_U6NJNDP731CXpd7cjf7Aj4ui36Mrf4maU3zSoDZh2Zitf0NiWUEqWT9yqTSs--2jF9gDTfUf3iO7IreMuzQQScyefAsuizRk1vJaY3rpJftpaPXuPNiG8lUjdrw4uU9LDDWvvBsoCU-KtELvFDgf1=w131-h138" width="131" /></a></div><p></p><p class="MsoNormal">The question is, if it’s said loud enough will it be
believed? Because this time it really is true (it is being said very loudly). Or
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<p class="MsoNormal" style="text-indent: 0.5in;">The discussion about recession has
been on-going for some time now. I started writing about recession
possibilities over a year ago. The discussion has moved back and forth between
how do we avoid one to how do we get a soft landing to what can we do to help
those that will likely suffer if the landing isn’t so soft. We may see in the
next several months various pronouncements by various talking heads. You notice
I didn’t say anything about what phase this is. I don’t know and it doesn’t
matter as much as most news personnel would like you to believe from their<span style="mso-spacerun: yes;"> </span>strident and every increasing noise. Remember,
it is important to keep the fans whipped up. We will be able to look back in
several months when the National Bureau of Economic Research (NBER) will state
that a recession started at such and such a point, or didn’t. Remember, only
the Bureau is recognized as the official group that can declare such and they
always include factors that are backward looking, meaning we don’t officially
know until after the fact. This also means that we don’t officially know if we
have had a soft landing, missed recession or face plant until after the fact either.
There are other signs that may give us indications of various outcomes,
however. We have been moving toward this point for months and months. It is
dragging on longer than a normal news cycle so it gets recycled regularly.
Expect to see it to continue. Again, the fans need to be whipped up to keep enthusiasm
high. We are getting more comments like JPMorgan Chase CEO, Jamie Dimon (CNBC,
Apr 14, 2023 Manie Dimon issues warning on rates: ‘It will undress problems in
the economy’) that investors and business should plan on interest rates
remaining higher for longer. The Fed still needs to “dry out” the economy, get
the excess funds (easy money) out of the system. That hasn’t changed. We still
have a recession we are trying to work around or work through depending on what
you think may happen. Work around implies a soft landing or just a slowdown; The
economy slows down, unemployment rises a bit. Banks tighten their lending
policies. A few business and individuals suffer or go under. The Fed is able to
get their balance sheet down without the stock and bond market tanking (it
slows down, drops and recovers fairly quickly). We stumble a bit and slow down.
No or mild recession and we carry on at a more measured pace. Work through
implies a recession; we trip or worse, face plant and have to pick ourselves
back up. We see bank failures, businesses and individuals declare bankruptcy.
The Fed isn’t able to maintain a smooth decrease in its balance sheet or worse
doesn’t reduce it. The stock and bond market react to all the uncertainty and
failures by tanking. It takes a longer to climb out of the hole. <o:p></o:p></p>
<p class="MsoNormal" style="text-indent: 0.5in;">One of the consequences of the
higher rates is the financial sector including banks will feel the pinch. They
have to change from an easy money mentality to a more measured lending stance.
Easy money implies less diligence in protecting deposits and in shoring up a
banks balance sheet. There is little or no profit in protecting deposits
(lending them out is where money is made) or doing more than the minimum
required or skirting regulations. Most banks try to balance the profits with
the safety, we have seen the banks that didn’t. The price for skirting the
safety regs in good times is minimal and it is hard to see which banks may be
skirting until too late when times turn bad. The best we can do is go with
financial institutions with a long record of being conservative. Credit Unions
tend to be more conservative by their nature and charter requirements. Still,
it’s hard to tell. There is something to be said for spreading money around
between institutions. We also have deposit insurance which is helpful but in
the Silicon Valley Bank and First Republic Bank failures the Fed stepped in and
guaranteed all deposits which stressed the insurance provider FDIC (it almost
broke it such that another big hit would cause serious problems). So, things
are complicated, of course. By guaranteeing all deposit they essentially gave a
green light to the poor practices of the bank. They also prevented a bank run
on several similar shaky banks across the country. Whether that was the right
thing to do or not should be debated for a long time. The current mentality is
that the government can fix everything which makes them responsible. Hence more
regulation and laws and more places for shady people to find loopholes. Notice
that the defense for many of these funny practices is that the entity did
nothing wrong, they were following the rules. It was the rules fault. So, of
course, more rules are needed. That is a very bad spiral and you can follow it
down to the final conclusion. Watch the financial sector for more stress in
general and how they seem to take care of it. Look for more rules and
regulations. I am glad I am finishing up my career in finance and not starting
it. It is a very different and much more difficult place to work then 30-35
years ago when I was first involved. <o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>Now the
debt ceiling question. I am not going to quote any articles. There have been so
many. It is the current hot, hot, hot topic button and the news media are
mashing it with their biggest and most massive sledge hammers (gleefully I
might add). Do you feel like you have been beat up no, pummeled for weeks on
end. Everywhere you turn someone or some organization is talking dire straits,
doom, gloom, death, destruction, mayhem, the very end of the world as we know
it, the end of civilization, the death of all we hold near and dear, (pause for
dramatic breath!!!!!!) AURRRGHHHHHHHH. Why can’t you people see how important
this is!!!!!!!!!!!<o:p></o:p></p>
<p class="MsoNormal">Sorry…., I got just a little bit carried away. <o:p></o:p></p>
<p class="MsoNormal">It won’t happen again (at least until tomorrow anyway.) <o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>This is
the news and financial media at its finest. This it the current news media
model and the debt ceiling is the ultimate opportunity to exercise its model to
the fullest. The underlying question is the government has set some limits on
its spending capability, a good thing. It has come around again that the
government can’t manage its input and output. The easy solution is raise the debt
ceiling or remove the debt ceiling requirement or better yet get spending under
control. Now, granted, the answer is never that easy and that is also part of
the problem. The solution is pretty complex but workable. However, we have
powerful political forces that are using this debt ceiling to push their
various points and agendas. <span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal">As background information. The following is from Wikepedia,
United States debt Ceiling;<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">The U.S. has never reached the
point of default where the Treasury was incapable of paying U.S. debt obligations,
though it has been close on several occasions. The only exception was during
the War of 1812 when parts of Washington D.C. including the Treasury
were burned.<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">In 2011, the U.S. reached a
crisis point of near default on public debt. The delay in raising the debt
ceiling resulted in the first downgrade in the United States credit rating,
a sharp drop in the stock market, and an increase in borrowing costs. Congress
raised the debt limit with the Budget Control Act of 2011, which added to
the fiscal cliff when the new ceiling was reached on December 31,
2012. <o:p></o:p></p>
<p class="MsoNormal">The last time things got too close, government set new rules
and they immediately went about figuring out where the loopholes are. And it is
continuing. Is it a problem. Yes. Is it the end of things as we know them (as
the news is telling us). No. Are there solutions. Yes. Should you be upset.
Yes. Should we be acting like Chicken Little. No. It will play out. It will get
close. There will be much rejoicing in the media when the “solution” is
reached. Then the media will begin the analysis phase which will allow for
continued coverage for many months. So it continues. Should you follow all the
stories. DEFINATELY NOT. When this crisis passes the media will need something
else to keep us tied to them. Look for the recession to come back in vogue. Don’t
be lead around. The various financial crisis will continue in the news. You can
always find them if you want. I suggest you don’t want to. Keep your finances
simple. Keep debt low. Save as you can. Debt is good for some things, housing,
education, transportation. Live simply. <o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>Remember
what is important. It <u>isn’t</u> news. It is family, friends, the things you
love. It is the beauties around you. It is relationships, the good earth, the
joy of interacting. It is game nights, movies together, playing with kids (big
and little ones). It is in quite walks, talking in person to friends and
family. Meeting new people, a meal together, building something, watching a
sunrise and sunset. Tell someone you love them. Share precious things, a hug a
kind word, hope. <o:p></o:p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-73905901420597364732023-03-23T14:12:00.003-06:002023-03-23T14:12:56.438-06:00Bank Failure, Recession – What Is Happening<p> </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1R3oEBTJQ9X18ncQe_pBdx_oe43LgopwdtsavuWVq1iG9sTG65VDuFnf23GzkD10IUWEdlONYn1i0sX9vjbbMaF3fh7x_5r2nD-zOjfnx76qdceT2seJdj6jzflOh5hYK9yp5b0RWfYoqICFHCbH-5ffzuvCi2X73UxvONemu3GbUb459_yz-pKVN/s810/soapman.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="505" data-original-width="810" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1R3oEBTJQ9X18ncQe_pBdx_oe43LgopwdtsavuWVq1iG9sTG65VDuFnf23GzkD10IUWEdlONYn1i0sX9vjbbMaF3fh7x_5r2nD-zOjfnx76qdceT2seJdj6jzflOh5hYK9yp5b0RWfYoqICFHCbH-5ffzuvCi2X73UxvONemu3GbUb459_yz-pKVN/w268-h200/soapman.png" width="268" /></a></div><p class="MsoNoSpacing"><span style="mso-tab-count: 1;"> </span>I am
composing this blog while listening to 5 songs, playing loudly, <i>Living the
Dream</i> by Foreigner, <i>Demolition Man</i> by Sting, <i>Bang a Drum</i> by Jon
Bon Jovie, <i>Wheel in the Sky</i> by Journey, and <i>Dr. Heckyll & Mr.
Jive</i> by Men at Work. Mainly because they sound good loud, better louder,
especially with more bass. The lyrics are a good mix of some of my feelings regarding
the economy, economic policy and the people playing the various roles in this current
economic play (especially <i>Bang a Drum</i>). <o:p></o:p></p>
<p class="MsoNoSpacing"><span style="mso-tab-count: 1;"> </span>I
haven’t said anything for a few weeks as I was waiting for the news noise to settle
down and we can pick through the points in a more reasoned manner. <span style="mso-spacerun: yes;"> </span>The Associated Press article titled <i>Fed raises
key rate by quarter-point despite bank turmoil</i> by Christopher Rugaber (3/22/23)
is a good summary of the past several weeks and may hold some insight into future
activities. I have put a link to the article at the end of this post.<o:p></o:p></p>
<p class="MsoNoSpacing"><span style="mso-tab-count: 1;"> </span>First,
bank failures. The problem is 3-fold. One, with the Fed raising the Fed Funds
rates and attempting to dry out the economy by removing money from the economy,
all borrowing costs have increased as well as interest rates on all new debt
instruments. Treasury rates have changed wildly and are higher across the
board. Don’t worry about short term vs. long term differences, just know all
rates are up, up a lot. The purpose is to remove money from the overall economy
so that too much money is not chasing too few goods (one of the basic
definitions of inflation). The higher rates affect you in many ways but
especially if you have old bonds (bonds at old, lower rates) and you need to
get the principal before the bonds naturally mature. Remember, interest rates
and principal value are inversely related. If rates go up principal value goes
down. However, this only happens if the bonds are sold before their maturity
date. If the bonds don’t need to be sold early then no foul, no harm. When they
talk about bonds losing or gaining value it only relates to having to sell them
before maturity. It’s only a paper change based on current conditions. It is a
way of looking at current opportunities vs. what was spent / invested previously.
If you have an existing, older mortgage you are saying, boy what I deal I got.
If you are looking at invested funds you are saying I wish I had my money free
right now because I could earn a lot more if I invested now. You don’t owe any
more interest on your mortgage or have fewer dollars coming in from your invested
bonds. Now, if you need to borrow new money or invest some current excess funds
then the current rates will apply. That is where you will see the impact of
higher rates, on any new debt you want to acquire or new investments which will
give you more earnings. If, however, you need to get the money out of your
current investments you will have a problem which is what all the current news
is talking about as lost money. Remember, there is an inverse relationship between
rates and principal, as rates increase, principal decreases and vise-versa. In
order for you to get your money back early (i.e., sell your current debt/bond)
someone else will have to buy it and they are not going to want your old
interest rate bond because it has a lower interest earnings rate than what that
person can get if they were to take their money into the market today and buy
a new debt instrument. In order to make it attractive to the new investor you need
to make your old debt equal to the current debt they can get. Debt is equal to
the value of the stream of remaining interest payments plus the principal
payment. So if the interest payments are lower than current interest payments
you have to take less principal to make up the difference (not quite that
simple because compounding is also included). So, if current interest rates are
higher and you have to sell your old debt then you will get less than the
stated principal to make up the difference. If you were counting on that total
principal amount you now have less.<o:p></o:p></p>
<p class="MsoNoSpacing"><span style="mso-tab-count: 1;"> </span>That
leads to the second part of the bank failure problem. Banks make money by
lending out their deposits and funds to borrowers (no problem). Banks learned a
long time ago that they can’t lend all their deposit as they need some funds to
cover regular transactions. If people can’t get their money in a timely fashion
they won’t invest in the bank. The Fed has set various rules for how much banks
must maintain in cash and cash equivalents to meet short term demand. (A
discussion for another time is why does the Fed have to set the rules thus
removing the need for banks to be their own monitors. That is why we have too big
to fail banks and other problems, banks aren’t responsible for their poor
decisions because the Fed picks up the responsibility, and cost.) One of the
cash equivalents allowed by the Fed is the bank can hold Treasury bonds and
high quality municipal debt (bonds). The bank should always be monitoring the
impact of changing rates and if rates are moving then what is the value of the
principal if the debt has to be sold immediately (can’t wait for maturity). Usually
the bank will “hedge” the debt meaning they have various financial products
that will allow them to cover the loss in having to sell before maturity. These
instruments are not perfect and can have problems themselves. <o:p></o:p></p>
<p class="MsoNoSpacing"><span style="mso-tab-count: 1;"> </span>The
third part of the bank failure. Silicon Valley <span style="mso-spacerun: yes;"> </span>and Signature Bank had depositors that
included venture capitalists and other very sophisticated investors. The
investors realized that the bank was either not hedging their funds properly or
had lent out too much in relation to what they needed to cover their short term
needs. The investors fairly quietly started taking their deposits back. Problem
is many watch venture capitalists very closely. It took only a few days for a
run to start on the bank meaning not just a few but lots of people want their
money back, now. The bank had to sell their cash equivalent funds (because they
didn’t have enough cash) which were in treasury bonds, considered very safe (and
they are because the federal government will always pay what they owe) but they
had to sell in a rising interest rate market. Investors won’t pay the full
principal amount because interest rates are higher than the rates on the bonds.
Hence,<span style="mso-spacerun: yes;"> </span>less principal coming back. The
bank sold something like $21 billion in securities and lost $1.8 billion. They
needed to make up the difference and tried to sell new stock to raise it. That
sent more shockwaves through bank customers which led to a run on the bank. No
one wanted to buy the stock. The bank was overwhelmed by withdrawals and couldn’t
meet the demand. The Fed stepped in and closed the bank. <o:p></o:p></p>
<p class="MsoNoSpacing"><span style="mso-tab-count: 1;"> </span>Many
are suggesting that the Fed’s interest rate policy led to the bank failures.
High interest rates certainly caused the problem of the lost principal when the
bank was forced to sell before maturity. The bank was supposed to be monitoring
such things. According to reports, the bank’s mix of securities and cash was
substantially different (worse) from industry averages.<o:p></o:p></p>
<p class="MsoNoSpacing" style="text-indent: .5in;">The Fed this week increased the Fed
Funds Rate by only 25 basis points, recently it was expected to be 50 basis
points. There is news noise that the Fed should stop, increase, change. There
are calls for Congress to do something (more regulation), again news noise.
There may well be new regulations but let it sit a bit before you start looking
/ commenting. Previous Federal policies and regulations made much of this mess,
they may or may not be able to do some good. I am not particularly hopeful but
one never knows. There is much noise around the Treasury and Federal Reserve’s
move that guaranteed all deposits not just those of $250,000 or less (FDIC
insured) at the failed banks. That move was to keep the bank runs from
spreading to other banks. It seems to have worked at this point but things are still
dicey in the banking sector. Questions are being asked about what other banks
may have similar situations to SVB and Signature bank. There have been
rumblings in other parts of the country. We have had many public officials making
official public announcements. Remember news noise, we don’t know yet in spite
of all the words. Back to the guaranteeing of all deposits. That releases all
responsibility of the banks and the big depositors. The system wasn’t designed
to cover those types of costs. Biden and Yellen have promised that taxpayers
won’t cover this cost. There isn’t enough money in the FDIC funds to cover the
cost of insuring those uninsured deposits. The insurance premiums are collected
from bank fees to all banks. You and I pay those fees. I don’t see how we aren’t
going to pay the costs. Unless public officials come up with some other plan, we
can hope they will. Now we have another precedence set for banks to rely on the
Federal government to bail them out, tying them closer still to the government.
<o:p></o:p></p>
<p class="MsoNoSpacing"><span style="mso-tab-count: 1;"> </span>A
recession is still very much on the table. The Fed needs to balance the
problems caused by tighter policy (higher rates) with the expected problems
generated by those policies, yes expected (the problems aren’t new). They also include
stalled growth (which is needed but how long might it last), increasing
unemployment, higher borrowing costs. Markets really, really hate, loth, fear,
you name it, all this uncertainty. They don’t like it and tend to rebel (do
things that the Fed isn’t expecting or prepared for – like bank failures).
Expect to see this continue. It’s all part of the process. Remember, we have
survived this sort of thing before (recession). It is NOT the end of the world
as we know it. It is NOT going to go on forever. The sky is NOT falling. (Things
you will hear in the news noise.) It is part of the process of getting the
economy back on track and working better. It is going to work, it has worked before
and it will work again. Hang in there. Remember what is important and that important
things are NOT found in news noise. They are found in friends, family, loved
ones and enjoying life. It is doing things together and learning new things. It
is in seeing all the beauty around us and enjoying that. It is found in loving
and caring more.</p><p class="MsoNoSpacing"><span> </span><span> <span> </span> </span>I am now stepping off my soapbox and turning down the music
volume. <o:p></o:p></p>
<p class="MsoNoSpacing">AP news article -</p><p class="MsoNoSpacing"><o:p></o:p></p>
<p class="MsoNormal">https://apnews.com/article/federal-reserve-inflation-banks-interest-rates-jobs-91a9185ebce972bbf5ab1f46654f1a53</p><br /><p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-90184750244677307992023-01-31T09:25:00.000-07:002023-01-31T09:25:25.176-07:00The Sword of Damocles - Recession Discussion & Related Thoughts<p class="MsoNormal" style="text-indent: .5in;"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: left; margin-right: 1em; text-align: left;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcnhSkJAsMtVWqM4YQQqgjHV6ptLtS483Dd-N9oJspB5lqyC33F32HFvQn-MXsQTopfS93QsE-HRIPkJ1f5GginbH2yBsP1SBkIpkEJ-8ZO3wf57NSJmjCufeVsYo9wnDzBFqG8J2FPJUF0aIw-6nhuF2ZIehEw2lFq_W2fkdWh9XKd3hFdlPCHQ62/s1024/Damocles-WestallPC20080120-8842A.jpg" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1024" data-original-width="803" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcnhSkJAsMtVWqM4YQQqgjHV6ptLtS483Dd-N9oJspB5lqyC33F32HFvQn-MXsQTopfS93QsE-HRIPkJ1f5GginbH2yBsP1SBkIpkEJ-8ZO3wf57NSJmjCufeVsYo9wnDzBFqG8J2FPJUF0aIw-6nhuF2ZIehEw2lFq_W2fkdWh9XKd3hFdlPCHQ62/w157-h200/Damocles-WestallPC20080120-8842A.jpg" width="157" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Sword of Damocles<br />by Richard Westall</td></tr></tbody></table><br /><span> </span><span> <span> </span></span>We start the new year with the
sword of Damocles poised over the national and world financial markets. The
articles are a smattering of comments, commentary and conjecture from market gurus (both national and world) and
federal officials tasked with knowing what is going on. Much of the thinking is
still relating to recession but a new term is being introduced into the
discussion. Additionally, many are discussing just what and when a recession
may or may not occur and Powell (Fed Chairman) is trying to keep the Fed
focused on is core responsibility. A typical month in the life of the financial
world with many pronouncements, much hand wringing and many loud protestations.
So, let’s dive into the murky waters and see just what we can see (or not see).
<o:p></o:p></p>
<p class="MsoNormal"> A new
term is being floated to describe the current financial situation, “slowcession”.
Apparently the phrase was coined by Cristian deRitis and used by Moody’s
Analytics chief economist Mark Zandi. It means economic growth “comes to a near
standstill but never slips into reverse [recession].” Every economic downturn
and upturn for that matter, is a bit different and past historical data can
only give limited help in describing any current situation. We won’t know how
this recession or as noted above, slowcession, will look until after the fact.
It will probably have several differing characteristics from previous
recessions but will meet the basic definition of recession. Do we know how this
recession will play out, no. Are there some ideas, yes, many. Will any of the
ideas be correct. Maybe. Then again they may all be wrong or at least mostly
wrong. Then again, with all the possible ideas and conjectures floated over the
past 12 months there is likely to be a couple of the ideas that will hit close
to what actually happens. Remember, we have had so many possible scenarios described
from the death of the markets to no recession that all possible options have at
least been considered. Something has to hit, given enough shots taken. So, we
don’t really know but we have some ideas on a recession and its impacts.<o:p></o:p></p>
<p class="MsoNormal"> <i>The
Guardian</i> (London) collected comments from a variety of international
economists and financial gurus and gives us a cross-section of thinking. They
suggest from their sources that we should “brace for another turbulent year in
the financial markets”. (Nothing new there.) Their comments suggest possible
improvement and likely fall of markets, particularly the US. The head of the
International Monetary Fund suggests that a third of the world’s economies are
in recession which is likely “because the three big economies – US, EU and
China – are all slowing down simultaneously”. Some are suggesting a global
recession this year. Much of the speculation is based on what economists and
other believe will be the response by central banks to the high inflation rate,
which will be raising governmental monies interest rates. An interesting side
comment, the article suggests that Russia’s economy is already in recession
caused in large part by Putin’s failure to find an easy way out of the war.<o:p></o:p></p>
<p class="MsoNormal"> I have
selected 3 articles on recession comments. <i>The Bond Buyer</i> (1/24/23)
brings several analysts’ comments together suggesting recession is necessary.
Some economists are suggesting a modest recession (Wells Fargo Securities and
others) during 2023, others think more than modest. There is now discussion
about the impact of the recession on inflation. Remember, recessions are
supposed to kill inflation. Some are suggesting inflation will remain above the
Fed target of 2.0% and be in the range of 2.5% to 3.5% for at least a decade.
