Sunday, January 14, 2018

NEUTERING THE NET BY ENDING NET NEUTRALITY



In twenty years or so, the Internet has moved from office computer work tool and entertainment center to utter ubiquity.  Mobile apps and network connections are everywhere. Your networked refrigerator can text your smart phone and remind you that you are out of ice cream. It won’t be long before your cat can send you a popup empty bowl gif rather than rubbing your leg and meowing obnoxiously. Important news about community events come in through texts and posting.

So when something about as important as the blood stream is changed in a fundamental way, people should pay attention.  This is an economics, finance and investment blog, so a thorough discussion of the issue is beyond our scope. But if you do not want to see the Internet turn in to cable television with tier pricing, limited options and lack of the information that YOU want to use, keep reading.

MOVING TO PAY TO PLAY. AND WE KNOW WHO WILL HAVE TO PAY 

In 2015 the Federal Communications Commission (FCC) defined the Internet as a “common carrier.” This treated the Internet as a “common carrier,” and effectively requires that Internet Service Providers (ISP) treat all content them same. They cannot block content nor charge more for certain content. 

So under a Net Neutrality model, content providers compete based upon the content they provide, rather than paying bounties to ISPs for faster service delivery.
So a new video streaming service will have the same opportunity for failure or success as a service owned by an ISP.  By way of example, in 2005 YouTube was startup company in competition with Google Video. Under Net Neutrality principles, Google Video was not permitted to pay ISPs for faster downloads and less latency. This allowed YouTube to succeed in the market based upon consumer desires.

THE DECEMBER DECISION

The 2015 rule defining the Internet as a common carrier provided Net Neutrality. But in December of last year, the FCC voted, by a 3-2, party line vote, to end Net Neutrality.  They did this by changing the legal definition of the Internet from a common carrier to that of an “Information Service” and weakening content protection. The chairman of the FCC, a Trump appointee, was formerly counsel for Verizon, led the effort to repeal Net Neutrality.

Several states Attorney Generals have sued the FCC to overturn the rules.

THE LONG GAME
           
Very little will change in the near term. But unless Net Neutrality is reinstated, the Internet may soon resemble Cable TV. 400 Channels and nothing worth watching.

YOUR HIGHTLIGHTS FROM THE DESERT OF THE REAL!

Sunday, January 7, 2018

JANUARY 2018 DESERT OF THE REAL ECONOMICS INVESTMENT NEWSLETTER


JANUARY 2018 DESERT OF THE REAL ECONOMICS INVESTMENT NEWSLETTER

This newsletter will look at a few fossil fuel issues that may affect the long-term trend of the global economy.  And this newsletter will announce the much heralded launch of upcoming Desert of the Real Economics Strategic Investment Strategy Products.

WILL THE WORLD RUN OUT OF OIL OR WILL THE WORLD RUN OUT OF THE NEED FOR OIL?

For years, experts have warned of “peak oil,” a time when imputed demand for oil will outstrip the supply.  I use the term imputed because we know that demand will adjust as available oil supply decreases. And the price of oil will continue to rise at increasing rates. (Of course we know that supply and demand will reach an equilibrium price. What the Authors are referring to are junctures when demand for oil price it to a point where it becomes "practically" too expensive.")

At least since the oil supply shocks of the 1970s, politicos and economists have worried about “peak oil” and its implications.  Inflation, political tensions, societal unrest that could descend into local and potentially global conflicts. A world with over ten billion people with the power disconnected.

Of course the world will never run completely out of oil or natural gas. The price would increase to a point that some residual amount would be worth more than any possible utility. No one will ever bother to pay a thousand dollars for a gallon for gas.

That was the narrative, and it was a reasonably objective presentation of the future in the 1990s.  The foundations of this prediction had its roots in 1970.  That is the year that the United States reached domestic “peak oil.” Domestic peak oil is when the oil output of a nation falls behind its demand. In other words, a country starts demanding more than it can supply domestically and the nation then becomes a net oil importer. (1)


PUTTING OUT THE CAMPFIRES

Oil, natural gas, coal, and firewood, create energy through combustion. Some initial heat and/or pressure is applied and they release great amounts of energy.  They fuel the furnaces, the cars, the locomotives and other engines that run the world. There are finite supplies of these sources and the combustion of these sources produce pollution and global warming CO2. So the petro-party will end. But when?  

