Showing posts with label growth. Show all posts
Showing posts with label growth. Show all posts

Saturday, March 19, 2016

Mike Seery's Weekly Futures Recap - Crude Oil, Natural Gas, Gold, Coffee, Sugar

It's Saturday and that means it is time for a heads up from our trading partner Michael Seery. We've asked him to give our readers a recap of the this weeks futures markets and give us some insight on where he sees these markets headed. Mike has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets. 

Crude oil futures in the April contract settled last Friday in New York at 38.50 a barrel while currently trading 40.65 up over $2 for the trading week now trading above its 20 and 100 day moving average for the first time in 6 months. The selloff in the U.S dollar has pushed up oil prices tremendously over the last several weeks. Oil prices are trading higher for the 3rd consecutive day; however this rally has been based on very low volume which is a little concerning as I'm sitting on the sidelines in this market as I have missed the rally to the upside. The U.S dollar has hit a 6 month low and that has propped up many commodity prices and especially crude oil as gasoline and heating oil also have rallied substantially. You will notice this at your local gas station as you are paying much more than you were just three or four weeks ago as the tide has turned in the commodity markets. Rumors are circulating that Saudi Arabia is going to urge OPEC to start cutting production, therefore, pushing up prices even higher as their economy is struggling due to low prices. However, the chart structure is poor and sometimes you miss trades as this did not meet criteria to enter into and that's exactly what happened to me, as I am leery of this market in 42/45 level as I assume production will come back onto the table because of higher prices.
TREND: HIGHER
CHART STRUCTURE: POOR

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Natural gas futures in the April contract is now trading above its 20 day, but still below its 100 day moving average settling last Friday in New York at 182 while currently trading at 194. I was recommending a short position getting stopped out earlier in the week as now I'm currently sitting on the sidelines. Natural gas prices are trading at a 4 week high. However, the chart structure is poor meaning that the 10 day low it's too far away to meet my criteria to enter into a new trade so keep a close eye on this market as we could get involved to the upside soon. The fundamentals remain bearish. However, that has already been reflected in the price as supplies are huge at the present time, but the bearish short term trend has ended in my opinion. The energy sector has caught fire over the last several weeks as crude oil is now trading at 42 a barrel which has also supported gas prices in the short term, but look at other markets that are beginning to trend with higher potential.
TREND: MIXED
CHART STRUCTURE: POOR

Gold futures in the April contract settled last Friday in New York at 1,259 an ounce while currently trading at 1,254 down slightly for the trading week in a very highly volatile trading manner as prices reacted sharply to the upside off of the Federal Reserve statement of not raising interest rates sending prices up over $40 in Thursday's trade. At the current time, I'm sitting on the sidelines in this market as I have missed the upside. However, I am not bullish gold at this price level as I think prices are topping out. However I'm not recommending a short position, but if you believe my opinion, I would sell a mini contract while placing the stop loss above the most recent high of 1,287 risking $30 or $1,000 per mini contract plus slippage and commission. Negative interest rates throughout the world have spooked investors back into the gold market as commodities, in general, have rallied as a whole. However, I remain bullish the stock market which continues to move higher as I think money flows will come out of the precious metals here in the short term. Remember when trading commodities it’s all based on risk as the risk/reward on the short side I think is in your favor, but it does not meet my criteria for an official entry into a new trade which has to be a 4 week low, but decide for yourself what's best for your trading account.
TREND: HIGHER
CHART STRUCTURE: POOR

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Coffee futures in the May contract settled last Friday in New York at 125.80 a pound while currently trading at 134.50 trading higher for the 3rd consecutive trading session up around 900 points for the trading week hitting a 5 month high. I've been recommending a bullish position from around the 121.50 level and if you took that trade continue to place your stop loss below the 10 day low which currently stands at 119 as the chart structure is terrible at the present time due to the fact that coffee prices have exploded to the upside over the last week. The commodity markets, in general, have rallied substantially due to the fact that the U.S dollar has hit a 6 month low and it certainly looks to me that the bear markets are over with in the short term. However, if you have missed this trade the risk/reward is not your favor at the current time as you missed the boat so you must look at other markets that are beginning to trend. The next major level of resistance is the October high around 142 as I think prices could test that level next week as coffee prices are still cheap in my opinion as demand currently is strong. At the current time, I'm recommending a bullish position in cocoa and coffee as the soft commodity markets have certainly caught fire recently including the sugar market so start looking at the commodities to the upside.
TREND: HIGHER
CHART STRUCTURE: POOR

Sugar futures in the May contract settled last Friday in New York at 15.13 a pound while currently trading at 15.86 continuing its remarkable bullish run to the upside hitting a 14 month high as I'm sitting on the sidelines as the chart structure has not met my criteria towards entering into the trade. However, I'm certainly not recommending any type of short position as it looks to me that prices are headed even higher. Sugar futures are trading above their 20 and 100 day moving average telling you that the short term trend is to the upside as the commodity markets have caught fire as who knows how high sugar prices can actually go as production cuts throughout major growing regions throughout the world are causing concerns about carryover levels pushing prices up tremendously over the last 3 weeks. Remember when you trade commodities the trend is your friend and trading with the path of least resistance is the most successful way to trade in my opinion over the course of time so do not sell sugar at this point, but if you have missed this trade sit on the sidelines and look at other markets that are beginning to trend as the horse has left the barn in this market in the short term.
TREND: HIGHER
CHART STRUCTURE: POOR

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Saturday, February 20, 2016

Mike Seery's Weekly Futures Recap - Crude Oil, Natural Gas, U.S. Dollar, Gold, Silver, Sugar

It's Saturday and that means it is time for a heads up from our trading partner Michael Seery. We've asked him to give our readers a recap of the this weeks futures markets and give us some insight on where he sees these markets headed. Mike has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets. 

Crude oil futures in the April contract settled last Friday at 31.91 a barrel while currently trading at 32.00 basically unchanged for the trading week with a possible double bottom being created around $29 the level occurring. Crude oil prices are still trading below their 20 and 100 day moving average telling you that the short term trend is to the downside as the long term trend is also to the downside despite the fact that several countries decided to freeze production this week, but that still leaves production at record levels as investors found that as another negative situation.

The volatility in crude oil is extremely high at the current time as I’m looking to possibly enter into a short position on any type of rally as the chart structure has improved tremendously, therefore, lowering monetary risk, but at this point I’m sitting on the sidelines waiting for an opportunity which could develop any day. The commodity markets in general still look weak as I still have many short positions in several different commodity sectors including natural gas which is hitting another contract low today as supplies are just too high across the board despite the fact that the U.S dollar may have topped out.
Trend: Lower
Chart Structure: Poor

Natural gas prices in the April contract settled last Friday in New York at 2.03 while currently trading at 1.89 trading lower 7 out of the last 8 trading sessions as the original recommendation was a short position in the March contract as we rolled over and if you took that trade continue to place your stop loss above the 10 day high which stands at 2.23 as the chart structure is very poor at the present time.

Natural gas prices continue to move lower on a weekly basis as this trade has gone straight down from the original recommendation so continue to place the proper stop loss as the chart structure will start to improve on a daily basis, as I still see lower prices ahead possibly retesting 1.75 and if that is broken I think we can test 1.50 as extremely warm weather in the Midwestern part of the United States continues to plague this commodity.

The fundamentals in natural gas are extremely bearish with all time high inventories as we were producing too many products especially in the energy sector including natural gas so continue to play this to the downside as I'm looking at adding more contracts once some type of price kickback develops, as I still see no reason to own natural gas especially as we enter the month of March, as springtime is upon us.
Trend: Lower
Chart Structure: Poor

The U.S dollar in the March contract settled last Friday at 95.98 while currently trading at 96.92 up around 100 points for the trading week as I’m currently recommending a short position from around the 96.90 level while placing my stop loss above the 10 day high at 97.50 risking around 60 points or $600 per contract plus slippage and commission.

The dollar is trading below its 20 and 100 day moving average telling you that the short term trend is to the downside as prices are near a 4 month low due to the fact that the interest rates in the United States have been dropping dramatically, as lower rates mean a lower U.S dollar generally. Volatility in the dollar certainly has increased because of the stock market which is on a roller coaster ride daily sending shockwaves into currency markets.

