What’s going on with the Labor market? A look at the rapid changes from 1990 through today.

Intro:

Many people in the financial world are puzzled by the modern labor market which refuses to conform with traditional models. The unemployment rate is low, employers are having a hard time filling slots, yet median wage increases have been sluggish and the percentage of working age people in the labor force is still at multi-decade lows.

Parents give job search advice to their children, who roll their eyes because it doesn’t seem to apply to the job market today at all. Boomers call Millennials lazy, while Millennials call Boomers greedy. Distance between generations seems almost as wide as that of the 1960’s, but for totally different reasons which seem difficult to explain.

The entire way the job market functions barely resembles that of 30 years ago, but it didn’t change overnight. The changes can be divided into sections, however, as a different primary catalyst shaped the system.

I. Mid 1990’s and prior: The age of the physical job search.

During this period, job searching had a very local factor. Job seekers would look through the classified ads, often in local newspapers, or would drive out to industrial and commercial centers and ask about openings and employment opportunities. Job applicants often sent out letters and resumes by mail in response to these ads as well. Employment offices in the college campuses played a large role for large corporations, who would seek employees from a fresh block of new grads. However, small businesses provided a large number of job opportunities with decent incomes, and labor unions were still a powerful force in the private sector.

The major concern at this time was big chains and corporations stomping out the small private stores. Small video rental stores all started to be replaced by The Warehouse and Blockbuster. Local hardware stores were being replaced by Home Depot and Lowe’s. Local bookstores lost out to Borders and Barnes & Noble. Local electronics stores (Remember Babbage’s?) lost to Circuit City, Comp USA and then Best Buy. Starbucks began to displace local coffee shops. The list goes on.

II. Late 90’s to mid 2000’s: The rise of the internet

The early internet was very different from that of today. No one knew how big it could get, or what problems could crop up, just that it’s potential was huge. AOL was the first platform to totally dominate the space. Other fairly early sites were My Space for social media and Monster for job search. These early sites were all drastically affected and lost out because of the first major problem that the open space created: Spam. People found their AOL email accounts bombarded with ads and scams, abandoned their accounts, and dissociated with AOL. MySpace became creepy, fast. Monster bombarded companies with resumes and job seekers with openings which were often out of date.

As companies continued to consolidate into larger entities, they also responded to the wave of spam by looking inward for job search and creating their own corporate job-search portals. Smaller businesses continued to use Monster to some extent, but they began to rely more on intermediaries (job hunters) to help them advertise and fill positions.

Meanwhile, the days of corporate power loomed ever larger and they began to win the fight against the private sector unions. Wal-Mart pulled into the grocery market as a staunchly anti-union power. First there were waves of anti-Wal Mart demonstrations, but they spread further. Then there were waves of strikes at the local grocery stores as pay and benefits were slashed to compete. The days of raising a family in a small apartment as a retail clerk came to an end. Right to work laws began to prevail in many states, and unions everywhere were under more intense pressure than ever.

The job market at this time was still fairly sound, and solutions were being found to help combat spam … spam filters in emails, along with the rise of personal networks by invitation started to form (Facebook for social media, LinkedIn for job search). As a job-seeker at this time I transferred from the Navy to a high paying temporary job for Hurricane Katrina work in less than two weeks, and from that to a career in commercial construction in less than 2 weeks. It was getting easy – tailor resumes and applications to a number of places, get a few interviews, and get a job offer. I suppose it was too good to be true.

III. Late 2000’s to mid 2010’s: The Great Recession

Two factors suddenly came to a head in the Great Recession, which drastically changed the nature of Job Search:

1. Companies were flooded with job applications and resumes like never before, for a relatively small number of openings.

2. Computers and the internet were seen as the ultimate tools to deal with problems.

By this time, the idea of “showing up” to commercial and industrial areas to ask about openings was completely unwelcome. People doing this would be shooed out – either semi-politely with statements of “apply at our website please” or more rudely with accusations of trespassing.

