Taiwan Semiconductor Beats On Earnings and Revenue

Taiwan Semiconductor Manufacturing announced its quarterly results on Thursday, October 19, 2017. The company reported EPS of $3.47 versus the consensus estimate of $0.56. Revenue also beat coming in at $252.11 billion versus the consensus estimate of $249.49 billion.
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Jobs Report Shows 222,000 Jobs Added In June

The jobs report showed that non-farm payrolls jumped by 222,000 jobs in June, the Labor Department said on Friday, beating economists’ expectations for a 179,000 gain.

Data for April and May was revised to reveal 47,000 more jobs than previously reported.

Wage growth was unchanged from May and softer than expected. Average hourly earnings rose by 0.2% month-over-month, and 2.5% year-over-year.

The Federal Reserve looks like they were right when they said economic weakness in the first half of this year was transitory although I’d like the July jobs report to confirm this. The Fed seems on track for a possible rate increase toward the end of the calendar year as well as toward a decrease in the $4.5 trillion balance sheet.

Jobs Report

President Donald Trump has vowed to boost economic growth and further strengthen the labor market by cutting regulation and slashing taxes.

May’s jobless rate was 4.3%. A wider measure of unemployment, including discouraged workers and those who are working part time but favor a full-time job, inched up from 8.4% in May to 8.6% in June. It’s pretty obvious that the trend in employment growth is strong enough to keep the unemployment rate trending down.

Wages are finally being raised by companies. I expect unfilled jobs to boost wage growth, which has remained low.

The labor-force participation rate inched up to 62.8%, from 62.7%.

While the hourly wage component is below consensus estimates, the more powerful headline payroll number coupled with upward revisions, suggest that wages should rise in the near to medium term. The gain in hours in the work week suggests that economic activity is picking up under the surface.

Average hourly earnings increased 0.2% in June after gaining 0.1% in May. That raised the year-over-year increase in wages to 2.5% from 2.4% in May.

Despite the lack of a big pick-up in wage growth and core inflation, the Fed will push forward with hiking interest rates. The unemployment rate is already unusually low and is likely to fall further over the coming months.

The increase in jobs reflected hiring of new graduates. Ultimately the millennial’s are starting to get more jobs. Hiring in the service sector was strong. Health care hiring was up. The retail, construction and manufacturing sectors were weak but the economy appears strong enough to absorb these workers. There does seem to have been a modest deceleration of hiring within the last 12 months and an average of 187K a month job creation is high enough to absorb any remaining slack in the US labor market. The market needs to create 75,000 to 100,000 jobs a month to keep up with growth in the population.

Economists had expected employment gains of between 175,000 and 178,000.

The most shocking number in the jobs report came from the retail sector. Retail hiring rose for the first time since January, pausing an exodus of jobs from large department stores that are losing ground to ecommerce. There were 8,100 workers added in retail breaking its 4 month losing streak.

The employment gains of June exceeded the average for 2016, reinforcing views that economic growth is back on track in the second quarter.

The most important thing is that jobs are out there, and job hunters with marketable skills are in a good position to move on or move up.

Construction added 16,000 jobs.

The Fed raised its benchmark overnight interest rate for the second time this year in June. But with inflation retreating in May, economists expect another rate hike in December.

Wages are certainly weaker than anticipated, so it keeps alive the whole debate regarding the relationship between slack and inflation and how far the Federal Reserve should allow the unemployment rate to fall.

The most jobs were contributed by the medical sector. No jobs were added by the coal sector.

As the labor market reaches toward full employment, the pace of job growth is expected to slow. There is growing anecdotal evidence of companies struggling to find workers and so I expect these companies to raise wages to fill the vacant jobs.

Government employment rebounded by 35,000 jobs.

The automobile sector lost 1,300 jobs as slowing sales and inventories induce manufacturers to cut back on production.

US Manufacturing Grows At Faster Pace In June

The US manufacturing sector picked up in June according to the Institute for Supply Management report. In fact, it is the fastest growth in manufacturing in 3 years.

The ISM said its purchasing managers index climbed to 57.8 in June from 54.9 in May, with a reading above 50 indicating growth in the manufacturing sector. Economists had forecast a 55.2 print.