The next major level of support is around the 95.00 level and if that is broken I think we can retest the 93 level in the coming weeks as it certainly looks to me that interest rates are even going lower as worldwide rates have turned negative in certain countries which is an amazing situation in my opinion as the risk/reward is in your favor at the present time as I am still recommending this trade even if you did not take the original advice.
Trend: Lower
Chart Structure: Poor

Gold futures in the April contract settled last Friday in New York at 1,239 an ounce while currently trading at 1,231 down about $8 for the trading week trading in a highly volatile manner. Gold prices are trading above their 20 and 100 day moving average telling you that the short term trend is to the upside as prices have skyrocketed from the contract low around 1,050 and now have rallied over $200 in a matter of weeks as panic around the world is sending gold prices sharply higher.

At the current time, I am sitting on the sidelines as the risk is too much for me to tolerate as the only recommendation in the precious metals currently is the silver market as the gold chart structure is terrible. The S&P 500 has been extremely volatile in the year 2016 and that has supported gold prices however the S&P has rallied significantly over the last week, but it has not been a negative influence on gold as there is demand for gold at the current time and I’m certainly not recommending any type of bearish position as that would be counter trend and poor trading in my opinion so avoid this market at the present time.

Trading is all about risk as I see other opportunities in the commodity markets where the risk/reward is in your favor coupled with outstanding chart structure as gold does not meet any of my criteria to enter into a trade as sometimes you miss trades and that’s exactly what has occurred in this situation.
Trend: Higher
Chart Structure: Poor

Silver futures in the March contract settled last Friday in New York at 15.79 an ounce while currently trading at 15.47 down about $.30 in a highly volatile trading week with large swings on a daily basis as I have been recommending a bullish position from around 14.80 and if you took that trade continue to place your stop loss below the 10 day low which now stands at 14.90 a chart structure has improved tremendously over the last several days.

The next major level of resistance in silver is around the $16 level as we will have to roll out of the March contract into the May contract early next week due to expiration as I will give the new stop loss in that blog as well. Silver prices are trading above their 20 and 100 day moving average telling you that the short term trend is to the upside as money flows continue to go back into the precious metals for the first time in several years as the precious metals have fallen tremendously from their highs just hit in the year 2011.

In my opinion, the U.S dollar has topped out which is bullish the precious metals so stay long this market while placing the proper stop loss as volatility has certainly come back into this market which is generally a bullish indicator.
Trend: Higher
Chart Structure: Improving

Sugar futures in the May contract settled last Friday in New York at 13.12 while currently trading at 12.64 a pound hitting a fresh 5 month low as I’ve been recommending a short position originally in the March contract as we rolled over into the May contract and if you took that trade place your stop loss above the 10 day high which stands at 13.50 as the chart structure is poor.

Sugar prices are trading lower for the 3rd consecutive day as I still think there’s a probability that prices will fill the gap at 11.80 which is still another 85 points away as prices are still trading far below their 20 and 100 day moving average telling you that the trend is getting stronger to the downside on a weekly basis so stay short in my opinion while placing the proper stop loss.

Sugar prices experienced a rounding top which I’ve talked about in many previous blogs over the last several weeks peeking out around 15.50 as being nimble is a major key to success in my opinion as waiting for the trade to develop is definitely beneficial in the long run so stay short as I’m looking to add more contracts once the chart structure and the risk/reward meet my criteria as lower prices are ahead in my opinion.
Trend: Lower
Chart Structure: Poor

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Saturday, February 13, 2016

Mike Seery's Weekly Futures Recap - Crude Oil, Natural Gas, Gold, U.S. Dollar, Coffee, Sugar

Today it is time for a heads up from our trading partner Michael Seery. We've asked him to give our readers a recap of the last weeks futures markets and give us some insight on where he sees these markets headed. He has been Senior Analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

Crude oil futures in the March contract are trading below their 20 and 100 day moving average hitting a contract and multi year low in Thursday’s trade before rallying this Friday currently trading at 28.10 a barrel up nearly $2 on massive short covering ending the week. Crude oil futures traded as low as 26.05 in Thursday’s trade only to rally, but this market certainly remains weak, but at the current time on sitting on the sidelines as the risk does not meet my criteria as the chart structure is very poor presently. As a trader you must think about probabilities of success and at the current time I’m only focused on the soft commodities as they have very tight chart structure with solid trends to the downside as crude oil remains choppy down these levels as the easy money to the downside has already been made in my opinion. The problem with crude oil is the fact that we have huge worldwide supplies as there is a possibility that the United States might be entering a recession due to the fact that the world has slowed down tremendously as global growth is a thing of the past in the short term.
Trend: Lower
Chart Structure: Poor

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Natural gas futures in the March contract continue to head lower despite the fact of very cold temperatures in the Midwestern part of the United States currently trading at 1.98 as I’ve been recommending a short position from around the 2.14 level and if you took that trade continue place your stop loss at the 10 day high which now stands at 2.17 as the chart structure is outstanding at the present time. Natural gas prices are trading below their 20 and 100 day moving average telling you that the short-term trend is to the downside as the long term now trend line is also intact so I remain short as I think there’s a possibility that we can retest the December 18th contract low around 191 as winter is almost behind us, therefore, demand could weaken even more. If you did not take the original trade wait for some type of price rally before entering, therefore, lowering risk as the 10 day high will not be lowered for another 9 days, so you’re going to have to be patient with the risk tolerance at this point. Natural gas prices are trending stronger on a weekly basis in my opinion as who knows how low prices could actually go.
Trend: Lower
Chart Structure: Outstanding

Gold prices experienced a wild trading week settling last Friday in New York at 1,157 an ounce while currently trading at 1,233 up around $75 for the trading week hitting a 1 year high as panic has struck the financial markets sending huge money flows into the interest rate market and precious metals. At the current time, I’m sitting on the sidelines in gold as the chart structure is terrible as the risk is huge at this point, but I’m certainly not recommending any type of bearish position as that would be counter trend so avoid this market at the present time. The S&P 500 has certainly propped up gold prices here in the short-term as gold prices are trading far above their 20 and 100 day moving average telling you that the trend is to the upside as my only recommendation in the precious metals is silver. Gold is in overbought territory in my opinion as volatility is huge at the current time as we had over a $50 rally in Thursday’s trade as I think volatility will continue to remain high as there is so much uncertainty worldwide at the present time. The U.S dollar has also entered into a bearish trend topping out around the 100 level which is a fundamental bullish indicator towards gold prices.
Trend: Higher
Chart Structure: Poor

The U.S dollar in the March contract settled last Friday at 97.05 while currently trading at 96.12 continuing its bearish momentum as I missed this trade to the downside as I’m currently on sitting on the sidelines remaining bearish, but the chart structure and the risk/reward did not meet my criteria to enter into a short position. The dollar is trading below its 20 and 100 day moving average telling you that the short term trend is to the downside as prices are right at a 4 month low due to the fact that the interest rates in the United States have been dropping dramatically, as lower rates mean a lower U.S dollar generally. Volatility in the dollar certainly has increased because of the stock market which is on a roller coaster ride daily sending shockwaves into currency markets as I’m looking to enter into a short position once the risk/reward is in my favor which could happen sometime next week so keep a close eye on this market as we could be entering into a new trade soon. The next major level of support is around 95.00 level and if that is broken, I think we can retest the 93 level in the coming weeks as it certainly looks to me that interest rates are even going lower as worldwide rates have turned negative in certain countries which is an amazing situation in my opinion.
Trend: Lower
Chart Structure: Poor

Coffee futures in the March contract are trading below their 20 and 100 day moving average telling you that the short term trend is to the downside as this market remains extremely choppy and has been over the last 6 months as I’m sitting on the sidelines waiting for something to develop. Coffee settled last Friday in New York at 123.20 a pound while currently trading at 115.40 down about 800 points for the trading week as the commodity markets and especially the soft commodities remain weak in my opinion. However, a breakout has not occurred at the present time. Recently there has been very little fresh fundamental news to dictate short term price action as this is basically a technical trade, but keep an eye on this market as a breakout will occur in my opinion, so you are going to have to be patient as I do like trading the coffee market, but have not been involved for many months. As a trader you must be diversified for example sometimes the grain market or any other market might go sideways for a long period of time, so it’s tough to go to make money, however that’s why you must be diversified and look at all markets, as something is always developing, therefore, giving you a better chance of success in my opinion so keep a close eye on this market as I’m very hopeful one day we will be involved.
Trend: Lower
Chart Structure: Solid