Companies responded to these problems in two major ways:

First, they began to use ever more arbitrary ways of cutting down applications. Jobs that never required college degrees would be filtered for college grads only. Then they’d filter out people who’d been unemployed more than a year. Then they’d filter out anyone without specific degrees or without specific industry experience.

Second, they began to add more steps to the job application process. They would look only for well-tailored resumes, ask essay questions, and require specific online forms (often with questions they could use to filter out applicants).

Job searches during this time were brutal. You would spend hours, sometimes days, applying to individual jobs only to have them filtered out in microseconds. You would go to job fairs hoping that face-to-face contact would help, and then just be told to apply online. Nothing seemed to work and yet people kept telling you to pour more and more time into these applications. You would often hear things like “what do you mean there’s no jobs – I just pulled up a search and there’s some here, here, here… It was very frustrating and de-humanizing. People felt utterly rejected by the system and found ways to survive outside it in droves – applications for food stamps and social security disability soared.

Trust in the entire job-search system was broken. You would spend hundreds of hours to be auto-filtered out for arbitrary reasons. Companies would leave jobs listed that were already filled, or create positions required for open search with internal employees already in mind. Postings with one opening would receive thousands of applicants. Job seekers had absolutely no way to determine if they would receive a real chance at getting a job or if they were just wasting their time. Spam on the company side was matched with spam on the job seeker side, as websites promised to send your resumes to thousands of employers.

College employment offices were strongly pushing the building of LinkedIn social networks at this time. The advice was to target an industry, tailor your resume to the industry as a whole, follow any companies you can think of in it, request to follow employees there, go to industry-specific networking events, use these feelers to discover where the opportunities are. They advised to treat job-search as a full time job in itself.

During this time, private sector labor unions practically died out while central banks and government policies encouraged corporate consolidation on a scale not seen since before FDR. Correspondingly, small business lost much of its place in the economy, industries began to show more signs of monopolistic behavior, and the wealth gap grew by leaps and bounds.

IV. Mid 2010’s and on: The rise of employment agencies and job search networks

The economy went through a long and painfully slow recovery, and companies were beginning to have trouble filling slots once again. Traditional job search sites would get spam or nothing, company specific portals would list jobs that got no qualified applicants. Nothing seemed to work and they began to pay third party employment agencies to help them advertise and fill positions like never before.

Many people still feel that they are underemployed and opportunities are limited, yet they feel like it’s a waste of time searching online because it’s a lot of work for little to no feedback. Headhunters are beginning to contact potential employees and encourage them to apply for specific positions, yet the whole system remains opaque.

With this loss of trust, employees are still wary of job changes, wondering if they’ll be kept when the economy turns again. Employees are also skeptical of working for Wall Street firms requiring long hours, feeling like they’re being used and their hard effort will come to nothing as their promised upward mobility fails to materialize and they are simply discarded in 5 years for the next set of suckers.

All the while, people feel left out of the system as labor mobility & opportunities remain elusive and costs of living soar – and they increasingly respond politically. Private sector unions practically died out during the downturn, and what remains of the small businesses sector doesn’t provide nearly as many job as it used to.

V. Recommendations

Lack of trust in the labor market needs to be recognized and understood as a problem with the labor force today. This can be combatted using a more balanced system for both employers and job seekers. Here’s my main recommendation:

Give job seekers the information and tools they need to find your job by including relevant information in judging their chances – and allow them to search by them. Include:

1. Number of applications received for the position

2. Number of positions needed to fill

3. Applications/slot

4. Use clearly defined minimum requirements which totally replace the use of hidden auto-filters

E. Clearly indicate pay ranges for advertised positions

F. Include a description of what you hope to find in an employee

Right now, the job market for employers is a serious challenge while overqualified employees, often working long hours, are reluctant to spend their free hours applying for jobs unless they feel they will actually be considered. Employers will have to consider the positions of those they seek in order to find ways of reaching out. Headhunters have their methods which can be effective, so I won’t be surprised if they continue to gain market share.