The positive surprise in US manufacturing came as the production index jumped to 62.4 in June from 57.1 in May and the new orders index surged up to 63.5 from 59.5.

The positive surprise in manufacturing shifts sentiment towards the Bulls. Remember, much of the bearish commentary over the last few months was supported by the fact that US manufacturing was contracting for all of 2017. June’s surprise number breaks that bearish trend.

Needham Gives Applied Optoelectronics a Strong Buy Rating

May 22, 2017: Needham initiates coverage of Applied Optoelectronics with a Strong Buy rating and a price target of $85. Needham says that they see substantial upside to Applied Optoelectronics’ revenue forecasts, gross margin estimates, and valuation. Needham thinks Applied Optoelectronics will beat Street estimates as the industry rolls through the steep ramp phase of the Data Comm upgrade to 25G/100G. Needham thinks Applied Optoelectronics is the market share leader and lower cost supplier. Needham expects strong demand growth during the next several years as the Web 2.0 Big Data, Social Media and IaaS companies drive efficiencies through their current and new scaled-out Data Center footprints.

April 20, 2017: Applied Optoelectronics Inc. will replace Adeptus Health Inc. in the S&P SmallCap 600, effective prior to the open on Tuesday, April 25. Adeptus Health has filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code to pursue a plan of reorganization and has been halted by the NYSE effective before the market open today.

April 18, 2017: Hearing takeover rumors circulating about Applied Optoelectronics. The rumor is that Cisco Systems could be interested in acquiring the company. Could not find a credible source for the rumor.

April 10, 2017: Sell Applied Optoelectronics for a big 58% win and congrats if you made money on the trade.

March 6, 2017: Applied Optoelectronics announced the development of Electro-absorption Modulated Lasers (EMLs) operating at a data rate of 10 Gigabits per second (Gbps).

Applied Optoelectronics’ 10 Gbps EMLs are designed specifically for 10GBASE-ZR Ethernet and cable TV (CATV) Remote PHY connectivity to enable deployment of the next-generation FTTH, telecom, and CATV networks. The lasers are available at wavelengths spanning the ITU-T C-band dense wavelength division multiplexing (DWDM) grid and are able to support fiber transmission distances up to 80km. They also feature a high laser chip operating temperature up to 55oC, enabling commercial and industrial operating temperature ranges for transceivers.

February 24, 2017: Applied Optoelectronics reports Q4 EPS of $0.84 versus the $0.69 estimate. Revenue also beat coming in at $84.9 million versus the $82.7 million estimate.

The CEO Dr. Lin said, “Our ability to internally manufacture lasers and light engines provides us with cost-leadership advantages, a faster time to market, and the ability to quickly scale to demand. Looking ahead, as the 100G transition accelerates this year, we see the opportunity to build on our momentum and expand our market leadership.”

February 22, 2017: Applied Optoelectronics announced the immediate availability of 100G QSFP28 10km transceivers based on the 4WDM-10 MSA specification.

The new product family supports hyperscale datacenters, datacenter interconnects, and backhaul applications for metro and mobile networks. The modules consume less than 3.5W of power and support 100Gbps transmission over 10km duplex single-mode fiber. The modules are based on the same CWDM wavelength grid as existing 100G QSFP28 CWDM4 2km modules, and are interoperable with CWDM4-compliant modules up to 2km. The transceivers leverage AOI’s industry-leading manufacturing capacity and vertical integration, with in-house 25G laser diodes, light engine packaging, and module production.

The new modules are important to hyperscale datacenter operators who need solutions to extend interconnect distances beyond 2km, a realm that had previously been served by more expensive solutions relying on coherent optics or other specialized designs. By enabling longer distances while still being interoperable with shorter distance modules, this solution reduces cost and simplifies network planning.

January 15, 2017: Roth Capital raised the price target of Applied Optoelectronics to $34 from $30. Roth Capital also reiterated a Buy rating on Applied Optoelectronics. Roth Capital says that Applied Optoelectronics is extremely well positioned to take advantage of the transition from copper to optical interconnect inside the datacenter. Roth Capital believes this quarter’s outperformance validates that thesis and likely indicates that new hyperscale customers have been added. Given the macro tailwinds, as well as the strategic positioning, Roth continues to believe a 20x 2017 multiple is warranted. Thus, with their FY:17 forecast rising to $1.71.