Sugar futures in the May contract settled last Friday in New York at 13.14 a pound while currently trading at 13.12 basically unchanged for the trading week as I have been recommending a short position for several weeks and if you took the original trade we were short the March contract and now we have rolled over into the May contract while now placing your stop loss above the 10 day high which stands around 13.50 as chart structure is outstanding at the present time. Sugar prices are right near a 4 month low as one of my main reasons for selling this market was the fact of a rounding top on the daily chart taking about 3 months to occur, but as a trader, you must have patience as this paid off here in the short-term. The chart structure at the current time is outstanding as the 10 day low will not be lowered for another 7 days, so you’re going to have to be patient with the risk situation, as the next major level of support is around 12.75 and if that is broken I think we could test the contract low around 11.50 so remain short in my opinion as I still see no reason to own many of the commodities as currently I’m short cocoa, cotton, and, of course, the sugar market.
Trend: Lower
Chart Structure: Excellant

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Tuesday, August 11, 2015

Closing the Sausage Factory

By John Mauldin

“Bureaucracy destroys initiative. There is little that bureaucrats hate more than innovation, especially innovation that produces better results than the old routines. Improvements always make those at the top of the heap look inept. Who enjoys appearing inept?”
– Frank Herbert, Heretics of Dune

“Economies naturally grow. People innovate as they go through life. They also look around at what others are doing and adopt better practices or tools. They invest, accumulating financial, human and physical capital.
Something is deeply wrong if an economy is not growing, because it means these natural processes are impeded. That is why around the world, since the Dark Ages, lack of growth has been a signal of political oppression or instability. Absent such sickness, growth occurs.”
– Adam Posen, “Debate: The Case for Slower Growth

Today’s letter will be shorter than usual, because I’m at Camp Kotok in Grand Lake Stream, Maine, where the first order of business today is trying to outfish my son (not likely to happen, this year). But I’ve been looking closer at productivity barriers, and I want to give you some points to ponder.

The New Normal?

Like many of you readers, I’m old enough to remember a time when 2.3% annual GDP growth was a disappointment. We always knew America could do better. Not anymore, apparently. Some people actually cheered last week’s first estimate for 2Q real GDP growth. It was 4.4% in nominal terms, but inflation brought the figure back down. While certain segments are growing like crazy, for the most part we are muddling along in a slow growing malaise. You might even call it “stagnant.”

I for one still think the United States can do more. We have a large population of intelligent people who want to build a solid future for their children. They’re willing to work hard to do it. If that’s not happening – and clearly it isn’t – some barrier must be standing in their way. What is this barrier to productivity and growth? There are actually several, but government red tape is one of the biggest. I thought about this after reading an excellent Holman Jenkins column in the Wall Street Journal last week.

Jenkins led me to an audio recording of an interesting discussion on “The Future of Freedom, Democracy and Prosperity,” conducted at a symposium held at Stanford University’s Hoover Institution last month.
Government research & development funding has fallen off considerably from its peak in the 1970s moonshot days. This holds back worker productivity. The federal government is doing too much to slow down business and not enough to boost it.

The three economists who spoke at Stanford all pointed to important productivity barriers emanating from Washington DC.....

One of the participants, Hoover economist John Cochrane, spoke of fears that America is drifting toward a “corporatist system” with diminished political freedom. Are rules knowable in advance so businesses can avoid becoming targets of enforcement actions? Is there a meaningful appeals process? Are permissions received in a timely fashion, or can bureaucrats arbitrarily decide your case by simply sitting on it?

The answer to these questions increasingly is “no.” Whatever the merits of 1,231 individual waivers issued under ObamaCare, a law implemented largely through waivers and exemptions is not law-like. In such a system, where even hairdressers and tour guides are subjected to arbitrary licensing requirements, all the advantages accrue to established, politically connected businesses.

The resources that businesses put into complying with government regulations is staggering. I have often envied people outside the highly regulated financial industry for their freedom to operate rationally. In my business we seem to spend half our time – and an ungodly fraction of our money – just maneuvering through the regulatory morass.

Intrusive federal regulations touch every part of the economy:
  • Energy and mining companies have to deal with environmental protection rules.
  • Drug companies and health care providers must satisfy the FDA and Medicare.
  • Cloud technology companies have to process FBI and NSA demands for user information.
  • Retailers and consumer product makers are required to abide by the fine print on millions of product labels.
I could go on, but you get the point. Anything you do attracts bureaucratic oversight now. We may laugh at “helicopter parents” hovering over their children at school, but we all have a helicopter government looking over our shoulders at work.

Before anyone calls me an anarchist, I think some government regulation is perfectly appropriate. We all want clean drinking water. Everyone appreciates knowing our cars meet crash survival standards. I’m glad FAA is keeping order in the skies.

The problem arises when agencies enforce confusing, contradictory, and excessive regulations and try to micromanage the nation’s businesses. Every business owner I know is glad to play by the rules. They just want to know what the rules say, and that is frequently very hard to do.

A few weeks ago, in “Productivity and Modern-Day Horse Manure,” I explained that growth is really quite simple: if we want GDP to grow, we need some combination of population growth and productivity growth.

The US population is growing, thanks mainly to immigration, but the effectiveness of the workforce is another matter. Baby Boomer retirements are rapidly removing productive assets from the economy. To offset that trend, we need to make younger workers more productive.The red tape that constantly spews out of Foggy Bottom is not helping matters.

Regulatory Capture

The red tape hurts the economy overall, but it does help certain parties. The largest players in any niche often “capture” their regulators. Then they use their influence to tilt enforcement away from themselves and toward smaller competitors.

Put simply, new regulations can be great for your business if you are already well established and have the resources to comply with government mandates. New entrants rarely have those resources. The resulting lack of competition boosts profits for the big players but hurts consumers. The competition that would normally lead to better, less expensive goods and services never happens.

Holman Jenkins makes another great point about how over regulation affects growth.

Another participant, Lee Ohanian, a UCLA economist affiliated with Hoover, drew the connection between the regulatory state and today’s depressed growth in labor productivity. From a long-term average of 2.5% a year, the rate has dropped to 0.7% in the current recovery. Labor productivity is what allows rising incomes. A related factor is a decline in business start ups. New businesses are the ones that bring new techniques to bear and create new jobs. Big, established companies, in contrast, tend to be net job shrinkers over time.

Recall our economic growth formula: population growth plus productivity growth. The US population grew at a peak rate of 1.4% in 1992, and growth has been trending down ever since. Now it is around 0.75% per year. Add that to 0.7% productivity growth, and you see why Jeb Bush’s 4% growth target will be so hard to hit.

Blame Flows Downhill

Business leaders love to complain about the bureaucrats who run Washington’s alphabet-soup agencies. I think the problem goes deeper. With only a few exceptions, the regulators I’ve met over the years have been competent professionals. They weren’t intentionally trying to hurt my business. Often the regulations confused them as much as they confused me.

The real blame, I think, starts on Capitol Hill. Our legislative process is a sausage factory. Congress passes vague, complicated laws riddled with exceptions for this and zero tolerance for that. The result is superficially attractive but a mess inside. People in the alphabet agencies then have to remove the sausage skin and make sense of the contents. This would be a tough job for anyone. I certainly don’t envy them.

Jenkins mentions Obamacare’s convoluted waivers and exemptions. Even its advocates admit the law is a crazy mess. But how and why did it get that way?

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.



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Sunday, June 14, 2015

Free Webinar: Small Lot Trading Strategies for Options Traders

John Carter of Simpler Options is back this Tuesday evening June 16th at 8 p.m. with another great free webinar. John's focus this week is on trading strategies that can be used when trading small lots. These trading methods can be used with ANY size account.

Register Here

Here’s what you’ll get out of John's free webinar.....