For example, the World Energy Council’s earliest forecasts, in a report conducted in collaboration with Accenture Strategy, were for peak oil demand to take place around 2030 at between 94 million barrels and 103 million barrels of oil per day.  Supply would then fall inexorably below demand, prices would increase and substitutes would develop.

PEAK OIL DEMAND…

In the last few years, energy production has moved inexorably to renewables such as wind and solar. Electrical vehicles are moving into the mainstream. Some nations are placing an outright ban on internal combustion vehicles. For example, England will no longer allow the purchase or sale of gasoline vehicles after 2045.  And auto giant General Motors has announced that its future is with electric vehicles and not gasoline engines.  Part of what prompt’s GM’s decision is developing and maintaining leadership in foreign markets that will demand only electrical vehicles.

So we may be no longer talking about peak oil demand in terms of being outstripped by supply. We are talking about the world demanding less oil so supply exceeds demand.  Or in other words, the supply of renewalbles and alternatives will permit humans to leave the carbon in the ground.

“SMARTER” BY HALF

Two-wheeled vehicles are also diverting fossil fuel demand. Worldwide, scooter, bicycles and mopeds are becoming greener. American firms are also looking at the expanding American environmentally friendly urban market. For example, URB-E, a start-up in Pasedena, CA is building foldable electric scooters for the urban landscape. 

OIL DAY-TO-DAY

Below are the 15 countries that exported the highest dollar value worth of crude oil during 2016:
  1. Saudi Arabia: US$136.2 billion (20.1% of total crude oil exports)
  2. Russia: $73.7 billion (10.9%)
  3. Iraq: $46.3 billion (6.8%)
  4. Canada: $39.5 billion (5.8%)
  5. United Arab Emirates: $38.9 billion (5.7%)
  6. Kuwait: $30.7 billion (4.5%)
  7. Iran: $29.1 billion (4.3%)
  8. Nigeria: $27 billion (4%)
  9. Angola: $25.2 billion (3.7%)
  10. Norway: $22.6 billion (3.3%)
  11. Venezuela: $20.4 billion (3%)
  12. Kazakhstan: $19.4 billion (2.9%)
  13. Mexico: $15.5 billion (2.3%)
  14. Qatar: $14.6 billion (2.2%)
  15. United Kingdom: $13.3 billion (2%)

All of the above international traders posted declines in the value of their crude oil exports from 2012 to 2016, ranging from -32.5% for Iraq to -72.8% for Nigeria. Other fast-declining crude oil exporters were: Venezuela (down -70.4%), Mexico (down -66.9%), Kazakhstan (down -65.7%) and Angola (down -63.4%).

The listed 15 countries accounted for 81.4% of all crude oil exports in 2016 (by value). 

The United States is 20th on the list, exporting $8.3 billion, or 1.5% of world usage.

2018 “INVESTING OPPORTUNITIES” 

Probably the two top investing stories of 2017 were the record stock market closes and Bitcoin. Bitcoin has made stratospheric gains since it was launched in 2009 and there are many competing cryptocurrencies, such as Litecoin, Etherium and Zcash. 

Recently, however, Bitcoin has stalled and new ETFs which allow investors to take long and short positions in Bitcoin may rationalize and restrain its bubble-like moves.

In the December 2017 Newsletter, the Author Rob discussed the lack of attractive non-equity investments and the specious products appearing on the market. Such products included:

• A painting (which may be fake) sold for $450 million.
• Bitcoin (which may be worthless) soared nearly 700% from $952 to ~$8000. (Now up to over $11,000.)
• US corporations sold a record $1.75 trillion in bonds.

•Argentina, a serial defaulter, sold 100-year bonds in an oversubscribed offer.
• Illinois, hopelessly insolvent, sold 3.75% bonds to bondholders fighting for allocations.
• The market cap of the FANGs increased by more than $1 trillion.
• Money-losing Tesla Inc. sold 5% bonds with no covenants as it burned $4+ billion in cash and produced very few cars.  (Hmmm… when did we last hear the term "burn rate"? 2000, the Author Rob recalls.) 