January 11, 2017: Applied Optoelectronics reports preliminary Q4 EPS of $0.77 to $0.82 versus the $0.50 estimate. Revenue will come in between $84.5 million to $84.8 million versus the $77.4 million estimate.

Dr. Thompson Lin, Applied Optoelectronics President and CEO said, “Accelerated demand for our market-leading datacenter products and increased capacity fueled our results. Additionally, we continued to drive manufacturing efficiencies, which contributed to a record gross margin. We are excited by the good close to the year and look forward to sharing the additional details of our fourth quarter performance on our conference call in February.”

Applied Optoelectronics, Inc. is a leading developer and manufacturer of advanced optical products, including components, modules and equipment. AOI’s products are the building blocks for broadband fiber access networks around the world, where they are used in the internet datacenter, CATV broadband and fiber-to-the-home markets. Applied Optoelectronics supplies optical networking lasers, components and equipment to tier-1 customers in all three of these markets.

TTM Technologies Beats on Earnings and Revenue

May 03, 2017: TTM Technologies reports Q1 EPS of $0.37 versus the $0.29 estimate. Revenue also beat coming in at $625.2 million versus the $615 million estimate.

The CEO Thomas T. Edman said, “TTM delivered strong organic year on year growth in the first quarter of 7 percent, near the high end of our guidance, and profitability which exceeded our forecast. On a year over year basis, most end markets grew, with the fastest growth coming from the cellular, computing and aerospace and defense end markets. This growth, along with strong operational execution, resulted in non-GAAP EPS above the high end of our guidance. These results represent the highest revenue and EBITDA for a first quarter in the history of the company.”

February 8, 2017: TTM Technologies reports Q4 EPS of $0.58 versus the $0.45 estimate. Revenue also beat coming in at $706.5 million versus the $672 million estimate.

The CEO said, “On a year over year basis, most end markets grew, with the fastest growth coming from the cellular and automotive end markets. This drove substantial operating income leverage in the business resulting in the highest non-GAAP EPS in the history of the company.”

December 12, 2016: Detecting heavy call activity in TTM Technologies, 5000 June $17.5 calls trade at $0.65.

November 30, 2016: Stifel raises price target of TTM Technologies to $15, from $13, and reiterates a Buy rating.

October 30, 2016: JPMorgan raised the price target of TTM Technologies to $16 from $14, and reiterates an Overweight rating.

TTM Technologies, Inc. is a major global PCB manufacturer, focusing on quick-turn and technologically advanced PCBs and the backplane and sub-system assembly business.

NN Inc Beats on Earnings and Revenue

May 03, 2017: NN Inc reports Q1 EPS of $0.47 versus the $0.42 estimate. Revenue also beat coming in at $226.3 million versus the $216 million estimate.

The CEO Richard D. Holder said, “We are pleased with our first quarter performance. Sales grew organically in all three groups for the second consecutive quarter, driven largely by new programs in our medical and aerospace end markets. Additionally, we saw our industrial markets continue to normalize. Finally, we continue to see improvements in our operating performance year over year driven by the NN Operating System.”

December 21, 2016: Lake Street Capital Markets initiates coverage of NN Inc with a Buy rating.

NN, Inc. is a leading global manufacturer of high precision metal and plastic components and assemblies. Founded in 1980, the company is headquartered in Johnson City, Tennessee. With over 5,400 employees at our 40 manufacturing facilities in North America, South America, Eastern Europe, Western Europe, and Asia, we proudly serve customers around the globe with high-quality precision solutions.

3D Printing Stocks For Playing Trump Trade War With China

A trade war between the US and China is likely going to start next year with a key promise of Trump to declare China a “currency manipulator” on day one of his Presidency and to enact a 45% tariff on certain Chinese produced products sold in US markets.

China has threatened to retaliate by dumping Boeing and instead ordering from Airbus. China has said it will block sales of US automobiles and iPhones in China and that US soybeans and maize imports will be halted.

To better understand why I think 3D printing stocks are a good play on a trade war with China, we have to go back in history and use macroeconomic analysis to see how we got to where we are today.