 * The difference between trading for income vs. growth

 * Why attempt to double your account “before” it goes to zero in 12 months or less

 * How to control risk while being an aggressive trader

 * What Stops to use and when

 * The mindset of an aggressive trader

    and much more....

Get ready for the webinar by watching this great video John put together to give you an idea of what's going to be covered in detail on Tuesday night....Watch "What's Behind the Big Trade"

John's free classes always fill up fast so get your reserved seat now and make sure you log in early so you keep it.

Get Your Reserved Seat Now

See you Tuesday evening,
Ray @ the Crude Oil Trader


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Monday, June 8, 2015

Cleaning Out the Attic

By John Mauldin


Three weeks ago I co-authored an op-ed for the Investor’s Business Daily with Stephen Moore, founder of the Club for Growth and former Wall Street Journal editorial board member, currently working with the Heritage Foundation. Our goal was to present a simple outline of the policies we need to pursue as a country in order to get us back to 3–4% annual GDP growth. As we note in the op-ed, Stephen and I have been engaging with a number of presidential candidates and with other economists around the topic of growth.

We spent a great deal of time going back and forth on a variety of topics, trying to get down to a few ideas that we think make the most sense. I should note that few people will read the piece below without being upset by at least one of our suggestions. The goal was to not just list the standard Republican “fixes” but to actually come up with a plan that might garner support across the political spectrum on ways to address the critical problem of how to get the country back to acceptable growth.

Part of the challenge was reducing what could have been a book to just 800 words. Today’s letter will start with the actual op-ed, and then I will expand on some of the points. Readers and friends have been pressing me to offer some ideas as to what policies I think we should pursue, so here they are. I hope the op-ed will create some thoughtful response. It would be nice if we could get a few candidates to embrace some or all of what we are suggesting, even (or maybe especially) some of the more radical parts.
(I have made a few very minor edits to the op-ed.)

A Six Point Plan to Restore Economic Growth and Prosperity

By John Mauldin and Stephen Moore
The dismal news of 0.2% GDP growth for the first quarter only confirmed that the US is in the midst of its slowest recovery in half a century from an economic crisis. Could it be that at least some of the rage we've seen in the streets of Baltimore is a result of a paltry recovery that hasn't benefited low-income inner-city areas? We are at least $1.5 trillion a year behind where we would be with even an average post-World War II recovery.

While many blame a lack of sufficient demand and even insufficient government spending, our view is that the primary factors behind the growth slowdown are an increasingly intrusive regulatory environment, a confusing and punitive tax scheme, and lack of certainty over healthcare costs.

Each of these factors has contributed to a climate where growth is slow and incomes are stagnant. These are problems that cannot be solved by monetary and fiscal policy alone. To get real growth and increased productivity, we need to deal with the real source of economic progress: the incentive structure. The coming presidential race offers an opportunity for candidates to put forth concrete and comprehensive ideas about what can be done to create higher economic growth – as opposed to platitudes and piecemeal ideas that don't address the entire problem. The two of us have met with several candidates and discussed tax reform and other economic growth issues.

We offer here some solutions of our own for them to consider.

1. Streamline the federal bureaucracy. 
Government has become much like the neighbor who has hoarded every magazine and odd knick knack for 50 years. The attic and every room are stuffed with items no one would miss. The size of the US code has multiplied by over 18 times in 65 years. There are more than 1 million restrictive regulations. Enough already. It's time to clean out the attic. The president, with some flexibility, should require each agency to reduce the number of regulations under its purview by 20%, at the rate of 5% a year. And then Congress should pass a sunset law for the remaining regulations, requiring them to be reviewed at some point in order to be maintained. Further, if new rules are needed, then remove some old ones. Stop the growth of the federal regulatory code. We have enough rules today; let's just make sure they're the right ones.

2. Simplify and flatten the income tax. 
Make the individual income rate 20% (at most) for all income over $50,000, with no deductions for anything. Reduce the corporate tax to 15%, again eliminating all deductions other than what is allowed by standard accounting practice. No perks, no special benefits. Further, tax foreign corporate income at 5%–10%, and let companies bring it back home to invest here. This strategy will actually increase tax revenues.

3. Replace the payroll tax with a business transfer tax of 15% 
which will give lower income workers a big raise. Companies would pay tax on their gross receipts, minus allowable expenses in the conduct of producing goods and services. Nearly every economist agrees that consumption taxes are better than income taxes. Further, this tax can be rebated at the border, so it should encourage domestic production and be popular with union workers since it makes US products more competitive internationally.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.



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Thursday, February 5, 2015

Procter & Gamble, the Strong Dollar, and Pepto Bismol

By Tony Sagami


Applied Materials. Boeing. Coach. Ford. Intel. McDonald’s. Nike. Pfizer.

What do those household name companies have in common? Not much, other than that a huge part of the sales come from outside the US.

Really, really huge.

Collectively, the 500 companies in the S&P 500 get 46% of their sales and roughly 50% of their profits from outside the US. They are truly multinational giants.

Expanding your customer base is always a good thing, but doing business overseas is not without peril, and one of the under appreciated perils is the impact of currency movements. A stronger dollar can hurt companies that do a large share of their business overseas because sales in other countries translate back into fewer dollars.

Just ask Procter & Gamble, which reported their Q4 results last week.


P&G sold $20.16 billion of toothpaste, laundry detergent, diapers, toilet paper, and razor blades last quarter, but that was a 4% decline from the same period a year ago.

Worse yet, profits plunged by 31% to $1.06 per share, which was not only well below the $1.13 per share Wall Street was expecting but also a horrible 31% year over year drop. That’s bad.

What’s behind those terrible numbers? The U.S. dollar.

“The October-December 2014 quarter was a challenging one with unprecedented currency devaluations,” said CEO A.G. Lafley.

The US Dollar Index was up 13% in 2014 and is now near a 9-year high. That strong dollar is a big millstone around the neck of US exporters, whose products are now more expensive for foreign buyers as well as negatively affecting profits once those foreign sales are converted back into US dollars.


Worse yet, Lafley said the environment will “remain challenging” in 2015.

The US dollar is now at a 9 year high and threatening to go higher. Much, much higher. By historical standards, the US dollar is still cheap and expected to go higher by many observers, including Procter & Gamble.

P&G warned Wall Street that its 2015 sales will fall by another 5% and its 2015 profits will shrink by another 12%.

Think about those two numbers: 5% lower sales and 12% lower profits.

The strong dollar is a big problem for P&G because it gets roughly two thirds of its revenues from outside the US, so it’s more affected by the strong US dollar than most companies, but P&G is far from alone when it comes to currency woes.

The line of companies that have warned that the strong dollar is hurting their profits is getting longer and longer. Microsoft, Pfizer, McDonald’s, Caterpillar, United Technologies, Emerson Electric, 3M, and even Walmart have warned that the rising dollar is depressing their profits.

What does this mean to you? That a LOT more companies are going to report lower than expected sales and profits in 2015 and those that do will see their stock get hammered, just like P&G.

The problem is that Wall Street is blind to this profit-crushing trend.

In 2014, the S&P 500 companies collectively earned $117.02, and the median forecast of Wall Street strategists for 2015 S&P 500 earnings is $126, which is an optimistic 7.6% growth in earnings.

Unless you think that Procter & Gamble is an isolated island of trouble (and it’s not), you should be very worried that Wall Street is grossly underestimating the profit crushing impact of the strong dollar as well as grossly overestimating corporate America’s earnings growth.


That massive disconnect between reality and the Wall Street dream world is going to translate into some very tough times for stock market investors. If you haven’t added some defense to your portfolio… you may need lots and lots of a popular Procter & Gamble product: Pepto Bismol.

Tony Sagami
Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click Here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, Click Here.



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Wednesday, December 17, 2014

Crude Oil, Employment, and Growth

By John Mauldin


Last week we started a series of letters on the topics I think we need to research in depth as we try to peer into the future and think about how 2015 will unfold. In forecasting U.S. growth, I wrote that we really need to understand the relationships between the boom in energy production on the one hand and employment and overall growth in the US on the other. The old saw that falling oil prices are like a tax cut and are thus a net benefit to the US economy and consumers is not altogether clear to me. I certainly hope the net effect will be positive, but hope is not a realistic basis for a forecast. Let’s go back to two paragraphs I wrote last week:

Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of Houston had more housing starts than all of California. Much, though not all, of that growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth is related to energy. But it’s no secret that not only will energy related capital expenditures not grow next year, they are likely to drop significantly. The news is full of stories about companies slashing their production budgets. This means lower employment, with all of the knock on effects.

