- Before I get into the economic news of the past couple of days, the big event today was the terrorist attacks in Belgium and I want to offer my condolences to the people of Belgium and also on behalf of my listeners from the U.S. and all over the world
- This will probably work to the benefit of Donald Trump, who didn’t waste much time in capitalizing on the event
- We do have a couple of primaries today, Arizona and Utah
- In Arizona, Trump is well in the lead – it’s a winner take all state and today’s news will probably solidify Trump’s lead there
- The wild card will be the Utah primary where Donald Trump is in last place. Mitt Romney didn’t endorse Cruz, but said a vote for Cruz is a vote against Trump. If Cruz gets less than 50% of the votes, however, the delegates would be divided proportionately.
- Not much action in the market – Gold spiked up on the news of the Brussels attacks, and closed up just under $5
- Silver was up earlier this morning, but there’s a lot of support building in the silver market
- I had noticed that there were some traders shorting silver and buying gold
- When gold gets this expensive relative to silver, I wouldn’t want to bet that that trend continues
- I would say, if you like gold, just buy gold, don’s short silver, because you could turn a winning trade into a losing trade
- The big action in the currency markets was in the British Pound
- The Aussie and the Canadian dollar continue to rise against the U.S. dollar
- European currencies were a little bit weaker, but the main weakness was in the British pound
- One would think, wouldn’t the euro be hurt more than the pound, by the terrorist attack?
- Traders believe that the attacks will increase the refugee problem, which is at the core of Great Britain’s possible exit from the European Union, and the pound is falling on that speculation
- Most of the economic data that came out yesterday and today was weaker than expected
- They were expecting a bounce in the Chicago Fed National Activities Index and instead of a +.25, we got a -.29
- They did increase the positive number from +.28 to +.41, so the February decline is actually more dramatic
- Bigger miss that came out was in Existing Home Sales; it was a 7.1% drop
- That’s the biggest drop in 6 years, and the 3rd consecutive month of declines
- The problem they’re pointing to is high prices
- Imagine what would happen if the Federal Reserve were to raise interest rates 2 more times
- If the Fed were to raise interest rates, what does that do to mortgage rates? They go up also
- When home sales are falling sharply because they’re unaffordable even with record low mortgage rates, what happens to affordability when mortgage rates go up?
- How does the Fed increase interest rates when they are already not low enough to sustain the market, even at rock bottom?
- They’re also pointing to lack of inventory as a culprit, but there are no buyers at these prices
- The only thing keeping these overpriced homes affordable is the artificially low interest rates, courtesy of the Fed, and the government, through Fannie Mae, Freddie Mac and the FHA
- Another problem is the lack of viable jobs in this economy
- Also this morning we got the PMI Manufacturing Index – expected to improve on last month’s 51, dangerously close to the borderline between expansion and contraction
- We did improve but only to 49.5, a full one point below expectations
- The one outlier of the week, was the Richmond Manufacturing Index – last month, February, was -4 and the consensus expectation was 0 for this month
- We ended up getting +22 – this was the biggest beat ever and the highest number going back to 2012
- The number is so high it looks suspicious to me – it will be interesting to see what happens to the subsequent month, or if there is a revision
- All the other reports this week were weak, so one outlier does not give me reason to jump to any conclusions
- One of the interesting stories of the week was the government garnishing wages from students who were delinquent in their student loans
- The article points out how delinquencies are rising despite the fact that income-based repayment programs are in wide use and there has been a 48% increase graduates who take advantage of these programs
- In fact, lower-paying jobs might actually net a higher income with income-based student loan payments, including a lower tax rate
- This is the moral hazard the government has introduced to higher education
- In a free market, there would be incentive to major that would result in the highest paying job
- With income-based repayment plans, students are actually encouraged to go into low-paying career fields
- The incentive is to get the highest degree at the most expensive institution and then get a low-paying job
- The government has further encouraged higher education for certain low-paying jobs because once the graduate has made a certain number of payments over the prescribed time, the rest of the loan is forgiven
- Who pays for that? The taxpayer. Under the Obama Administration, the government directly issues student loans
- I posted another interesting article published recently about RBS (The Royal Bank of Scotland) firing about 220 investment advisors, and replacing them with robotic advisors
- They’re not actually robots they are automated computer programs that apply cookie-cutter asset allocations to clients’ answers to a set of questions
- They’re doing this for smaller accounts
- It’s not just low-skilled workers who are being impacted by government regulations
- This approach will be accepted widely in the U.S., especially of the Obama administration’s new regulations on fiduciary responsibility for retirement accounts
- Brokerage firms are mitigating their exposure to fines and litigation by getting rid of the human beings
- So all of the rules and regulations that governments impose on financial institutions, particularly pertaining to smaller accounts, proportionately increase the cost of compliance to the point where firms are less and less likely to take on the smaller investor, hence the robotic investment advisor
- But while small investors are getting robotic advice, their strategies are being “dumbed-down” to meet the government’s idea of safe investments
- This will also destroy a lot of jobs, eliminating entry-level opportunities to new investment professionals