Economist blames low capital spending on low interest rates.

In today's WSJ, we learn that economist Jason Thomas of Carlyle Group says that low interest rates are stimulating dividend increases and share buybacks at the expense of capital spending, which is expected to be negative in real terms in 2016. If he is right, then the Fed is preventing the very thing it seeks to achieve.

Here's how the article by Greg IP begins:

"One of the great mysteries of the recovery is why low interest rates have done so little to lift business investment.

"After all, that is supposed to be one of the ways monetary policy works: A lower cost of capital makes any project more viable. But what if lower interest rates are actually hurting investment by encouraging companies to pay dividends or buy back stock instead?

"That’s the theory advanced by economist Jason Thomas of private-equity giant Carlyle Group. It is at odds with conventional economics but has some intuitively appealing logic and supportive data.

"He calculates that since 2009, just after the Federal Reserve took interest rates to near zero, U.S. companies have boosted stock buybacks by 194% and dividends by 66.5%, but investment by 43%. Big energy companies have been slashing capital expenditures while boosting payouts. Even companies without the headwind of lower commodity prices are holding the line: McDonald’s Corp. and Eli Lilly & Co. are maintaining flat capital expenditures while raising dividends; Verizon Communications Inc. said it plans to trim its capital budget and has raised its dividend."

There's a great quote in the article:

Since 1976, higher-yielding stocks systematically outperform the overall market by 0.76 percentage point when inflation-adjusted interest rates fall 1 percentage point, Mr. Thomas finds. Moreover, the relationship becomes more extreme the lower rates go and the longer they stay low.

“John Bull can stand many things but he cannot stand two per cent,” Walter Bagehot, a 19th century editor of the Economist, once said, describing investors’ need for some minimum level of income.

It make sense to me.

Missing Fed gold found!

Ron Paul, Bernie Sanders and other conspiracy theorists have long suggested that the Fed has refused to audit its vaults since 1963 (?) because the gold simply isn't there. Today we saw the first pictorial evidence that Paul and Sanders are right when, in an unguarded moment, Fed Gov. Lael Brainard rested her chin in her hand.

Lincoln

Prof. Boskin is "living in a fantasy land."

President Obama has rightly remarked that anyone who thinks the economy isn't doing well is "living in a fantasy land."  I agree.  We are living in a fantasy land.

Michael Boskin, the economics professor who changed the inflation calculation for social security so that it would rise less than actual inflation, that during the reign of the male Clinton, writes the following in an op-ed in today's Wall Street Journal:

"Mr. Obama will likely go down as having the worst economic-growth record of any president since the trough of the Great Depression in 1933—over eight decades spanning 13 administrations. Mr. Obama thus far has overseen 1.7% average annual economic growth, and the Blue Chip forecast for the remainder of 2016 is only slightly higher."

Given that capital spending is expected to contract in real terms in 2016, the immediate future does not look much different from the recent past. Nonetheless, I may choose to fantasize about a better outlook. (But I certainly wouldn't put money on it.)

Will the Fed tightening cycle produce a long period of negative returns?

An interesting article in the WSJ this morning ("Pension Funds Pile on Risk" http://www.wsj.com/articles/pension-funds-pile-on-the-risk-just-to-get-a-reasonable-return-1464713013 ) pointed out the extent to which ZIRP has forced pension funds, which typlically have a 7.5% actuarial assumption, to adopt abnormal investment policies. The question one should ask oneself is whether "normalization" will force declines in all types of long duration securities.

Given the allocations in the chart in the article, I would assume that cash, both directly and in the form of deleveraging, could suddenly become the preferred asset class. That would constitute a rude surprise for many people.

Food writer offends 1.2 billion people, for starters

The back page of the TLS of May 13th has an amusing comment on political correction. Calvin Trillin wrote a poem about Chinese food, which he loves, in the New Yorker; it has produced some outrage. Here is the offending passage: "Have they run out of provinces yet?/ If they haven't, we've reason to fret./ Long ago, there was just Cantonese./ (Long ago we were easy to please.}/ But then food from Szechuan came our way,/ Making Cantonese strictly passé./ Sometimes we do miss, I confess,/ Simple days of chow mein but no stress."

It seems that it was the word "stress" that provoked the outrage. A letter of protest from Diana Keren Lee stated that this created an us-them conflict by employing "language that is reminiscent of the Yellow Peril of the nineteenth century, in which people of Asian descent were viewed as dangerous." The TLS's commentary ends with the following: "Have they run out of ways to be offended yet? Will the well of microaggression ever run dry? Even to ask is to offend."

The TLS commentary begins by noting that the writers of an earlier generation, such as Norman Mailer, Jean Genet,John Osborne, Erica Jong etc. considered it their duty to épater la bourgeoisie by defying conventions. Then they were lauded for it; today they would be run out of town. (You may click on the image to read the article.)

Ferguson Effect: Murders up 60% in 2015 in heavily black US cities

An article in this morning's Wall Street Journal ( http://on.wsj.com/1sNu9Ws ) discusses the effect of the end of "proactive policing" produced by federal policies and various pressure groups, such as "Black Lives Matter," on security in urban areas. Last year murders were up 17% in the 56 largest urban areas in the US, 60% in heavily black cities. In Chicago, in the first 4 1/2 months of 2016 murders are up 95% compared to the same period in 2014.

I am somewhat relieved that we let our family membership in the Museum of Fine Arts (Boston) lapse. There is no point in taking unnecessary risks.

Of course, this is consistent with everything else that is happening.

You may click on the image below to read the article:

The US military is starting to look more like America. (budget-wise)

An article on page A11 of this morning’s WSJ mentioned that the Marine Corps reports that 70% of its F/a-18 jets are not flight worthy due to inadequate maintenance.

This reminded me of Robert Gates testimony in Congress just before he retired as Secretary of Defense in 2011; he said that the Pentagon was being “destroyed” (he may have used another similar but different dramatic adjective) by the cost of veterans benefits and asked that they be removed from the defense budget.

The US federal budget overall has evolved into a support system for individuals (social security, Medicare/Medicaid, food stamps, etc.)  In fact, direct payments to individuals, including salaries, are now 70% of the budget.

:

Veterans’ benefits are $160.6 billion/year, or 4% of the total spending, while other military spending is 16%, meaning the VA is now 20% of total military spending.  Disability benefits for veterans were about $20 billion per year in 2000 AD and now are about $60 billion per year.  These rising costs are squeezing the other portions of the defense budget. 

PS: Another worrisome category is “interest on debt,” which is now 6%.  Were the average cost of federal debt to rise to 4%, this would be 20%.