The stock market may be ahead of itself but the mustard gas clouded economy is lifting.
By Marc L. Flaster
NEW YORK New York (Texas Insider Report) Chaos? You would have to say so the way the media highlights the imperfections of the new Trump Administration as it gets itself organized. Through the fog we can see why government is the preferred line of work for career politicians and those in academia taking a risky step out of the security of tenure for an existential experience.
Tapping successful businessmen to serve in the Trump Administration requires that they give up their mercantile involvement place coveted assets in trust as well as divest from areas of influence before signing on to a temporary appointment that generates more headaches than accomplishments. As we have seen the promises of book rights are not worth the aggravation. The threat of being expelled into purgatory surrounds every working day.
The stock market has taken the Man at his word. Since the election the market is up 12.
- The promise of regulatory repeal and reform fiscal stimulus lower corporate tax rates with concessions to allow monies earned abroad to be repatriated is tantalizing the investor. (Most of which is likely to be immediately returned to shareholders in the form of stock buy-backs and dividends.)
- A focus on repairing the deteriorating infrastructure of our nation be it roads dams bridges or public buildings just to name a few suggests a HUGE transfer of federal monies to the sovereign states.
- The demand for Sanctuary Cities" may bring supporters to the streets but when elected officials see the $$s that will flow through their own budgets those noises will fall on deaf ears.
Just the promise of
withdrawal of enforcement of the financial regulations imposed by the Dodd-Frank Act (DFA) has breathed new life into the banking sector. There are lots more to come.
OK We know all this but... Whats New?
Buried in all the energetic frustration from those who feel that all their hard work to create an egalitarian world where everyone is treated equally without bias neither based on gender nor economic status is the harsh reality of the effect those regulations have had on our economy. Yes the nation has survived
and business has prospered but at a reduced rate. GDP failed to reach 2 growth during the whole of Obamas term. The stock market first hemoraged bringing the DOW index to its knees in March of 2009.
By the fall of 2016 the index was almost 3X higher. This is a tribute to the ability of American business to accept and adapt not an endorsement that the nation was on a better track. Emperor Obama created a nation of whistle-blowers and tattle tellers. Investment advisors were rule-bound to provide advice that was in the best interests of the client thereby leaving it up to the individual to make his own choices. Sounds good tastes bad.
Immediately you could see where this was headed. Investors who felt poorly served would bring suit against their advisors with the governments ombudsman at their side. The immediate result was for that industry to contract with some companies seeking bankruptcy. Fair lending rules took the banks to the woodshed resulting in fines and a forced focus on unprofitable businesses. A side result was to require banks to carry a larger capital cushion.
A Mothers Work is Never Done
In the final days of the O-b-wans liberal-progressive administration the lights burned well into the night. Auto mileage CAF standards were finalized two years before they were expected. Weeks or months of hearings were condensed into a Yea or Nay vote committing the industry to provide an average fuel economy standard of 54 mpg for the assortment of cars that each manufacturer offered by 2025. That is more than double the current standard! To reach 54 mpg cars and trucks would have to be lighter smaller and run on an acceptable alternative to fossil fuels. Work is already under way to unravel this regulation reducing costs and allowing the auto companies to provide products that their buyers want. We are moving toward better fuel efficencies but not by mandate.
Tweets schmeats!! What is important is the relaxation of the effort to herd the nations businesses into a corral and then be monitored with threatening intensity. For the financial industry regulation has been brutal. Some parts of DFA will be modified some just not enforced and some repealed. The biggest need is for that army of government busy bees collected by the prior administration to leave either on their own or be replaced as the new cabinet officers take their posts. Federal Financial Institutions
Examination Council (FFIEC) Chairman Daniel Tarullo has resigned a major proponent for more banking misery. This is the true promise of the Trump administration. The turn has not been from the left it has been fully to the right.
The stock market may be as many claim ahead of itself but the mustard gas cloud that has enveloped the economy is lifting.