Lacy Hunt and I were talking yesterday about Texas and the oil industry. We have both lived through five periods of boom and bust, although I can only really remember three. This is a movie we’ve seen before, and we know how it ends. Texas Gov. Rick Perry has remarkable timing, slipping out the door to let new governor Greg Abbott to take over just in time to oversee rising unemployment in Texas. The good news for the rest of the country is that in prior Texas recessions the rest of the country has not been dragged down. But energy is not just a Texas and Louisiana story anymore. I will be looking for research as to how much energy development has contributed to growth and employment in the US.

Then the research began to trickle in, and over the last few days there has been a flood. As we will see, energy production has been the main driver of growth in the US economy for the last five years. But changing demographics suggest that we might not need the job creation machine of energy production as much in the future to ensure overall employment growth.

When I sat down to begin writing this letter on Friday morning, I really intended to write about how falling commodity prices (nearly across the board) and the rise of the dollar are going to affect emerging markets.

The risks of significant policy errors and an escalating currency war are very real and could be quite damaging to global growth. But we will get into that next week. Today we’re going to focus on some fascinating data on the interplay between energy and employment and the implications for growth of the US economy. (Note: this letter will print a little longer due to numerous charts, but the word count is actually shorter than usual.)

But first, a quick recommendation. I regularly interact with all the editors of our Mauldin Economics publications, but the subscription service I am most personally involved with is Over My Shoulder.
It is actually very popular (judging from the really high renewal rates), and I probably should mention it more often. Basically, I generally post somewhere between five and ten articles, reports, research pieces, essays, etc., each week to Over My Shoulder. They are sent directly to subscribers in PDF form, along with my comments on the pieces; and of course they’re posted to a subscribers-only section of our website. These articles are gleaned from the hundreds of items I read each week – they’re the ones I feel are most important for those of us who are trying to understand the economy. Often they are from private or subscription sources that I have permission to share occasionally with my readers.

This is not the typical linkfest where some blogger throws up 10 or 20 links every day from Bloomberg, the Wall Street Journal, newspapers, and a few research houses without really curating the material, hoping you will click to the webpage and make them a few pennies for their ads. I post only what I think is worth your time. Sometimes I go several days without any posts, and then there will be four or five in a few days. I don’t feel the need to post something every day if I’m not reading anything worth your time.

Over My Shoulder is like having me as your personal information assistant, finding you the articles that you should be reading – but I’m an assistant with access to hundreds of thousands of dollars of research and 30 years of training in sorting it all out. It’s like having an expert filter for the overwhelming flow of information that’s out there, helping you focus on what is most important.

Frankly, I think the quality of my research has improved over the last couple years precisely because I now have Worth Wray performing the same service for me as I do for Over My Shoulder subscribers. Having Worth on your team is many multiples more expensive than an Over My Shoulder subscription, but it is one of the best investments I’ve ever made. And our combined efforts and insights make Over My Shoulder a great bargain for you.

For the next three weeks, I’m going to change our Over My Shoulder process a bit. Both Worth and I are going to post the most relevant pieces we read as we put together our 2015 forecasts. This time of year there is an onslaught of forecasts and research, and we go through a ton of it. You will literally get to look “over my shoulder” at the research Worth and I will be thinking through as we develop our forecasts, and you will have a better basis for your own analysis of your portfolios and businesses for 2015.

And the best part of it is that Over My Shoulder is relatively cheap. My partners are wanting me to raise the price, and we may do that at some time, but for right now it will stay at $39 a quarter or $149 a year. If you are already a subscriber or if you subscribe in the next few days, I will hold that price for you for at least another three years. I just noticed on the order form (I should check these things more often) that my partners have included a 90 day, 100% money-back guarantee. I don’t remember making that offer when I launched the service, so this is my own version of Internet Monday.  

You can learn more and sign up for Over My Shoulder right here.

And now to our regularly scheduled program.

The Impact of Oil On U.S. Growth
I had the pleasure recently of having lunch with longtime Maine fishing buddy Harvey Rosenblum, the long-serving but recently retired chief economist of the Dallas Federal Reserve. Like me, he has lived through multiple oil cycles here in Texas. He really understands the impact of oil on the Texas and U.S. economies. He pointed me to two important sources of data.

The first is a research report published earlier this year by the Manhattan Institute, entitled “The Power and Growth Initiative Report.” Let me highlight a few of the key findings:

1. In recent years, America’s oil & gas boom has added $300–$400 billion annually to the economy – without this contribution, GDP growth would have been negative and the nation would have continued to be in recession.

2. America’s hydrocarbon revolution and its associated job creation are almost entirely the result of drilling & production by more than 20,000 small and midsize businesses, not a handful of “Big Oil” companies. In fact, the typical firm in the oil & gas industry employs fewer than 15 people. [We typically don’t think of the oil business as the place where small businesses are created, but for those of us who have been around the oil patch, we all know that it is. That tendency is becoming even more pronounced as the drilling process becomes more complicated and the need for specialists keeps rising. – John]

3. The shale oil & gas revolution has been the nation’s biggest single creator of solid, middle-class jobs – throughout the economy, from construction to services to information technology.

4. Overall, nearly 1 million Americans work directly in the oil & gas industry, and a total of 10 million jobs are associated with that industry.

Oil & gas jobs are widely geographically dispersed and have already had a significant impact in more than a dozen states: 16 states have more than 150,000 jobs directly in the oil & gas sector and hundreds of thousands more jobs due to growth in that sector.

Author Mark Mills highlighted the importance of oil in employment growth:



The important takeaway is that, without new energy production, post recession U.S. growth would have looked more like Europe’s – tepid, to say the least. Job growth would have barely budged over the last five years.

Further, it is not just a Texas and North Dakota play. The benefits have been widespread throughout the country. “For every person working directly in the oil and gas ecosystem, three are employed in related businesses,” says the report. (I should note that the Manhattan Institute is a conservative think tank, so the report is pro-energy-production; but for our purposes, the important thing is the impact of energy production on recent US economic growth.)

The next chart Harvey directed me to was one that’s on the Dallas Federal Reserve website, and it’s fascinating. It shows total payroll employment in each of the 12 Federal Reserve districts. No surprise, Texas (the Dallas Fed district) shows the largest growth (there are around 1.8 million oil related jobs in Texas, according to the Manhattan Institute). Next largest is the Minneapolis Fed district, which includes North Dakota and the Bakken oil play. Note in the chart below that four districts have not gotten back to where they were in 2007, and another four have seen very little growth even after eight years. “It is no wonder,” said Harvey, “that so many people feel like we’re still in a recession; for where they live, it still is.”



To get the total picture, let’s go to the St. Louis Federal Reserve FRED database and look at the same employment numbers – but for the whole country. Notice that we’re up fewer than two million jobs since the beginning of the Great Recession. That’s a growth of fewer than two million jobs in eight years when the population was growing at multiples of that amount.



To put an exclamation point on that, Zero Hedge offers this thought:

Houston, we have a problem. With a third of S&P 500 capital expenditure due from the imploding energy sector (and with over 20% of the high yield market dominated by these names), paying attention to any inflection point in the U.S. oil producers is critical as they have been gung-ho “unequivocally good” expanders even as oil prices began to fall. So, when Reuters reports a drop of almost 40 percent in new well permits issued across the United States in November, even the Fed's Stan Fischer might start to question [whether] his [belief that] lower oil prices are "a phenomenon that’s making everybody better off" may warrant a rethink.

Consider: lower oil prices unequivocally “make everyone better off.” Right? Wrong. First: new oil well permits collapse 40% in November; why is this an issue? Because since December 2007, or roughly the start of the global depression, shale oil states have added 1.36 million jobs while non shale states have lost 424,000 jobs.