For job seekers, your best bet is to get good at networking with LinkedIn. Follow all the companies you’re interested in working for and you can hear about real openings. Add individual contacts with those employers if possible because someone might give you that hot tip on a job they’re having trouble filling. Unfortunately most people can’t tell what jobs employers are having trouble filling without some kind of personal link – and the goal here is to find the places where your application will actually be read and considered. Just applying to listings that come up can take a lot of time and won’t necessarily get you any feedback.

Please note that there are some problems which we simply cannot control, we just have to see how they get resolved in the messy political system. These include the decline of private sector unions, the decline of small business, soaring costs of living, getting people off food stamps or disability and back into the labor force, and so on. The only recommendation I can give there is to focus on your own situation – how best for an individual to seek a job and how best for an employer to attract job seekers.

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Opportunities coming in high yield debt?

Interesting thoughts from Mauldin’s Frontline today. Consider:

1. Dodd-Frank practically removed big banks as a market maker for high yield debt. Hedge funds have stepped in, but they don’t claim a responsibility to maintain liquidity the way the banks used to.

2. The stretch for yield has pushed high yield mutual funds and ETF’s to grow larger than ever. Investors in these vehicles expect liquidity. If the market turns down, money WILL be drawn from these, and the Mutual funds / ETF’s will have to sell holdings to cover the withdrawals.

3. If the market turns down, no large buyers will be available for high yield debt at spot, the price will have to move considerably to drive sales.

4. Once this happens, there will be incredible opportunities in high yield debt. This is likely to happen as the central bank tightens policy. Once net buyers become net sellers, a big discount in high quality HY debt is inevitable.

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Understanding precious metals and their uses

For a number of years I’ve been convinced that the closest thing we have to a sure bet in the investing world is that gold will gain value over the next decade. The new era of investing we find ourselves in is dominated by central bank money being created throughout the world and thrown into asset markets, creating all-time highs for stocks, bonds, and housing as asset classes.

The past has shown repeatedly that speculative investment money tends to be fickle – once they stop increasing, a lot of the holders start looking to sell and the price can collapse. Speculative investing, to be clear, is looking for asset price gains rather than cash flow. Examples include trading 10 year treasuries instead of holding them for their annual payout, or most stock investing (Warren Buffet has been a historical exception), or buying a house with the idea of selling at a gain rather than living in it or renting it. That being said, it has become increasingly more difficult over the years to find investments that have a potential upside without the increasing significant risk of a major correction to the downside.

Now back to precious metals. Their are a number that can be held in coins or bars, including gold, silver, platinum, and palladium. Here is a chart showing the price movements of all four over the decades:

http://www.kitco.com/commentaries/2017-07-28/Investment-Potential-of-Platinum-and-Palladium.html

Chart 1: The price of gold (yellow line, Comex future price, weekly average), the price of silver (red line, right axis, Comex future price, weekly average), the price of platinum (blue line, Nymex future price, weekly average), and the price of palladium (green line, Nymex future price, weekly average).

Recent prices per ounce: Gold $1324, Silver $16.55, Platinum $921, Palladium $975

You can see that some of them are relatively higher at different times. Palladium seems a bit of a newcomer with a big spike in 2001, gold and platinum often switch places for highest price, and silver has a unique trajectory as well.

Plenty of articles will tell you it’s time to buy one when it’s relatively cheaper than the others, but the key is asking why it is cheaper. For precious metals, the answer lies in their uses – who are the big buyers and what are they used for.

GOLD:

SILVER:

PLATINUM:

PALLADIUM:

I’m out of time so I’ll leave it at that for now. I realize that this is incomplete without including supply, and that Silver is shown in ounces while everything else is on a percentage basis. It is frustrating to type this on an iPad and my tools are very limited, but I hope it gets you thinking.

