Brexit and investment strategy

Brexit Cameron and MerkelAs I write this the Dow 30 is down almost 500 points due to the shock to world financial markets of the vote by the British to leave the European Union. Here is the transcript of Dean Baker’s analysis given on PBS’s News Hour.  Baker believes that this is, in part due to strong anti-immigrant sentiment. Among the (perhaps) unintended consequences is the ease with which young Brits were able to seek and take jobs anywhere within the EU. It will also adversely affect the 2.5M British expats living on the continent.

What I expect to see is what I predicted to my client this morning where we see each other poolside mornings. I told him the Dow could plunge as low as 500 points today. If you are an investor with a well diversified portfolio of stocks, bonds (both domestic and international) and other asset classes is that your holdings’ values will dip as their underlying prices dip but you will not lose the number of shares you own. If you sell during this downturn perhaps speculating that the slide will continue, you will lose your shares, as well as their value.

Smart investors (and their smart advisors) will not sell holdings during this downturn but will examine their asset allocation to see which of them have been affected. This will be evident in the change in their proportion to the entire portfolio. If you, as other smart investors do, hold cash as a distinct asset class, you will have the liquidity to buy more shares to bring those holdings back to their target allocation. In this process you will be buying shares that have a (hopefully temporary) market discount. Please consult your advisor for confirmation of this general outlook. If you have any questions, please don’t hesitate to call. (520) 623-3646. Thank you!

Just what is a “normal” Fed Funds rate?

Job seekersDean Baker plumbs the depths of the Federal Reserve raising rates in this article published today. Baker rightly places Fed funds rates squarely where it belongs: in the macro-economic arena. He asks why there are still calls (even within the Federal Open Market Committee or “FOMC”) to raise interest rates when we are observing economic indicators such as increases in those employed part-time yet unable to find full time work and those who have become so discouraged they are no longer actively seeking a job. This is called the “Labor Force Participation Rate” and it is measured by the number of people who are registered with state employment offices.

He asks my title question when he questions those on the FOMC who call for interest rate “normalization”. Baker observes that there was a lengthy period in US history when interest rates were in the 6-8% range. The Fed Funds rate is currently .25%; far below that range. However, these are hardly “normal” times we are living in. Manufacturing, for instance is just a fraction of what it was 30 years ago. Shipping costs for importing dry goods from overseas are a fraction of what they were prior to the invention of the shipping container; making the search for the lowest wage possible globally a practical business model.  We have also experienced skyrocketing productivity since the advent of the personal computer and widespread robotics. We are just 8 years past the Great Recession and, while the “too big to fail” banks have fully recovered, the middle class has not.

The biggest reason, we are continuing to experience such a tepid economic recovery is that the USA continues to be dominated by Wall Street banks. Wall St. banks do not do the heavy lifting when it comes to lending to small businesses; community banks do that. Yet, even with almost free money from the Federal Reserve, we see very weak lending to the sector of the economy that grows most of the jobs we need. Dodd-Frank has been very hard on community banks and has closed hundreds of them since the Great Recession. Wall St. banks nationwide have been quick to pick up the spoils.

Here in Arizona, three banks: Wells Fargo, Bank of America, and JP Morgan Chase enjoy 70% of the $100B Arizona customers have deposited. Yet, according to this article from the Arizona Daily Star of June 7, a US Congressman had to get involved at the behest of the Arizona Chamber of Commerce and the Tucson Hispanic Chamber to find source capital for the $5,000 to $50,000 loans that small businesses are seeking. Since it seems that risk is so averse to the banks that dominate states, the USA will never see the robust growth we can achieve with one exception: North Dakota; the only state to have a thriving Public Bank; the Bank of North Dakota. North Dakota has some 68 distinct financial institutions and 50 of them are so community based that they are subchapter S corporations. It’s time the Wall St. banks fulfill their obligation to the communities in which they operate or make way for public banks.

 

Dodd Frank Financial Reform Act Reform?

image-20160331-28459-fk6s7nThe Wall St. banks continue to chafe under the very mild and sensible reforms created under Dodd-Frank and Texas Republican Jeb Hensarling is carrying water for them. This New York Times article today outlines the bill that would gut the Consumer Financial Protection Bureau and repeal the Volker Rule. Hensarling’s complaint that “it hasn’t worked”, citing numerous economic benchmarks places the blame on Dodd-Frank and does not hold the “too big to fail” banks for weak lending during this tepid economic recovery after the Great Recession.

Obama’s Labor Rule on Overtime

This article by Dean Baker at the Center for Economic and Policy Research details the US Dept. of Labor’s stance on why this change is necessary. You will find that the current threshold (less than $24,000/year) for classifying employees as salaried exempt was set in 1975 has not been adjusted for inflation or productivity in 40 years.

Lunch break on the Empire State Building (Lewis Hine)

The Fair Labor Standard Act was established to protect American workers from gross economic exploitation. It sought to do so by establishing a legal hourly minimum wage and also to insure that workers would not suffer work hours that exceeded 40 hours per week. Overtime requirements were set by the FLSA to discourage employers from compelling excessive workloads. Baker points out that millions of workers have been classified as supervisory in an effort to game the FLSA and cause employees to work as much as 60 hours per week on a salary of $24,000. If the $24,000 salary had been adjusted for inflation the current level would be $50,440. This does not take increases in worker productivity into account which, as Baker says would place the threshold at closer to $100,000. Anticipating the “pushback” from Business, Baker observes that when this rule was set in 1975 it hardly caused an economic ripple. He does not venture into the macro economic effects such as increased discretionary income for millions of American workers that will surely translate into an increase in consumer demand (sales).