THE 2018 LAUNCH OF DESERT OF THE REAL ECONOMICS STRATEGIC INVESTMENT STRATEGIES

The Authors announce the launch of a series of investment products to compete in this NIRP/ZIRP (2) market.  We will launch one or two a month. They are best enjoyed if you read them while playing the Jimmie Fallon Show “Note Writing” pianomusic

New-Life Lotto-This environmentally friendly “Green” ETP seeks to develop superior returns in the recyling and repurposing arena. New-Life Lotto will invest in discarded lottery tickets under the assumption that intoxicated, illiterate and really stupid people occasionally throw away winning lottery tickets. Advanced environmentally friendly “mining” techniques will include digging through liquor store, tavern and convenience store dumpsters searching for discarded tickets. Tickets will be “recycled” by rechecking them for winning combinations and redisposing of the losing tickets at recycling centers around the nation.

Bitchcoin-This new cryptocurrency will service the American prison inmate community. As we know, America imprisons more people than any other nation on earth.  Because of this, the market is very large and should continue to expand, especially given Attorney General Jeff Session’s pledge to step up enforcement of the draconian federal marijuana laws. Bitchcoin will use the emerging prison blockchain techonology to store and transact bitchoin transactions. This prison blockchain will reside on the networks of illicit cellphones inside prisons. Bitchoins may be used as a cryptocurrency to buy and sell illicit drugs, commissary items, discounted prison pay-phone call time, shankings, and as the name implies, “bitches.” (3)


OFF AS ALWAYS TO A GREAT NEW YEAR IN THE DESERT OF THE REAL

(1) Because of new supply and fracking techniques, the US is once again a net oil exporter and may one day again become a net importer. But maybe not.  Great Britain has moved from net importer to net exporter with North Sea Oil, back to net importer, and now back to net exporter.
(2) NIRP is an acronym for Negative Interest Rate Policy and ZIRP is an acronym for Zero Interest Rate Policy. 
(3) Altough it should not be need to be said, the Desert of the Real Investment Products are shared only for the purposes of satire, parody and farce. It is hoped that State Secuity Commissioners and the Securities and Exchange Commission appreciate this humor.

Saturday, December 23, 2017

THE OBLIGATORY YEAR-END REVIEW FROM DESERT OF THE REAL ECONOMICS



It would be beyond cliché for the Authors to quote the opening line from Charles Dickens’ classic tale of the French Revolution, “Tale of Two Cities. But what the heck. English composition classes are ancient history. 

It was the best of times,
it was the worst of times,

it was the age of wisdom,
it was the age of foolishness,
it was the epoch of belief,
it was the epoch of incredulity,
it was the season of Light,
it was the season of Darkness,
it was the spring of hope…


But 2017, like most years, contained some of the best and lots less of the worst than what we have seen in the last century and in the early years of this century. So is the world getting to be a better place? Is it just any worse than it was? Is it worthwhile to even ask the question?

A Facebook friend and a guy I have known many years posted his belief that despite his natural optimism, he was feeling very anxious about the future. He’s not the only one. A poll that the Author Rob found reported that only six percent of Americans are positive about the future. Another friend once told me that he thought that Americans were very unhappy people. Gloom and doom, fire and brimstone, the coming dystopia are very common American worldviews. And it is very easy to become negative. The country faces challenges at home and challenges abroad. The nation is often oblivious to endemic problems at home and the more rational views of other nations in the world. Our political system is toxic and practically dysfunctional. So it looks like we are peddling more of the same bad news.  

Nope. We have plenty of good news. Some of it really good news. Much of it comes from other countries, some of it is world wide, but there is no shortage of good news in this country. John Mauldin writes a newsletter called “Thoughts from the Frontline.” Mauldin is often considered a “perma bear.” But Mauldin cites to an article on the website Future Crush. The title of the web article is “99 Reasons that 2017 was a Good Year.”  Let’s look at a few:

HEALTH RELATED:

Cancer deaths have dropped by 25% in the United States since 1991, saving more than 2 million lives. Breast cancer deaths have fallen by 39%, saving the lives of 322,600 women. Time

In October, new research from the Center for Disease Control revealed that between 2000 and 2016, the measles vaccine saved 20.4 million lives.  (Anti-vaxxers read this and wise up. You are endangering your kids and other people.)