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A Brief Autobiography Focused on Travel

I just got back from Spain yesterday and I was daydreaming on trips I’ve done in the past, when it occurred to me that I should write all of this down.  Well, here goes…

My childhood was somewhat idyllic, living in a nice house in San Juan Capistrano and going on camping trips a few times a year with a big one every summer.  We went to all sorts of places from California parks like Sequoia, Death Valley and Yosemite to those of western states such as Yellowstone, the Grand Canyon, and Zion.  Sometimes it was backpacking, sometimes ATV and motorcycle riding, sometimes shooting out at sites designated for that.  My first time on an Airplane was during that time, to visit relatives in Pittsburgh Pennsylvania.

My first trip abroad was after graduating from high school in 1997.  At this point it makes more sense to switch from straight narrative to more of a list form.

1997 Summer – Mexico – a week in beautiful Ensenada, with highschool friends.  Juan of them (pun intended) has family land there.  It is now the home of Ochento’s Pizza and El Chivo Gruñón craft beer, although both of those came much later.  I’ve been going back almost every year since, though typically only once a year.

1997 Fall – I started at UC San Diego in La Jolla for a Bachelor’s in Mechanical Engineering

1998 Fall – Indiana – a week at my sister’s place in Hammond, IN and my first trip to Chicago, IL.  It was snowing.  We had a great time.

1999 Summer – Austria – a week in Weiz, a small town near Gratz, visiting my brother and his wife who were living there at the time.  We definitely made a day trip to Wien (Vienna).  I was taking German in college and this was a great chance to try it out.

2000 Spring & Summer – Germany – 4 months studying abroad at the Goettingen Universitat.  I had a chance to travel to many places in Germany including Hamburg, Heidelberg, Quedlinberg, Munchen, Berlin, and others.  During this time I also got short trips in to Paris & Strausberg in France, Basil in Switzerland, Prague in the Czech Republic, and then Rome, Florence, Venice & Bologna in Italy.

2001 – Denver – a bit over a week visiting friends who were attending Denver University.

2003 – I started on with the US Navy which began with OCS in Pensacola, Florida

2003-4 – I moved to Charleston, South Carolina at the Nuclear Propultion Officer Training Command.  During this time I visited relatives in Atlanta, Georgia and in Virginia near the DC beltway, naturally touring the capital.

2004-5 – I moved to Clifton Park, New York at the Nuclear Propulsion Training Unit in Ballston Spa.  I had a number of excursions from here including Virginia & DC again, Boston & Concord, Massachusetts, and Pittsburgh Pennsylvania.

2005 August – After training, I parted ways with the US Navy and decided to make a trip of it when driving back to southern California.  I stopped to see Niagara Falls in Canada, Mount Rushmore in South Dakota, and went hiking on various trails in Iron Mountain South Dakota and along the 70 freeway in Colorado.

2005 September – I flew out to Washington DC for training to become a FEMA Project Officer.  My assignment was the Katrina disaster in Jackson, Mississippi.

2006 – FEMA HQ in Mississippi moved down to Biloxi at the coast after that area was cleared out.  During this time I went all over Mississippi and made some side trips to Atlanta to visit family there.  Also, they covered a trip back home every 30 days which I eagerly took to keep up with my friends & family in southern California.

2006 Summer – Texas – a bit under a week in the beautiful Garner State Park near Austin, Texas.  It was a beautiful place and a lot of fun.

2007 February – I moved back to Orange County, California and started working with ACCO, an HVAC company, out of Tustin.  The FEMA work could’ve lasted longer, but I got the feeling it was time to move from temporary contract work and start a career.

2007 Fall – Hawaii – a week in Maui, going with friends who just got their AAA’s in Volleyball, allowing them to enter a pro tournament there.  It was an amazing trip with a lot of highly energetic people.

2008 Summer – Las Vegas, Nevada – a week in Vegas with a bunch of friends.  This wasn’t my first or last time there – Vegas was an overnight stopover on many trips and I even had a business trip there in 2003.  However, this was an amazing trip that was much more in depth than the others.