The writer of this Zero Hedge piece, whoever it is (please understand there is no such person as Tyler Durden; the name is simply a pseudonym for several anonymous writers), concludes with a poignant question:

So, is [Fed Vice-Chairman] Stan Fischer's “not very worried” remark about to become the new Ben “subprime contained” Bernanke of the last crisis?

Did the Fed Cause the Shale Bubble?

Next let’s turn to David Stockman (who I think writes even more than I do). He took aim at the Federal Reserve, which he accuses of creating the recent “shale bubble” just as it did the housing bubble, by keeping interest rates too low and forcing investors to reach for yield. There may be a little truth to that. The reality is that the recent energy boom was financed by $500 billion of credit extended to mostly “subprime” oil companies, who issued what are politely termed high yield bonds – to the point that 20% of the high yield market is now energy production related.

Sidebar: this is not quite the same problem as subprime loans were, for two reasons: first, the subprime loans were many times larger in total, and many of them were fraudulently misrepresented. Second, many of those loans were what one could characterize as “covenant light,” which means the borrowers can extend the loan, pay back in kind, or change the terms if they run into financial difficulty. So this energy related high yield problem is going to take a lot more time than the subprime crisis did to actually manifest, and there will not be immediate foreclosures. But it already clear that the problem is going to continue to negatively (and perhaps severely) impact the high-yield bond market. Once the problems in energy loans to many small companies become evident, prospective borrowers might start looking at the terms that the rest of the junk-bond market gets, which are just as egregious, so they might not like what they see. We clearly did not learn any lessons in 2005 to 2007 and have repeated the same mistakes in the junk bond market today. If you lose your money this time, you probably deserve to lose it.

The high yield shake out, by the way, is going to make it far more difficult to raise money for energy production in the future, when the price of oil will inevitably rise again. The Saudis know exactly what they’re doing. But the current contretemps in the energy world is going to have implications for the rest of the leveraged markets. “Our biggest worry is the end of the liquidity cycle. The Fed is done. The reach for yield that we have seen since 2009 is going into reverse,” says Bank of America (source: The Telegraph).

Contained within Stockman’s analysis is some very interesting work on the nature of employment in the post recession U.S. economy. First, in the nonfarm business sector, the total hours of all persons working is still below that of 2007, even though we nominally have almost two million more jobs. Then David gives us two charts that illustrate the nature of the jobs we are creating (a topic I’ve discussed more than once in this letter). It’s nice to have somebody do the actual work for you.

The first chart shows what he calls “breadwinner jobs,” which are those in manufacturing, information technology, and other white collar work that have an average pay rate of about $45,000 a year. Note that this chart encompasses two economic cycles covering both the Greenspan and Bernanke eras.



So where did the increase in jobs come from? From what Stockman calls the “part time economy.” If I read this chart right and compare it to our earlier chart from the Federal Reserve, it basically demonstrates (and this conclusion is also borne out by the research I’ve presented in the past) that the increase in the number of jobs is almost entirely due to the creation of part time and low wage positions – bartenders, waiters, bellhops, maids, cobblers, retail clerks, fast food workers, and temp help. Although there are some professional bartenders and waiters who do in fact make good money, they are the exception rather than the rule.



It’s no wonder we are working fewer hours even as we have more jobs.

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Monday, November 17, 2014

The Return of the Dollar

By John Mauldin


Two years ago, my friend Mohamed El-Erian and I were on the stage at my Strategic Investment Conference. Naturally we were discussing currencies in the global economy, and I asked him about currency wars. He smiled and said to me, “John, we don’t talk about currency wars in polite circles. More like currency disagreements” (or some word to that effect).

This week I note that he actually uses the words currency war in an essay he wrote for Project Syndicate:

Yet the benefits of the dollar’s rally are far from guaranteed, for both economic and financial reasons. While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries. There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies’ performance, such a shift could be characterized as a “currency war” in the US Congress, prompting a retaliatory policy response.

This is a short treatise, but as usual with Mohamed’s writing, it’s very thought provoking. Definitely Outside the Box material.

And for a two-part Outside the Box I want to take the unusual step of including an op-ed piece that you might not have seen, from the Wall Street Journal, called “How to Distort Income Inequality,” by Phil Gramm and Michael Solon. They cite research I’ve seen elsewhere which shows that the work by Thomas Piketty cherry-picks data and ignores total income and especially how taxes distort the data. That is not to say that income inequality does not exist and that we should not be cognizant and concerned, but we need to plan policy based on a firm grasp of reality and not overreact because of some fantasy world created by social provocateur academicians.

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The calls for income redistribution from socialists and liberals based on Piketty’s work are clearly misguided and will further distort income inequality in ways that will only reduce total global productivity and growth.
I’m in New York today at an institutional fund manager conference where I had the privilege of hearing my good friend Ian Bremmer take us around the world on a geopolitical tour. Ian was refreshingly optimistic, or at least sanguine, about most of the world over the next few years. Lots of potential problems, of course, but he thinks everything should turn out fine – with the notable exception of Russia, where he is quite pessimistic.

A shirtless Vladimir Putin was the scariest thing on his geopolitical radar. As he spoke, Russia was clearly putting troops and arms into eastern Ukraine. Why would you do that if you didn’t intend to go further? Ian worried openly about Russia’s extending a land bridge all the way to Crimea and potentially even to Odessa, which is the heart of economic Ukraine, along with the Kiev region. It would basically make Ukraine ungovernable.

I thought Putin’s sadly grim and memorable line that “The United States is prepared to fight Russia to the last Ukrainian” pretty much sums up the potential for a US or NATO response. Putin agreed to a cease-fire and assumed that sanctions would start to be lifted. When there was no movement on sanctions, he pretty much went back to square one. He has clearly turned his economic attention towards China.

Both Ian Bremmer and Mohamed El Erian will be at my Strategic Investment Conference next year, which will again be in San Diego in the spring, April 28-30. Save the dates in your calendar as you do not want to miss what is setting up to be a very special conference. We will get more details to you soon.

It is a very pleasant day here in New York, and I was able to avoid taxis and put in about six miles of pleasant walking. (Sadly, it is supposed to turn cold tomorrow.) I’ve gotten used to getting around in cities and slipping into the flow of things, but there was a time when I felt like the country mouse coming to the city. As I walked past St. Bart’s today I was reminded of an occasion when your humble analyst nearly got himself in serious trouble.

There is a very pleasant little outdoor restaurant at St. Bartholomew’s Episcopal Church, across the street from the side entrance of the Waldorf-Astoria. It was a fabulous day in the spring, and I was having lunch with my good friend Barry Ritholtz. The president (George W.) was in town and staying at the Waldorf. His entourage pulled up and Barry pointed and said, “Look, there’s the president.”

We were at the edge of the restaurant, so I stood up to see if I could see George. The next thing I know, Barry’s hand is on my shoulder roughly pulling me back into my seat. “Sit down!” he barked. I was rather confused – what faux pas I had committed? Barry pointed to two rather menacing, dark-suited figures who were glaring at me from inside the restaurant.

“They were getting ready to shoot you, John! They had their hands inside their coats ready to pull guns. They thought you were going to do something to the president!”

This was New York not too long after 9/11. The memory is fresh even today. Now, I think I would know better than to stand up with the president coming out the side door across the street. But back then I was still just a country boy come to the big city.

Tomorrow night I will have dinner with Barry and Art Cashin and a few other friends at some restaurant which is supposedly famous for a mob shooting back in the day. Art will have stories, I am sure.
It is time to go sing for my supper, and I will try not to keep the guests from enjoying what promises to be a fabulous meal from celebrity chef Cyrille Allannic. After Ian’s speech, I think I will be nothing but sweetness and light, just a harmless economic entertainer. After all, what could possibly go really wrong with the global economy, when you’re being wined and dined at the top of New York? Have a great week.

John Mauldin, Editor
Outside the Box
subscribers@mauldineconomics.com

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The Return of the Dollar

By Mohamed El-Erian
Project Syndicate, Nov. 13, 2014

The U.S. dollar is on the move. In the last four months alone, it has soared by more than 7% compared with a basket of more than a dozen global currencies, and by even more against the euro and the Japanese yen. This dollar rally, the result of genuine economic progress and divergent policy developments, could contribute to the “rebalancing” that has long eluded the world economy. But that outcome is far from guaranteed, especially given the related risks of financial instability.