POLLUTION REMEDIATION AND GLOBAL WARMING PROGRESS:

China carried out its largest ever crackdown on pollution, reprimanding, fining or jailing officials in 80,000 factories, 40% of the country’s total. NPR

Sweden committed to phasing out all carbon emissions by 2045, and the country’s largest pension fund divested from six companies that violate the Paris Agreement, including Exxon, Gazprom and TransCanada. CleanTechnica

Deutsche Bank, one of the coal industry’s biggest financiers, announced it would stop financing all new coal projects. Ouch. Mining.com

In the United Kingdom, the birthplace of the industrial revolution, carbon emissions fell to the lowest levels since 1894, and on the 21st of April the country did not burn coal for the first time in 140 years. Independent UK

Solar energy is now responsible for one in every 50 new jobs created in the United States, and the clean energy sector is growing at 12 times the rate of the rest of the economy. CNBC

General Motors believes “the future is all-electricVolkswagen announced it’s investing 70 billion euros and “putting its full force behind a shift into electric cars” and Volvo said that starting in 2019 it will only make fully electric or hybrid cars “the end of the combustion engine-powered car.” Atlantic

SOCIAL PROGRESS:

New data showed that young people are officially less racist than old people. The worldwide trend is towards less discrimination on the grounds of skin tone or caste. Quartz

The immigrant population of the US (people born in another country) has now reached 43.7 million people, one out of every eight residents, the highest proportion in 106 years. CIS

Global deaths from terrorism dropped by 22% from their peak in 2014, thanks to significant declines in four of the five countries most impacted: Syria, Pakistan, Afghanistan and Nigeria. ReliefWeb

ANIMAL RIGHTS ISSUES:

Snow leopards have been on the endangered list since 1972. In 2017, they were taken off, as the wild population has now increased to more than 10,000 animals. BBC

Taiwan became the first Asian country to ban the eating of cats and dogs, with new laws imposing fines for consumption and jail time for killing and cruelty. National Geographic

Gucci announced it would go fur-free in 2018 and auction off all remaining fur items. It follows in the footsteps of Armani, which went fur free in 2016. Harper’s Bazaar

There is a lot of good news here, and there is much more to be found on Future Crunch. 

2018, THE VIX, AND THE VECTOR OF BITCOIN

It would it be impossible to close out 2017 without a look at the historically low level of market volatility and the insane activity of the cryptcurrency Bitcoin. The VIX is an indicator of market volatility based upon market expectations for the next 30 days. For much of 2017, the VIX has been in a very abnormally low range. It has spent much of the time from March to today in the level close to ten, even falling below ten. The VIX is also called the “fear index,” as it roughly reflects the short-term investor sentiment regarding the possible swings in stock prices. VIX at this level indicates a generally positive and stable near-term market outlook, despite the large grind to the upside and some international instability. But for option traders such as the Authors, it makes it difficult to find the large movements in price to generate good returns. Other strategies can work in these slow trending markets suc

Finally Bitcoin. The Authors have dipped their toes into Bitcoin with shares of GBTC, a Bitcoin Unit Investment Trust.  Swings have been large, and it is still difficult to get good valuations of the trust premium (this premium is the difference between the underlying value of the trust’s Bitcoin holdings and the amount which investors are paying for shares of the trust). Next year will bring ETFs that will trade Bitcoin long and short. The Author Rob has little understanding of Bitcoin. But in his opinion, it is not an alternative currency. It is a commodity that promoters wish to become an alternative currency. The market is incredibly opaque and illiquid. But perhaps when it is widely traded in the markets, it will be discounted for it really is. Not much of anything. 

OF SKINING OFF THE LAST FEW PAGES OF THE 2017 CALENDER

Markets slow at the end of the year. Western countries, especially historically Christian countries, slow for Christmas and New Years. And these holidays stretch further back into our pagan histories. These short days have always been a time of indoor festivity and “prayers” to the sun to return in the spring. So it is worth stepping back a bit and sitting before the figurative Yule Log. Or the digital Yule Log, if you wish.

The New Year is a time for resolutions and fresh starts. For fitness centers, diet companies and the maker of Chantix, this is their Black New Years Day. So let’s kick back and refresh over the holidays and kick-start 2018 with some nice gains and great times with friends (make sure to make some new ones this year) and family. Adopt a shelter pet and donate to animal welfare or your favorite charity. And hope like the Author for a trip to the Super Bowl for the Minnesota Vikings.