2008 Fall – I started getting my MBA at USC in Finance and Entrepreneurship.  A master’s degree was a goal of mine, and ACCO was supportive, moving me to their office in Glendale to work in Engineering.

2008 December – UK – a week in London surrounding New Year’s, with 6 relatives.  In addition to going all over London we went out to Oxford, Stratford on Avon, Stonehenge, and Warwick Castle.

2009 Summer – I stopped working for ACCO, which gave me time to do a lot more with USC including seeing the games, wine tasting in Napa, and whitewater rafting in.  I was still going to Ensenada about once a year and I think they started Ochentos around this time.

2010 March – China – about 12 days in Shanghai for a USC PM Globe trip.  In addition to going all over the city, we had various excursions and trips out to see businesses including GM China and a semiconductor fab facility.

2011 Spring – Germany – A bit over a week visiting my mother in Wolfenbuettel, where she was working on her doctoral thesis with a Fullbright scholarship.  My father came with me and stayed a lot longer.  We traveled a bit together to a few other cities such as Braunshweig and Gossler.

2011 Fall – Massachusetts – about a week with friends visiting a friend who moved out to Boston.

2012 April – I started working with Sachs Electric Company in St Louis Missouri.  After a few weeks I went on to my assigned project in Hammond, Indiana.  During this time I saw Chicago a lot, visited family in South Bend, Indiana next to the Notre Dame campus, and went on a company trip in southern Missouri.

2012 Summer – A week at a friend’s ranch (orange farm) around Modesto, CA for a friend’s bachelor party.

2013 March – India – A week going to various cities including Dehli, Agra, Jaipur, Udapur, and Goa.  A close friend from USC took me there and showed me around.  We had an amazing time.

2013 May – The project I was working on came to a close, and I headed back to southern California.  Shortly after, I joined a friend starting a business in LED lighting called Syren LED.  This was very promising and exciting for the first year, but we didn’t land enough projects to keep going and had to fight to get paid on those we had.  About 18 months into it we ran out of money and had to BK and move on.

2013 August – Mexico – A week in Cancun at an all-inclusive resort.  A friend from USC was getting married there.  It was beautiful and relaxing.

2014 Fall – A week at Lake Havisu with at a good friend’s bachelor party.  Wakeboarding, exploring, cliff jumping, etc.

2015 January – not a travel thing per se, but I started my career at City Tile and Stone in Los Angeles, which has been a really good fit for me so far.

2015 May – Greece – A week long Mediterranean cruise from Athens to Mykinos, Patmos, Santorini, Crete, and Ephesus (Turkey).  This was my first cruise – we went with a lot of family and my niece got engaged there.

2015 October – Hawaii – Four days visiting my brother in Oahu.  We went to a number of places around the island and saw a good bit of Waikiki.

2016 May – Costa Rica – A week with friends starting at a place called the Peace Lodge in the mountains and then moving on to a beach resort on the Carribean side where my friends got married.

2016 June – Alaska – A week long cruise with family for my parent’s golden anniversary.  We saw mendenhall glacier, Juneau, Ketchican, Skagway, and then Victoria Island in Canada.

2017 March – Lake Tahoe – About a week with friends near the Heavenly ski resort.

2017 June – Norway & Denmark – A week long cruise with family leaving from Southampton, UK with a few stops up the beautiful fjords of Norway and then Copenhagen in Denmark.

2017 October – Ireland – A week long land tour with family.  We started in Dublin and went west to the ring of Kerry, Galway, the Cliffs of Moher, south through Cork county, north through Waterford, then back to Dublin.

2018 February – Spain – A week long land tour with my mother.  We saw Madrid, Seville, Grenada, Valencia, then Barcelona.

That brings us to today.  I have more trips planned, such as Cuzco, Peru in the fall, but I’ll have to add them later.  I know I missed a bunch in the middle there including motorcycle trips, fishing, concerts, football/baseball/basketball/hockey games … you just cant list everything so I stuck with travel, though I did expound a bit to include some vacations in California or other US states.