Two major factors are currently working in the dollar’s favor, particularly compared to the euro and the yen. First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism – and will likely continue to do so – owing not only to its economic flexibility and entrepreneurial energy, but also to its more decisive policy action since the start of the global financial crisis.

Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one. Indeed, whereas the US Federal Reserve terminated its large-scale securities purchases, known as “quantitative easing” (QE), last month, the Bank of Japan and the European Central Bank recently announced the expansion of their monetary-stimulus programs. In fact, ECB President Mario Draghi signaled a willingness to expand his institution’s balance sheet by a massive €1 trillion ($1.25 trillion).

With higher US market interest rates attracting additional capital inflows and pushing the dollar even higher, the currency’s revaluation would appear to be just what the doctor ordered when it comes to catalyzing a long-awaited global rebalancing – one that promotes stronger growth and mitigates deflation risk in Europe and Japan. Specifically, an appreciating dollar improves the price competitiveness of European and Japanese companies in the US and other markets, while moderating some of the structural deflationary pressure in the lagging economies by causing import prices to rise.

Yet the benefits of the dollar’s rally are far from guaranteed, for both economic and financial reasons. While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries. There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies’ performance, such a shift could be characterized as a “currency war” in the US Congress, prompting a retaliatory policy response.

Furthermore, sudden large currency moves tend to translate into financial-market instability. To be sure, this risk was more acute when a larger number of emerging-economy currencies were pegged to the U.S. dollar, which meant that a significant shift in the dollar’s value would weaken other countries’ balance of payments position and erode their international reserves, thereby undermining their creditworthiness. Today, many of these countries have adopted more flexible exchange-rate regimes, and quite a few retain adequate reserve holdings.

But a new issue risks bringing about a similarly problematic outcome: By repeatedly repressing financial-market volatility over the last few years, central-bank policies have inadvertently encouraged excessive risk-taking, which has pushed many financial-asset prices higher than economic fundamentals warrant. To the extent that continued currency-market volatility spills over into other markets – and it will – the imperative for stronger economic fundamentals to validate asset prices will intensify.

This is not to say that the currency re-alignment that is currently underway is necessarily a problematic development; on the contrary, it has the potential to boost the global economy by supporting the recovery of some of its most challenged components. But the only way to take advantage of the re-alignment’s benefits, without experiencing serious economic disruptions and financial-market volatility, is to introduce complementary growth-enhancing policy adjustments, such as accelerating structural reforms, balancing aggregate demand, and reducing or eliminating debt overhangs.

After all, global growth, at its current level, is inadequate for mere redistribution among countries to work. Overall global GDP needs to increase.

The US dollar’s resurgence, while promising, is only a first step. It is up to governments to ensure that the ongoing currency re-alignment supports a balanced, stable, and sustainable economic recovery. Otherwise, they may find themselves again in the unpleasant business of mitigating financial instability.

How to Distort Income Inequality

By Phil Gramm and Michael Solon
Wall Street Journal, Nov. 11, 2014

The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

What the hockey-stick portrayal of global temperatures did in bringing a sense of crisis to the issue of global warming is now being replicated in the controversy over income inequality, thanks to a now-famous study by Thomas Piketty and Emmanuel Saez, professors of economics at the Paris School of Economics and the University of California, Berkeley, respectively. Whether the issue is climate change or income inequality, however, problems with the underlying data significantly distort the debate.

The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since. That misery led to the election of Ronald Reagan, whose economic policies helped usher in 25 years of lower interest rates, lower inflation and high economic growth. But Messrs. Piketty and Saez tell us it was also a period where the rich got richer, the poor got poorer and only a relatively small number of Americans benefited from the economic booms of the Reagan and Clinton years.

If that dark picture doesn’t sound like the country you lived in, that’s because it isn’t. The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs. Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

And now, thanks to a new study in the Southern Economic Journal, we know what the picture looks like when the missing data are filled in. Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation expanded the Piketty-Saez income measure using census data to account for all public and private in-kind benefits, taxes, Social Security payments and household size.

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988—though this change reflected how income was taxed, not how income had grown. This change in the structure of American businesses alone accounts for roughly one-third of what they portray as the growth in the income share earned by the top 1% of earners over the entire 1979-2012 period.

An equally extraordinary distortion in the data used to measure inequality (the Gini Coefficient) has been discovered by Cornell’s Mr. Burkhauser. In 1992 the Census Bureau changed the Current Population Survey to collect more in-depth data on high-income individuals. This change in survey technique alone, causing a one-time upward shift in the measured income of high-income individuals, is the source of almost 30% of the total growth of inequality in the U.S. since 1979.

Simple statistical errors in the data account for roughly one third of what is now claimed to be a “frightening” increase in income inequality. But the weakness of the case for redistribution does not end there. America is the freest and most dynamic society in history, and freedom and equality of outcome have never coexisted anywhere at any time. Here the innovator, the first mover, the talented and the persistent win out—producing large income inequality. The prizes are unequal because in our system consumers reward people for the value they add. Some can and do add extraordinary value, others can’t or don’t.

How exactly are we poorer because Bill Gates, Warren Buffett and the Walton family are so rich? Mr. Gates became rich by mainstreaming computer power into our lives and in the process made us better off. Mr. Buffett’s genius improves the efficiency of capital allocation and the whole economy benefits. Wal-Mart stretches our buying power and raises the living standards of millions of Americans, especially low-income earners. Rich people don’t “take” a large share of national income, they “bring” it. The beauty of our system is that everybody benefits from the value they bring.

Yes, income is 24% less equally distributed here than in the average of the other 34 member countries of the OECD. But OECD figures show that U.S. per capita GDP is 42% higher, household wealth is 210% higher and median disposable income is 42% higher. How many Americans would give up 42% of their income to see the rich get less?

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. They’ve fallen because bad federal policies have yielded the weakest recovery in the postwar history of America.

Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their “fair share.” The politics of envy may work here as it has worked so often in Latin America and Europe, but the economics of envy is failing in America as it has failed everywhere else.

Mr. Gramm, a former Republican senator from Texas, is a visiting scholar at the American Enterprise Institute. Mr. Solon was a budget adviser to Senate Republican Leader Mitch McConnell and is a partner of US Policy Metrics.

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The article Outside the Box: The Return of the Dollar was originally published at mauldineconomics.com.


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Thursday, August 28, 2014

Employers Aren’t Just Whining: The “Skills Gap” Is Real

By John Mauldin


Paul Krugman and other notables dismiss the notion of a skills gap, though employers continue to claim they’re having trouble finding workers with the skills they need. And if you look at the evidence one way, Krugman et al. are right. But this week an interesting post on the Harvard Business Review Blog Network by guest columnist James Bessen suggests that employers may not just be whining, they may really have a problem filling some kinds of jobs.

Unsurprisingly, the problem is with new technology and the seeming requirement that workers learn new skills on the job – you know, like when the student pilot has to take the helm of a 747 in a disaster movie. Perhaps there’s not quite the same pressure in the office or on the factory floor, but the challenges can be almost as complex. Most of us have had the experience of needing to learn completely new ways of doing things, sometimes over and over again as the technology for whatever we’re doing keeps changing.

The proverb about old dogs and new tricks is being reversed, as old dogs are required to learn new tricks to keep up with the rest of the old dogs, not to mention the new pups. It’s either that or go sit on the porch. What follows is not a very long Outside the Box, but it’s thought-provoking.

There hasn’t been much happening in Uptown Dallas chez Mauldin. Lots of reading, routine workouts, long phone conversations with friends, and the occasional appearance of offspring. The amount of material hitting my inbox has slowed down considerably as well, although I know that will change in a week as everyone comes back from holidays. And even if we’re not on vacation, there is a certain slack we seem to cut ourselves in late summer.

Growing up, Labor Day marked the beginning of a brand new school year. Even though many school districts have pushed the start time back a few weeks, Labor Day seems to be a sort of national mental reset button that tells us we must refocus our attention on the tasks in front of us.