The solution to higher than target rates, the Fed can always move its target upward
and declare victory in the war on inflation. That wouldn’t surprise me.
Finally, there is some discussion that we will have a split year. Good for half
and bad for half. Don’t know which half first. <i>BNN Bloomberg</i> (1/5/23) is
a discussion by St. Louis Fed Reserve Bank President James Bullard that Fed
Funds Rates are getting closer to high enough to bring down inflation. The
thought by many from his comment is that the Fed still has some increases to
come. The question is will they be .25% or .50% increases. The market views a
slowing increase as positive at this point. Several Fed officials are still
concerned that inflation is to high or way to high. That points to bigger
increases. The 3<sup>rd</sup> article from Reuters (1/25/23) is about the
impact of all this to investors. The article warns that many “heavyweights
[are] warn[ing] of pain ahead despite market’s recent reprieve”. Even though
recent market movements have been positive or optimistic, most are warning that
recession is still likely. The article states, “correctly gauging the economy
is crucial for investors”. The statement is absolutely correct and impossible
to do. Remember that. Don’t try. No one can. Ever. Don’t do it. In spite of
what many say especially talk radio financial hosts and slick financial
advisors. And of course many believe they know more. Some very few will get
very lucky and be correct and you will hear about them and their phenomenal
good skills (luck is <u>not</u> a skill). The majority (most) will get it wrong
and there will never be any report on them or their numbers.<o:p></o:p></p>
<p class="MsoNormal"> Stay
your course. Don’t panic or as the British war message stated “Keep Calm and Carry
On”. Keep your debts manageable / low. Don’t borrow without careful thought.
Save and above all….. enjoy life, friends, family and the beauties around us.
Be grateful. I am.<o:p></o:p></p>
<p class="MsoNormal">Articles used:<o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.theguardian.com/business/2023/jan/02/global-economic-forecast-for-2023-a-stormy-start-followed-by-a-ray-of-hope">https://www.theguardian.com/business/2023/jan/02/global-economic-forecast-for-2023-a-stormy-start-followed-by-a-ray-of-hope</a><o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.cnn.com/2023/01/03/economy/moodys-us-economy-slowcession/index.html">https://www.cnn.com/2023/01/03/economy/moodys-us-economy-slowcession/index.html</a><o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.bnnbloomberg.ca/fed-s-bullard-says-rates-are-getting-closer-to-sufficiently-high-1.1866262">https://www.bnnbloomberg.ca/fed-s-bullard-says-rates-are-getting-closer-to-sufficiently-high-1.1866262</a><o:p></o:p></p>
<p class="MsoNormal"><o:p></o:p></p><p><a href="https://www.reuters.com/markets/us/wall-street-heavyweights-warn-against-goldilocks-hopes-2023-01-25/">https://www.reuters.com/markets/us/wall-street-heavyweights-warn-against-goldilocks-hopes-2023-01-25/</a> </p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-81167745200046516722022-10-28T08:44:00.001-06:002022-10-28T08:48:08.791-06:00Hang On For A Rough Ride<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi17RAgVLWxE3dSV3W8OhTgF0-V1dx_IepwGV3XxNF8o-BKKR_CZ7n4WHawk1roWkpus8ETqJppvhvZOXex7s6AFyzkCcd7B2S7iPi5jzNgqmNsOxFpH-HeU7Qgapd9tSSDmbmZWNWafr1daifj6tKzGGjqr1fHU4No1lUj5SDdxkpCse_Rr7wcO3Do/s3456/rough-road.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="2304" data-original-width="3456" height="138" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi17RAgVLWxE3dSV3W8OhTgF0-V1dx_IepwGV3XxNF8o-BKKR_CZ7n4WHawk1roWkpus8ETqJppvhvZOXex7s6AFyzkCcd7B2S7iPi5jzNgqmNsOxFpH-HeU7Qgapd9tSSDmbmZWNWafr1daifj6tKzGGjqr1fHU4No1lUj5SDdxkpCse_Rr7wcO3Do/w183-h138/rough-road.jpg" width="183" /></a></div> <span> </span> As the
old saying goes, hang on, things are likely to get a bit rough. I have pulled
financial news articles from the past week or so. Financial thinking has been
fairly consistent for the past weeks and the most recent 10 days have been
fairly typical. By consistent I mean, lots of uncertainty, markets and thinking
are moving up, down and sideways most all of the time. Nobody really knows much
of anything but there is lots of noise.<p></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal" style="text-indent: .5in;">First, a good article from Think
Advisor (10/24/22) concerning the annual meeting of the Securities Industry and
Financial Markets Association (SIFMA), an organization I subscribe to and is
very much an industry standard. The meeting is attended by many big wigs from
finance and government. Janet Yellen, secretary of the Treasury, spoke at the
meeting (more on that later). One of the panel discussions included several
business economists discussing inflation and recession among other things.
Several are now predicting that there will be a recession in 2023. The
participants listed several factors supporting their conclusion. The factors
are the same as have been discussed before, inflation being the 800 lbs.
gorilla in the room. The article gives some good comments and supports for
their conclusions. Much of the current discussion involves estimating and
second guessing the Fed and its inflation response. Since the 1970s and Alan
Greenspan’s solution to inflation the Fed has been terrified of any type of uncontrolled
inflation. The solution in the 1970s just about destroyed the US economy before
it corrected itself. Corrected itself is also correct, Alan Greenspan and the
Fed did not fix the 1970s economy but they made it possible for it (the
economy) to rebalance itself – governments and individuals don’t control
economies in spite of what they say, economies control governments and people. The
Greenspan solution was one that worked or at least that was what governmental
and financial think tank gurus came up with that worked, and it did work.
Governmental officials and politicians ever since then will do just about
anything to avoid that situation again. The problem is that much of the fiscal
and governmental policies of the past 20 years have been such that it supports
inflationary growth. Then the loose money supply accompanied with artificially
low interest rates (yes, dear reader, rates have been artificially low for 20
years, held down by direct intervention from the Fed which allowed government
to pursue its various expansionary agendas) got away from the governmental
people as it had to do. The low interest rates and expanding money supply
couldn’t go on forever but for 20 years governmental types have been kicking
that can down the road until now. That is why the current administration is
howling that the current inflation isn’t their fault but they are willing to
add to the problem by increasing governmental spending by unprecedented amounts
which is very inflationary. Hence, trying to kick the can down the road again
but the financial system has reached its limit. Goods and services are not able
to absorb the excess funds without adjusting and that means prices have to go
up, in this case way up, way fast (the basic definition of inflation) as we
have seen in the last 8 months. That is why the big concern. This looks a lot like
the inflation rates of the 1970s. The cure is of course, recession, the rapid
deceleration of spending and the removal of the excess money from the system. It
would really help shorten the recession and cause it to be less severe if government
curtailed spending, reduced governmental needs and did not fund new programs
without also including revenue sources (net funding). All of which the current administration
refuses to consider but instead is increasing spending and unfunded programs.
We have to wait for price increases to begin to slow or stop (in spite of the
governmental spending headwinds) as supply and demand are brought into closer alignment,
i.e. demand does not outstrip supply and so prices are normalized and we don’t
have too many dollars chasing too few goods. We have to weather inflation as
price and supply try to find some sort of new equilibrium. I am afraid
inflation hits very unevenly in these situations. It is inherently unfair,
unjust and unkind. <o:p></o:p></p>
<p class="MsoNormal"> Again,
the mechanism to get inflation under control or rather, under more control is
to dry out the excess money from the economy and that is done by making money
more difficult or expensive to acquire and use. It has to cost more. The
interest rates we pay is the control mechanism. Hence, the Fed Funds Rate helps
increase or decrease what it costs to borrow and use money. In the second
article by Reuters (10-24-22), Yellen is trying to make the point that the
Treasury is aware of the problems of drying out the economy and at least in the
area she has some control over is attempting to assure the financial system
that the government is willing and able to keep one of the major secondary problems
caused by inflation at bay. The problem is that as the cheap money (low
borrowing costs, relatively speaking, caused by very low interest rates) dries
up, investors become unwilling to speculate and began to draw their funds out
of banks and financial institutions and put it in safer places such as Treasury
instruments or cash (again safer is relative). Banks and financial institutions
use leverage to earn additional profits by using borrowed money to invest. You
take your money, they have to go find money somewhere on a short basis to cover
your withdrawals. In the great recession of 2008 there wasn’t enough liquid
funds available to meet the withdrawal needs and the government bailed out many
financial institutions by printing more money among other things and almost
wasn’t fast enough in responding (TARP if anyone remembers). Several big
financial firms didn’t survive or were absorbed. Yellen is trying to tell the
markets she is aware of the situation and it is under control which may or may
not be accurate but we can hope.<o:p></o:p></p>
<p class="MsoNormal"> The
Bloomberg article of 10-21-22 is a discussion of what Fed Funds Rates may be
and why or why not. There is some speculation that Fed Funds rates may need to
be as high as 4.75% - 5.0%. The Fed is trying to give the impression of
controlling inflation and the financial institutions are trying to act like the
Fed has some control. Both are incorrect. The Fed can’t “control” inflation and
financial institutions are not really supporting the Fed but trying to find any
place to hide away from the train wreck that is coming. As an aside, the financial
economists are having a heyday because they can predict just about anything and
there is a pretty good chance they will be correct at some point, for a change.
Watch to see who claims they got the forecast right and what part of the
forecast in the next 18 months or so. I need to flog a dead horse again. The
Fed can not control inflation with any kind of fine tuning. Watch and see, at
the very most they can nudge the inflation rate around. The Fed will get this
whole process wrong (as measured by various financial institutions, markets and
money gurus). But they may be able to influence inflation to some extent. According
to the people in the know (don’t trust the people in the know), the Fed started
raising the Fed Funds Rate to late or too early, they will not raise it fast
enough or they will raise it too fast, and they will overshoot how high and for
how long rates need to stay up and they will either not decrease rates fast
enough or too fast on the back side of things. They will not be able to stop
the inflation rate from gyrating all over the place, both up and down and they
will likely completely miss their target inflation rate of 2.0% by a wide
margin. The final solution to the last point will be that the Fed will change
the target inflation rate to something other than 2.0%. In two years the Fed
will declare that they beat inflation and it is now tame again at whatever rate
they decide on. Again, not accurate (notice I didn’t say not true) as the Fed
never has really been able to control inflation but rather sets a rate (for the
last several years, 2.0%) that somewhat matches the ongoing economic activities.
There will be more articles about the Fed and its “fine tuning” the Fed Funds
Rate in the coming months. Don’t be fooled by the noise. <o:p></o:p></p>
<p class="MsoNormal"> The
final article is a bit of fluff about the resignation of Prime Minster Liz
Truss (Britain) after just 44 days in office. She has the distinction of being
the shortest serving prime minster in history. Many of her problems were caused
by very aggressive economic policies that were considered too radical for the
times. Just a reminder why governments tend to be slow and ponderous in their
decisions and a good example of why we have had 20+ years of expansion in this
country. It is too politically difficult to change things and who wants to rock
the boat, even if it needs it until there is some kind of popular uprising that
is consistent with the political leaders thinking. A good example is the case of
Ronald Regan and the then new thinking of supply side economics which was a
good thing.<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal">Articles referenced;<o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.thinkadvisor.com/2022/10/24/bofa-economist-i-dont-see-how-we-avoid-a-recession/">https://www.thinkadvisor.com/2022/10/24/bofa-economist-i-dont-see-how-we-avoid-a-recession/</a><o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.reuters.com/markets/us/yellen-says-taking-steps-enhance-treasury-market-funds-resilience-2022-10-24/">https://www.reuters.com/markets/us/yellen-says-taking-steps-enhance-treasury-market-funds-resilience-2022-10-24/</a><o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.bloomberg.com/news/articles/2022-10-21/fed-officials-expect-debate-on-rate-peak-and-when-to-slow-hikes">https://www.bloomberg.com/news/articles/2022-10-21/fed-officials-expect-debate-on-rate-peak-and-when-to-slow-hikes</a><o:p></o:p></p>
<span style="font-family: "Calibri",sans-serif; font-size: 11.0pt; line-height: 107%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;"><a href="https://www.bnnbloomberg.ca/markets-are-calling-the-shots-uk-traders-react-to-truss-exit-1.1835289">https://www.bnnbloomberg.ca/markets-are-calling-the-shots-uk-traders-react-to-truss-exit-1.1835289</a></span><span face=""Calibri",sans-serif" style="font-size: 11pt; line-height: 107%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;"></span>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-62036791379005212672022-09-16T08:48:00.000-06:002022-09-16T08:48:10.912-06:00The Whirlwind of Financial News<p> </p><p class="MsoNormal"><span style="font-family: "Arial",sans-serif;"></span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKt3JTcJPj3XvyOVfsCXlbBvB8kS3mBrMvj4jJa1WnYy3NE4hDRa196eo_axQClItUHFK3oTXIuByR-b8aeMNkLfBby8wZiPNU1VSfIO--PTjZNkc07_c_jmAHkonfTp6n4wE4K7VovpOActBfJ5xUH3ltvfn_NIwRpVQ4TyjBM1LdvwTzg7vDU46O/s1280/whirlwind.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1280" data-original-width="805" height="174" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKt3JTcJPj3XvyOVfsCXlbBvB8kS3mBrMvj4jJa1WnYy3NE4hDRa196eo_axQClItUHFK3oTXIuByR-b8aeMNkLfBby8wZiPNU1VSfIO--PTjZNkc07_c_jmAHkonfTp6n4wE4K7VovpOActBfJ5xUH3ltvfn_NIwRpVQ4TyjBM1LdvwTzg7vDU46O/w109-h174/whirlwind.png" width="109" /></a></div><span style="font-family: Arial, sans-serif;"><span> </span>“Round and
Round she goes, where she stops nobody knows.” The phrase was used by the </span><i style="font-family: Arial, sans-serif;">Major
Bowes Original Amateur Hour</i><span style="font-family: Arial, sans-serif;">, a radio show that ran from 1934-1948. However,
I think it also describes our current economic and financial situation to a
tee. I present to you 3 themes from this week’s news feeds that are “round and round”
or in my mind, or more of the same. The news themes are; (a) vanishing
liquidity and its impacts, (b) impacts of slowing economy, specifically in this
article as it relates to investors, and (c) Dow Jones is down… again. However,
since it isn’t zero that means there had to have been some ups somewhere.</span><p></p>
<p class="MsoNormal"><span style="font-family: "Arial",sans-serif;"><span style="mso-tab-count: 1;"> </span>Bloomberg is reporting in its
article of 9/12/22, titled <i>Vanishing Bond Market Liquidity Bad for Fed
Balance Sheet Unwind</i>, that the Fed program to reduce its balance sheet may
be headed for the rocks. The article discusses the tightening liquidity in the
short term money market and how that may make it more difficult for the Fed to
reduce its balance sheet. The article is fairly esoteric but the bottom line is
the possible recession is making the drawdown of the Fed balance sheet more difficult
and uncertain. The high balance sheet makes it more difficult for actions the
Fed takes to have as much impact as it may, i.e. there is little or no room to
flex monetary <span style="mso-spacerun: yes;"> </span>policy to change the
impact or likelihood of recession. With Pres. Biden’s <span style="mso-spacerun: yes;"> </span>Inflation Reduction Act which really doesn’t
reduce inflation pressures as much as it adds to the balance sheet you can see
that the Fed is being painted into a corner. The current Fed policy of
increasing Fed Funds Rate to try to tighten spending (reduce it) is being
offset by the Inflation Reduction Act which is expanding monetary policy. The
Fed’s only possible response is to raise its Funds Rate high enough to put a
damper on inflation caused by excess money in the system, which the president
just increased by a tremendous amount. This does not bode well for an economic
“soft landing” as proposed and suggested by the Fed and pushed by
Administration personnel, i.e. the Treasury Secretary, and of course the
president, amount others. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: "Arial",sans-serif;"><span style="mso-tab-count: 1;"> </span>In the second article UBS Bank
suggests its clients are becoming more cautious in their money management and
involvement. The Reuters article titled, <i>USB CFO sees increased client
caution as global economy slows</i> discusses the decreased activity by bank
clients in the world financial systems. This would mainly be the large bank
clients involved in the world markets. The article discusses how this is
putting downward pressure on bank revenues as their revenue tends to be based
on transactions, fewer transactions generates less revenue. The important part
of the article is that the financial markets impact is worldwide. The bank is
attempting to assure bank investors they (the bank) recognize the problem and
as with all situations like this, they are not responsible for declining
revenue as no one could have foreseen this. This seems like some attempted
fancy footwork to distance management from what it sees as a likely downturn in
revenue. The bank is betting on economic slowdown at best and, I suspect,
recession at worst. They are declaring they are not responsible. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: "Arial",sans-serif;"><span style="mso-tab-count: 1;"> </span>Finally CNBC is reporting another
stock market down record in its 9/13/22 headline,<i> Dow tumbles 1,200 points
for worst day since June 2020 after hot inflation report</i>. This is a good
article to show the up and down and down and up nature of markets in troubled
(meaning uncertain) economic times and the reporting by news organizations on
such things. Notice two things about the headline, one, the Dow is moving 1,200
points, in this instance down. That is about 3.9% as reported in the article.
The second thing is this is the largest change in 2 years. The first statement
implies that 1,200 is a big deal the second statement suggests that it isn’t
that uncommon, only 2 years since the last time we had such a shift. Somewhat contradictory
statements. The article states the drop erased “nearly all of the recent rally
for stocks”. You will not easily find articles on stocks increasing 1,200
points recently but you will and do find many articles on stock decreases. <span style="mso-spacerun: yes;"> </span>Part of the reason for not finding articles on
increases is they tend to be a bit more gradual. I do believe there have been some
recent trading days that were up a lot though they are a bit more difficult to
find. It’s important to weigh any major swing reported in the news in light of
just how significant it is. One of the definitions of economic upheaval is wild
and vicious swings. You should look at this as a general reporting news story. Try
to separate the facts and figures from the color commentary.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: "Arial",sans-serif;"><span style="mso-tab-count: 1;"> </span>In conclusion, stuff happens. Markets,
interest rates and prices go up and down, many times violently in an economic
upheaval (think pre-recession – recession). If all the negative news of the
last little while were added up the Dow Jones Industrial Average would be at
zero or below. It is down, admittedly, but not zero and actually closer to its
high or sitting at about 31,000. It may fall 10-15% total from the recent high
to whatever its low point will be before it recovers. We won’t know until <u>after
the fact</u> what the total fall may have been, or when the recession started
or when we have officially recovered. We had our annual meeting with our
financial advisor a couple of weeks ago. Parts of our portfolio are definitely
down from last year but they had been up a great deal previously. Other parts
are holding fairly steady and some parts are actually benefiting from the
increasing interest rates. So, balance in life and investments is helpful. Hang
in there we will make it through this. Live, love, and enjoy life. There is
much to be grateful for and thankful for.<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 0in;">Bloomberg article:<o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.bloomberg.com/news/articles/2022-09-12/vanishing-bond-market-liquidity-bad-for-fed-balance-sheet-unwind">https://www.bloomberg.com/news/articles/2022-09-12/vanishing-bond-market-liquidity-bad-for-fed-balance-sheet-unwind</a><o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;">REUTERS article:<o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.reuters.com/business/finance/ubs-cfo-sees-potential-higher-dividend-next-year-2022-09-13/">https://www.reuters.com/business/finance/ubs-cfo-sees-potential-higher-dividend-next-year-2022-09-13/</a><span class="MsoHyperlink"><o:p></o:p></span></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span class="MsoHyperlink"><span style="color: windowtext; text-decoration: none; text-underline: none;">CNBC article:</span></span><o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.cnbc.com/2022/09/12/stock-futures-are-higher-as-wall-street-awaits-key-inflation-report-.html">https://www.cnbc.com/2022/09/12/stock-futures-are-higher-as-wall-street-awaits-key-inflation-report-.html</a><o:p></o:p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-15561314274405131592022-08-08T12:26:00.000-06:002022-08-08T12:26:38.376-06:00The Fed and Beating Up Inflation<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB8ZUCzPZZ75300iqq6Ao6oPhCvEGzD7vDWQq27vwlra670HUWNQTXPOzzNmuyuVe3dcLi6zsts6U-oBEgRL-XhFqnz6cpKJSPhRTIMzF36VxKAoJxbS0pT2A5hhJDfygqdZQQIa1L_Sp2mY10guLDGJCl9ycEzwQ5cGERQEuIRWyj7mZNJXyiOIUx/s2667/Biden-inflation.webp" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="2667" data-original-width="2000" height="131" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB8ZUCzPZZ75300iqq6Ao6oPhCvEGzD7vDWQq27vwlra670HUWNQTXPOzzNmuyuVe3dcLi6zsts6U-oBEgRL-XhFqnz6cpKJSPhRTIMzF36VxKAoJxbS0pT2A5hhJDfygqdZQQIa1L_Sp2mY10guLDGJCl9ycEzwQ5cGERQEuIRWyj7mZNJXyiOIUx/w98-h131/Biden-inflation.webp" width="98" /></a></div><span style="font-family: inherit;"> “The
beatings will continue until morale improves.” The author is uncertain but it is the correct statement for the current
economic situation. The beatings are, of course, increases in Fed Funds rate
and morale is an improving inflation rate. We, the general public, are the
implied beaten person. I have 3 main articles I am drawing from for this post
regarding economic conditions, the Fed and other central banks responses and
expected outcomes, i.e. what the officials want/hope with all their hearts.</span><p></p><p><span style="text-indent: 0.5in;">The first and oldest article is from
Reuters of July 22</span><sup style="text-indent: 0.5in;">nd</sup><span style="text-indent: 0.5in;"> titled “Analysis: R.I.P. forward guidance:
Inflation forces central banks to ditch messaging tool”. The article is
referring to central banks and their guidelines or projections of interest rate
changes in the Fed Funds Rate or equivalent central bank rates for other
countries. For many years central banks have given a longer term estimate of
rates changes. Since June of this year, the Federal Reserve has stepped away
from that policy when they raised rates by 75 basis points (bp). Previously
they had said they expected 50 bp increases for some time. Instead they raised
it 75 bp. Other central banks have raised their equivalent funds rates by
wildly differing amounts from their stated goals. This goes back to the old
saying, don’t telegraph your plays if you don’t want the opponent to sack your
quarterback. The our team in this is the Federal Reserve, the opponent is the
stock market/investors and the sack is the ability of the Fed to influence
inflation rates. We talked about the market anticipating changes and therefore
the change not having the same punch. The Fed and other Central banks have
given notice they are no longer going to telegraph their plays. The outcome
will be greater volatility in all interest rates and the markets (much wider
and wilder ups and downs). The Fed’s hope is that they will have a greater
impact on inflation. Again, remember that the Federal Funds Rate which the Fed
controls is not a finely crafted and precise economic instrument that the Fed
can wield with dexterity, grace and fine precision (regardless of what some in the
media, talking heads, and governmental officials may suggest). It is a massive,
unwieldy, gross (meaning large and ungainly), ugly (meaning exactly that) blunt
force trauma inducing massive piece of economic plate iron. It is about as finely
controllable as trying to hit a large, ugly rat (inflation) on a sidewalk by
dropping it from a 10 story building onto that same busy sidewalk. The goal is
to get the rat and miss the people, streetlights, cars, prams, butterflies and
in fact the sidewalk. You will likely get the rat after a number of drops but,….
you will not be able to avoid the non-combatants (i.e., all the non-rat things)
regardless of the precision of the drop. Now the governmental response to all
this. From July 24</span><sup style="text-indent: 0.5in;">th</sup><span style="text-indent: 0.5in;"> Reuters article titled,</span></p><p class="MsoNormal" style="text-indent: .5in;"><o:p></o:p></p>
<p class="MsoNormal" style="margin-left: .5in;">“U.S. economy slowing but recession
not inevitable, Yellen says”. <span style="mso-spacerun: yes;"> </span>“I’m not
saying that we will definitely avoid a recession,” Yellen said. “But I think
there is a path that keeps the labor market strong and brings inflation down.” <o:p></o:p></p>
<p class="MsoNormal" style="text-indent: .5in;">Some of the current debate is if we
have entered a recession now or not. That kind of thinking is dangerous for the
current administration who claims to have things under control or moving in the
right direction or improving or something. You may have heard something about
redefining what is a recession. The only ones who can declare recession or end
of recession is the independent private research group tasked with that job.
