Quote of the Week 

“Holding on to anger is like grasping a hot coal with the intent of throwing it at someone else; you are the one who gets burned.” — Buddha

Technical Corner

Last week the markets started with a sell-off at the beginning of the week but rallied back to finish about where they started. The Dow was up 0.15%, the S&P 500 was up 0.31%, and the Nasdaq was up 1.08%. Year to date the Dow is up 0.14%, the S&P 500 is up 1.78%, and the Nasdaq is up 7.68% as of last Friday. The markets have sold-off today (Tuesday) by approximately 1% with a slight rally at the end of the day.

The markets have definitely lost their upward momentum. We got out of the stock markets on March 26th of this year due to a sell signal from our software. The markets are slightly higher by about 1% since our exit. However, this is misleading. The indexes have been holding steady only because the high technology flyers have been up, but the rest of the boring stocks have been down. I am seeing lots of pre-recession indicators coming into play.

I want to talk about one such pre-recession indicator which is a decline in M2 or otherwise known as money supply. What is M2? It is a broad measure of the money supply, including cash, checking, and savings accounts, time deposits, and money market mutual funds. In a healthy economy, M2 should be growing. Diminution of that growth suggests that a recession is coming but not necessarily soon. The broad measures of monetary growth can begin to decline up to two years before you have an actual recession.

This symptom results from an underlying disorder. M2 money supply grows with bank credit growth. It falls when banks reduce lending growth. They do that when finding credit-worthy borrowers gets harder, as it does in a recession. So, what I see is a condition that isn’t itself problematic now, but it points to one. This is a concern now as related to future stock prices. When people invest in the stock market, they are looking into the future of between six months and up to two years. If the prospect for appreciation in the future is considered poor, investors will either not buy now, or they may consider selling now. Just like any market, if there are more sellers than buyers, the prices come down.

In the first quarter of 2018, M2 growth decelerated to just above a 2% annual rate. Year-over-year, M2 growth slowed to just 3.9% versus the 6.6% long-term average growth. Additionally, bank credit growth declined at a 0.6% annual rate. Loans continued to inch upward but at a very slow rate. Loan volume does not typically fall until an economy is in a recession because firms borrow to finance an unintended rise in inventories as the demand is falling.

Note that credit growth doesn’t have to go negative. It rarely does, the main historical exception being the Great Depression. The key is its direction and distance below that 6.6% long-term average. The present 3.9% rate is the lowest since 2009. We all remember what happened in 2008 and 2009. This again points to recession on the horizon. Not next month or even this year but likely in 2019 or 2020. If we stay at the 2% M2 growth, a recession could come sooner.

The graph below shows the direction of M2 growth going down which is not a good sign.  


Tom’s Thoughts

Government Efficiency

Making government more efficient is a huge opportunity to provide better service for taxpayers and to reduce costs.  The following article provides some interesting examples of how blockchain technology can do just that.

The Next Big Technology to Transform Government

It’s called blockchain. Some say it will have a bigger impact than the internet.

BY LIZ FARMER | SEPTEMBER 2017 issue of Governing Magazine

Imagine this: Homeowners no longer need to buy title insurance. The chronology of ownership and claims for every piece of property in a jurisdiction are on an unhackable, constantly updated, always current ledger.

Or this: Governments, companies, and individuals can transfer funds from their banks to another bank or party instantly — without any administrative holding period or fee.

If these sound like future projects, they’re not. They’re both here-and-now developments using an underlying technology called blockchain. Cook County, Ill., is using it to build a land records ledger. Seven of Europe’s largest banks are buying into a blockchain that IBM is putting together for financial institutions. Beyond that, in the wake of questions about the security of voting systems during the 2016 presidential election, many believe blockchain technology will be the answer to securing future elections, allowing them to be audited in real time.

Blockchain is a type of distributed ledger technology (although many people now use the terms interchangeably). DLT has the ability to allow users to record data and transactions instantaneously in a way that is unhackable. A key to understanding blockchain is that each distributed ledger isn’t maintained or stored by any one entity, but is accessed and cultivated by a number of users. Everyone’s changes appear instantly on each user’s copy of the ledger and are encrypted in a way so that they can’t be changed or deleted. Thus, each new block is permanently linked onto an unbreakable chain.

In looking at the possible advantages of the technology to governments, Jennifer O’Rourke, business liaison for the Illinois Blockchain Initiative, notes that many folks in both business and government spend a lot of time making sure that every copy of a document in users’ hands is identical. “It’s really important that both our pieces of paper say exactly the same thing,” she says. “So how do we try to make sure that audit effort is immediate and efficient? This technology provides that solution.”

Early enthusiasts see blockchain as a way to improve a variety of record-keeping ventures, from business transactions to health records to voting rolls. In the public sector, governments in Asia and Europe have jumped at the notion of consolidating and linking their records. Among the former Soviet bloc countries, Estonia has long used blockchain-like technologies to secure health records, while Georgia’s National Agency of Public Registry recently moved its land registry onto the blockchain. Sweden is similarly testing a blockchain-based land registry, and Dubai plans to run its entire government on distributed ledger technology by 2020.

China’s approach to the technology has been to fertilize entrepreneurs with forward-looking ideas and then step out of the way. It has actively invested in consortiums and so-called blockchain parks that are designed to attract the best startups.