The Ugly Reality of the New Normal" Economy is First Appearing
The internet has changed shoppers decision making. It was at first a guise for price comparison. Now it is a vehicle to avoid physical interaction with the shopping experience (as well as rude sales agents). Stores report reduced foot traffic. Sales are down as wholesalers and intermediaries capture the orders. Anchor tenants that were the attraction around which shopping malls prospered have been closing. Macys closed 100 stores. JC Penneys Target Lord & Taylor and Sears even more. The Limited has gone out of business along with Wet Seal and now Radio Shack.
20 of the high end storefronts in NYC are empty. We are now dependent on a government agency the USPS to deliver more than the mail. The need for cardboard has increased to make boxes. In years past the need for liner-board was a leading indicator. Now it is an indicator of a different sort.
The Fed wants us to believe that the nation is at full employment. But the figures they use tell us otherwise. The employment participation rate has been falling for the past 10 years. The nations best work force is not only aging but retiring. The pledge from both the old and the new administration is
that we must create good jobs. The only problem is the industries that have low barriers to entry for employment now have shifted beyond our borders and what remains here is highly automated. 80 of job growth has been in the service health care and contractor industries. Trucking companies no longer hire their own drivers. They contract that out to an on demand" driving pool. A trucker gets paid for miles driven. When he stops for a lunch or a cup of coffee he is as they say off the clock.
Colleges avoid the cost of tenure by contracting classroom instruction. Uber and Lyft are other examples of on demand" employment. Opportunity? Yes. But there are no financial or health benefits beyond the immediate fare. This is not how our nation has prospered.
We often hear about the instant wealth gained from intellectual property that created a niche that caught on. (Facebook Snapchat.) What is missing from this narrative is that these are the exceptions not the rule. Only 40 of the workforce has better than an 8th grade education. And most complain that the workplace offers opportunities below their pay grade. So we are becoming more dependent on immigrant labor to take up the slack. Want to send them back? Who is going to be your restaurant server or housekeep your messy hotel room?
The Fed has engineered a sub-basement level of miserly interest rates. It has been in place for eight years now. A brutal experience for an aging population that is dependent on savings and pension benefits that earn less than promised. The average retiree has only $15000 in net worth. That includes cash and any equity value in other assets. The wealth effect of rising stock and housing markets came to those who have wealth" in the first place. For the bulk of Americans it encouraged risk taking and a bite
into leverage. The Feds policy put the nation at risk right at the bread box.
As Inflation Simmers the Fed Cheers!
Now they can raise their target rates. Unfortunately the dots they are connecting are fading fast. A doubling of oil prices from the depths in the past year and other commodity price improvements have reached their plateau and now receding. Low interest rates encouraged commercial construction. Many of our major cities report a glut of leaseable space with more still coming on stream. Multi-unit residential housing is going begging. Rentals are offering improving discounts. Condo sale prices are lower than first advertised. Home mortgage defaults are rising again as over extended borrowers now recognize that they are over-levered in a flat to weakening market.
Refinancings have slowed with the rise in interest rates since last summer. In July the 10 year T note was 1.40. Today it is 2.55. And banking credit standards are tighter. Nine percent of sub-prime auto loans are in default. The repossessed autos sell for less than the loan residual. About the only force working in the other direction is the minimum wage. These progressive ideas all sound well and good when considered in a vacuum but when the doors are opened and competitive pressures are applied they turn to ruin.
This is why the outcome of the fall election was such a surprise. The Donald Trump is the President. By the way do you not remember the remarks of the prior resident in the White House soon after his inauguration? I WON! Now lets get to work on My agenda!
Let me know what you think and feel free to share this email with anyone you believe might have an interest. It is written from my point of view about topics that I find interesting and I dont expect readers to agree with me even half the time.
Marc L. Flaster
has advised financial institutions across Texas in balance sheet management for over 35 years. The views expressed in this article do not necessarily reflect the opinions of any client or organization with which Marc L. Flaster might be affiliated. Readers are advised to complete their own due diligence and analysis prior to taking any actions based upon my economic and political views.