Governmental administrations try to influence public opinion and other groups
but that is all it is, attempted influence.<o:p></o:p></p>
<p class="MsoNormal" style="text-indent: .5in;">The last article is from CNBC of
August 3<sup>rd</sup>. “Fed’s Bullard sees more interest rate hikes ahead and
no U.S. recession.” That is the great goal, increase the interest rate (Fed
Funds Rate) which will slow inflation, which is running at 9.1%, and do that
with no recession. And if we really are in trouble we can try to adjust the
definition of recession.<span style="mso-spacerun: yes;"> </span>Quoting from the
article. <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: .5in;">“St. Louis Federal Reserve
President James Bullard said Wednesday that the central bank will continue
raising rates until it sees compelling evidence that inflation is falling.” …“We’re
not in a recession right now. We do have these two quarters of negative GDP
growth. To some extent, a recession is in the eyes of the beholder,” he said.
“With all the job growth in the first half of the year, it’s hard to say
there’s a recession. With a flat unemployment rate at 3.6%, it’s hard to say
there’s a recession.”<o:p></o:p></p>
<p class="MsoNormal"><span style="mso-spacerun: yes;"> </span>Again, pick and
choose your variables (a very econometric way to do things) and highlight what
appears important to make your case which is not unreasonable but you as the
reader need to be aware of what is being said and not said by such statements.
Bullard is laying out some hard “facts” while not saying just when they will do
things (no play telegraphing). The Fed sees the large, ugly rat on the sidewalk
(inflation). They tell us they are now focused on the rat. They have their tool
to deal with it which many imply is an elegant piece of economic equipment and
they are willing to employ it with all the finesse of the large piece of plate
iron it is. Elegant no, effective, likely. We are also told they will use it
several times, as necessary, to get this rat. You (the public) may be assured
and comforted. That is especially true if you like large plate iron induced
headaches.<o:p></o:p></p>
<p class="MsoNormal" style="text-indent: .5in;">So gentle reader, do I think we are
in a recession? The National Bureau of Economic Research (NBER) will look at
the data, after the fact, and declare if there has been one. No one else can do
that. The more important questions are how will inflation, shortages, supply
chain bottlenecks, wages, job stability and the host of every day, individual
and personal impacts affect our ability to grow, love, learn, help, serve and
enjoy life and loved ones. I don’t know about a recession by the definition but
I do know I need to take time for the more important and personal challenges
and opportunities around me. We have had recessions before, we will have them
again. Let’s get on with living and doing the best we can under the
circumstances. <span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal">Articles quoted / cited:<o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.reuters.com/markets/europe/rip-forward-guidance-inflation-forces-central-banks-ditch-messaging-tool-2022-07-21/">https://www.reuters.com/markets/europe/rip-forward-guidance-inflation-forces-central-banks-ditch-messaging-tool-2022-07-21/</a><o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.reuters.com/markets/us/us-economy-is-slowing-recession-not-inevitable-yellen-says-2022-07-24/">https://www.reuters.com/markets/us/us-economy-is-slowing-recession-not-inevitable-yellen-says-2022-07-24/</a><o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.cnbc.com/2022/08/03/feds-bullard-sees-more-interest-rate-hikes-ahead-and-no-us-recession.html">https://www.cnbc.com/2022/08/03/feds-bullard-sees-more-interest-rate-hikes-ahead-and-no-us-recession.html</a><o:p></o:p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-55611402159939945632022-07-13T12:58:00.002-06:002022-07-13T12:59:26.812-06:00Kitten on a Mission - How Things Change<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjlLnSLpQI2U2SJ96dViOz-Bc7wlUYVGjYE7GUjT8M9i8hkQKfNQ_DOCMqYrzeipgONxEKIs1Nwy1vaQBcP-tnlfRXHfT91AzjQ1LKBL_h1rzbnhB-y3AKGImTJpU6McdwoesGnnvVScFcHFS7pTQJIiMAlif3U0nCOYoZ3EOn4WCldqb1jZg39ibp/s275/Pouncing%20Kitten.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="183" data-original-width="275" height="183" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjlLnSLpQI2U2SJ96dViOz-Bc7wlUYVGjYE7GUjT8M9i8hkQKfNQ_DOCMqYrzeipgONxEKIs1Nwy1vaQBcP-tnlfRXHfT91AzjQ1LKBL_h1rzbnhB-y3AKGImTJpU6McdwoesGnnvVScFcHFS7pTQJIiMAlif3U0nCOYoZ3EOn4WCldqb1jZg39ibp/s1600/Pouncing%20Kitten.jpg" width="275" /></a></div><br /><span style="font-family: arial;"> Notice how a kitten will jump on anything and everything
and is easily distracted. This applies to governmental officials, financial professionals
and financial news organizations.</span><p></p><p class="MsoNoSpacing"><span style="font-family: arial;"><o:p></o:p></span></p>
<p class="MsoNoSpacing" style="text-indent: .5in;"><span style="font-family: arial;">The National Bureau of Economic
Research is a private organization responsible for calling the official timing
of a recession. It states a recession “is a marked declined across the economy
in a range of indicators, including the labor market, investment and spending.”
Usually people tend to look for 2 quarters of downturn in several indicators
including GDP growth (negative), employment (negative), consumption and
spending and other financial measures such as an inverted yield curve. Many of
these measures can be analyzed by month, which is 5 months shorter than the
classical 2 quarter+ measurement of the official bureau. That is why we get the
range of dates or even no date on recession estimations. The only one
officially recognized to call a recession tends to use at least 2 quarters of
historical data before they make a pronouncement. <o:p></o:p></span></p>
<p class="MsoNoSpacing"><span style="font-family: arial;"><span style="mso-tab-count: 1;"> </span>With
that in mind let’s turn to some news stories. From June 6<sup>th</sup>, BNN
Bloomberg (Canada), the headline reads “Powell says soft landing ‘very challenging,’
recession possible.” The article suggests that “Powell has given his most
explicit acknowledgment to date that steep rates could tip the US economy into
recession, saying one is possible and calling a soft landing ‘very challenging”
‘. Notice that the language is still couched and nuanced and leaves much room to
wiggle. He still leaves a way for the Fed to claim that they are not
forecasting a recession, yet. In spite of the hikes in the Fed Funds Rate and
the reduction of the Fed balance sheet. The article discusses Powell’s
reactions and actions to inflation reports. Republican have recently been
blasting Powell for not jumping on inflation sooner by raising rates faster.
Again we have the current bandwagon of thought. Watch as comments shifts back
and forth. Powell didn’t do enough, Powell did too much. Remember, the Fed has
a sledge hammer to deliver adjustments and the talking heads including Congress
are reacting as if there is a precise tool. There isn’t and they (Fed) can’t
use it that way (with precision). The Fed has fostered this thinking which is bringing
the problem back to roost (as the saying goes) by their own past statements and
actions. They act as if they can precisely control inflation and growth. They
can’t. So when they get called out for not being able to steer the economy they
have in large measure brought it on themselves by implying they can control.
Again, they can’t. Expect to see more and harsher statements especially from
Congress and talking heads.<o:p></o:p></span></p>
<p class="MsoNoSpacing"><span style="font-family: arial;"><span style="mso-tab-count: 1;"> </span>Moving
to the 2<sup>nd</sup> article, from Politico of 7/04/2022. Tag line is “President
Joe Biden says ‘there’s nothing inevitable’ about a recession in the U.S. Right….,
and where is the rest of the statement the country asks? Many are saying the
president is a lone voice in the noise of recession and he probably is at this
point. This is pure politics. Since the president can’t (or shouldn’t) try to
influence the Fed which is supposed to be independent by definition, the
president can make calming public statements and call Powell privately in desperation.
Several Democrats are on record as suggesting this recession thing is not a big
problem, we just need to spend more.<o:p></o:p></span></p>
<p class="MsoNoSpacing"><span style="font-family: arial;"><span style="mso-tab-count: 1;"> </span>The 3<sup>rd</sup>
article is from BNN Bloomberg of 7/07/2022. The tag line reads, “US recession
is already here, according to Wells Fargo Investment Group”. Think back to our previous
blog on economic / financial forecasts and notice that here we have the first
news grabbers with a new story or new twist and trying to get out front of the news
competition. We can see the progression of news stories as we went from no
recession to possible recession to more likely recession to predicting
recession in the future (from middle to end of 2023) to now we are in a
recession. Pure news grabbing. Watch to see of others will jump on this bandwagon
or if they suggest something else. Regardless they (the newsies) have a new and
exciting twist to write about which generates copy (not necessarily good copy but
copy). <o:p></o:p></span></p>
<p class="MsoNoSpacing"><span style="font-family: arial;"><span style="mso-tab-count: 1;"> </span>What
to do. Slow and steady wins the race or in this situation slow and thoughtful
keeps their sanity. You know the news articles and newsies are going to jump on
everything just like our kitten does. Their attention is divided so many
different direction (very much on purpose) because it generates pages to read.
Again, there are few if any consequences in reporting so you have to be
selective in what you read. Watch for things to settle out a bit and see. A
good example is the recession. Since the first of the year the talking heads
started as recession was not likely but a possibility to now a recession is
likely and may be as early as next year. I don’t give much weight to the Wells
Fargo comments about the recession has started because it is the first mention
(a kitten pounced on something let’s all look). That makes it a new idea and
someone was trying to get the jump on everyone else. If they are wrong it doesn’t
matter to them. It’s news. Remember, slow and thoughtful helps you keep your financial
sanity. You don’t have to react to every new thing. Paraphrasing what President
Brigham Young was supposed to have said to the woman who came in for counseling,
“Well sister, if your husband tells you to go to hell, well just don’t go.” If
the newsies, financial pundits and governmental officials tell you we have to
jump, well, just don’t jump (wait and see). Regardless of their screaming we
will figure it out. Earplugs help. Enjoy family, friends and your favorite
sport or book, take a walk, do something fun and relaxing. The screaming, finger pointing and loud noises will still be there when we get back and maybe, just maybe, there might be some calmer voices with some real, helpful information. We can always hope.<o:p></o:p></span></p>
<p class="MsoNoSpacing"><o:p><span style="font-family: arial;"> </span></o:p></p>
<p class="MsoNormal"><span style="font-family: arial;"><a href="https://www.bnnbloomberg.ca/powell-says-soft-landing-very-challenging-recession-possible-1.1782346">https://www.bnnbloomberg.ca/powell-says-soft-landing-very-challenging-recession-possible-1.1782346</a><b><o:p></o:p></b></span></p>
<p class="MsoNormal"><span style="font-family: arial;"><a href="https://www.politico.com/news/2022/07/04/recession-talk-surges-in-washington-00043818">https://www.politico.com/news/2022/07/04/recession-talk-surges-in-washington-00043818</a><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: arial;"><a href="https://www.bnnbloomberg.ca/us-recession-is-already-here-according-to-wells-fargo-investment-group-1.1789170">https://www.bnnbloomberg.ca/us-recession-is-already-here-according-to-wells-fargo-investment-group-1.1789170</a><o:p></o:p></span></p>
<p class="MsoNoSpacing"><o:p><span style="font-family: arial;"> </span></o:p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-74898774507177817482022-06-20T15:28:00.000-06:002022-06-20T15:28:35.854-06:00The Art of the Economic / Financial Forecast<p> </p><p class="MsoNormal" style="margin-bottom: 0in;"><span> </span></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgG7WGY21xbHBhnge-CxiNx2apWMg2FPzAq1HjNp1jTSTtZZfSYzZIDxiXEp7HcnyKjBuZ4e2Y_EXkbAcOvlVNuT5ghi6F6C9aMFTf-gsjo-6-XOtQ87Rb7shYVmNuTL-ChRdlTRlXRwwnhlAp1edh_ZoGV-5J_FIVzDmEqM-l3p4pPk34adAQ8hijG/s1200/finger%20painting.jpeg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="675" data-original-width="1200" height="146" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgG7WGY21xbHBhnge-CxiNx2apWMg2FPzAq1HjNp1jTSTtZZfSYzZIDxiXEp7HcnyKjBuZ4e2Y_EXkbAcOvlVNuT5ghi6F6C9aMFTf-gsjo-6-XOtQ87Rb7shYVmNuTL-ChRdlTRlXRwwnhlAp1edh_ZoGV-5J_FIVzDmEqM-l3p4pPk34adAQ8hijG/w260-h146/finger%20painting.jpeg" width="260" /></a></div><span> </span><span> </span>Have you watched a child finger
paint recently. Some start slowly then add more colors or big swirls. Then at
some point mix the colors all together and want to start over. That is a good analogy
for today’s markets and the forecasts that are being generated by various
parties. What can you make from the mess? There are some nuggets in the mess
but they may be more related to the process than the actual information
provided. Economic / financial forecasting has a sequence to it. As a new
problem is perceived the individual members of the reporting community try to
grab the initiative on the other community members by reporting something fastest
and loudest. There usually isn’t much substance and very little analysis to the
first reports / analysis, mainly noise to generate interest. Quick charts and
graphs will be added to give substance but may not be of much value. As the
issue develops more concrete information is included as it becomes known, statements
from officials, past trends that are thought to be similar to the current
unfolding situation. Remember, the new problem has not really developed yet so
any comparisons to past data are wild and loose. But there will be charts and
graphs and comparisons. As the situation develops, conjectures, suppositions,
ideas, comparisons and theories will be put forth and discarded at a rapid
rate. There should be lots of conflicting opinions and conflicting charts and
graphs. As the situation further develops the initial flurry should settle down
a bit with more concrete information based on actual current data. Opinions on the
meaning of the data will still swing wildly and there will be many interpretations
and many conflicting points, still. At some point the data will tend to support
a particular analysis. All the other conflicting statements will be forgotten
or just dropped and there will be some general pronouncement from some
official, governmental or business leader that many if not most will agree
with. There will be a short period of quiet or something like a breather then
some news group will perceive a new problem and away they all go again with the
reporting community trying to grab the initiative. Several new problems may be simultaneously
running depending on the particular economic climate. Our current climate is
very conducive to the multiple current problem scenarios. The news groups love
this type of environment. There are so many possible new problems that many
groups have the opportunity to be first on something. This is the time for them
to be looking and jumping on and at any and every new piece of information and
rumor. <o:p></o:p><p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>So,
what are you to do. Take it slow and easy on the new news. Wait for a theory or
idea to stand some test of time. As an example, I quote from a CNN Politics
article of June 1<sup>st</sup> ,<i>Treasury secretary concedes she was wrong on
‘path that inflation would take’</i> and which were also referred to in a
Reuters article of June 7<sup>th</sup>, <i>Yellen says inflation to stay high,
Biden likely to up forecast</i>, <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">“US Treasury Secretary Janet Yellen
admitted Tuesday that she had failed to anticipate how long high inflation
would continue to plague American consumers as the Biden
administration works to contain a mounting political liability.<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">"I think I was wrong then
about the path that inflation would take," Yellen told CNN's Wolf Blitzer
on "The Situation Room" when asked about her comments from 2021 that
inflation posed only a "small risk."<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">The admission was the latest
indication that the administration's expectations of a normalizing economy were
thrown into disarray by the continuing pandemic and the war in Europe.<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">"As I mentioned, there have
been unanticipated and large shocks to the economy that have boosted energy and
food prices and supply bottlenecks that have affected our economy badly that I
didn't -- at the time -- didn't fully understand, but we recognize that
now," she said.<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">Yellen and other White House
officials once framed inflation as a temporary side effect of the economy
returning to normal following the pandemic, pointing to snags in supply chains and
demand outstripping supply.”<o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;">Yellen has taken more
responsibility than is usually done for her comments. The market did call her
out on it however. Notice the time frame is 6-8 months,<span style="mso-spacerun: yes;"> </span>much too long to wait in the news hungry
environment that requires snap statements and quick facts and figures. <o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><span style="mso-tab-count: 1;"> W</span>hat then are some of the new, new problems that the news folks are jumping on.
Stagflation is now starting to show up in articles, recession is much more common
and is expected to occur in 2023. The discussion is now when in 2023 for recession,
some are saying 2<sup>nd</sup> quarter, others late in the year. The shouting
has gone from no recession or few saying it was possible, including the governmental
officials, to many saying recession is possible even likely. Notice there hasn’t
been as much said (or at least not said by the mainstream newsies) about supply
chain bottlenecks or the Ukrainian war. Employment figures have become sparce
in the last little while. The stock and bond market movements are getting some
attention on a periodic basis, mainly when a new high or low is hit. Notice I
didn’t specify just how high or low or how relevant it might be. Movement is what
seems to be interesting the newsies. Again it comes back to volatility and
uncertainty. With uncertainty newsies can make wild statements and maybe they
get it right. If they don’t there is very little consequence to being wrong.