MERRY CHRISTMAS, HAPPY HANNUKAH, HAPPY KWANZA AND SUPER SOLTICE FROM THE DESERT OF THE REAL! 




Saturday, December 16, 2017

BITCOIN-BUBBLE AND BIOSYTEM DISASTER



The December 2017 Investment Newsletterr addressed some reasons for equities ongoing increases. It also addressed Bitcoin, the bubble de jour in these halcyon days for market “froth.” 

Bitcoin, as we surely know, has hit the stratosphere. It is currently pegged at $17,600, and was trading at $17,270 at 16:00 hours today, Saturday, December 16, 2017. This site tracks bitcoin in real time.

Based upon the driving human emotions of economics, fear and greed, and observations of legion financial bubbles, a few will cleanup and most will get fleeced.  But that’s business as wise guys know it.  Sure, some will lose houses, life savings, pension-regrettable, but avoidable. . But the bigger world will be the earth’s atmosphere and depleting fossil fuels. Sound’s crazy, right? Here’s how.

BITCOIN MINING IS DONE IN BOTTOMLESS PITS

Remember that Bitcoin is a crypto currency with no physical. It “exists” on a huge peer-to-peer network.  Many Bitcoin Investors  (Author’s Disclosure: The Author’s own the equivalent of .2 Bitcoins in GBTC, a Bitcoin Investment Trust) “own” the Bitcoin. There are other ways to invest. The CBOE has begun futures trading in Bitcoins and there are institutions that wish to create Exchange Traded Funds (ETF) that will hold Bitcoin. There may also be RTS that short Bitcoins.  But if you have enough computing power, you can use computer to “mine it”.

But as we know, Bitcoin exists only as electrons, or as executable computer code. To mine it, you must have massive amounts of computing power to solve complex mathematical problems (“hashing algorithm” called SHA-256) with “brute force” computing power. These calculations require so much computing power that your systems must use profligate amounts of electricity and produce tremendous amounts of heat.  If your system crunches the hash algorithm more quickly, you earn some bitcoins. But we are not talking megawatts. The amount of electricity to mine Bitcoin is currently equivalent to the usage of Serbia. I exceeds that of the aggregate electic power use of many third world countries. By 2019, Bitcoin mining will use as much electricity as the US. And by November 2020, it will use the same amount as is currently used by the entire world.

Of course this usage curve is unsustainable. But where will it stop and when Perhaps the oldest of human emotions, fear and greed will crash the entire Bitcoin universe.

THE DESERT OF THE REAL IS  PRIME REAL ESTATE FOR SOLAR POWER.

Wednesday, December 6, 2017

DECEMBER 2017 DESERT OF THE REAL ECONOMICS INVESTMENT NEWSLETTER


DECEMBER 2017 DESERT OF THE REAL INVESTMENT NEWSLETTER

It is likely that 2017 will see the major market indices close at record high levels. It is possible, even likely, that there will be a pullback in the short term. The outlook for 2018 is not guaranteed, but signs indicate the first part of the year will continue to provide gains or at least avoid large, sustained pullbacks. Several factors point in that direction.

First, monetary policy has shunted everyone into equities, or at least away from cash. Interest rates have been extremely low, causing money to cascade into equities or other oddities.  Take a look at information contained in a recent John Mauldin newsletter, “Thoughts from the Frontline.”    Here is where some money is going:

• A painting (which may be fake) sold for $450 million.
• Bitcoin (which may be worthless) soared nearly 700% from $952 to ~$8000. (Now up to over $11,000.) More on this later…
• US corporations sold a record $1.75 trillion in bonds.
• •Argentina, a serial defaulter, sold 100-year bonds in an oversubscribed offer.
• Illinois, hopelessly insolvent, sold 3.75% bonds to bondholders fighting for allocations.
• The market cap of the FANGs increased by more than $1 trillion.
• Money-losing Tesla Inc. sold 5% bonds with no covenants as it burned $4+ billion in cash and produced very few cars.  (Hmmm… when did we last hear the term "burn rate"? 2000, I recall.)

Two historical and seasonal market factors may also come into play. The first is the “Santa Claus Rally” and the second the “January Effect.” The Santa Claus rally happens in the last week of December and the first two days of January. This effect is attributed to workers investing their Christmas Bonuses (the Author Rob asks “what are these.?” He has not gotten a Christmas Bonus since the early 1990s.), purchasing based upon lower prices anticipated by the January effect, and the tiny gasps of “peace on earth and goodwill toward men” that are still in utterance.