I also pretty much cut out from mentioning Ensenada after the first time, even though I have been going almost every year and it’s always been an amazing time.  The surrounding area has been developing quickly into the Napa of wine and the Carlsbad of beer.  My friend’s at Ochentos have a significant new project completed with another one started every time I visit.  Also, El Chivo Grunion Artisinal Beer (headed by some of my best friends) has been growing by leaps and bounds.  That place is truly alive – every time you visit there are very noticeable changes

Anyway, its good to reflect on things once in a while.  I have certainly been fortunate and I’ve had a blessed life so far that still has a lot left to go.  This ran a lot longer than expected, but I hope it leaves you with happy thoughts.

 

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Thoughts on the “Tax cuts and jobs act”

Near the end of 2017, we saw a large tax reform signed into law that will have some significant changes and effects.

—-Corporate changes

The primary focus of the law was the corporate tax side, so I’ll start there. These tax changes are “permanent,” meaning it will take a new congressional law to change them. The theory is that corporate changes take time, and that corporations wouldn’t make a decision to relocate to the US or invest in more production here.

Here are some of the biggest changes:

– A single 21% flat tax on corporate earnings replaces the previous progressive tax with the 35% top rate.

– Capital investments can now be expensed immediately instead of over a 5-year period

– Foreign earnings are no longer subject to tax in the future, and a system is in place to tax commonly used methods (such as profit sharing) used to repatriate domestic earnings as foreign tax liabilities.

-Foreign earnings (currently on the balance sheet) can be re-patriated at an 8% rate if classified as investments or a 15.5% rate if cash equivalents.

My thoughts:

These changes are designed to encourage foreign registered corporations to re-register under the US banner, and discourage US companies from registering in foreign countries. As such, expect that other countries will react with their own tax reforms and complain at the UN.

Tax receipts are likely to go up the first year as one-time tax charges to repatriate incomes at lower rates are taken. Much of this money will be classified as investments, freeing up domestic earnings for stock buybacks. Expect significant stock market support from stock buybacks next year.

Much of the capital investments in the US will be in various forms of automation- requiring less workers for higher production. This is a good thing long term, as productivity per person is essential to supporting per-capita income growth which can increase standards of living. In the short-term it can also lead to increased income inequality, but this will inevitably be addressed at some point because we have a functioning Democracy which allows for election upsets and votes for change.

It is likely that many S-Corporations will redesignate as C-corporations to take advantage of the lower corporate tax rates. Similarly, individuals with high earnings will try to shift some tax liability to the corporate side. This will cause “average” individual incomes to come down significantly as they are reclassified in the system. A change in taxes for S-Corporations was made to somewhat mitigate this.

Politically, Trump will crow about higher tax receipts and a rising stock market while Democrats crow about corporate incomes rising while private incomes fall. Both are red herrings; neither argument will reflect real or permanent changes to the system.

I’d like to mention one positive change, not big but a force in the right direction. A major side-effect of current low interest rate policies is to encourage way too much corporate leverage, as large amounts of debt are created for stock buybacks and companies or hedge funds use leveraged buyouts to pile debt onto otherwise solvent companies. That has lead to many large bankruptcies. Now, not only do lower corporate rates reduce the value of the interest payment deduction, but the law caps corporate interest deductions to discourage this shift from equity to debt that has been going on.

The only way to really fix this problem in my view is to make stock buybacks illegal again (made legal under Reagan in 1986), to better regulate leveraged buy-outs so that the SEC will not allow them if the underlying company ends up with too much debt, and to make one-time dividends illegal for a period of time (say 5 years) after any leveraged buyout occurs.

—Individual changes

Note that unlike the corporate tax changes, the individual changes are mainly set to expire in 2025. The inflation rate, which adjusts certain deductions, will calculated in a new way to make it lower, so that individuals will see an increase in 2017 tax levels after expiration.

The reason these individual tax changes are temporary is to game the system so that the tax changes seem more revenue-neutral. In reality, everyone expects them to be extended as a sharp increase would be unpopular.