Remember that, no or very minor consequences for being wrong. Look at Yellen
and Powell. No job loss, little or no censure but it is important to have an
excuse, the greatest one is “unforeseen circumstances”. In that context
everything can be considered unforeseen. <o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>Good
luck and hang in there. Take everything with a grain of salt until some time
has passed. Remember the definition of recession requires a look back meaning
that we have to have historical data meeting certain criteria before a
recession can be declared. It is past tense. We won’t know when a recession has
started until after the fact. Many financial situations are like that. It’s not
worth getting worked up and panicky about. Enjoy life, family, friends and the
beauties around us. <span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;">CNN Article<o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><a href="https://edition.cnn.com/2022/05/31/politics/treasury-secretary-janet-yellen-inflation-cnntv/index.html">https://edition.cnn.com/2022/05/31/politics/treasury-secretary-janet-yellen-inflation-cnntv/index.html</a><o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;">Reuters Article<o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 0in;"><a href="https://www.reuters.com/markets/us/us-faces-unacceptable-levels-inflation-yellen-tells-senators-2022-06-07/">https://www.reuters.com/markets/us/us-faces-unacceptable-levels-inflation-yellen-tells-senators-2022-06-07/</a><o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-42136260894796448802022-05-25T07:10:00.001-06:002022-05-25T07:15:39.784-06:00<p> </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTp8lTsO-Bcz0H3lK6Rh8W3G9psfm_yciucPSz8J_FOoLmUG6mc8Z_WJBOtv4jsV81YF1FcdSmGM-6wbSsvYltKinCgyg7U5IKfPa7mjGQTG6g0MjhidWR8LqaW9OM8075VPPGe5n8hH7Qwf-rsm7RzG78BVhDq9y3-LuZ7nsWaWMhds40CJrIHWE2/s587/cat-on-a-hot-tin-roof.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="489" data-original-width="587" height="167" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTp8lTsO-Bcz0H3lK6Rh8W3G9psfm_yciucPSz8J_FOoLmUG6mc8Z_WJBOtv4jsV81YF1FcdSmGM-6wbSsvYltKinCgyg7U5IKfPa7mjGQTG6g0MjhidWR8LqaW9OM8075VPPGe5n8hH7Qwf-rsm7RzG78BVhDq9y3-LuZ7nsWaWMhds40CJrIHWE2/w200-h167/cat-on-a-hot-tin-roof.jpg" width="200" /></a></div><p class="MsoNormal"><b><span style="line-height: 107%;"><span style="font-size: large;">Cat on a
Hot Tin Roof – Some Explanations and Information </span><span style="font-size: 14pt;"><o:p></o:p></span></span></b></p>
<p class="MsoNormal"><br /></p><p class="MsoNormal">A cat on a hot tin roof is the appropriate image for how the
financial markets and economies feel and are reacting at the moment. An
avalanche of commentaries and volumes of data are pouring into and being poured
over by a myrid of individuals, specialists, talking heads, and governmental
bodies. There is no shortage of information, opinion, comment, commentary,
noise and confusion. I have found a couple of articles over the past 2 weeks I
think may be interesting and helpful. I am including them in their entirety. <o:p></o:p></p>
<p class="MsoNormal">Some observations. Quoting from the first line of the
Bloomberg article, “The world’s most powerful central bank is about to find out
how far it can squeeze financial markets before something breaks.” That sums up
exactly what is happening. That is the 900 lbs. gorilla in the room. If or when
it breaks, that is recession. The 2<sup>nd</sup> article from the Spokane
Review (originally from Bankrate.com) is a pretty good discussion on how rising
interest rates may impact various financial instruments. Remember, don’t focus
on the hype language. Look for the solid information. Good luck. Hang in there
and don’t panic.<o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.bloomberg.com/graphics/2022-world-economy-wall-street-market-worries/">https://www.bloomberg.com/graphics/2022-world-economy-wall-street-market-worries/</a><o:p></o:p></p>
<p class="MsoNormal"><b>Bloomberg<o:p></o:p></b></p>
<p class="MsoNormal"><b>Everything That Could Go Wrong in Markets as Free-Money
Era Ends<o:p></o:p></b></p>
<p class="MsoNormal">By Jack Pitcher, Alexandra Harris, and Alex McIntyre<o:p></o:p></p>
<p class="MsoNormal">May 9, 2022, 6:00 AM MDT<o:p></o:p></p>
<p class="MsoNormal">The world’s most powerful central bank is about to find out
how far it can squeeze financial markets before something breaks. Struggling to
tamp down the most pervasive inflation in decades, the Federal Reserve
delivered its biggest interest-rate increase since 2000 last week while outlining
a plan to begin unwinding trillions of dollars in asset purchases that have
kept world markets brimming with cash since the 2020 crash. Its peers will soon
follow suit. Bloomberg Economics has estimated that policy makers in the Group
of Seven countries from the European Central Bank to the Bank of Canada will
shrink balance sheets by about $410 billion combined in the remainder of 2022.<o:p></o:p></p>
<p class="MsoNormal">Yet it all comes at one of the most precarious times in
recent memory for the global economy. Russia’s war in Ukraine, and the bevy of
sanctions that followed, have upended business. Supply chains that were
disrupted by the pandemic have grown even tighter, causing chaos for companies
lashed by soaring prices for everything from labor to commodities. The worry
now is whether central banks can accomplish the high-wire act of weaning Wall
Street off unprecedented stimulus, without disrupting the flow of capital and
tipping economies into recession.<o:p></o:p></p>
<p class="MsoNormal">Bloomberg News canvassed traders, money managers and
analysts on their top market indicators to track corporate distress, liquidity
shocks and cracks in the financial plumbing. We then analyzed decades of price
history to identify the systemic turning points — when central bankers on a
hawkish mission risk crashing the real economy.<o:p></o:p></p>
<p class="MsoNormal">While there’s little sign of widespread stress yet, some
barometers of cross-asset health are moving closer to the danger zone. All that
suggests investors are in for a bumpy ride as the Fed drains its unprecedented
liquidity measures.<o:p></o:p></p>
<p class="MsoNormal">Here are four indicators keeping Wall Street worrywarts on
edge.<o:p></o:p></p>
<p class="MsoNormal"><b>1. An Upside-Down Bond Market<o:p></o:p></b></p>
<p class="MsoNormal">Like it or not, the U.S. Treasury yield curve remains the
top dog economic forecaster on Wall Street — even if the Fed’s bond-buying
spree in the pandemic has distorted its message. In normal times, when the
business cycle is in good health, the interest rate on debt maturing in, say,
10 years, will be higher than that on shorter-term securities as investors
demand more compensation for the risk that inflation down the road will erode
returns. If the opposite happens, meaning short-term rates are higher than the
longer term, the foreboding dynamic is known as an inversion — signaling a bet
that the central bank will eventually have to cut rates in order to salvage
growth.<o:p></o:p></p>
<p class="MsoNormal">While not every inversion in the yield curve has led to a
downturn, prolonged distortions have become eerily accurate, especially when
two of the most widely followed curves become inverted at the same time, data
compiled by Bloomberg show. Since the beginning of the 1990s, whenever yields
on both 3-month Treasury bills and two-year notes have risen above the rate on
10-year bonds, a recession has followed almost without fail within the next six
to 18 months. It's a simplified measure — the most recent double inversion
preceded a pandemic that no one saw coming — but big moves in yield curves have
kept Wall Street on edge recently.<o:p></o:p></p>
<p class="MsoNormal">In late March and the start of April, the gap between two-
and 10-year yields briefly inverted before normalizing, reflecting market angst
that the Fed’s mission to aggressively tighten policy risks sparking a
recession by ramping up the cost of money and thereby constraining consumer
spending as well as business activity. At the same time, the spread between the
three-month Treasury bill and the 10-year yield has been heading in the
opposite direction, suggesting a still-healthy outlook for U.S. investment and
consumption that gives the central bank room to make good on its
policy-tightening plan.<o:p></o:p></p>
<p class="MsoNormal">For now, yield-curve worriers are easy to find as the end of
the easy-money era rocks global markets. Already this year, the Nasdaq 100
index of technology shares has had the worst start in decades, speculative
stock strategies have lost billions and cross-asset volatility has spiked all
over the world.<o:p></o:p></p>
<p class="MsoNormal">PGIM Chief Executive Officer David Hunt warned last week
that signals in the bond market suggest a significant risk of a recession in
2024, while Citadel’s Ken Griffin said the outlook is the most uncertain since
the global financial crisis.<o:p></o:p></p>
<p class="MsoNormal"><b>2. Disruption to the Flow of Credit<o:p></o:p></b></p>
<p class="MsoNormal">U.S. companies have lost their ability to borrow money at
ultra-cheap rates, a direct function of the Fed’s mission to cool the red-hot
business cycle that’s stoked inflation for everything, everywhere all at once.<o:p></o:p></p>
<p class="MsoNormal">But when borrowing costs surge too far, too fast, the flow
of corporate credit can become disrupted or even blocked entirely. In extreme
instances, healthy companies can lose access to funding, wreaking economic
havoc. This happened most recently during the onset of the pandemic, which
forced the Fed to take unprecedented action to keep corporate America afloat.<o:p></o:p></p>
<p class="MsoNormal">The most widely followed credit gauge is the additional
yield over Treasury bonds that investors demand to hold debt from the largest
and strongest U.S. corporations. Currently, the spread on a Bloomberg index of
U.S. investment-grade bonds has risen to 1.35 percentage points, from as low as
0.8 percentage point in June 2021, signaling higher borrowing costs that still
sit below a key threshold for stress.<o:p></o:p></p>
<p class="MsoNormal">When the spread rises above 1.5 percentage points, it’s a
warning sign that credit markets could seize up, making borrowing a lot harder,
according to analysts and investors informally polled by Bloomberg. The metric
has proved a reliable red flag in the past after crossing 2 percentage points
in the volatile years after the global financial crisis and during the pandemic
fallout.<o:p></o:p></p>
<p class="MsoNormal">To illustrate how the flow of credit across the entire U.S.
economy can constrict, Bloomberg examined commercial and industrial loan data
from all commercial banks, published monthly by the Federal Reserve.<o:p></o:p></p>
<p class="MsoNormal">The analysis, dating back to 1989, shows that when
investment-grade credit spreads approach and exceed 2 percentage points, a
threshold that’s been crossed just six times over that period, a contraction in
loan growth almost always follows.<o:p></o:p></p>
<p class="MsoNormal">In January 2008, for example, borrowing costs for
investment-grade companies soared to more than 2 percentage points for the
first time in more than five years. Risk premiums remained above that level for
nearly two years, and a prolonged slowdown in commercial and industrial loan
volumes came next. Loan volumes fell for two years beginning in November 2008,
causing historic damage to the world economy.<o:p></o:p></p>
<p class="MsoNormal">More recently, credit spreads spiked to over 3.5 percentage
points in the March 2020 selloff. Yet some of the easiest borrowing conditions
on record took hold in the following year as the Fed pumped liquidity into the
financial system and even offered to buy corporate bonds directly.<o:p></o:p></p>
<p class="MsoNormal">Now premiums are back on the rise and company debt is
becoming volatile. Investors and companies alike will be watching whether
borrowing costs spike into risky territory that would disrupt the flow of
credit once more.<o:p></o:p></p>
<p class="MsoNormal"><b>3. The Junk Penalty<o:p></o:p></b></p>
<p class="MsoNormal">Borrowers with weak balance sheets were given a reprieve
after the Fed and other central banks rode to the rescue in the dark days of
the pandemic. For the better part of two years, credit was dirt cheap and
defaults became virtually non-existent. But the liquidity party is coming to a
rapid end as interest rates rise — with new speculative-rated debt offerings
this year falling to the lowest volume since 2009.<o:p></o:p></p>
<p class="MsoNormal">A recent bond sale from Carvana Co., for example, initially
struggled to attract investors, and the used-car company ended up paying a
whopping 10.25% yield while buyers demanded a clause intended to help shield
them from losses if the company were to head to bankruptcy court. Similar cases
abound.<o:p></o:p></p>
<p class="MsoNormal">A measure investors are watching closely is the extra risk
premium that bond buyers demand to own debt from the lowest-rated companies
compared to investment-grade peers. Call it the junk-bond penalty. When this
premium goes up, it makes borrowing more costly and less accessible to issuers
who need the funding the most, especially those who have poor credit ratings
due to weak cash flows or high debt loads compared to their earnings.<o:p></o:p></p>
<p class="MsoNormal">If firms that have limited money on reserve and debt coming
due in the near future lose access to primary markets, that makes defaults and
bankruptcies more likely — bad news for growth-minded policy makers at the
White House.<o:p></o:p></p>
<p class="MsoNormal">For most of the post-pandemic era, junk-rated companies
across the globe paid little more to borrow than some of the biggest
corporations — an average of just 2.4 percentage points more during 2021, a
year that saw some of the easiest credit conditions ever, according to data
compiled by Bloomberg. That made corporate failures exceptionally rare. But the
tide is starting to turn. The junk penalty climbed above 3 percentage points
last week. While that’s below the historical average of about 4 percentage
points, the fast pace of liquidity tightening could soon cause trouble for the
most vulnerable of companies. Since 2000, when the junk penalty has climbed
above 5 percentage points and held above that level for an extended period,
defaults have almost always risen above the historic norm, data compiled by
Bloomberg show.<o:p></o:p></p>
<p class="MsoNormal"><b>4. Short–term money markets crack<o:p></o:p></b></p>
<p class="MsoNormal">The Fed’s massive pandemic stimulus program caused excess
liquidity in the financial system to balloon, with banks flush with record cash
in the form of reserves. Now, as the monetary authority begins to pare a $9
trillion balance sheet, a process known as quantitative tightening, Wall Street
is on high alert for any resulting logjams in the financial plumbing.<o:p></o:p></p>
<p class="MsoNormal">When the Fed starts to shrink asset holdings — by simply not
replacing maturing securities — there will be an increase in the number of
Treasuries and mortgage bonds in search of a home in the private sector. And
the amount of reserves held in the banking system will fall by design.<o:p></o:p></p>
<p class="MsoNormal">No one knows how any of this will ultimately play out. But
the last time the central bank embarked on quantitative tightening, bad things
eventually happened in late 2019. Banks saw their reserves fall sharply —
fueling a disruptive spike in interest rates on so-called repurchase
agreements, a keystone of short-term funding markets. That caused liquidity
headaches all around and forced the central bank to intervene in the funding
markets.<o:p></o:p></p>
<p class="MsoNormal">The Fed has since implemented additional tools to help
reduce these liquidity risks. But all bets are off. Some two and half years
ago, total reserves held by depository institutions at the Fed slid to around
$1.4 trillion. That was enough to cause liquidity issues in overnight lending,
even though banks at the time considered $700 billion as the lowest threshold
for comfort.<o:p></o:p></p>
<p class="MsoNormal">This time round, Barclays Plc estimates the tipping point at
some $2 trillion versus $3.3 trillion currently. All this is guesswork with few
historic precedents, so the reserve level will be a key focus for risk watchers
well before it hits this point.<o:p></o:p></p>
<p class="MsoNormal">All in, traders around the world are bracing for a
disruptive tightening in financial conditions on multiple fronts, from bonds
and credit to money markets, as the Fed spoonfeeds markets with liquidity no
longer.<o:p></o:p></p>
<p class="MsoNormal">“We have never been able to reduce inflation by more than 2
percentage points in the U.S. historically without inducing recession,” said
Guggenheim Partners Chief Investment Officer Scott Minerd at the Milken
Institute Global Conference in Los Angeles. “I think that it's going to be
really hard for the Fed to maneuver into a soft landing.”<o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 6pt;"><a href="https://www.spokesman.com/stories/2022/may/09/biggest-winners-and-losers-from-the-feds-interest-/">https://www.spokesman.com/stories/2022/may/09/biggest-winners-and-losers-from-the-feds-interest-/</a><o:p></o:p></p>
<p class="MsoNormal" style="margin-bottom: 6pt;"><span style="font-size: medium;">The Spokesman Review - Spokane, Washington</span></p><p class="MsoNormal">Biggest winners and losers from the Fed's interest rate hike</p><p class="MsoNormal">Updated: Mon, May 9, 2022</p><p class="MsoNormal">Spokane, Washington<o:p></o:p></p>
<p class="MsoNormal"><b>James Royal<span style="mso-spacerun: yes;"> </span></b>Bankrate.com
(TNS)<o:p></o:p></p>
<p class="MsoNormal">Last week, the Federal Reserve announced that it’s raising
interest rates by half a percentage point, bumping the federal funds rate to a
target range of 0.75 to 1.00 percent. The move follows an increase of 0.25 percent
in March, as the Fed continues reducing liquidity to the financial markets to
help tamp down soaring inflation.<o:p></o:p></p>
<p class="MsoNormal">The central bank also announced that it was further reducing
stimulus to financial markets by letting its holdings of bonds decline over time.
The Fed will work its way up to letting about $95 billion in bonds roll off its
balance sheet every month, reducing liquidity by about $1 trillion per year.<o:p></o:p></p>
<p class="MsoNormal">The Fed’s move comes as inflation rages in the U.S. economy
at the highest annual rate in some 40 years, hitting 8.5 percent in March. With
the Fed hitting the brakes on an overheated economy, the main question for many
market watchers is how fast Federal Reserve Chairman Jerome Powell & Co.
will continue to raise rates.<o:p></o:p></p>
<p class="MsoNormal">“The Federal Reserve is behind the curve on inflation and
has a lot of catching up to do,” says Greg McBride, CFA, Bankrate chief
financial analyst. “This means rate hikes at successive meetings for the first
time in 16 years, and for the first time in 22 years, a larger half-point
hike.”<o:p></o:p></p>
<p class="MsoNormal">At about 3 percent, the 10-year Treasury bond is now at its
highest level since late 2018, as markets price in the expectation of sustained
inflation and rising rates. After some ups and downs in 2021, the benchmark
bond has soared since December 2021 and especially since the start of March,
when it sat at just 1.65 percent.<o:p></o:p></p>
<p class="MsoNormal">As the Fed embarks on what appears to be a longer period of
raising rates, here are the winners and losers from its latest decision.<o:p></o:p></p>
<p class="MsoNormal">1. Mortgages<o:p></o:p></p>
<p class="MsoNormal">While the federal funds rate doesn’t really impact mortgage
rates, which depend largely on the 10-year Treasury yield, they’re often moving
the same way for similar reasons. With the 10-year Treasury yield zooming
higher in recent months, as the market prices in expectations of the Fed
raising rates, mortgage rates have risen alongside them.<o:p></o:p></p>
<p class="MsoNormal">“Mortgage rates have bounded higher by 2 full percentage
points since the end of 2021, one of the largest and fastest run-ups in
history,” says McBride. “Mortgage rates move well in advance of Fed action and
the outlook for inflation and the economy will be the key determinants of what
we see with mortgage rates in the months ahead. Until we see signs inflation
has peaked, the risk is definitely to the upside.”<o:p></o:p></p>
<p class="MsoNormal">The run-up in rates – following the rapid rise in housing
prices over the past couple years – has created a double whammy for potential
homebuyers. Home prices are more expensive and the financing is pricier,
resulting in a slowdown in the housing market.<o:p></o:p></p>
<p class="MsoNormal">So would-be homebuyers are worse off by the rise in rates. <o:p></o:p></p>
<p class="MsoNormal">2. Home equity<o:p></o:p></p>
<p class="MsoNormal">The cost of a home equity line of credit (HELOC) will be
ratcheting higher, since HELOCs adjust relatively quickly to changes in the
federal funds rate. HELOCs are typically linked to the prime rate, the interest
rate that banks charge their best customers.<o:p></o:p></p>
<p class="MsoNormal">Those with outstanding balances on their HELOC will see
rates tick up, though interest expenses may continue to be low historically. A
low rate is also beneficial for those looking to take out a HELOC, and it can
be a good time to comparison-shop for the best rate.<o:p></o:p></p>
<p class="MsoNormal">But with rates moving higher, even a little bit, and the
expectation that they’ll move higher still as the year progresses, those with
outstanding HELOC balances should expect to see their payments continue to rise
in the near term. <o:p></o:p></p>
<p class="MsoNormal">3. Credit cards<o:p></o:p></p>
<p class="MsoNormal">Many variable-rate credit cards change the rate they charge
customers based on the prime rate, which is closely related to the federal
funds rate. The Fed’s decision means that interest on variable-rate cards will
move higher now.<o:p></o:p></p>
<p class="MsoNormal">“Credit card rates will march higher in step with the
Federal Reserve, and often follow within one or two statement cycles,” says
McBride. “Pay down credit card debt now because it will only get more expensive
and you don’t want that debt hanging over your head, should the economy topple
into recession.”<o:p></o:p></p>
<p class="MsoNormal">If you have an outstanding balance on your cards, then
you’re going to get hit with higher costs. With rates projected to rise for a
while, it could also be a welcome opportunity to shop for a new credit card
with a more competitive rate.<o:p></o:p></p>
<p class="MsoNormal">Low rates on credit cards are largely a non-issue if you’re
not running a balance.<o:p></o:p></p>
<p class="MsoNormal">4. Savings accounts and CDs<o:p></o:p></p>
<p class="MsoNormal">Rising interest rates mean that banks will offer rising
returns on their savings and money market accounts, but will likely adjust
their yields at a measured pace.<o:p></o:p></p>
<p class="MsoNormal">Account holders who recently locked in CD rates will retain
those yields for the term of the CD, unless they’re willing to pay a penalty to
break it.<o:p></o:p></p>
<p class="MsoNormal">Those with savings accounts may look forward to rising
rates, but it’s off a low base, as most banks quickly ratcheted rates to near
zero following the Fed’s emergency cuts in March 2020.<o:p></o:p></p>
<p class="MsoNormal">“Yields on certificates of deposit have started to pick up
and we’ll see the same in savings yields, although with a bit of a lag,” says
McBride. “The outlook for the next year or so is much better than what savers
have endured over the past three years, where rates fell and then inflation
took off.”<o:p></o:p></p>
<p class="MsoNormal">“It will take a while, but as rate hikes continue, the returns
savers get will rise and inflation will hopefully decline,” he says.<o:p></o:p></p>
<p class="MsoNormal">Savers looking to maximize their earnings from interest
should turn to online banks, where rates are typically much better than those
offered by traditional banks.<o:p></o:p></p>
<p class="MsoNormal">5. Stock and cryptocurrency investors<o:p></o:p></p>
<p class="MsoNormal">A huge boon for the stock market has been the Fed’s
willingness to keep rates at near zero for an extended period of time. Low
rates have been beneficial for stocks, making them look like a more attractive
investment in comparison to rates on bonds and fixed income investments such as
CDs. But that’s changing.<o:p></o:p></p>
<p class="MsoNormal">In the last few months, investors have been pricing in the
potential for rate increases, with the S&P 500 starting 2022 in a deep
slump.<o:p></o:p></p>
<p class="MsoNormal">“The market went up with little hesitation while the Federal
Reserve was pumping stimulus into the economy, but now that they’re removing
that stimulus, market volatility has returned,” says McBride. “Particularly
susceptible have been the high-octane growth stocks that were the primary
beneficiaries of low interest rates, with investors now questioning what value
to put on those stocks in a higher interest-rate environment.”<o:p></o:p></p>
<p class="MsoNormal">Cryptocurrencies have also been feeling the brunt since
November, when the Fed more clearly telegraphed its intentions to reduce
liquidity in the financial system. Bitcoin, Ethereum and other major cryptos
are well off their 52-week highs and have shown a solid downtrend over the last
few months, as they priced in reduced stimulus and the potential for higher interest
rates.<o:p></o:p></p>
<p class="MsoNormal">The Fed’s reduction in its own bond portfolio should further
decrease support for stocks and crypto.<o:p></o:p></p>
<p class="MsoNormal">6. The U.S. federal government<o:p></o:p></p>
<p class="MsoNormal">With the national debt above $30 trillion, rising rates will
raise the costs of the federal government as it rolls over debt and borrows new
money. Of course, the government has benefited for decades from a secular
decline in interest rates. While rates might rise cyclically during an economic
boom, they’ve been moving steadily lower long term.<o:p></o:p></p>
<p class="MsoNormal">For now, the interest rates on debt remain at historically
attractive levels, with 10-year and 30-year Treasurys running well below
inflation. As long as inflation remains higher than interest rates, the
government is slowly taking advantage of inflation, paying down prior debts
with today’s less valuable dollars. That’s an attractive prospect for the
government, of course, but not for those who buy its debt.<o:p></o:p></p>
<p class="MsoNormal">Bottom line<o:p></o:p></p>
<p class="MsoNormal">Inflation has been running hot over much of the last year,
and the Fed is raising interest rates to combat it. But rates still do remain
low by historical standards, at least for now, so it makes sense to think about
how to take advantage, for example, by being more discriminating when it comes
to shopping for rates on your savings accounts or CDs.<o:p></o:p></p>
<p class="MsoNormal">(Visit Bankrate online at bankrate.com.)<o:p></o:p></p>
<p class="MsoNormal">©2022 Bankrate.com. Distributed by Tribune Content Agency,
LLC.<o:p></o:p></p><br /><p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-15310968771673424892022-05-06T16:38:00.001-06:002022-05-06T16:38:15.678-06:00How to Maintain Your Financial Health in Unhealthy Times<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpr6mukqveLZh1bthyfRAASTiME9VBlz_35sXRWGm9WDIufXUzVJXJn_ttd-LW7pZjL2g7RjS-fICTE07XqJ3zYOLzR6T4WRz31yefX2lpIpUIcz_vZw6bRYl6p5QjVBqWnNTAp_XnDFoeBYKQ5Jh36nv4QgSGyNnM5yat0PgtsAonEnU-_1ijAz2w/s276/Financial%20Health.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="183" data-original-width="276" height="155" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpr6mukqveLZh1bthyfRAASTiME9VBlz_35sXRWGm9WDIufXUzVJXJn_ttd-LW7pZjL2g7RjS-fICTE07XqJ3zYOLzR6T4WRz31yefX2lpIpUIcz_vZw6bRYl6p5QjVBqWnNTAp_XnDFoeBYKQ5Jh36nv4QgSGyNnM5yat0PgtsAonEnU-_1ijAz2w/w235-h155/Financial%20Health.jpg" width="235" /></a></div><p></p><p class="MsoNormal"><span style="font-size: x-small;"><a href="https://www.bloomberg.com/news/articles/2022-04-26/deutsche-bank-sees-5-6-fed-target-rate-and-deep-u-s-recession">https://www.bloomberg.com/news/articles/2022-04-26/deutsche-bank-sees-5-6-fed-target-rate-and-deep-u-s-recession</a><o:p></o:p></span></p><p class="MsoNormal"><span style="font-size: x-small;"><a href="https://www.bloomberg.com/news/articles/2022-05-03/investors-are-so-bearish-on-stocks-that-the-market-looks-bullish">https://www.bloomberg.com/news/articles/2022-05-03/investors-are-so-bearish-on-stocks-that-the-market-looks-bullish</a><o:p></o:p></span></p><p><span style="font-size: x-small;"> <a href="https://www.bnnbloomberg.ca/yellen-sees-solid-growth-possible-soft-landing-for-u-s-economy-1.1761068#:~:text=(Bloomberg)%20%2D%2D%20Treasury%20Secretary%20Janet,moves%20to%20bring%20down%20inflation">https://www.bnnbloomberg.ca/yellen-sees-solid-growth-possible-soft-landing-for-u-s-economy-1.1761068#:~:text=(Bloomberg)%20%2D%2D%20Treasury%20Secretary%20Janet,moves%20to%20bring%20down%20inflation</a></span></p><p class="MsoNormal"><span style="font-size: x-small;"><a href="https://www.bnnbloomberg.ca/u-s-stocks-roar-as-powell-quells-fear-of-jumbo-hikes-1.1760681">https://www.bnnbloomberg.ca/u-s-stocks-roar-as-powell-quells-fear-of-jumbo-hikes-1.1760681</a><o:p></o:p></span></p><p class="MsoNormal"><a href="https://apnews.com/article/business-stock-markets-asia-sydney-hong-kong-c341786b3e475916247b2fcd5c07602f"><span style="font-size: x-small;">https://apnews.com/article/business-stock-markets-asia-sydney-hong-kong-c341786b3e475916247b2fcd5c07602f</span></a><o:p></o:p></p><p class="MsoNormal"> There
is a concept in behavioral economics called loss aversion. It refers to the situation
that a real or potential loss is perceived either psychologically or
emotionally as being more severe than an equivalent or equal gain. We feel more
deeply for a loss than a gain or the loss of $100 is far greater than the joy
of gaining $100. For greater insight into this concept check out Nassim Talab’s
book, <i>Fooled by Randomness</i>. I recommend it for this and many other
things. This applied to today’s comments on several levels. <o:p></o:p></p><p class="MsoNormal"> I have
included several articles on the recent happenings in the markets and with
various statements by banking and governmental officials which need to be read
in order listed to show the progression of thoughts and ideas in the last two
weeks. I had a discussion earlier this week with someone who wanted to know
what they should be investing in. They didn’t think I had given a very
satisfactory answer when I suggested they shouldn’t be doing any investing. I
would go so far as to suggest that looking at financial news with the intent of
investing should not be done right now. Don’t look or follow or even think
about financial news, at least not if you are looking for information to help
you choose investments or trying out some strategy suggested by a financial advisor
or even well meaning friend. Because the only thing that will happen is you will
feel rotten or worse, hopeless. Any investment decision you make right now will
result in some loss, possibly a lot of loss and remember, loses contain more
negative punch than comparable gains. Granted, your current investments may be
taking a hit but then you are not following my initial counsel to avoid looking
at financial news with the intent to invest. Think back to the first paragraph
about loss aversion. Right now the market is so all over the place any gains
(feeling some little good) will be massively offset by losses (feeling much more
bad). The articles I have included / listed show how in just a couple of weeks
we have gone from despair to euphoria to despair (not quite that extreme but you
get the point). <o:p></o:p></p><p class="MsoNormal"> The
first article from Deutsche Bank (April 26, 2022) suggests we will definitely have
a recession in 2023 and that the Fed monetary policy needs to be very aggressive,
i.e. really jumping the Fed Funds rate up a lot and often. The second article from
Bloomberg dated May 3, 2022 suggests investors are too Bearish. “Investors have
become so negative about the stock market that Wall Street [read smart money]
is starting [to] think a rally may be on the way.” They give several technical
metrics to support their thinking. The Third article from BNN Bloomberg (May 4,
2022) states Yellen thinks the Fed can make a “soft landing” for the economy. Again,
a couple of reasons are listed. We have a very negative article (recession next
year) followed by 2 very positive articles (market likely going up and no
recession next year). <o:p></o:p></p><p class="MsoNormal"> The
last two articles show what actually happened. The BNN Bloomberg article is
from May 4, 2022 the day of the Fed meeting and the AP article is from May 5,
2022 the day after the Fed meeting. The May 4<sup>th</sup> article is after the
meeting and gives the reaction of markets during the next few hours. Markets are
up 3%, joy and jubilation. Several reasons are given including that Chairman
Powell says that .75% Fed Funds Rate increases are off the table. All is roses
and smells great (an emotional gain). The next day the markets falls 3% (an
emotional loss). How could this happen, the fiscal doves had taken over, the
world was roses, champagne had been flowing. The talking heads had spoken. We
are told in the AP News article that “yesterday’s sharp rally was not rooted in
reality and today’s dramatic selloff is a reversal of that misplaced exuberance”.