At the state and local level, there has been some movement. A few places are eyeing targeted pilot programs. But Illinois most closely mirrors the approach seen abroad by aggressively cultivating and investigating the technology’s use in government.

Illinois officials are acutely aware that they are exploring unchartered territory. The upside, says Michael Wons, the state’s chief technology officer, is an opportunity to transact business seamlessly and for less money. A government license filing that costs $500 and takes months to process, for instance, could instead take a day and cost a fraction of that amount — “could” being the operative word. “There are gaps,” Wons acknowledges. “That’s why we want to attract entrepreneurs to help us work through the holes.”

That’s what the Illinois Blockchain Initiative is all about. It’s a first-of-its-kind effort that kicked off late last year and counts six state and local agencies among its founding members.  The main goals are threefold: ensure thoughtful and light-touch governance as it applies to the technology; support building out the blockchain ecosystem from an economic development perspective; and promote government integration of the technology itself.

In terms of attracting talent, the initiative recently launched the Blockchain Center in Chicago. The center is charged with not only fostering development and collaboration between startups but also recruiting and training some of the state university system’s top computer science talent.

When it comes to the third prong — government adoption of blockchain technology — the initiative has already gained some insights. Before joining the project last year, the Cook County Recorder of Deeds’ office had already begun its own blockchain pilot program. It put roughly 2,000 vacant Chicago properties on the blockchain so that the system could prevent scammers from illegally selling houses they don’t own.
Scammers have been taking advantage of the fact that information about properties that had been seized by the city for nonpayment of back taxes are scattered among five government offices and therefore vulnerable to misuse. The scammers advertise the properties as fixer-uppers, obtain a copy of the property deed and use it in a sale to an unsuspecting homebuyer. Once the homebuyer hands over payment for the house — five, ten or twenty thousand in cash or money order — the scammers disappear. Unfortunately, a lot of unsuspecting homebuyers were forking over cash and putting additional money into repairs, reports John Mirkovic, the county’s deputy recorder of deeds.  “Then,” he says, “they find out they can’t record the deed because the person [from whom they bought the house] never owned it in the first place.”

The pilot program, though, ultimately raised more questions  than answers. Building a blockchain for just 2,000 properties was complicated enough. To scale up to a statewide level would require counties to unify the way they enter property information. But doing so would ultimately save homebuyers and homeowners millions of dollars as there would no longer be a need for them to buy title insurance. On a blockchain, the chronology of ownership and claims on the land are all there for anyone to see. “This is an opportunity,” Mirkovic says, “to make public records better and more educational for people.”

The Illinois initiative is kicking off four other government pilot programs. These focus on putting academic credentials, birth records, health provider registries and an energy credit marketplace on a blockchain.

And while Illinois’ initiative stands out, it’s not the only state that recognizes the role government can play in fostering the technology. This year, Nevada took steps to encourage use of the technology by banning blockchain taxes. Arizona passed a law legally recognizing signatures recorded on a blockchain and smart contracts. Delaware, where two-thirds of Fortune 500 companies are incorporated, passed a law allowing companies to use blockchain technology to store and transfer securities and communicate with shareholders. The move is expected to increase transparency in the shareholder voting process and automate the annual report and franchise tax filings in Delaware.

Like Illinois, Delaware’s forward movement was born from a desire to be out in front of other states. “I was talking to a lawyer in New York who said, ‘I have a client who wants to issue shares on a blockchain, but they’re concerned about a lawsuit,’” says Andrea Tinianow, Delaware’s director of corporate and international development. “That’s what got the ball rolling.”

However, there’s also a possible workforce concern: Making records seamless has the potential to eliminate jobs. Land title insurers, for instance, would have some objections to being made obsolete in Illinois by blockchain. And elsewhere, there’s been much discussion in the financial services industry about the processing and verification jobs the technology would kill. Similar back-office jobs in government, such as data entry work, could be rendered obsolete. But Mirkovic says the technology creates a larger opportunity to offer high-level jobs — and more of them. “There’s a way to organize this to give taxpayers a higher level of service,” he says. “If we got rid of 10 data entry people, we could hire 20 paralegals and still save taxpayers money.”

Finally, there are costs. Governments don’t have a lot of money to invest in experiments that might not work. A more practical role is to enable entrepreneurship and wait for private industry to develop best practices. In other words, it’s OK to be a little behind the first wave. “If I were to look at it in the typical hype cycle of tech,” says Illinois’ Wons, “we’re in the throes of enlightenment right now. It’s, hold on—let’s give it a whirl first.”

Farmer, Liz (September 2017) The Next Big Technology to Transform Government. Retrieved from http://www.governing.com/topics/mgmt/gov-blockchain-technology-government-services.html

By the Numbers

FEELING CONFIDENT – 47% of Americans surveyed in December 2017believed that there was at least a 75% chance that a diversified stock portfolio would increase in value during 2018. The 47% who expressed confidence in the 2018 stock market at the end of 2017 was the largest percentage recorded in a survey that has been conducted each December since 2002 (source: University of Michigan). – Michael A. Higley, BTN 05-28-2018

If you have friends or family in need of financial life planning services,

It would be the honor of Laurence Lof Financial Advisors to assist them.

We value your referrals!

Follow us on Facebook: https://www.facebook.com/LaurenceLof/

These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs. The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly. Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

Share This