The “January Effect” is believed to the result of investors selling off losing investments to harvest the tax losses (lower prices for stocks) and again, investment of Christmas bonuses.

BUBBLE. BUBBLE, WHO’S GOT THE BUBBLE?

Remember the kids’ game, “Button, Button, who’s got the Button?” Several players would put their hands out and one kid would secretly drop the button into another’s hand. Then the kids would try to guess who had the button. (This is not to be confused with the game of “Hot Potato,” which may prove to provide a much better analogy.) Only one kid can have the button, and the player that makes the right guess wins the game.

BET ON BITCOIN?

A Bitcoin is a cyber-currency that has no physical existence. It is held on peer-to-peer networks and not on a single server. Bitcoin is accounted for on the “block chain,” a distributed database of the transactions. Bitcoin “miners” are paid in Bitcoins for solving extremely complex problems that protect the block chain. When Bitcoin was released, a PC had enough processing power to mine Bitcoins. Now it requires a huge server farm in a remote part of the world where electricity is very cheap.

Bitcoin is accepted by numerous parties. It is gaining in acceptance across the world, but is by no means broadly accepted. It is banned in many countries, especially in countries in economic turmoil such as Venezuela.

There are also concerns about Bitcoin because of its use in criminal and terrorist activity.

And we should also note that there are several other cryptocurrencies trying to compete with Bitcoin. And if you really, really wanted too, you could launch your own cryptocurrency.

WHEN SHOULD WE GET THE BUTTON?

Bitcoin is currently worth $11,056. (12.3 at 6:00pm ET) https://www.coindesk.com/price/ It is extremely volatile. It will soon be trading as a commodity in the Futures market. The US Commodity Futures Trading Commission (CFTC) confirmed Friday that CME Group and CBOE had met the requirements for regulated trading, while Cantor Exchange would also be able to debut Bitcoin binary options. 

Bitcoins have not yet been approved for major American markets and Bitcoin ownership is not just one mouse click away.  But large financial institutions are poised to launch Bitcoin exchanged traded funds. This is when to get the button.  A we know, exchange traded funds (ETFs) or sometimes known as exchange traded products (EFPs) are a common investment product. There are ETPs for market indices, market sectors and foreign markets. Currently, there are Bitcoin ETPs awaiting SEC approval.  Proshares  and  REX  
Both of these funds will have a product that is short Bitcoin exposure and one that is long Bitcoin exposure.

Some investors are betting it all on Bitcoin. Early adopting investors are dabbling in it and some got on the train very early. The Authors have not invested in Bitcoin yet, but believe the time to move is as soon as the ETPs are issued. These products will be launched with much fanfare and money will flow in at a fast and greatly accelerating rate.

At this point, the “Greater Fool” effect will be in full vigor. The price behavior of Bitcoin will resemble that of dot.com stocks in 2000, real estate in 2008 and perhaps even tulip bulbs in 17th century Holland. Keep your stop loss orders tight and hold on for the ride. The Authors’ need to ride another wave of other peoples’ insanity.

SURF’S UP IN THE DESERT OF THE REAL


Saturday, November 25, 2017

BOOM, BUST, BOOM, BUST BUST


There are not many “advantages” to getting old. Experience, hopefully. Wisdom, possibly. Occasional big drops in one’s stock portfolio, definitely.

As I said in the November 2017 Desert of the Real Economics Investment Newsletter, not even a lone trapper in Alaska could not have heard the news that American stock markets are at record highs, and pushing again through prior record highs. And what comes with record highs in the value of houses, tulip bulbs, gladiola corms or stocks? Record busts. The Author Rob has seen a few. The October 1987 Market Crash, the 2000 dotcom Bubble, and the Housing Collapse of 2008 (which was almost an economic collapse).

Could the next market crash be lurking afore? Could there be a 1-2 punch? Let’s take a look at two graphs. 
 





IS THIS CRAP GOING TO BE ON THE TEST?