Exactly what does that mean. So, yesterday pundits couldn’t read the signs but
today they can? What about tomorrow’s swings, for there certainly will be
swings. Will those signs be read correctly? What will be the greater insight
and understanding that will allow for reasoned understanding and the ability to
plot the market and world economies, especially on a day to day basis. Now do
you see why you should not be reading the financial news thinking about
investing. The financial noise is so loud individuals can’t hear, let alone
think in any kind of reasonable manner. There is little real information in the
noise that would allow for reasoned decisions. The financial pundits will never
apologize for, attempt to correct nor take any responsibility for any misconception,
error or misleading statements . You will find contradictions among the nuggets
of truth and accurate information. It is the nature of financial noise because remember,
in the markets, information is power and financial noise may contain useful
information and….. may not. How do you tell (it is extremely difficult). <o:p></o:p></p><p class="MsoNormal"> What
should you be doing at this point or any point in which you need to make financial
decisions. Think of the tortoise and the hare or slow and steady. Limit your debt
to necessities like education, housing (don’t ever consider variable rate
financing – too many potential problems) and transportation. Have a diversified
portfolio of stocks, bonds, mutual funds. Remember, stocks are usually a longer
term investment with the expectation that they will go up and down, mainly up over the longer term. Bonds tend to be a bit more stable and many times move opposite
stocks (but not always) and mutual funds, to get more diversity from smaller
investments. <span style="font-family: inherit;">A mix is good. Look at rebalancing your investments on a regular
basis, a <u>good</u> financial advisor can help. <o:p></o:p></span></p><p class="MsoNormal">
<span style="font-family: inherit;"> <span style="font-size: 11pt; line-height: 107%;">Hang in there. These are unhealthy times for
those that immerse themselves in the dirty waters of too much financial noise
(news). Watch from the sidelines. Keep to the regular and steady investing schedules
you have established before and don’t think you can time or out smart the
market.</span></span></p><p class="MsoNormal"><o:p></o:p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-23509268278161576692022-04-21T13:07:00.000-06:002022-04-21T13:07:11.066-06:00<p> </p><p class="MsoNormal"><span style="font-family: arial; font-size: medium;"><b>Why So Much Uncertainty? Recession, Slowdown, Retrenchment</b></span><o:p></o:p></p><p class="MsoNormal"><span style="font-family: arial;"></span></p><div class="separator" style="clear: both; text-align: left;"><span style="font-family: arial;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRYuQ7e0iJkm9B2KK2n1xm6qRiAdgmIH7AtPNi6WbQIq-6CKWeihrHh6WEb0vYIMZL1P_N6Y9e1xzLiGGDEMw8ewyyPkoV-hb5KZEq2ADxOg9y9FvzcfjDs6sJ4I_gweaxyBK1H3B1EWqlDV27RdrF3Pgzy4gwbAzlB0Tfl1IYirDaFGH1egirgRLo/s260/overcomplex%20graph.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="194" data-original-width="260" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRYuQ7e0iJkm9B2KK2n1xm6qRiAdgmIH7AtPNi6WbQIq-6CKWeihrHh6WEb0vYIMZL1P_N6Y9e1xzLiGGDEMw8ewyyPkoV-hb5KZEq2ADxOg9y9FvzcfjDs6sJ4I_gweaxyBK1H3B1EWqlDV27RdrF3Pgzy4gwbAzlB0Tfl1IYirDaFGH1egirgRLo/w205-h153/overcomplex%20graph.jpg" width="205" /></a></span></div><span style="font-family: "Calibri",sans-serif; font-size: 11.0pt; line-height: 107%; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">https://www.bloomberg.com/news/articles/2022-04-11/world-markets-are-falling-again-with-echoes-of-the-2018-rout</span><p></p><p class="MsoNormal">https://www.bnnbloomberg.ca/junkiest-junk-bonds-flash-a-warning-sign-for-the-economy-1.1754017<o:p></o:p></p><p class="MsoNormal">https://www.theguardian.com/business/2022/apr/19/imf-governments-covid-debt-world-economic-outlook<o:p></o:p></p><p class="MsoNormal"><a href="https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874">https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874</a><o:p></o:p></p><p class="MsoNormal"><a href="https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874">https://www.bnnbloomberg.ca/u-s-economy-to-see-modest-recession-next-year-fannie-mae-says-1.1753874</a><o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>Yesterday
the dentist put a new crown on a tooth for me. It was the culmination of about
3 weeks of pain, discomfort and unpleasantness. I was enjoying the ability to
chew on both sides of my mouth this morning when another tooth broke. What a
mess. I have an appointment with the dentist at 4:00 pm today for another crown
(that is another very personal economic hit). This is kind of like the economy
at the moment. We are suffering through one problem and something else gets
added. I have 5 articles (2 of them very short) <span style="mso-spacerun: yes;"> </span>I think may be interesting relating to
national and world thinking on interest rates, markets and recession thinking.<o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>The
first article from Bloomberg dated 4/12/22 <i>World Markets are Falling Again
With Echoes of the 2018 Rout</i>, discusses various watched indicators and what
they are doing. Fed officials and comments on Fed Funds Rate increases, stocks
and bond market changes, recession comments all add to a cacophony of noises
and sounds some helpful most mainly noise. The article uses words like rout,
economic retrenchment, hawkishness, stampede, fear, hunkering down, all
designed to create tension, show action or just to jar the senses. You see such
things in the daily news relating to most stories. I am afraid it is the
current fad in news reporting in general and financial markets and reporting
are no different. So, can we cut through some of the rhetoric, yes we can. For
example, in the Bloomberg article referenced above there are two or three items
you should look at. One, the Fed is staying the course with rate hikes. There
is talk of 75 basis points (bp or .75%) increases from various sources. That is
an indication that the Fed is more worried about inflation than recession which
they have stated before and they are not as afraid of recession. They are
hoping for no or a very mild recession which is possible. The economic and
financial indicators are currently giving<span style="mso-spacerun: yes;">
</span>very mixed messages and advisors and officials are having a hard time
gaining helpful information from those messages. This is not unexpected or
unusual. Officials and markets will be trying to discern a direction or an
intensity or a trend from all the market and data signals. Don’t hang your hat
on any one piece of information regardless of how loudly or strongly someone pushes
it at this point.<o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>The
second Bloomberg article dated 4/19/22, <i>Junkiest Junk Bonds Flash a Warning
Sign for the Economy</i>, suggests the junk bond (very low credit worthiness)
market, by its recent increase in costs of borrowing, is signaling that a recession
is becoming more likely. Maybe yes and maybe…… yes. The article lists several indicators
that are supporting what they think is more likely to be pointing to recession
or at the very least, a significant economic slowdown (or retrenchment). A
slowdown may or may not fall into a recession, there are some technical
definitions that separate the two. Some consider a slowdown or retrenchment a
very mild recession (negative growth in GDP and a few other indicators) but if
you don’t have to use the recession word, especially as a Fed official, that is
very good. The article lists several indicators that are pointing various
directions including uncertainty caused by the war. Remember, markets don’t
handle uncertainty well at all and tend to bounce and wiggle alarmingly when
they are subjected to much of any uncertainty. They are currently being
subjected to very large quantities of uncertainty. They will be very unsettled.
Depending on when some news story is generated, the conclusions of the story
may be way up or way down. It is more important to watch trends but the news
will not generally do that. You will tend to get the Chicken Little report (the
sky is falling, the sky is falling) rather than something measured. Try to look
for the measured. <o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>The
next article is from The Guardian. I don’t have a lot of experience with this
particular rag. It bills itself as “the world’s leading liberal voice”. I am
not certain exactly what that means but the article seems pretty good. They are
discussing the International Monetary Fund (IMF) and some of its thinking and
findings. The article is short but I think fairly informative. I would like to
quote a couple of sections; <o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">“The IMF also warns the war has
exacerbated two tricky policy dilemmas, one facing central banks and one
troubling finance ministers.<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">For central banks, such as the Bank
of England and the Federal Reserve, the issue is how to tackle mounting cost of
living crises without killing off still incomplete recoveries from the
pandemic. That’s not going to be easy, as the IMF freely admits.<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">For finance ministers, such as
Rishi Sunak, it is getting the balance right between protecting the most
vulnerable while repairing the damage caused to the public finances by Covid-19
spending. The IMF understands the difficulties but warns against being too
penny-pinching.”<o:p></o:p></p>
<p class="MsoNormal">The article also points out the global supply chain
disruptions and suggests world markets are becoming more fragmented which they
consider, not good. Germany is considered the big power in Europe and no one
wants to remember the problem of a large powerful Germany with economic power
(think WWII). One of the ideas of the European Union was and is to bind France
and Germany (and the others) so closely together they can’t swing fists at each
other. Supply chain problems makes it so economies and businesses stockpile
resources and such which makes them less dependent on each other to some
extent. The IMF is suggesting something similar about Russia and the war. The
war is driving a wedge into positive relationships which were being created
over the last 20 to 30 years between Russia and the European Union countries and
creating economic disconnections which help drive nations apart. In positive
times, the interlocking economies help reduce friction and give a reason to
work together. Another reason several European countries are less vocal than
others concerning the Ukraine / Russian conflict (like Great Britain who has
its own oil supplies and other sources and is very vocal) is that Russian
natural resources especially natural gas and oil supply a large percentage of
European needs. That is part of what the IMF is referring to in its “supply
chain” comments as have other world financial leaders done in the last several
weeks. Moscow has the ability to be an unreliable supplier and many European
nations are staring that big problem square in the face. A little economic
blackmail can certainly be and likely will be part of Putin’s overall game plan
for Eastern Europe. <o:p></o:p></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>The
last article is really 2 sources for the same information. I thought you might
like to see the different reporting of the same information. BNN Bloomberg and
The Hill reported on Fannie Mae’s<span style="mso-spacerun: yes;"> </span>(the
governmental housing arm) comments on recession. Fannie Mae is suggesting we
will have a recession in 2023. You can see from the short articles. Quoting
from the BNN Bloomberg article;<o:p></o:p></p>
<p class="MsoNormal" style="margin-left: 0.5in;">“Rising interest rates at the U.S.
Federal Reserve will further slow an economy already weighed down by high
inflation and the fallout from the Russian invasion of Ukraine, causing a
“modest contraction” [recession] in the second half of 2023, according to
Fannie Mae.”<o:p></o:p></p>
<p class="MsoNormal">Short and sweet. Expect to see more statements like this
from various bank economists, quasi-governmental agencies, like Fannie Mae, and
world economists. Whether its called a recession, economic slowdown, economic
retrenchment or something else. Look for higher interest rates, slowing grow
rate to negative growth rate (recession) or maybe, just hopefully, a cooling of
the overheated economies and a return to more normal growth in housing and
prices. One can and should hope for the best but prepare for something else. <o:p></o:p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-91733678573678621962022-04-05T14:54:00.000-06:002022-04-05T14:54:19.074-06:00<p> </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMf2yDGA3awOQErBVI_6N8w-owhRpFOc-92mwGx_FLuV-zKNa1vbp1-eapPCJnFu1kd9SX8gIHVSgSZ859_wWRmp-HrnJhcyS0mECqed7Pf3TVWB7Fd2XjdvGuW_2wAUNQcyjaAevH8M15i-35tuqocXJvQV5M5JMVHmY10aSdpRzlXvlHutUCygJl/s1500/stock-vector-airplane-in-the-sky-with-clouds-image-of-a-biplane-on-a-watercolor-stain-hand-drawn-vector-1121511203.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1171" data-original-width="1500" height="141" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMf2yDGA3awOQErBVI_6N8w-owhRpFOc-92mwGx_FLuV-zKNa1vbp1-eapPCJnFu1kd9SX8gIHVSgSZ859_wWRmp-HrnJhcyS0mECqed7Pf3TVWB7Fd2XjdvGuW_2wAUNQcyjaAevH8M15i-35tuqocXJvQV5M5JMVHmY10aSdpRzlXvlHutUCygJl/w181-h141/stock-vector-airplane-in-the-sky-with-clouds-image-of-a-biplane-on-a-watercolor-stain-hand-drawn-vector-1121511203.jpg" width="181" /></a></div><b><span style="font-size: large;">The Inverted Yield Curve and Recession?</span></b><p></p><p></p><p class="MsoNormal"><a href="https://www.bloomberg.com/news/articles/2022-04-02/inverting-yield-curve-signals-high-stakes-for-fed-and-investors">https://www.bloomberg.com/news/articles/2022-04-02/inverting-yield-curve-signals-high-stakes-for-fed-and-investors</a><o:p></o:p></p><p class="MsoNormal">https://www.reuters.com/world/us/ny-feds-williams-balance-sheet-run-off-could-start-soon-may-2022-04-02/<o:p></o:p></p><p></p><p></p><p class="MsoNormal"><span style="mso-tab-count: 1;"><br /></span></p><p class="MsoNormal" style="text-align: justify;"><span style="mso-tab-count: 1;"> </span>I was
checking the financial news feeds yesterday morning and found the attached 2
articles. The Bloomberg article continues the discussion on the inverted
/inverting yield curve which is a pretty good advance warning sign for
recession. The second, Reuters article, involves one of the Fed’s presidents, John
Williams, and his views on Fed actions and reactions. Both are good for
different reasons.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-tab-count: 1;"> </span>The
Bloomberg article is highlighting that many in the financial community are
feeling the Fed needs to get the Fed Funds Rate up now to help bring inflation
down. Talk of .50% and even .75% increases are now routinely discussed where a
.75% increase wasn’t considered at all until recently. The purpose of the
increases is to brake and break inflation. To brake the rate of increase and to
break the rate down from the current 7.5% annual rate that is increasing, to
the Fed’s long term target annual rate of around 2.0%. The article is showing
that more and more groups are calling for higher and faster rate increases. The
final paragraph in the Bloomberg article does a pretty good job of summarizing
the possible outcomes of this -<span style="mso-spacerun: yes;"> </span>“It’s
not a done deal that we are going to have stagflation or a recession but we are
getting close,” said Jake Remley, a senior portfolio manager at Income Research
+ Management, which oversees about $92 billion. “That inflection point is out
there somewhere, and it’s possible that at some point we may hit it soon if
they keep pushing the expectations for [Fed Funds Rate] hikes.”<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-tab-count: 1;"> </span>The
second article from Reuters is a summary of comments by John Williams, one of
the Federal Reserve Bank’s presidents. Williams is responding to questions
about Fed intentions. It is not uncommon for various Fed bank presidents and some
others to make limited statements about current Fed thinking or activities.
They very seldom make a definitive statement and usually don’t say much more
than generalities however, and this is very much on purpose. They sometimes use
these types of settings to get a feel for what the thinking is in the markets.
It is an interesting dance, the Fed tries to make calming statements with
little or no content and then tries to “read” the comments from the market to
see what the market may be thinking or may do. The market meanwhile tries to
“read” what the Fed is saying (as the Fed tries not to say much) and get more
information out of the limited statements. The reason for this dance is that the
market can react very quickly to any information or direction it “thinks” is
important. The Fed doesn’t want to diminish its ability to influence markets by
telegraphing their plays. We had this problem in the 1970s-80s with Alan
Greenspan and the raging inflation and interest rates of that period. Greenspan
would share what he was thinking (kind of like thinking out loud, not necessarily
<span style="mso-spacerun: yes;"> </span>concrete, more exploring several ideas,
we all do it)<span style="mso-spacerun: yes;"> </span>with some of his people or
other governmental people, congress etc. and within hours (sometimes if felt
like minutes) the markets would have gotten hold of the information and reacted
in some way or other. Greenspan finally had to stop saying anything just so he
could think through things. That basically has carried over through all Fed
officials since then, they don’t dare say anything before they want to act
themselves. Remember, everything in the market is about information and
perception or worse perceived information. Williams, as reported in this
article, spent a little time relating past performance of Fed policies (in the 2019
Fed actions) <span style="mso-spacerun: yes;"> </span>that were viewed by the Fed
as being successful. Now if I was going to say that last statement as proper
Fed-speak I would say something like; Many individuals in the market and government
perceived our actions (Fed actions of 2019) as being somewhat successful and we
believe given current conditions which may or may not be similar to conditions
in 2019 that the Fed may be successful or not in doing something similar though
not necessarily the same again, i.e. slow the economy without crashing it
(recession). Do you get the idea. The article reports that Williams gave some
general rate targets and hinted that the Fed might consider (the next section is
my words not Williams but you get the idea)…., trying but may not try, still it
might work, but there are no guarantees, but maybe….. something “like” the
previous actions might, or possibly might not do something similar or not, in
the current situation that may or may not be like the previous situation,
maybe. Do you get the drift of the depth and breadth that the Fed people will
go to to say something but not say something. The article goes on to say
Williams suggests the high inflation rate is currently the “greatest challenge”
for the Fed at the moment (which may or may not change) - nothing is ever a
problem, just a challenge, and lists several factors likely influencing the
current inflation trends. Notice in the list nothing is said about the Fed’s
massive balance sheet which in my mind is the 900 lbs. gorilla in the room.