– There are 7 tax brackets, which all go down except for the lowest at 10% and the second-highest at 35%. Middle class earners will notice the 3% reduction in each of the second and third brackets.

– The personal deduction goes away, and the standard deduction is doubled. This will cause a significant shift as the middle class homeowner will no longer itemize taxes; the mortgage interest deduction will effectively only apply to the most expensive homes. This will be a noticeable benefit to renters while homeowners won’t see their taxes increase, so it is one of the few progressive measures of the tax bill. At the same time, the real estate lobby will fight it, so expect to hear a lot of quacking on it next year.

– The child tax credit increases to $2000 (up to $1400 refundable for low incomes). The child must be under 18. A $500 non-child dependent is also created. This is another progressive change as it helps young families, and making the benefit a credit means it keeps its value for low earners. I hope this survives the 2025 expiration because it actually helps young families.

—Other noteable changes

Some of these are individual tax changes, but the consequences wont be noticed by middle class households or were unique in ways that deemed separation. I’ll start with one of the latter.

– The tax penalty of the “Affordable Care Act” reduces to zero starting in 2018. This will have an unknown effect on insurance premiums. Big insurance companies like to claim that healthy people will drop coverage which will increase rates. However, I like to think insurance premiums will stabilize or drop because the companies will once again have to “sell” their plans again instead of merely dictating what people have to pay. Time will tell, though their is significant political will on both sides to overhaul the ACA anyways. I see this as a temporary reprieve for squeezed middle to lower-middle class families who will no longer be forced to pay a large portion of their take home pay in health premiums for high deductible plans that don’t help them much anyway.

– The estate tax exemption is raised. This only helps the newly wealthy really, as too many loopholes exist to keep dynastic wealth intact while the vast majority will never hit the old exemption amount.

– State tax deductions are limited to $10,000. This only affects high earners in high tax states directly. Indirectly, it is an added incentive for high earners to relocate from high tax states to lower tax states. While arguably a mixed bag, I tend to hope it helps to counteract the disturbing trend for jobs to leave the countryside and crowd into the big cities. People can only live where the jobs are, and it would be nice for people to be able to aspire to home ownership instead of being stuck in a tiny apartment in an overcrowded city while paying crazy high rents.

– Much of the arctic wildlife refuge in Alaska has been opened up for oil & gas drilling. This will have the typical groups fighting, but most people won’t notice the change.

—That’s it

Perhaps I should mention the affect on the national debt. Many will talk about it in the news and political circles, but it’s not something that will cause a quick change we can usefully analyze. Our country will not go bankrupt, as the Federal Reserve can simply purchase all of it the way the Bank of Japan does.

The wealth divide is very real, and the tax plan primarily helps the top. However, the trickle-down monetary policy during the Obama years created far more wealth disparity than trickle-down tax cuts will.

This plan isn’t the end of the world or the savior of the country, it has its pluses and minuses like anything else and we’ll continue to muddle through. In my view the real way to fix the county and rebuild the middle class is to use the SEC to break up companies that have gotten way too big while lowering barriers to entry for small business formation, and we don’t see any interest there from the leadership of either of the two major parties. Monopolies are simply bad economic policy which leads to stagnant growth and rising inequality. I don’t mean to get sidetracked. Our country still has a good system going overall, I just don’t want to be dragged in to the pro- or anti- Trump camps in the wave of relentless over-politicization.

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A history of stock market cycles. Where are we today? Charts from 1950-2017.

Mid 1950’s-1960’s: Buy and hold is the way to go

Late 60’s-70’s: Caution is king – watch that valuation because holding alone will set you back:

Early 80’s: from flat and choppy to spike and crash:

Early 80’s-mid 90’s: Buy and hold is king again. Note the great 1987 crash is now visible as a market correction in an up-trend.

1997-2008: Caution is again king. The flat and choppy 1970’s looks a lot smaller compared to these tidal waves.

