Paper Chase: Midterms
The unemployment rate of is the best it has been since July, 2008. The 214,000 jobs created in October were slightly below analysts’ expectations. The data was also revised higher for previous months.
Crude oil is at a new 4 year low this week falling below 80 dollars. This is due to weakening global demand, increasing American supply, and the stronger dollar.
Jobs
In addition to the U3 number falling to 5.8%, the labor force participation rate is stabilizingg, and the U6 underemployment rate is now at the level where the Fed started tightening in 1994. All of these metrics show an economy and market headed in the right direction. As we previously mentioned, wage pressures are important, though I think they may have bottomed.
Midterms
The lack of growth in wages were not good enough for most Americans last week. Voters were unhappy with the President, his performance, and the economy as they took the Senate and governorships in Maryland, Massachusetts, Illinois and other blue states. This was not a vote of confidence for the Republican Party, but more a vote of no confidence in economy. This was the lowest turnout for a midterm election in 72 years.
In the new Congress, I expect trade deals with Asia and Europe giving the President fast track trade authority. There could be some corporate tax reform to lower the overall rate and close some loopholes. I don’t think much will get done though as a narrow window for action. Obama will act unilaterally on immigration, and I expect Republicans will fight him on that, along with Obamacare and many other issues.
While markets are normally positive after midterm elections, the bar and expectation of something positive coming out of Washington is so low, that anything will be a silver lining. I expect the midterms to have little to no impact on this beastly market. Specific legislation may include a medical device tax, and authorization of the Keystone Pipeline. If not, oh well. There is nothing but upside in this market.
We also know that there will be no confrontation over the budget and the debt ceiling. Eventual Senate Majority Leader Mitch McConnell’s stated goal is to get Congress and Senate working again. This means there will be no shutdowns of the government nor threats to default on the debt. In other words, we will not be shooting ourselves in the foot.
I continue to be optimistic despite and often times in spite of what’s happening in DC and not because of it. Lower oil prices are unambiguously good for the majority of the economy as 70% of it is consumer spending, and savings from lower gas prices would be tremendous. Earnings and markets are at an all time high, and in an environment where the 10 year treasury yield is 2.3%, equities are compelling. Roughly a third of the companies in the S&P 500 have higher dividend yields than the 10 year treasury. Multiples will continue to rise, and the biggest risk in the market now(higher inflation) is at least a year away. Actually, wage inflation would not be a bad thing now.
60,000 Dow by 2030?
Since 1960, the economy has grown at a rate of 6.7% per year. In 1960, the economy was 520 billion. Today, it’s 17 trillion. The entire economy in 1960 is worth less than what Apple is today.
In 1960, the Dow was around 600. It is now over 17,000. That’s 6.4% with depressions, inflations, recessions, terrorists attacks, wars etc. Adding dividends it’s 8% annually. The stock market and economy both double roughly every 10 years. We aren’t just seeing continuous growth but exponential growth.
Military Start-Up
At West Point, much of the history taught there is made by the people they taught. They have been teaching History of Warfare at Army since 1818. Eisenhower, Pershing and Patton all took it. This old and stayed subject has been revolutionized into a forum that is all digital, immersive, tactile and warlike. This is a full textbook on iPad with integrative movement and graphics. Cadets are able to see place, flank and maneuvering of troops by generals. Army wants to keep the smell of gunpowder in the course. While the Ivies traditionally taught the classics, the service academies focused on engineering, math, and science. The business of creating business is not their business.
West Point wants to rewrite military history by bringing it into the 21st century. An endowed textbook is a sustainable model where revenue would come back in to support the text. 1,000,000 new words, 1000 new maps and 49 new authors was beta tested with 1200 cadets. There was a 46% increase in A grades over a 5 year running average. This new way of learning may be critical for all of us for war is not like business, sports or law. It is much more complex. Americans are not militaristic as people, but we go to war a lot. Citizens need to understand war to be good citizens. Happy Veteran’s Day.
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