Williams does acknowledge that the Fed is going to try to “ease inflation to around
4% this year and ‘close to our 2% longer-run goal in 2024’ while keeping the
economy on track.” With inflation currently running at 7.5% and climbing that
is a good goal. The trick to the whole thing is in Williams’ quoted remarks in
the last paragraph, “These actions should enable us to manage the proverbial
soft landing in a way that maintains a sustained strong economy and labor
market”. That is really the goal, hope, prayer and fervent wish – a soft
landing of the economy. The success rate of soft landings is, unfortunately,
not particularly good. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-tab-count: 1;"> </span>Stay
tuned to the exciting continuation of the US Fed and the fight with the dragon of
inflation. The year 2022 promises to be interesting (not problematic, of
course). Think of the 1965 movie <i>Those Magnificent Men in their Flying
Machines</i>. The first 3 lines of the theme song describe our likely market
ride as the Fed attempts to bring the economy in for a “soft” landing. Think of
the Fed as the pilot and the economy as the flying machine.<o:p></o:p></p>
<div style="text-align: left;"><span> </span>Those magnificent men in their flying machines,</div><div style="text-align: left;"><span> </span>they
go up tiddly up up,</div><div style="text-align: left;"><span> </span>they
go down tiddly down down</div><p class="MsoNoSpacing"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-size: 9.0pt; line-height: 107%;">from <i>Those
Magnificent Men in the Flying Machines</i> theme song<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;">… and up and down and up and down and up.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;">As the stewardess says, everyone please fasten your
seatbelts we are entering turbulent weather.<o:p></o:p></p><br /><p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-23278052114700317092022-03-28T11:28:00.000-06:002022-03-28T11:28:06.737-06:00The Recession word is being tossed around<p> </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEief0BiZK7mAF5viI0QHeFmP5fN1BOk3s3_-tDVaqFl97cxfM9PrGKSaHYvuBh9D45eUZrChFC_MYbxM8E_0IT7j61BclLAaZ4pfhcYRiZliGVUvMI9szIM0Ygw2TrdGH_mmjodmNH39T5SXxibHo0s_mVXvOj-87YQ2iK-3KKDjqbhtQdVIQrMj3uA/s875/Fed%20Dot%20Plot%203-2022.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="430" data-original-width="875" height="157" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEief0BiZK7mAF5viI0QHeFmP5fN1BOk3s3_-tDVaqFl97cxfM9PrGKSaHYvuBh9D45eUZrChFC_MYbxM8E_0IT7j61BclLAaZ4pfhcYRiZliGVUvMI9szIM0Ygw2TrdGH_mmjodmNH39T5SXxibHo0s_mVXvOj-87YQ2iK-3KKDjqbhtQdVIQrMj3uA/w320-h157/Fed%20Dot%20Plot%203-2022.jpg" width="320" /></a></div><p class="MsoNormal"><span style="mso-tab-count: 1;"> </span>https://www.bnnbloomberg.ca/fed-officials-take-aim-at-inflation-say-ready-to-act-with-vigor-1.1742076</p><p class="MsoNormal">https://www.bnnbloomberg.ca/a-recession-warning-sign-part-of-u-s-yield-curve-inverts-for-first-time-since-2006-1.1743815<o:p></o:p></p><p></p><p></p><p class="MsoNormal">https://edition.cnn.com/2022/03/26/economy/inverted-yield-curve-march-warning/index.html<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"> Another
day another crisis of some sort. I trust you have put on your financial
blinders so you can function in this rapidly changing and not changing environment
(is that ambiguous enough to sound like a talking head). Take a look at the 3
articles above. The first, BNN
Bloomberg-Fed ready to act, is a discussion of the Fed’s response to inflation as
it raising the Fed Fund Rate. The dot plot shown in the article is a relatively
new invention of the Fed to signal its thinking. The dots supposedly show the
thinking of the voting members of the Fed on interest rate changes. This chart
was created because the market made so much noise several years ago about the
Fed never saying what they were thinking that the Fed created this and said, in
essence, here is what we are thinking now stop asking. If you are confused you are
in good company. Remember, the chart has no binding power, it is the equivalent
of thinking out loud but it has proven an indication of possible intent in several
instances. So the Fed is thinking of acting aggressively. That is a good sign.
Now we will see what they actually do. However, the market will react to the
perception of movement because the market really doesn’t have anything else to
go on. That is why you need to be wearing your financial blinders to help
protect from an overload of change that is based on perceived information not
necessarily actual information. It’s hard to separate the two.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-tab-count: 1;"> </span>The
second two articles are hot off the press, so to speak. The articles titled, A Recession
warning sign? and This recession indicator, are from today’s news feed discussing an
inverted yield curve. The CNN article makes the statement that a “yield curve
inversion has preceded every single recession since 1955” which is true.<span style="mso-spacerun: yes;"> </span>But not every yield curve inversion has been
followed by a recession. A subtle but important difference. An inverted yield
curve by its very nature is very unstable and traditionally corrects itself as
investors and the economy calm down. Having said that, there have been a couple
of times in the last 40 years that the curve stayed inverted for some time
(many months is very unusual but does happen). <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-tab-count: 1;"> </span>What
does it all mean. Well……, as the last sentence in the CNN articles says, “The
harder the Fed steps on the brakes [raises Fed Funds Rates], the higher the
probability the car seizes up and the economy goes into recession”. But
something has to be done to get the excess money out of the system and we have
kicked the can down the road for so long we are losing the ability to kick. Remember
from a previous post I said one of the quickest ways to reign in inflation is
recession, it isn’t a painless method but it usually works. I am afraid there
are only a limited number of options and a slow reversal of the excess money
policy and slowly removing the excess funds from the economy is definitely a
much gentler method of slowing down a raging economy but is infinitely more
difficult and the tools the Fed has are not very good at fine tuning. Regardless
of the impression they try to give, Fed Funds Rate changes and buying or
selling securities from the government controlled pool are more a blunt force
hammer than a fine tuning knob.<o:p></o:p></p><p class="MsoNormal" style="text-align: justify;"><span> </span><span> <span> </span>Stay tuned as the ride continues.</span><br /></p><div style="text-align: justify;"><br /></div><p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-49253600298114998102022-03-17T10:07:00.001-06:002022-03-17T10:18:48.581-06:00<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEh5eifm6DJ-ayOn-DT9P1y0fKaJKIpZpw1BcFSXebWcf5EjvvKsV3YSI7WIbXUJtwUNdcIK8QvkPZpM8IB81sR8lGuLSfxfqEDvkC5sAXy5pR2d1BifGYpuhEdV21x4jp3elUd0oEni24NndOPKaYUFZlHrJAljYFnA8kK4cb4hD21GJBU4dCoPXrJa=s300" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="273" data-original-width="300" height="182" src="https://blogger.googleusercontent.com/img/a/AVvXsEh5eifm6DJ-ayOn-DT9P1y0fKaJKIpZpw1BcFSXebWcf5EjvvKsV3YSI7WIbXUJtwUNdcIK8QvkPZpM8IB81sR8lGuLSfxfqEDvkC5sAXy5pR2d1BifGYpuhEdV21x4jp3elUd0oEni24NndOPKaYUFZlHrJAljYFnA8kK4cb4hD21GJBU4dCoPXrJa=w200-h182" width="200" /></a></div><p></p><p class="MsoNormal"><b><span style="font-size: medium;">Fed Interest Rate Hike and the Possible Impacts</span><o:p></o:p></b></p>
<h1 style="margin: 0in;"><br /></h1><div><br /></div><h1 style="margin: 0in;"><a href="https://www.reuters.com/world/us/all-systems-go-feds-liftoff-us-interest-rates-2022-03-16/"><span face=""Arial",sans-serif" style="font-size: 10pt;">https://www.reuters.com/world/us/all-systems-go-feds-liftoff-us-interest-rates-2022-03-16/</span></a><span face=""Arial",sans-serif" style="color: #404040; font-size: 10pt; font-weight: normal;"><o:p></o:p></span></h1>
<p class="MsoNormal"><b><o:p> </o:p></b></p>
<p class="MsoNormal"><span style="mso-tab-count: 1;">March 17, 2022</span></p><p class="MsoNormal" style="text-align: justify;"> The
Federal Reserve raised the Fed Funds interest rate as discussed in the article
from Reuters (listed above). Now begins the very delicate balancing act of
raising rates, which is supposed to reduce inflation. The problem is the interest
rate lever is not particularly precise nor the effects very controllable. Don’t be fooled by the Fed
language. It sounds like they have the ability to precisely control the effects
and impacts of the changes. They don’t. The changes caused by the Fed’s interest
rate adjustments will tend to be in a general direction (tightening or loosening
policy) but the magnitude of impacts is not really knowable or controllable. What
does a .25% increase do vs. a .50% increase? The problem is, too much increase too
fast and the economy goes into immediate recession, too little increase or too
slow and inflation just keeps on going. The Fed doesn’t really know the impact nor
does anyone else. It’s like a go-cart careening downhill out of control and the
brake is the stick against the wheel. Maybe it works, maybe it doesn’t. Remember,
there is no fine control regardless the words or language used or implied. Soft
landing, controlled slide, easy fix are just words with no meaning in this type
of situation. There will be under and over correction, wild swerves and hairy
curves on two wheels. There will be missed turns and some likely drop offs. A
crash is also likely (recession) and in the current situation we may have a
couple of crashes before it settles out completely. You will notice lots of
corrections and changes in forecasts and the news media will begin to pay less
attention to changes and such as they become more frequent. You will have to
dig that out yourself. There will be pronouncements by various Federal
officials and large bank economists about this and that affecting the inflation
rate. They will be all over the place. Energy, food and commodities prices will
bounce around generally going up (inflation) until they don’t which may be
caused by recession or if we are really, really lucky by successful Fed policy.
It sounds fairly bleak but we have done this before and it can be fairly mild,
think the recession of 1997 and 2002. They were really quite mild. Remember, the
definition of recession "is a macroeconomic term that refers to a <span style="text-align: left;">significant decline in general economic activity in a
designated region</span><span style="text-align: left;">. It had been typically recognized as two consecutive
quarters of economic decline, as reflected by GDP in conjunction with monthly
indicators such as a rise in unemployment.</span>” (<a href="http://www.investopedia.com/">www.investopedia.com</a>) If we have less
than the 2 quarters of downturn this is not considered a recession but it is an
economic slowdown. That is really what the Fed is trying to achieve, a series
of down sloping waves that reduce inflation but don’t quite drive the economy
into the red zone definition (recession). They will do everything they can to
avoid the recession definition, it looks very bad for them. Perception is
everything.</p><p class="MsoNormal" style="text-align: justify;"><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><span style="mso-tab-count: 1;"> </span>So, hope
for the ideal series of corrections. A series of down sloping waves that never
quite reach the definition of recession but that bring economic activity down by
drying up the easy money currently circulating in the economy. We should see
higher borrowing costs (interest rates), higher prices on commodities, energy
and food and less spending. That is going to be challenging for people as we
have become used to spending. I am hoping home prices come down without a crash
but we will have to see. Again, this isn’t the end of civilization as we know
it. We have had inflation and recession before, some mild some not so mild. The
US economy will make it through this even though it may take a while but it
will be okay. Reduce you debt as able or avoid it by postponing things, save
more and above all… enjoy life, stay close to family and friends, take some
time for yourself and don’t spend too much time listening to the talking heads
in either government or the media. <span style="background: white; color: #202124; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><o:p></o:p></span></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-19054045857562107062022-03-07T09:00:00.000-07:002022-03-07T09:00:34.988-07:00<p> Greetings. It has been quite awhile since the last post but I felt there are some that might find an analysis of the current economic situation as it relates to a very fast paced changing world situation interesting and helpful. It has been some time since we had a shooting war, the Gulf War was the last one involving the United States. The current conflict with Russia and Ukraine will likely stay warm for a bit longer. Putin has not yet reached his objectives. He won't stop until he does. Putin will call the West's bluff on an open attack and push to reach his objectives. Biden and the NATO powers will not risk an all out shooting war at this point (or ever perhaps). Putin has shown he has no such fears. Tom Clancy in his book <i>Red Storm Rising</i> shows what the US military's World War III scenario looked like in the later 1980s. A good book and a good read. Some of the same conditions still apply. I have collected a few financial articles from leading news groups and put together some brief comments. The bottom line at this point is the US and world economy is in for a fairly rough ride over the next several months and may stretch out to a couple of years. Like the COVID pandemic the economic problems will likely drag on. </p><p>I wrote the articles on the days shown and the news articles are from those days. Enjoy the read. Leave any comments and thoughts. Have a good day.</p><p></p><p class="MsoNormal"><u><span style="font-size: medium;">Written 3/2/2022</span></u><o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.bnnbloomberg.ca/global-bonds-extend-rally-as-war-curbs-pace-of-rate-hike-bets-1.1731072">Global Bonds Extend Rally as War Curbs Pace of Rate-Hike Bets - BNN Bloomberg</a></p><p class="MsoNormal">Greetings,</p>
<p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">
A new day, an increase in conflicts and more whipsawing of financial markets. Such
is the life of a market watcher. If you have been closely following financial
news (and regular news for that matter) you should have a very sore neck at
this point. I hope you are feeling somewhat jaded with all the news, views and
opinions swirling around at the moment. We have now had the State of the Union
message with attendant power statements, major and minor threats and much noise
including the continuing threat of spending trillions of dollars. The
attached Bloomberg article highlights the whipsaw nature of world turmoil.
According to this article the Fed will now not raise Fed funds rates in March
and likely any thoughts and plans should be scraped according to the article. I
am afraid this is the nature of market watching. The pundits / reporters / news
agencies tend to lurch from pillar to post with great speed. Remember,
everything is short term in financial reporting regardless of what is said
about forecasting and future planning. Any future plan will survive as long as
short term situations don’t change (of course they always and constantly
change). That is why you tend to see solutions being proposed and discarded
with great rapidity. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">
The underlying problem still exists. There is too much money in the system. I
am afraid that war is one way of wringing out some excess funds but not very
efficient and of course very painful. One can hope that the threat subsides
soon. If so, look to see inflation become the #1 topic again and then the
handwringing over Fed Funds rate hikes will quickly become the next short term,
long solution. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">
Just remember, long term proposals will be subject to short term criteria which
will cause new long term proposals based on the current short term situation.
No forecast survives today’s financial news. In the financial news business one
uses the simplest of forecasting tools which is the straight line regression
analysis or even easier (and quicker), pick a current point, pick a past point
and draw a line to the future. Remember any past point is acceptable as long as
it supports the current “group thinking”. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">
The best plan is to stay back from the front line of financial news reporting.
Let the pundits slug it out at the front. You and I can remain somewhat calmer
and more reserved and enjoy much less stress if we don’t try to react to every
“new” piece of information. In these situations slow and steady wins the race
both in the fairy tale and real life.</span></p><p class="MsoNormal">Good luck.</p><p class="MsoNormal"><br /></p>
<p class="MsoNormal"><u><span style="font-size: medium;">Written 2/14/22</span></u></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><a href="https://www.bnnbloomberg.ca/inflation-to-exceed-fed-s-2-goal-well-into-2023-survey-shows-1.1722016">Inflation to exceed Fed’s 2% goal well into 2023, survey shows - BNN Bloomberg</a></p><p class="MsoNormal">https://www.reuters.com/business/finance/what-global-banks-forecast-fed-rate-hikes-2022-2022-02-11/</p><p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">Greetings;<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">
Another 2 articles on the inflation front, markets and reactions. Things are
getting very interesting (you remember what that key word means from last
letter). The “very” modifier is a further definition of the key word,
interesting. It means that the governmental agencies are now reacting. That is
both good and bad. The politicians will attempt to minimize the importance of
the various datum that is being generated by the numbers guys. You can see what
form the politicians are initially likely to use in the statement from Pres.
Biden in the Reuters article, 3<sup>rd</sup> paragraph, when Biden says “we
will make it through this challenge”. Expect to see more politicians weigh in
on the themes of “we can do this and let’s all pull together and it isn’t as
bad as it looks”. Watch for it, the noises, platitudes and pithy sayings should
increase fairly soon. The various federal agencies, especially the Fed, will be
trying to assure the politicians and the markets they can handle things. As it
progresses and gets more involved (this will not likely be a short duration
situation) the politicians will start to blame the Fed and call for more
relief, help, etc. As I said it should be interesting. We haven’t seen this
sort of financial mix/mash since 2008-9 in the beginning of the great
recession. I don’t expect it to be as bad as that but it could be fairly rough.
<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">
I am hoping things are more like the recession of 1997 or 2002 which were much
more mild, relatively speaking, and were of fairly short duration. There are 2
basic types of recessions characterized by the letters “V” and “U”, the letters
refer to the shape of the recession. The “V” is a fast falling in markets and
things then a quick rebound, more of a blip that leaves markets gasping for
breath and wondering just why they did a faceplant into the payment but getting
up quickly and dusting themselves off (the markets tend to look around in this
type of recession to see if anyone saw them fall, they look a bit guilty but
carry on.) There will be commentary on what caused the fall. The “U” shaped
recession is a bit more serious/difficult. The fall comes but the market
faceplant is a bit more jarring and the markets may stay down on the pavement
for a time. (Represented by the bottom of the “U” which may draw out over
months as opposed to the “V” which may be quite short.) When the market gets up
it is a bit more groggy and it will look around and wonder just what tripped
them. As you would expect it can be quite a bit more jarring and damaging. (The
recession of the early 80s was more “U” shaped as was the great recession of 2009
which was very “U” shaped. You remember how long it took to get out of the 2009
recession, that’s the long bottom of the “U”, more like |____| .)<o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">
So, keep the faith, if not in the system in life in general. The Fed will be
increasing rates, the politicians will become more involved and their voices
more strident and shrill. Look for the blame game to start fairly soon. We must
have a scapegoat and the politicians will indeed look for and find one, whether
it is deserved or not. The Republicans will have one and the Democrats a
different one. Oh yes, and I forgot, the talking heads will have much to say,
most of it irrelevant but possibly entertaining in a sad sort of way. I will be
interested to see how it impacts the Democrats massive spending plans. The
diehard Democrats will want to push on with the spending which will make things
worse by pumping more money into the already loose money policy and not allow
the easy money to dry up. If they get the spending package through in most of
its aspects look for inflation to remain for years not quarters or look for
several quick, sharp recessions in a row for the next several years. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;">
Life is good when we remember that God, family and friends are the real value
in this life and inflation can’t diminish the value of them. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-hansi-font-family: Calibri;"><o:p> </o:p></span></p>
<p class="MsoNormal"><o:p> </o:p></p><br /><p></p>BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-73372211813321329172017-04-28T17:20:00.002-06:002017-04-28T17:20:49.245-06:00We See The Obvious But Fail to See The Less Obvious.., Obviously -- Part 1 – Historical Perspective
<br />
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhs9AQYH54wQcmYlvWmU8lJKWg2PN691bzLmb6NnM42-OmY8h2_ER5BtYuqUwwic-ARGgfNmmGfLbLQzWacHruih1tUkFrVdumyh3RCgmyBL_NsUCYKAqov41H0XzJvMzCjh0CMRX6q1Q8/s1600/Litle+jack_illustrated+by+William+Wallace+Denslow.jpg" imageanchor="1" style="clear: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhs9AQYH54wQcmYlvWmU8lJKWg2PN691bzLmb6NnM42-OmY8h2_ER5BtYuqUwwic-ARGgfNmmGfLbLQzWacHruih1tUkFrVdumyh3RCgmyBL_NsUCYKAqov41H0XzJvMzCjh0CMRX6q1Q8/s200/Litle+jack_illustrated+by+William+Wallace+Denslow.jpg" width="152" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">illustrated by William Wallace Denslow</td></tr>
</tbody></table>
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 1;"> </span>All of us are familiar with the
Mother Goose nursery rhyme <i style="mso-bidi-font-style: normal;">Little Jack
Horner</i> but look at his experience the next Christmas.</span></div>
<br />
<div style="border-image: none; margin: 0in 0.3in 10pt;">
<span style="font-family: "Arial","sans-serif";">Little Jack
Horner sat in a corner, eating his Christmas pie; he put in his thumb and
pulled out mincemeat and said, “What is this?? What a mess! This isn’t plum
pie, now I have to wash my hand and cook will box my ears and I’ll get nothing
for my pilfering.”</span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 1;"> </span>Little Jack Horner experienced the
impact of unintended consequences. The previous Christmas he had tried the same
stunt with cook; stole a pie from the cooling rack and in a quick stroke stuck
his thumb into the pie and hit a plum. He loves plums and felt very fortunate.
Latter cook found him and boxed his ears but he felt vindicated. He got the
plum. This year he tried the same trick; he stole a pie from the cooling rack, but
didn’t realize it was mincemeat. In his haste to avoid cook he didn’t look closely.
He hates mincemeat and when he failed to spear a plumb with his thumb he was
sorely disappointed at a handful of mincemeat! Yuck, no, double yuck. Not only
did he have to wash his hand but he didn’t get a plum and cook still boxed his
ears. Not at all satisfactory. What went wrong, he says to himself. “It worked
so well last year. I did the same things, why no plum?”</span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 1;"> </span>In <span style="mso-spacerun: yes;"> </span>1776 Adam Smith’s book, <i style="mso-bidi-font-style: normal;">The Wealth of Nations</i> was published in which he discusses his
“invisible hand” which is a famous metaphor and is an example of a positive
unintended consequence. His contention<span style="mso-spacerun: yes;">
</span>that the baker, butcher and others do things for their own self interest
and yet they supply food for the greater public provides the positive impact to
their own selfish acts of acquiring money through the sale of goods (food). Hence,
a positive unintended consequence. </span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 1;"> </span>Earlier, John Locke the English
philosopher and physician urged the defeat of a parliamentary bill in 1692. The
bill was designed to cut the maximum permissible rate of interest charged on
loans. Locke argued that instead of benefiting borrowers, especially small
borrowers which was the stated purpose of the legislation it would hurt the
very people it was meant to help. He suggested the actual results would be less
available credit not more credit and a redistribution of income away from
“widows, orphans and all those who have estates in money.” This is an example
of the more common perverse nature of unanticipated or unintended consequences
unlike Adam Smith’s positive unintended consequences. </span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 1;"> </span>In 1850 Frederic Bastiat, a well respected
French economist, published a paper shortly before his death titled <i style="mso-bidi-font-style: normal;">What is Seen and What is Not Seen, or
Political Economy in One Lesson</i>. Bastiat was very aware of what he called
“seen” and “unseen”. The seen were the easily recognized, obvious or visible
consequences. The unseen were the less easily recognized, less obvious or
unintended consequences. He was concerned that politicians,<span style="mso-spacerun: yes;"> </span>policy makers, economists, bureaucrats and
others were ignoring the impact of the unintended. He made the following
statement, “There is only one difference between a bad economist and a good
one: the bad economist confines himself to the <i style="mso-bidi-font-style: normal;">visible</i> effect; the good economist takes into account both the
effect that can be seen and those effects that must be <i style="mso-bidi-font-style: normal;">foreseen</i>.” I think Bastiat is suggesting that more effort is
required to be a good economist than a bad one. It takes effort, time, energy
and knowledge to “foresee” possible impacts from current rules and activities.