So, even with a somewhat reduced schedule, deadlines loom, and I have to do research on secular stagnation. It’s an interesting topic, but the stuff I’m reading about it reminds me to wonder why economists and investment writers feel they have to write in a way that is utterly stultifying and bone-sapping. A course or two in creative writing, with a focus on the creation of a narrative and some attention paid to the concept of a slippery slope ought to be requirements for an economics degree. Not that I have one – and maybe that’s my advantage.

Have a great week, and enjoy these last few days of August.
Your worried about how our kids will deal with the changing work landscape analyst,
Have a great week, and remember that robots need jobs too.
Your wanting more automation in his life analyst,
John Mauldin, Editor
Outside the Box


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Employers Aren’t Just Whining – the “Skills Gap” Is Real

By James Bessen 

Harvard Business Review HBR Blog Network

Every year, the Manpower Group, a human resources consultancy, conducts a worldwide “Talent Shortage Survey.” Last year, 35% of 38,000 employers reported difficulty filling jobs due to lack of available talent; in the U.S., 39% of employers did. But the idea of a “skills gap” as identified in this and other surveys has been widely criticized. Peter Cappelli asks whether these studies are just a sign of “employer whining;” Paul Krugman calls the skills gap a “zombie idea” that “that should have been killed by evidence, but refuses to die.” The New York Times asserts that it is “mostly a corporate fiction, based in part on self-interest and a misreading of government data.” According to the Times, the survey responses are an effort by executives to get “the government to take on more of the costs of training workers.”

Really? A worldwide scheme by thousands of business managers to manipulate public opinion seems far-fetched. Perhaps the simpler explanation is the better one: many employers might actually have difficulty hiring skilled workers. The critics cite economic evidence to argue that there are no major shortages of skilled workers. But a closer look shows that their evidence is mostly irrelevant. The issue is confusing because the skills required to work with new technologies are hard to measure. They are even harder to manage. Understanding this controversy sheds some light on what employers and government need to do to deal with a very real problem.

This issue has become controversial because people mean different things by “skills gap.” Some public officials have sought to blame persistent unemployment on skill shortages. I am not suggesting any major link between the supply of skilled workers and today’s unemployment; there is little evidence to support such an interpretation. Indeed, employers reported difficulty hiring skilled workers before the recession. This illustrates one source of confusion in the debate over the existence of a skills gap: distinguishing between the short and long term. Today’s unemployment is largely a cyclical matter, caused by the recession and best addressed by macroeconomic policy. Yet although skills are not a major contributor to today’s unemployment, the longer-term issue of worker skills is important both for managers and for policy.

Nor is the skills gap primarily a problem of schooling. Peter Cappelli reviews the evidence to conclude that there are not major shortages of workers with basic reading and math skills or of workers with engineering and technical training; if anything, too many workers may be overeducated. Nevertheless, employers still have real difficulties hiring workers with the skills to deal with new technologies.

Why are skills sometimes hard to measure and to manage? Because new technologies frequently require specific new skills that schools don’t teach and that labor markets don’t supply. Since information technologies have radically changed much work over the last couple of decades, employers have had persistent difficulty finding workers who can make the most of these new technologies.

Consider, for example, graphic designers. Until recently, almost all graphic designers designed for print. Then came the Internet and demand grew for web designers. Then came smartphones and demand grew for mobile designers. Designers had to keep up with new technologies and new standards that are still changing rapidly. A few years ago they needed to know Flash; now they need to know HTML5 instead. New specialties emerged such as user-interaction specialists and information architects. At the same time, business models in publishing have changed rapidly.

Graphic arts schools have had difficulty keeping up. Much of what they teach becomes obsolete quickly and most are still oriented to print design in any case. Instead, designers have to learn on the job, so experience matters. But employers can’t easily evaluate prospective new hires just based on years of experience. Not every designer can learn well on the job and often what they learn might be specific to their particular employer.

The labor market for web and mobile designers faces a kind of Catch-22: without certified standard skills, learning on the job matters but employers have a hard time knowing whom to hire and whose experience is valuable; and employees have limited incentives to put time and effort into learning on the job if they are uncertain about the future prospects of the particular version of technology their employer uses. Workers will more likely invest when standardized skills promise them a secure career path with reliably good wages in the future.

Under these conditions, employers do, have a hard time finding workers with the latest design skills. When new technologies come into play, simple textbook notions about skills can be misleading for both managers and economists.

For one thing, education does not measure technical skills. A graphic designer with a bachelor’s degree does not necessarily have the skills to work on a web development team. Some economists argue that there is no shortage of employees with the basic skills in reading, writing and math to meet the requirements of today’s jobs. But those aren’t the skills in short supply.

Other critics look at wages for evidence. Times editors tell us “If a business really needed workers, it would pay up.” Gary Burtless at the Brookings Institution puts it more bluntly: “Unless managers have forgotten everything they learned in Econ 101, they should recognize that one way to fill a vacancy is to offer qualified job seekers a compelling reason to take the job” by offering better pay or benefits. Since Burtless finds that the median wage is not increasing, he concludes that there is no shortage of skilled workers.

But that’s not quite right. The wages of the median worker tell us only that the skills of the median worker aren’t in short supply; other workers could still have skills in high demand. Technology doesn’t make all workers’ skills more valuable; some skills become valuable, but others go obsolete. Wages should only go up for those particular groups of workers who have highly demanded skills. Some economists observe wages in major occupational groups or by state or metropolitan area to conclude that there are no major skill shortages. But these broad categories don’t correspond to worker skills either, so this evidence is also not compelling.

To the contrary, there is evidence that select groups of workers have been had sustained wage growth, implying persistent skill shortages. Some specific occupations such as nursing do show sustained wage growth and employment growth over a couple decades. And there is more general evidence of rising pay for skills within many occupations. Because many new skills are learned on the job, not all workers within an occupation acquire them. For example, the average designer, who typically does print design, does not have good web and mobile platform skills. Not surprisingly, the wages of the average designer have not gone up. However, those designers who have acquired the critical skills, often by teaching themselves on the job, command six figure salaries or $90 to $100 per hour rates as freelancers. The wages of the top 10% of designers have risen strongly; the wages of the average designer have not. There is a shortage of skilled designers but it can only be seen in the wages of those designers who have managed to master new technologies.

This trend is more general. We see it in the high pay that software developers in Silicon Valley receive for their specialized skills. And we see it throughout the workforce. Research shows that since the 1980s, the wages of the top 10% of workers has risen sharply relative to the median wage earner after controlling for observable characteristics such as education and experience. Some workers have indeed benefited from skills that are apparently in short supply; it’s just that these skills are not captured by the crude statistical categories that economists have at hand.

And these skills appear to be related to new technology, in particular, to information technologies. The chart shows how the wages of the 90th percentile increased relative to the wages of the 50th percentile in different groups of occupations. The occupational groups are organized in order of declining computer use and the changes are measured from 1982 to 2012. Occupations affected by office computing and the Internet (69% of these workers use computers) and healthcare (55% of these workers use computers) show the greatest relative wage growth for the 90th percentile. Millions of workers within these occupations appear to have valuable specialized skills that are in short supply and have seen their wages grow dramatically.



This evidence shows that we should not be too quick to discard employer claims about hiring skilled talent. Most managers don’t need remedial Econ 101; the overly simple models of Econ 101 just don’t tell us much about real world skills and technology. The evidence highlights instead just how difficult it is to measure worker skills, especially those relating to new technology.

What is hard to measure is often hard to manage. Employers using new technologies need to base hiring decisions not just on education, but also on the non-cognitive skills that allow some people to excel at learning on the job; they need to design pay structures to retain workers who do learn, yet not to encumber employee mobility and knowledge sharing, which are often key to informal learning; and they need to design business models that enable workers to learn effectively on the job (see this example). Policy makers also need to think differently about skills, encouraging, for example, industry certification programs for new skills and partnerships between community colleges and local employers.

Although it is difficult for workers and employers to develop these new skills, this difficulty creates opportunity. Those workers who acquire the latest skills earn good pay; those employers who hire the right workers and train them well can realize the competitive advantages that come with new technologies.

More blog posts by James Bessen
More on: Economy, Hiring


James Bessen

James Bessen, an economist at Boston University School of Law, is currently writing a book about technology and jobs. You can follow him on Twitter.

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