The first chart provides the level of student debt in the US. From 2006 to 2016 it increased from 200 billion a little over a trillion. Some analysts warn of an impending repayment crisis. Student debt is currently the second highest type of debt we have in the country, behind only mortgage debt, and greater than either credit card debt or auto loans. (1)

Nationwide, the average student loan debt is $4, 920. However, averages rarely tell the whole story. About nine million student borrowers have less than the average amount. But 12.4 million student borrowers have debt of an amount between $10,000 and $25,000. More than one million students have debt between $100,000 and $150.000.

“The rate of borrowers who are in default or more than 90 days past due is approaching 40%. However, the average student loan balance for students in default is only $16,381 according to a recent report by Demos, virtually identical to the $15,654 balance for people paying on their student loans.”(2)

Student loan debt is generally not dischargeable in bankruptcy. However, the debt is not collateralized (Loan sharks collateralize their borrowers, however) and the repo man cannot come out and haul in the debtor. The wages or property of the borrowers can be garnished, but most of them have little to no property. Wage garnishments can get repayment, but long periods of time are required for wage garnishment to pay off a debt.  And because many debtors change jobs frequently, there are substantial delays in transferring garnishment orders to their new employers.

YOU CAN’T PAY YOU LOAN, YOU SAY. WELL, We’ll JUST MAKE DAMN SURE YOU CANNOT PAY BACK YOUR LOAN. IT IS LIKE SOMEONE KNOCKING YOUR TEETH OUT AND THEN REPROACH YOU WHEN YOU MUMBLE (3)       

Nineteen states can revoke a borrower’s professional license if they are in default on student loans. Three cesspools, Iowa, South Dakota, and Kentucky, can even revoke a borrower’s driver’s license. Remember, these are loans by the federal government, not the respective states. There are situations where licensed student loan borrowers refuse payment when they could legitimately pay. But in these cases, judgments against the debtor and wage garnishments would obtain payment. But in cases where the professional, such as a nurse, lawyer, firefighter will lose their ability to work (and repay) because their license is revoked, these laws reach absurd results and can trigger complete financial collapse for a person.



ASSET BUBBLES, MUSICAL CHAIRS AND DUCKING IN TIME (4)

The Author Rob remembers the dot.com run-up and fall-down. The Internet had hit critical user mass, consumers gained more bandwidth, and venture capitalists and young entrepreneurs were monetizing anything that they could. Startups were everywhere and established technology firms saw their stocks surge.  Money came in by the containership. The NASDAQ reached 5048 on March 10, 2000(5). Panic selling set in and we know the rest of the story.

As the second chart demonstrates, At the height of the dot.com bubble, the stock market capitalization was 143% of GDP. Stock market valuation is currently at 133% of GDP. The historical percentage of market capitalization is 75%.

It is always risky to draw upon historical antecedent. But one historical fact we know is that markets fall much more quickly than they rise. And we know some tried and true market lessons”
1.     No one knows the absolute high and low. So we rely on herd immunity to save us from being “too” wrong.
2.     When the music is playing, we all have to dance. We must also make sure there is a chair nearby when the music stops.

Negative exogenous events do cause drops in markets. A nuclear strike by or against the DPRK would roil markets around the world. But the effect may be short lived if the DPRK fell, was occupied by Western and East Asian powers, and was stabilized and put on the path to democracy and engagement.

A bigger threat to markets is the extremely troubling actions and statements by Saudi Arabia and Israel directed at Iran. The level of bellicosity is ramping up and a war against Iran would send oil prices soaring as the Straits of Hormuz would be blocked and oil production equipment would be decimated.

In situations like this the US must exert leadership, not feckless self-aggrandizing twitter feeds. This administration sees diplomacy as a low priority and also seeks to abnegate the US leadership role in world affairs. In fact, it was recently reported that Secretary of State Rex Tillerson is firing senior career diplomats or forcing them to resign (5). The Author Rob is concerned that the risks in the Persian Gulf will require skilled and nuanced leadership from Washington, A skill that this administration has neither demonstrated or shown any interest in doing.

IT IS NEVER BLACK FRIDAY, NOR CYBER MONDAY, IN THE DESERT OF THE REAL!


(1)  https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#4882cd1d5dab


(3) https://www.nytimes.com/2017/11/18/business/student-loans-licenses.html

(3)   “When the S**t Hits the Fan,” by the LA Punk Rock Band The Circle Jerks. https://en.wikipedia.org/wiki/Golden_Shower_of_Hits 

  (4)  https://www.investopedia.com/terms/d/dotcom-bubble.asp
employers.