To explore the possible impacts is much more challenging than looking at the
immediate, visible impacts only. I believe such actions require a much greater
commitment to finding the answers or truth than most of our current political
and business leaders are willing to allocate. The lack of effort is unfortunate
in the most benign cases and very damaging in the worst cases.</span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 1;"> </span>One of the most comprehensive
analysis on the concept of unintended consequences was done by Robert K. Merton
in 1936 in an article titled <i style="mso-bidi-font-style: normal;">The
Unanticipated Consequences of Purposive Social Action</i>. Merton identified
five sources of unanticipated consequences; 1) ignorance, 2) error, 3)
imperious immediacy of interest, 4) basic values, and 5) self-defeating
prediction (also the reverse of the idea would be the self-fulfilling prophecy).
Merton suggests that the first two are the most pervasive but the others can
and are destructive too. The imperious immediacy of interest refers to
instances were the individual wants the intended consequence so much that he
purposefully chooses to ignore any unintended effects. Think of blind obedience
to a program or course of action or willful ignorance. An example of this would
be that the Food and Drug Administration creates enormously destructive unintended
consequences with its regulation of pharmaceutical drugs. By requiring drugs
not only be safe but efficacious for a specific use the agency slows the
introduction of life saving drugs, many times by years. Time when many
sufferers may die or suffer needlessly because the drugs are not available. According
to some articles, the consequences have been so well documented that regulators
and legislators now foresee it but accept it. Merton suggests that the basic
values consequence can be seen in the Protestant work ethic. He says it “paradoxically
leads to its own decline through the accumulation of wealth and possessions.” In
his final point, self-defeating predications, he points to the population
growth warnings in the early 20<sup><span style="font-size: x-small;">th</span></sup> century which would lead to mass
starvation. The very fact that people were concerned lead to increased research
and development of food production which increased production and has since
made the likelihood of mass starvation very much reduced.</span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "Arial","sans-serif";"><span style="mso-tab-count: 1;"> </span>The law of unintended consequences
is working always and everywhere. I believe governments and bureaucrats are
particularly susceptible to ignoring or discounting unintended consequences. Also special interest
groups tend to pick and choose their desired results, regularly disregarding unintended
consequences as minor problems or inconveniences. Trade policies help one
industry at the cost to some other industry or group. After the September 11<sup><span style="font-size: x-small;">th</span></sup>,
2001 terror attacks there was an outpouring of support and concern which was
needed and helped the country work through the trials, destruction, death and
pain. However, it has been suggested that so much money was funneled to the
9/11 effort that other important charities and causes suffered significant
problems for some time after trying to raise funds for important and worthy
causes in disease control, relief of hunger, basic research and other
humanitarian aid. Where does one draw the line? One final example I found
relates to the case of the <i>Exxon Valdez</i> oil spill in 1989. Afterward,
many coastal states enacted laws placing unlimited <span style="mso-bidi-font-weight: bold;">liability</span> on tanker operators. As a result, the Royal Dutch/Shell
group, one of the world’s biggest oil companies, began hiring independent ships
to deliver oil to the United States instead of using its own forty-six-tanker
fleet. Oil specialists fretted that other reputable shippers would flee as well
rather than face such unquantifiable risk, leaving the field to fly-by-night
tanker operators with leaky ships and iffy <span style="mso-bidi-font-weight: bold;">insurance</span>. Thus, the probability of spills probably increased and
the likelihood of collecting damages probably decreased as a consequence of the
new laws.</span></div>
<div style="border-image: none;">
<span style="font-family: "Arial","sans-serif"; font-size: 11pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;"><span style="mso-tab-count: 1;"> </span>In following blogs we will examine
Bastiat and Merton more fully. Bastiat, looking and writing in the 1800’s sees
things with a certain clarity. Merton 80 years later created terms and thoughts
that help clarify and expand the concepts. Finally, we will look at modern workplace,
government and society for current examples and situations. Don’t make snap
judgments on this, stay with it and let’s see just what unintended consequences
we may discover.</span></div>
BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-6680764005427161032017-02-15T17:00:00.000-07:002017-02-15T17:00:20.503-07:00The Bear Trap that Looks Like a Cookie: The Seduction of Goal Setting Part 4 – Practical Experiences or How Not to Succeed in Goal Setting
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_9SMbpPE9e9mFVJRXsUqFaSzbEHBcyn7TKDRAJhyphenhyphenEkmBhn2h6OOYhRyphJWfNe4-ovG0r5Qq0MV2dpf_x62WzYIrXx2cyzq4kakK1gHKXTaYrVszvHhxdA3b7Wu_iffAC1Z_Nr3mmdU0/s1600/Goal+Clipart+-+free+download.bmp" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_9SMbpPE9e9mFVJRXsUqFaSzbEHBcyn7TKDRAJhyphenhyphenEkmBhn2h6OOYhRyphJWfNe4-ovG0r5Qq0MV2dpf_x62WzYIrXx2cyzq4kakK1gHKXTaYrVszvHhxdA3b7Wu_iffAC1Z_Nr3mmdU0/s200/Goal+Clipart+-+free+download.bmp" width="200" /></a><span style="font-family: Calibri;"><span style="mso-tab-count: 1;"> </span>Many of
you have likely been exposed to goals and goal setting at one time or another.
Some experiences may be pretty good but I am willing to bet that many have been
either pretty poor or down right dangerous. For a variety of reasons, most
people required to set goals either have no training or no knowledge of good
goal setting techniques. They may be driven by upper management or team leaders
who are themselves ill-prepared to help or even harbor dangerous ideas when it
comes to the overall organization mission. Below I have shared a few of the
situations I have encountered in my working career regarding goals, goal
setting and the results of goal setting. We can see the results of poor goal
setting in the Wells Fargo Bank illegal practice of opening unauthorized
accounts. The news broke around the first part of September, 2016 and caused
significant problems for the bank and is still on-going at this time.
Investigations by federal agencies, penalties and fines of $185 million (which
some think is small potatoes for Wells Fargo), the CEO, John Strumpf, stepping
down and significant headaches for the bank’s legal, ethics, and customer
service groups are all causing problems for the bank. All because of bad goals. (Google <i style="mso-bidi-font-style: normal;">Wells Fargo unauthorized accounts</i>, for a list of several news
organizations and articles on this.)</span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: Calibri;">In my early career days I worked for a utility company in
their finance group. We were different from the accounting department but still
under the company treasurer. One of our main functions was to estimate future <span style="mso-spacerun: yes;"> </span>weather (temperatures) and the effect it would
have on revenues. We were very interested in average temperatures. Since our
product, natural gas, was used by retail customers mainly for heating we tried
to gauge the impact of varying weather scenarios. This was especially true for
how cold we thought things would get. We would start with general cold weather
estimates and based on historical data, which we had quite a bit of, we would
estimate average per customer usage in various areas throughout our service
territory. Then during the year I would compare actual sales to our projected
sales and see how we did. It was especially helpful when the differences in
average temperature vs. actual temperatures supported the difference in usage
and revenue generated. Sometimes the differences were opposite the expected
impact and we had to look for other things that might affect usage and revenue.</span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: Calibri;"><span style="mso-tab-count: 1;"> </span>One year
the treasurer asked me to prepare the forecast usage (weather impact) and the
corresponding revenue generated for the annual budget. I spent several days
going over the historical data and making adjustments I thought were reasonable
and justifiable. When done I took the forecast and revenue generated to be
reviewed. The treasurer didn’t look at my model or assumptions or discussion
but at the bottom line, the revenue. He said “Bruce, this total revenue number needs
to be $1.0 million higher” and handed it back to me. I started to explain how
the average temperatures and regional adjustments had been developed and that I
felt very confident that there wasn’t an error. The treasurer gently stopped me
before I got very far and commented that he wasn’t concerned about the model or
assumptions but that the model needed to generate $1.0 million more revenue. It
took me a little while and a couple of trips back to him but I finally caught
on and added an “other revenue” line to the budget that contained $1.0 million.
It was then signed off. During the year I would compare the actual weather vs.
the average weather forecast to see where revenue differences could be
explained and I used the “other revenue” line to absorb changes I couldn’t
explain.</span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: Calibri;"><span style="mso-tab-count: 1;"> </span>That was
one of the first experiences I had with goal setting and reaching the goal. The
treasurer either had set a goal or had been given a goal to generate so much
revenue. It was not as important that the forecast model was right or wrong as
it was to have the correct revenue generated. This illustrates how goals can
impact in ways and places we might not normally expect. Who would have suspected
that weather manipulation was so important. It wasn’t of course but it was a
means to an end. No one knew what the weather was going to be but we had
established, over many years, a process that had been well vetted and well
received. That particular year the process was changed because of a goal. </span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: Calibri;"><span style="mso-tab-count: 1;"> </span>Some time
later I was a manager in the public finance group of a large financial services
company. I managed a group of very highly trained professionals with unique
skill sets and knowledge. In an organization of over 100,000 employees my group
of 4 to 6 people were the only employees that did what we did. They were not
clerical people but like most professionals knew and could perform some
clerical functions. At one point I was approached by a new HR representative
asking about the performance reviews I had prepared for my people. She had
reviewed my performance reports and had prepared new performance review reports
she wanted me to use. The new forms were a series of statements with check
boxes I was to use to show if my people were under, at or above performance
levels as contained in the statements. The HR person was concerned that I had
not set enough goals <span style="mso-spacerun: yes;"> </span>for my people. Her
main concern was that I did not have sufficient concrete goals to see if my
people had “performed” fully. The performance reports I had been using were
ones used for several years and I had thought, adequate. HR decided to “update”
the process. I was not involved in writing or helping create the new reports
that would be used for my people who were the only people in the company that
did what we did. I was not given the chance to review or comment on the new
reports. I was told to fill out the new reports by a date specific and return
them to her. It was a mess. The reports were essentially a modified clerical
position performance review report. Since some of my most junior people were on
a similar pay level as some of the most senior clerical people, it appeared the
HR person had just modified<span style="mso-spacerun: yes;"> </span>clerical performance
forms. As you would suspect it didn’t work, at all. It took me about 4 months
to get things straightened out. In the end I was able to get goals that allowed
my people enough flexibility to do their varied jobs and some freedom to try
new things and ideas.<span style="mso-spacerun: yes;"> </span>But I still had to
include some goals with check boxes. I have trouble understanding the need for
checkboxes.</span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: Calibri;"><span style="mso-tab-count: 1;"> </span>Sometimes
a company wants to make drastic changes to its business model. New goals can be
an effective way to implement changes quickly. During the great recession of
2007 – 2009 the organization I was working for bought out a competitor. In my
business area the purchased firm was given control of the operations not the
buying firm. The people who had been bought out by our company convinced executive
management that extreme changes needed to be make which would make division
look more like the bought out company. There was a lot of difference between
the two division (old division and purchased division) philosophies. The bought
out division was able to quickly make changes through establishing new goals.
Many people who didn’t fit the new look or mold were fired, several quit
because they didn’t agree with the new direction and goals and the change was
completed fairly quickly but with a fair amount of disruption to the new
combined division. </span></div>
<br />
<div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: Calibri;"><span style="mso-tab-count: 1;"> </span>This
concludes the series of blogs on goal and goal setting. Don’t give up hope on
goals but don’t be snowed under by them either. As the authors of the Harvard
Business study on goal setting I referenced in part 1 of this series, goal
setting should be used judiciously and with much thought and regular,
consistent review. It is not something to take lightly. </span></div>
BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-67932212543742060162017-02-01T17:00:00.000-07:002017-02-01T17:00:09.936-07:00The Bear Trap That Looks Like a Cookie: The Seduction of Goal Setting Part 3 - It's All About the Goals, Stupid<h2 style="border-image: none;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkNWELbksZZnI1YI0OFaCIsJtFnmYBRj1yKXzTXkwNca-q8swMPsp_yE4zHXJlgERfJCZt7gisXEfnzqmEhce2fch5BU8qz528UkTop9X19_mHXXqkff2kE5Rn5JMDpnAsGFAC_7fv2eg/s1600/Goal01+Clipart+-+free+download.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkNWELbksZZnI1YI0OFaCIsJtFnmYBRj1yKXzTXkwNca-q8swMPsp_yE4zHXJlgERfJCZt7gisXEfnzqmEhce2fch5BU8qz528UkTop9X19_mHXXqkff2kE5Rn5JMDpnAsGFAC_7fv2eg/s1600/Goal01+Clipart+-+free+download.jpg" /></a><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: "times new roman"; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>We have
been talking about problems associated with goals and goal setting, especially
performance goals. We will continue the process of reviewing and uncovering the
pitfalls and traps of poorly worked and implemented goals. Remember, it is
easier to create poor goals than good ones, as many of you may experience
regularly. </span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>Many claim
that goals set at the most challenging levels create the greatest inspiration
or commitment or performance. You have all heard that if we don’t shoot for the
stars we will never hit them. The logic is flawed. Many may look at such goals
and see the impossible nature and just not try. If employees do try for such
goals they may resort to excessive risk taking, unethical behavior or dishonesty
in their efforts to reach such goals.</span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>A problem
of risk taking is that it may very well distort the risk preferences of the
company or manager. Extreme goals can drive excessive risk taking. It does no
good for a manager to claim they didn’t want excessive risk when there are few
or limited options to success. Excessive risk can be generated by management and
managers who are fixated on goals to the exclusion of common sense. Some
managers may associate the goals with the idea of destiny or an idealized
future for themselves. Goals then drive the justification for risk taking. Risk
taking can also be used to justify face-saving activities if goals are not
meet. At Wells Fargo during the great recession of 2008 the company acquired
Wachovia Bank. At that time senior management designated Wachovia management as
in charge of Wells Fargo public finance responsibilities and other related
functions. The new management decided that it was necessary to change the focus
(goals) for these related areas to become more like what is called a New York
investment house. In order to do that it was necessary to create significant
changes in goals and emphasis. Many employees were either let go or quite
rather than take on the new goals and requirements which many considered overly
ambitious and did not serve the bank’s client base. Since that time there has
been significant changes in the type of clients served and not served as well
as employee turnover and change. </span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>As
mentioned earlier, overly challenging goals can lead to unethical behavior. If
missing the goal contains a high price of failure, it may be easier to “fudge”
the difference in the actual performance and the goal by cheating or
misrepresenting the performance. Extreme goals can make unethical behavior more
likely. Aggressive goals can make unethical behavior more rewarding or increase
the likelihood of unethical activities or behavior. With such pressure there
has to be greater vigilance to watch for and correct unethical behavior.</span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>Too
challenging goals can cause dissatisfaction and lead to psychological
consequences of failure. Missed goals can also affect future performance.
Dissatisfaction can lead to employees quitting the organization, creating
unfavorable comments and stories or other things that lead to loss of clients
and customer and reduction in general company goodwill. Wells Fargo’s current problems
including $185 million in fines and review by several Federal agencies was
created by employees trying to reach over-challenging goals.</span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>Performance
goals can have a negative impact on complex tasks. As individuals concentrate on
specific, <span style="mso-spacerun: yes;"> </span>challenging goals, they may
learn less from the experience which will degrade overall performance. There
may be better outcomes from encouraging one to do their best which allows for innovative
thinking and solutions outside the box of the goal parameters. Specific,
challenging goals may inhibit alternate solutions by creating a too narrow
focus and penalize creative thinking. Narrow focused goals may encourage and
inspire performance but at the cost of learning and innovation. If the challenge
is to put more widgets together that can be addressed by a specific performance
goal. However, the likelihood of finding a better way to put widgets together
is greatly reduced. </span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>Goals can
become a means unto themselves. They become their own reward. The final outcome
moves from improvement to finishing the goal. Managers are likely to overvalue
and overuse goals. Management can also use goals as a cop-out to cover poor
management skills. This is particularly true in those situations where managers
set a challenging new goal (or just a new goal) and then do not provide
training, materials or guidance specific to the goals. The individual is left
to “use their initiative” to solve the managers problem. The very nature of
performance goals can create their own internal problems and barriers to
success.</span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>Individuals
may loose their ability to think creatively and independently, instead looking
for the solutions only to the goal. The goals then create the drive and focus and
may eliminate the ability to see the greater interactions and overall aims. Such
things as mission statements and general purposes can get lost in the rush of
reaching for the specific performance goal.</span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>Goals can
create perceptions of unfairness which can be a significant problem. This is
especially true when everyone has individual goals. One may feel that their
goals are much harder or more difficult to accomplish than another. Allegations
of favoritism can easily start which seriously damages team work and team
communications. If all aspects of a goal are not thought through then it is
easier to game such goals. Creative or productive energy is spent gaming the
goals instead of improving the overall activity. </span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: small;"><span style="mso-tab-count: 1;"> </span>As a
former middle manager I was caught in the middle of goal setting; receiving
goals from upper management and having to translate and create goals for my
people. It was difficult and frustrating. Part of any goal is the need to
monitor and control. Cheating on goals is fostered when rewards are dependent
on performance quantity and not on quality outcomes. But quality requires more
effort, planning and review than quantity. We may inadvertently put individuals
into difficult ethical dilemmas by the type of goals we create thus forcing
people to make choices that can and do have profound impacts on themselves and
the company. Just look at Wells Fargo’s current problems.</span></span></span></div>
<span style="font-family: "times new roman"; font-size: small;">
</span></span></h2>
BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-73734135252146258462017-01-18T17:00:00.000-07:002017-01-18T17:00:13.467-07:00The Bear Trap That Looks Like a Cookie: The Seduction of Goal Setting Part 2 - The Several Faces of Motivation<h2 style="border-image: none;">
<span style="font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4p7jNtqiqwPizdaAxvP8rWWu-zXThXp1ksOuMlROUd6T9SEwas7WmC7GbzpIrCL9PBUt4_NaVefK_EWVBhmW7eJBSOErYsGqQ5gpojFj4YXjVq9rkOLcHl9GQQJ6RNTIlliCiM1u_328/s1600/slot-1536273_1280.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="211" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4p7jNtqiqwPizdaAxvP8rWWu-zXThXp1ksOuMlROUd6T9SEwas7WmC7GbzpIrCL9PBUt4_NaVefK_EWVBhmW7eJBSOErYsGqQ5gpojFj4YXjVq9rkOLcHl9GQQJ6RNTIlliCiM1u_328/s320/slot-1536273_1280.jpg" width="320" /></a><span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-size: small;">I am listening to the rock group, Journey and the song <i style="mso-bidi-font-style: normal;">What it Takes To Win,</i></span><span style="font-size: small;"> from the album
Revelation. This song is best played loud and with lots of bass. Daniel and I
enjoy this song. Daniel and Ian and I have spent much time over the years in
the mountains and deserts of Utah and Idaho hiking, rock climbing,
mountaineering and camping. This song reminds me of how we approached some of the
trails we hiked together. Some trails were vicious, hiking at altitude or
in</span><span style="mso-spacerun: yes;"><span style="font-size: small;"> </span></span><span style="font-size: small;">the oven of Utah deserts. We did it
to see unimaginable vistas. Deserts that are brutally beautiful. And to prove
to ourselves and each other that we could do it.</span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"><span style="font-size: small;"> </span></span><span style="font-size: small;">The song
reminds me of some of the goal setting sessions I have been involved in over
the years. If you get the chance, listen to it and see if it reminds you of
some of your experiences, either in the outdoors or the office. Sometimes the
goals and goal setting process we experience and endure in our employment may
seem like the hiking experiences with my boys or like parts of this song. The
song should be played loud to feel the rhythm and beat which complements the majesty
around you (mountain or manager). If you are picturing a work situation, the
song and lyrics can also block out voices of reason and moderation, especially
when played loud. Picture in your mind a strong drum beat with bass guitar in
the background playing strong, straight cords. The lead guitar plays a
straightforward cord repetition supported by the base drum on the down beat.
The lead vocalist sings with a strong voice and supporting vocals add depth on
the chorus.</span><span style="mso-spacerun: yes;"><span style="font-size: small;"> </span></span><span style="font-size: small;">“Will you look in their
eyes. They want you gone, they want the prize. When day is done, risk it all.
One will stand, and one will fall “. Is your manager one of those that treats everything
like a game, competition or battle, “With a hunger that never ends. When you
want to prove. You are the best that’s ever been”. Your performance is based on
your ability to make the goal. “ Seal the Deal. Get it done. Earn the right to
say you have won.” The goal is the thing, it is bigger than you, than anything
else. You are there to make the goal. “Stand your ground. Stay in the zone, now
do not back down. More than pride. Your depend. Fighting hard ‘til the very
end”. At the end of the day the numbers are the measure of success. Either you
stand proud in the sunshine on the summit of success or wallow in the shadows
of the valley of failure. Does this describe your goals and goal setting
experience? This method and message occasionally works, such as on the sports
field. </span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"><span style="font-size: small;"> </span></span><span style="font-size: small;">The
process of goal setting is fraught with potential bear traps. Goals can be too
specific. One type of too specific goal is the narrow focus goal. People tend
to concentrate on the thing which is emphasized and too narrow a focus leads to
problems. The siren song is that narrow focus goals are easier to measure and
establish, which is usually correct. The problems compound when the narrow focus
goal limits important interactions outside the goal’s parameters. People tend
not to look beyond the goal especially when it is being heavy emphasized (think
the drum beat). Goals will naturally limit view and vision in an organization.
The larger or bigger picture can be easily lost or subverted by narrow focus goals.
Even worse, wrong, poorly thought out or poorly monitored goals can cause
considerable damage and lead to poor results or unethical behavior through the
process of omission.</span></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"><span style="font-size: small;"> </span></span><span style="font-size: small;">An
additional problem of too specific a goal is when many specific goals are used
to define the overall aim of the company or department. The goals may be
related to each other or they may not. It is tough to multi-task or monitor many
goals, specific or otherwise. Quality will be sacrificed as individuals try to
cover all the goals or conversely people will emphasize one or two perceived higher
value goals and ignore or apply minimal efforts to the rest. Individuals may
assign a high priority to goals that, from the company standpoint, are not
considered such. The individual will try to maximize their reward be it money,
time or prestige. </span><span style="mso-spacerun: yes;"><span style="font-size: small;"> </span></span><span style="font-size: small;">Additionally, it is
easier to measure quantity then quality. Quantity goals will likely get more
attention then quality goals.</span></span></div>
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</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"><span style="font-size: small;"> </span></span><span style="font-size: small;">Tied up in
all this is the problem of what is known as inappropriate time horizons for
goals. Short term goals generate returns and recognition to the individual
sooner than long term goals. Immediate performance rewards focus efforts in the
here and now to the detriment of the long run. Goals may be perceived as
ceilings (maximum effort needed) rather than floors (minimum effort required).