2006-2017: Note how small that peak seams compared to this one. Will 2008 be seen as a market correction in the major trend just like in 1987, or are we seeing the latest major wave which will retest the lows from 2002 and 2008?

There are a few things to note here…

1. These charts are not corrected for inflation. The “flat” 1970’s would be a big loss for a buy-and-hold investor for example.

2. Stocks come in and out of the S&P 500 without reflecting the catastrophic losses of a buy-and-hold investor riding them out and later selling to buy the replacement. If you owned Kodak from the nifty 50 and held it with the S&P, you would have lost more than reflected when it shook out. Similar with massive Enron or world on bankruptcies that would have hit S&P index investors.

3. Look at the big waves of the past 2 decades, and think about “what if” you jumped out 2 years prior to the peak and waited in bonds until valuations hit below that level again. Would you be better off? It wouldn’t seem so while missing out on the last 25% gains, but it makes sense with a 10-year view.

I advise you to draw your own conclusions. My thinking is that the largesse of central banks throughout the entire world over the past decade has created the mother of all waves. I don’t believe that this central bank money can create a lasting up-trend by itself … the overall market should roughly follow GDP. In my view, when it crashes it will seem like the end of the world like it did in 2008 or many cycles past, but it won’t be … markets will simply cycle up again just as before (perhaps with even more central bank intervention? Who knows?).

A few thoughts:

1. Avoid leverage. Just like in 1987, leverage can make a significant drop clean you out so that you won’t even be able to float back on the next up-cycle.

2. Don’t be afraid to lose out on some gains – think seriously about upside vs downside risk. Take a look at valuations such as price-to-earnings so you can methodically phase out of stocks as it gets higher, and then methodically phase in as valuations drop. “Methodically” is key – try to take the emotional response out of it. Emotional response is dangerously pro-cyclical!

3. “Easy money” policies from central banks may be here for a long time – think of the entire post 1989 BOJ stance. If this is the case, the new money will always flow somewhere – and it will tend to float some sort of financial asset: land, stocks, bonds, precious metals, and commodities are different examples of these. I tend to support the idea of a rotation toward precious metals, but that’s just me.

4. Beware of crypto-currencies. Keep in mind a couple of things…

– They are not sovereign debt so that CAN go to zero and many have

– They are currently unregulated and impossible to regulate worldwide. Watch for pump-and-dump schemes which large funds are very good at taking advantage of

– Even the most established are less than 10 years old. They have shown themselves vulnerable to hacking many times, and they are very vulnerable to government policy (think of a crackdown of bitcoin by the Chinese government… yikes).

Merry Christmas, and may you be as nimble as a surfer on these waves!

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Is the stock market overvalued?

Does anyone else agree with my assessment that physical gold, physical silver, some stocks in the miners, relatively safe debt, and uninvested cash are the only things worth holding now?
Here’s my reasoning:

1. The stock market is still at all time highs with crazy high valuations.

2. ETF’s are the new craze in “safe” passive investing.  When investors get scared from a decline, much of the money that’s been piling in and pushing values up will rush to safety and pull values down.

3. Since 2009, Central banks around the world have been creating large amounts of money for “investments,” including outright stock market purchases in some cases.  This is beginning to reverse in minor ways with the fed and other central banks may slow their easing as well.

Here’s what I think will happen:

1. The decline of new hot money from central banks along with quantitative tightening will spark a minor correction, maybe 5%.

2. Many ETF investors will get spooked, put out and more will follow, causing a more significant downturn in stocks.

3. Central banks will respond once again with easy money policies.

4. Hot money will be more excited about gold and silver this next time around.

I’m at the airport writing on my phone, so I’m not going to include links or charts.  Interested in your thoughts though.

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I’m back from my trip, and I can’t resist posting this chart I got from realvision.com

CBTOTL is, verbatim from the website: CBTOTL is a custom index of the FED, ECB, PBOC, BOE, and BOJ. Note the correlation with the S&P 500, including the stall in the S&P coinciding with a steadying of central bank balance sheets in 2014.

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