(5) https://www.rawstory.com/2017/11/tillerson-is-firing-senior-diplomats-in-droves-or-forcing-them-to-resign-by-making-them-work-alongside-interns-report/

Sunday, November 12, 2017

NOVEMBER 2017 DESERT OF THE REAL INVESTMENT NEWSLETER


 

Not even a lone trapper in the Alaskan wilderness could have missed the fact that markets are at record highs, after pushing through numerous previous records. The markets closed Friday (11.10.17), after a small pullback at 23,422 for the Dow, 2582 for the S & P, and the NASDAQ at 6,751.

 

Higher closes are possible, perhaps likely. But a pullback is also inevitable. Whether the pullback comes in stages, or is a massive correction, is not completely predictable.  But a factor relevant to the run up, and likely the pull back, is record low volatility. 

 

VIX is not the Nick Name for the Fourth Reindeer

 

The Chicago Board Options Exchange (CBOE) VIX VIXis a measure of the expected volatility of the S & P 500 for the next 30 days.  It measures implied volatility, or what the market predicts.[1] It is sometimes referred to as the “Fear” index. It reflects investor sentiment. It formerly has predicted decreases in the S & P.

 

The VIX has remained generally low over the last few months. Historically, a VIX value of ten is very low. But recently, the VIX has spent much of its time below ten, sometimes falling as low as eight.

 

The VIX has seen a spike or two recently. A recent spike happened on November 9th, likely due to concerns that the republican tax plan would be delayed.  One can expect a volcano if it appears that the tax bill will not be passed, or only minimal parts of that proposal are passed. *

 

Where there is Momentum, There is Money. Where There is Volatility, There are Ways to Make Money

 

When markets move, either way, traders make money.[2] When markets reach stratospheric heights based upon discounted events, a substantial pullback is likely based upon the occurrence, or nonoccurence, of such event. So news of the collapse of the tax plan could send markets reeling. Investor sentiment of the possible failure of such tax plan may be presaged in the VIX.

 

Commentators have also noted that because the VIX does not include world markets, it is limited in its ability to gauge investor sentiment.  Others think that the VIX is being heavily shorted, effectively keeping the index low.

 

Get out Your Old Financial Economics Textbooks

 

Finally,  some believe that Fed monetary policy is uber-transparent, allowing market participants “real time” information about monetary policy and permitting market participants to anticipate and react accordinglyThis essentially creates a feedback loop where the market and the Fed match move to move. Market events are ostensibly discounted and the Fed is extremely accommodating. 

 

Investopedia Investor Anxiety Index (IAI)

 

The IAI is a broader, although less technically validated, index. It is based upon the sentiment of Investopedia readers worldwide. It captures three data points, macroeconomics, investor, and debit and credit sentiment. A reading of 100 on the index is considered neutral. The index currently stands at 101.9, very close to neutral.

 

Historically, October and November are the worst months for the markets. We are nearly one-half way through November, but those historical markers may not mean too much in a market like this. 

 

EVERYTHING IS DISCOUNTED, EVEN THE FIVE FINGERS, IN THE DESERT OF THE REAL!

 

* Although this is not generally a political blog, tax modifications, euphemistically called "tax reform," are merely grand plans for the operation of government, as artfully described by the late political scientist Harold Laswell, as "Politics: Who gets what, when, and how." This tax bill is a massive tax cut for wealthy business owners that own pass-through entities such as LLCs and LLPs. Lowering the corporate from 30% to 20% sounds meaningful, and may have some salutary effect. But since the effective US corporate rate is 18.8%, this piece of the bill is a canard. It provides modest tax relief to many middle income tax payers, and raises taxes for others. But the bill also zeroes out popular benefits for politically "weak" constituencies. In the Author Rob's personal view, he hopes the bill fails. The market will tank and he will clean up selling short positions. And a great injustice will be avoided.

[1] Implied volatility is also a relevant value for options. Implied volatility will aid an options trader in determining whether the option is more likely to fluctuate in price than other options. Remember, however, volatility is not a directional indicator. It only predicts price movement.
[2] Actually, there are ways for traders to make money in flat markets.  But that is a topic for another day.