People may want to take a break, relax, rest or pause at completion of a goal.
There may have been substantial energy, overtime or sacrifice involved in
reaching a goal. Or as in the example of the sales person who reaches his sales
goal earlier in the month, takes a couple of days off to play golf before he
has to get started on the next month’s goal.</span></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"><span style="font-size: small;"> </span></span><span style="font-size: small;">Too many
goals which may contain long and short term and quantity and quality
requirements will tend to lead to the short term, quantity goals being completed.
This will likely lead to results different than envisioned by the goal setting person.
The manager may have been trying to generate a well rounded effort which will
not be reached. This is very visible in public companies which have to juggle
increasing short term shareholder growth as shown by quarterly profits (short
term quantity goals) and </span><span style="mso-spacerun: yes;"><span style="font-size: small;"> </span></span><span style="font-size: small;">increasing the
company net worth (long term quality goals).</span></span></div>
<span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">
</span><div style="border-image: none; margin: 0in 0in 10pt;">
<span style="font-size: small;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span>Goals can
harm motivation. They can become a means unto themselves or their own reward.
Managers generally overvalue and overuse goals, especially when goals are used
as strictly a motivational tool (as opposed to team building, for example). Simple
or poorly conceived goals can become a cop-out for managers who are not willing
to properly construct and monitor goals. An extreme situation might be where a manager
gives the challenging goal to increase the district’s revenue by 15% this
quarter. Further, he tells you he is giving you a “free reign” to reach the
goal. He wants you to use your initiative and solve his problem. It is one
thing to consult employees in goal setting but quite another to require the
employee to create the goal. Having employees set non-supervised goals may lead
to goals that are in their best interest, not the company. Without some goal
setting training the process of goal setting is a sham. Poor managers blame the
employees when they themselves are to blame.</span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqrL0GT9aG5gnf34oVWQVSUDU0ntXSCtXRV0zYoSc21Xu8UeJ1NQpmkr5oe9NLMjnjPbsT_M1qcVI4g2H3mThc5W_WyfrRQ6HBibzPoK7cn12iTuCqVQMrlQbP_5y6vbjWfYfQXUBLJXM/s1600/reach+the+goal+02.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqrL0GT9aG5gnf34oVWQVSUDU0ntXSCtXRV0zYoSc21Xu8UeJ1NQpmkr5oe9NLMjnjPbsT_M1qcVI4g2H3mThc5W_WyfrRQ6HBibzPoK7cn12iTuCqVQMrlQbP_5y6vbjWfYfQXUBLJXM/s200/reach+the+goal+02.png" width="150" /></span></a><span style="font-family: Calibri;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"><span style="font-size: small;"> </span></span><span style="font-size: small;">In conclusion,
it is easier to create problems than solve problems through goals and goal
setting. Too narrow a focus goals, quantity vs. quality goals, inappropriate
time horizons all lead to poor or destructive goals. The question becomes, is a
particular goal really helping or hurting, reaching the desired outcome or
missing the target. It is neither an easy nor straightforward process to create
well crafted goals regardless of what you hear or are told.</span></span></span></div>
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BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-30402546583438566272017-01-04T09:53:00.000-07:002017-01-04T11:53:29.064-07:00The Bear Trap That Looks Like a Cookie: The Seduction of Goal Setting - Introduction (Part 1)<br />
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<span style="font-family: "arial" , "sans-serif"; font-size: 12pt; line-height: 115%;">At the beginning of this new year I want to
review the idea of goal setting. I am familiar with personal goals and the need
to establish things to do and ways to try and improve. However, I will sound the
call to watch and be mindful of goal setting. This is particularly true in business
and employment settings.</span></div>
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<span style="font-family: "arial" , "sans-serif"; font-size: 12pt; line-height: 115%;"></span><span style="font-family: "arial" , "sans-serif"; font-size: 12pt; line-height: 115%;"></span><span style="font-family: "arial" , "sans-serif"; font-size: 12pt; line-height: 115%;"><br /></span></div>
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<span style="font-family: "arial" , "sans-serif"; font-size: 12pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span><span style="mso-spacerun: yes;"> </span>One of the problems of any business is how to
motivate employees. The possible solutions can be land mines or cornucopias.
Over the next few weeks I will briefly explore the nature of goal setting, one
of the main methods of inspiring or damaging employees and the business itself.
This blog will explore the problems of goal setting that I believe are not
properly considered when goals are established to motivate and direct employee
efforts. I am using as the basis for and drawing heavily on in this and
subsequent blogs personal experiences, current news articles, and the article, <i style="mso-bidi-font-style: normal;">Goals Gone Wild: The Systematic Side Effects
of Over-Prescribing Goal Setting</i> by Lisa D. Ordonez, Maurice E. Schweitzer,
Adam D. Galinsky and Max H. Baxerman. Originally available from the Harvard
Business School as Working Paper 09-083. (<a href="http://www.hbs.edu/faculty/Publication%20Files/09-083.pdf" target="_blank">HBS paper</a>) I recommend that anyone interested in
beginning to understand the problems of goal setting read the entire article,
it is not particularly long. </span></div>
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<span style="font-family: "arial" , "sans-serif"; font-size: 12pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span>Goal
setting is used extensively in business to motivate and inspire employees to
increase their contributions to a business or business unit. The idea is to
give employees something to work toward, shoot for, strive to reach or expand
their ability to generate some predetermined results for the company. The
manager or HR group setting the goals may expect the goals to create better or
improved results for the company or improve the individual but that is not a
guaranteed outcome of the goals or may not even be a reasonable outcome
depending on the type of goals. The authors of the above listed paper make a
very strong case that one can not assume positive results from goal setting. In
fact, they suggest it may be quite difficult to get really positive results without
significant effort and considerable monitoring of the goal setting process and constant
review. I wish to suggest it may be easier to get negative results than good
solid returns. The authors suggestion is goal setting be used sparingly.</span></div>
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<span style="font-family: "arial" , "sans-serif"; font-size: 12pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span>The
authors suggest that goals can negatively impact the company in one or more of five
areas. Goal setting can create a narrow focus that harmfully impacts non-goal
areas. Goal setting can create an environment that fosters unethical behavior;
involving the individual, the company and the goals themselves. Depending on
how goals are structured, they can lead to distorted risk preferences. Goals
can create situations that cause employees to take harmful risks to the
company. Goals can also undermine an organization’s culture by causing
employees to ignore or circumvent company mission statements and underlying
values. And finally, poorly thought out (or even well thought out and poorly
executed) goals can reduce natural motivation. Goals do not need to be poorly
constructed, ambiguous or incomplete to cause problems. Well structured and well
thought out goals can cause unintended consequences. The interaction of individual
initiative, team objectives or personal goals can impact company goals and
create unexpected situations. Goals and goal setting is a complicated process
that is fraught with pits and traps for the unwary manager and should not be
treated lightly or without considerable thought. Adding to the problem is many
managers or team leaders who are required to create or set goals for
individuals, teams, divisions or even company wide have not received any type
of training that would help them create good goals or avoid the pitfalls
inherent in goal setting. Managers or upper management that require others to
create and set goals without training, instruction and guidelines are creating
a serious problem. The manager who says you or your team needs to increase
revenue by 50% without additional guidance, direction, instruction and
assistance is setting you up to fail, trying to protect themselves with vague
or unrealistic expectations, dislikes you and wants to get rid of you, doesn’t
understand his job (or yours) is just plain not very bright, is creating a
cop-out for himself or all of the above. It shows poorly on the manager and the
organization.</span></div>
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<span style="font-family: "arial" , "sans-serif"; font-size: 12pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span>There are
some organizations and subsets of organizations that are very successful with
goal setting. Yet we see many team leaders, managers and companies set goals
that create significant problems and who knows how may goals are just
ineffective or wasteful and some are very destructive. I am referring to Wells
Fargo and their recent debacle involving fraudulently opened banking accounts and
signing customers up for unrequested services. (See The <u>New York Times</u>
news article; <i style="mso-bidi-font-style: normal;">Wells Fargo Fined $185
Million for Fraudulently Opening Accounts</i>, September 8, 2016 by Michael
Corkery). Wells Fargo Bank’s problems can be traced back to goals and goal
setting problems. I don’t believe the problems are yet over for the bank. It
has cost John Stumpf his job and many feel that there should be additional and
stronger penalties against not only Stumpf but the bank and other management
members too. Wells Fargo disclosed in its standard regulatory filings that the
SEC was investigating its sales practices. It also stated that there were
“formal and informal inquires, investigations and examinations” being conducted
by U.S. Department of Justice, congressional committees, the SEC (as stated
above), California state prosecutors and attorneys general. Banks do not want
attention from regulatory agencies and like very quiet, low profiles. Wells
Fargo is anything but quiet or low key at this time.</span></div>
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<span style="font-family: "arial" , "sans-serif"; font-size: 12pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span>Subsequent
posts will go into some specific aspects of goal setting and the problems
that can be generated. I will also give some personal experiences and examples. </span></div>
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BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-75636443098686906422016-03-09T19:50:00.001-07:002016-03-09T19:50:33.756-07:00Don’t Ignore the Economy or Politics<div style="border-image: none;">
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<span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>I just loaded one of my playlists
to my computer’s music player. I have the following songs among many I am
listening to as I write tonight including <i style="mso-bidi-font-style: normal;">Roll
with the Changes</i> by REO Speedwagon, <i style="mso-bidi-font-style: normal;">Jukebox
Hero</i> by Foreigner, <i style="mso-bidi-font-style: normal;">Bang a Drum</i> by
Bon Jovi, <i style="mso-bidi-font-style: normal;">Heartbeat City</i> by The Cars,
<i style="mso-bidi-font-style: normal;">Bad is Bad</i> by Huey Lewis & the
News, <i style="mso-bidi-font-style: normal;">What it Takes to Win</i> by
Journey, <i style="mso-bidi-font-style: normal;">Speed Turtle</i> by Brian
Wilson, <i style="mso-bidi-font-style: normal;">Baby Come Back to Me </i>by
Manhattan Transfer, <i style="mso-bidi-font-style: normal;">Brand New Day</i> by
Sting, and <i style="mso-bidi-font-style: normal;">Africana </i>by Kurt Bestor.
The selections are a bit eclectic but a good mix for me. I realize it is loaded
with what many would consider some older period works (1970’s – 80’s). I have
very vivid memories of listening to groups like Three Dog Night <span style="mso-spacerun: yes;"> </span>and Journey in the Utah State University Spectrum
(basketball stadium) with more than 7,000 screaming fans (all considered close
friends by the end of the evening). The stage was raised about 6 feet off the
floor with four 20 foot high sound columns on the sides of the stage, a wall of
speakers behind the band that stood 8 feet high and ran the entire width of the
stage. I am convinced that when they powered up the sound and light systems in
the Spectrum the lights dimmed in the rest of Logan. The band would start with
something like <i style="mso-bidi-font-style: normal;">Line of Fire</i> (by
Journey) and it would just get better and better. This is not the same
experience you get by plugging in your ear buds and cranking up the volume on
your IPod. Ear buds may be able to deliver a similar decibel level as music measured
in a concert hall but that is where the similarities end. I remember the feel of
the sound waves slamming into me. It was very much a physical thing. One could
feel the bass notes through the floor, your shoes and into your bones. There is
something very real about the feel of that kind of music in that setting.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirEpgVp35JVeOT-6txYXEzM2spIa-N50U2bn3wSaJpuXU7R7YG0SXzyNCLT62XR5mVoRN_ya9zuB35WvgEIbsApT1k_emHS202kVPRA8T_XO7y5PoIS7pGgRuhsm0QQzl1Xm1KXjFcFhA/s1600/In_enemy_hands%255B1%255D.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirEpgVp35JVeOT-6txYXEzM2spIa-N50U2bn3wSaJpuXU7R7YG0SXzyNCLT62XR5mVoRN_ya9zuB35WvgEIbsApT1k_emHS202kVPRA8T_XO7y5PoIS7pGgRuhsm0QQzl1Xm1KXjFcFhA/s200/In_enemy_hands%255B1%255D.jpg" width="119" /></a><span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>The best writers, like the best
musicians help us experience stories through our senses. Somehow the reader has
to be able to feel, to see, to hear, to touch,<span style="mso-spacerun: yes;">
</span>to smell the story. All designed to create emotion and a sense of
connection. We need an investment in the story. I read one of David Weber’s <i style="mso-bidi-font-style: normal;">Honor Harrington</i> series of books about a
naval officer and her exploits. Weber is particularly good at describing naval
battles. The stories are very much science fiction but<span style="mso-spacerun: yes;"> </span>the terms, the tactics and the weapons are
all well detailed and dovetail together. I remember reading an engagement in
which the good guys did what is called a rearguard holding action. The action
is designed to allow a group to escape but depending on the strengths of the
opposing force, it may bode ill for the defending group. Here it allowed a
group of under armed transports to escape a devastating ambush. I felt heartache
for the dying rearguard force as the transports watched the destruction of this
cover fleet but which destruction allowed the transports to escape. In real
life those purchasing the time usually do not survive and know they are not
likely to. One doesn’t have to have actual experience in death and destruction
to feel the loss however, as Weber evokes emotions through descriptions and
feelings by the characters who survive and those who know they are going to die.
A good writer creates a mental image that one can immerse themselves in to generate
and drive complex emotions, some very intense ones.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8xKY0pusqLZE01j5P_NEElOyaObcjh_rj2FGtpmF_vINmm0BlTCopGTtqIw9aqC3yFmgcG-NATPoiXmDf9Y1k8mLq__VzSA7aot9AX1w_UZoavI54yqmaD0LhZOZOmsOMQiWDnm8hmk8/s1600/Modesitt+One-Eyed+Man.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8xKY0pusqLZE01j5P_NEElOyaObcjh_rj2FGtpmF_vINmm0BlTCopGTtqIw9aqC3yFmgcG-NATPoiXmDf9Y1k8mLq__VzSA7aot9AX1w_UZoavI54yqmaD0LhZOZOmsOMQiWDnm8hmk8/s400/Modesitt+One-Eyed+Man.jpg" /></a><span style="font-family: "arial" , "sans-serif";"><span style="mso-tab-count: 1;"> </span>L.E. Modesitt Jr. in his writing
has the ability to lay out very complex economic, political and ecological
concepts in such a manner as to make good story telling. Granted, one does not
usually experience death from economic conflicts but it can be the catalyst
that leads to death and destruction. However, with the proper use of such
conflicts a much richer story is delivered. These principles and concepts add
spice, flavors, colors, sounds, sights, if you will. It is important not to neglect
the use of the soft sciences in story telling. These can be part of the back
story or of the world building. They can also add dimensions and layers to main
and secondary characters and create well rounded<span style="mso-spacerun: yes;"> </span>plots and story arcs. Consider just a few of
Modesitt’s books for particular situations. <i style="mso-bidi-font-style: normal;">Parafaith
Wars</i> and <i style="mso-bidi-font-style: normal;">The Ethos Effect</i> show
religious expansionism <span style="mso-spacerun: yes;"> </span>vs.
eco-technology and what can happen. The books are stand alone volumes but written
in the same universe, centuries apart yet linked. A portion of the <i style="mso-bidi-font-style: normal;">Recluse</i> series involves the main
character named Lerris who is an order mage but has to earn his living as a
woodworker (a craftsman). He has to practice his trade to get enough money to
travel. Yet because of his trade there are many great story arcs. The first 3
books of the <i style="mso-bidi-font-style: normal;">Imager</i> series involves
the main character as a portraiturist and then as a magic user. The painting
stays in the character’s background and colors the story. The entire economic
and political setting is consistent with this aspect. In the <i style="mso-bidi-font-style: normal;">Ghost</i> series (a three book series) the
main characters are university professors. The setting is such that it reminds
me of class and all the situations one gets in that setting. Again Modesitt
weaves the occupations into the story which adds story arcs and gives
interesting flavors to the setting and characters.</span><span style="font-family: "arial" , "sans-serif";"> One of my favorite science
fiction books by Modesitt is <i style="mso-bidi-font-style: normal;">The One-Eyed
Man.</i> Here a society and social order is build around a planet that is
influenced by a unique lifeform hidden yet in plain sight. The hero is
commissioned to do an ecological survey to see if the settlements are
interfering with the planetary systems. No one wants to upset the balance but
things look poised to do just that.</span></div>
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<span style="font-family: "arial" , "sans-serif";"><span style="mso-spacerun: yes;"> </span><span style="mso-tab-count: 1;"> </span>So,
don’t neglect the full body effect of economic and political settings, ecologic
and environmental aspects and certainly give characters jobs and lives. All will
help generate deeper and more intense situations and many more story arcs,
plots and subplot opportunities. Remember, politics can kill us. Just look at
the French revolution.</span></div>
BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-71999046904523317052016-02-15T19:52:00.003-07:002016-02-15T19:52:58.316-07:00LTUE 2016 & persentationWe have just finished up with LTUE 2016. It was a busy 2 days for me. EA (Emily) Younker and I were able to give our presentation; Faith, Followers and Fanatics: The Devine in Fantasy and Science Fiction. I would like to thank those who participated in the presentation. Some asked if they could get a copy of the paper. I will gladly send a copy, just drop me a short line at my email address; <a href="mailto:bhallredgen@gmail.com">bhallredgen@gmail.com</a> . Thanks again for coming to our presentation and watch here over the coming weeks for new posts on economic and financial concepts and thoughts.BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0tag:blogger.com,1999:blog-3390517414586624392.post-62561075518833514552014-10-22T19:43:00.000-06:002014-10-22T20:11:47.573-06:00The Colonial System and Its Impact – Part 3<br />
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;">The discovery of America and
that of a passage to the East Indies ... are the two greatest and most
important events recorded in the history of Mankind.</span></i><span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;"> </span><span style="font-family: "Arial","sans-serif"; font-size: 8pt; line-height: 115%;">(Wealth
of Nations, Bk IV, chapter 7, paragraph 166)</span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span>I have been discussing the impact
of colonization on the home country and on the colonies themselves. In Part 1 of
this series we looked at why nations establish colonies. Colonial expansion
traditionally had three benefits to offer. First, raw land and its vegetable
production. Second, animal production which is different yet linked to the
first benefit. And third, mineral production which in the time of Smith and the
colonization of South America by the Spanish and Portuguese was specifically for
silver and other precious metals. Mother nations kept a tight rein on colonies
to protect their markets and so tended to develop monopolies in trade and
goods.</span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span>In Part 2 we looked further at
trade and monopolies particularly as they related to Great Britain and saw the
other costs and expenses associated with colonies. The British people were
bearing a tremendous cost to keep the colonies (America) in line and producing
for the home markets as well as selling finished goods to them from the English
side of the pond. It was costing England a very pretty penny to have a captive
source of raw materials and a captive market for finished goods. </span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span>So, if all this colonization was
such a good thing why were so many, especially those ungrateful American
colonies so unhappy? The idea of a fair deal and the ability to make a pound
sterling at a reasonable expenditure of labor and materials was making many
colonists very unhappy as they felt they were not getting what they wanted or
deserved. This is where taxation comes to the forefront. As we saw in Part 2,
Britain needed to be compensated for its costs of providing government including
a stable courts system and for its protection against other nations (standing
army and navy). Additionally, the colonies were expected t0 pay something
towards the total cost of being a great nation since the colonies received the
benefits of this umbrella coverage. However, as Smith points out, “colony
assemblies... [will not] levy upon their constituents a public revenue
sufficient not only to maintain... their own civil and military establishments,
but to pay their proper portion of the expense of the general government of the
British Empire seems not very probable.” (Wealth of Nations, Bk IV, ch. 7, para
155) Britain felt it had every right to establish the taxes necessary to cover
the costs. How were the colonies who did not see or know the big picture going
to have any idea what were necessary expenses for the defense and support of the
whole empire. Smith assumes that Britain would be fair and reasonable because
it is in the best interest of the Empire. Something that may or may not have
been believed by the colonists. And the colonies had a firsthand example of Britain’s
assumed <span style="mso-spacerun: yes;"> </span>altruistic nature in the monopoly
powers granted to various British trades and industries. Such monopoly powers
were not fair and definitely not reasonable in the colonists eyes.</span></div>
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<a href="https://www.blogger.com/" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;" unselectable="on"></a><span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span>What then could be done. The colonies
were up in arms over taxes which were a symptom of the bigger problem that they
felt they couldn’t get a fair deal (think monopolies). There needed to be
another way of allocating costs of government. Smith suggests that there could
be an assembly comprised of representatives from every part of the Empire. Such
representation could be based on some measure of involvement in the Empire. He
suggests the allocation of representatives could be based on the proportion of the
produce of taxation. Where more taxes are generated, more representation is given.
Produce or finished goods would be taxed consistently throughout the Empire so
the area that is more efficient or larger for that matter, all other things
being equal, has better representation. Let me let Smith summarize the possible
outcome. Remember this is in the 1770’s. “Such has hitherto been the rapid
progress of that county [America] in wealth, population and improvement, that
in the course of little more than a century, perhaps, the produce of America
might exceed that of British taxation.” “ The seat of government would
naturally remove itself to that part of the empire which contributed most to
the general defense and support of the whole.” (Wealth of Nations, Bk. IV, ch..
7, para. 165)</span></div>
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" v:shapes="Picture_x0020_2" width="123" /></span><span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;"><span style="mso-tab-count: 1;"> </span>If the revolutionary war hadn’t
happened, would we be speaking British English and governing the British Empire
from somewhere along the East Coast of America? Who knows.</span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;"><span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;"><span style="mso-tab-count: 1;">
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<span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;">Reference:</span></div>
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<i style="mso-bidi-font-style: normal;"><span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;">An Inquiry into the Nature
and Causes of the Wealth of Nations</span></i></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%;">Adam
Smith (1723-1790)</span></div>
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</span><span style="font-family: "Arial","sans-serif"; font-size: 10pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">http://www.econlib.org/library/Smith/smWN.html</span></div>
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BH_Allredhttp://www.blogger.com/profile/06194000225419874621noreply@blogger.com0