China Joins the WTO

In 2001 China joined the World Trade Organization and began flooding America with illegally subsidized exports. Over the next ten years, the US would shut down over 60,000 factories, lose more than 5 million manufacturing jobs and see it’s historical annual rate of GDP growth cut by two-thirds.

Trade Deficits and Offshoring Subtract From GDP Growth

As a result of China joining the WTO, structural problems hit the US, Europe, and other major economies like Japan and South Korea.

If a country like the US runs a trade deficit, this directly subtract’s from its GDP growth. From that observation, you can see what the two most important structure drags on growth for many developed nations like the US have been.

The first has been the drag of the large trade deficits. The second has been the drag on lower domestic investment growth, as multinational corporations like Caterpillar, General Electric, and General Motors, have built more plants in other countries and fewer plants in the US.

Where have most of the offshoring of productions gone? The answer is China.

It’s no accident that the start of America’s era of slow growth in 2001 coincided with China joining the World Trade Organization or WTO, which gave China full access to American markets.

Contrary to the rules of the WTO, China began to flood the US with cheap, often illegally subsidized exports, and over the next decade and a half; the US would see the loss of over 60,000 factories and more than 5,000,000 manufacturing jobs.

The Emergence of Structural Trade Imbalances

During this time the economies of Europe, India, Brazil, among others, would likewise begin to have significant growth-sapping trade deficits with China and this would reduce global growth below what it would otherwise be.

The result would be the structural emergence of a growth-sapping global trade imbalance, as illustrated in the following set of figures.

Here, we see chronic annual trade deficits on the order of 200 to 400 billion dollars annually, with the heavily exported China.

By the year 2012, these deficits would help slow growth dramatically in both Europe and the US, and as a result, China’s two biggest customers would thereby be too weak to sustain China’s export-dependent growth.

In a ripple effect, slow growth in China, in turn, would lead to slower growth in so-called commodity countries like Australia, Brazil, and Canada, whose economies depend heavily on the sale of natural resources like coal, iron ore, and soybeans to China. More broadly, these structural trade relationships would lead to a new type of butterfly effect the world had not yet seen.

Here, we see that weak demand for Chinese exports from Europe and the US leads to weak import demand from China for commodities and other natural resources. In this way, chronic trade imbalances between China and other countries around the world would make it very difficult for a robust, global economic recovery.

Why Keynesian Stimulus Failed

From this butterfly effect, you can see why expansionary, Keynesian fiscal and monetary stimulus in the US and Europe, did not have the full effects anticipated. Indeed, this short-run Keynesian approach did nothing to address the underlying, chronic, long-term structural trade imbalances, acting as a drag on both the U.S. and European economies and by extension, much of the rest of the world.

3D Printing and China Manufacturing

China is rapidly losing ground to 3D printing technology. The business model of it being cheaper to manufacture goods in China could come to an end over the next ten years.

US companies will soon be able to make most things in small 3D printer factories right in your neighborhood or town. Factories, as we know them today, will get broken up and made smaller and local. Newsweek writes

In the distributed manufacturing scenario, the carbon footprint, so to speak, of each shoe drops precipitously. Asian manufacturing is toast, probably upsetting the global balance of power. And factory jobs—well, they’re likely never coming “back.” 3-D printing automates a lot of what factory workers would’ve done. The hope is that distributed manufacturing creates a whole new set of opportunities for middle-class workers and keeps money local instead of funneling it overseas.

Coming Trade War With China

A Trump Administration will be placing tariffs on Chinese-produced goods effectively penalizing US corporations that manufacture products in China. China will retaliate by blocking the sale of US goods inside of China.

This trade war with China will only speed up the adoption of cheaper and faster 3D printing facilities inside the US IMO.

Many US businesses could increase their purchases of 3D printing machines as a result of the worsening trade relationship with China as well as the public outcry over the loss of millions of US jobs to China.

The earnings recession which began in Q1 2015 prevented businesses from buying 3D printers as consumer demand was uncertain. This last quarter we saw an end to the earnings recession, and if corporate earnings continue to rise, we could see more companies buying 3D printers.

Big Players and Big Money Flowing Into 3D Printing Technology

In September of 2016, General Electric acquired Arcam for $1.4 billion as it makes a major move into 3D printing.

In May of 2016, the 2D printing giant HP revealed that it has been spending billions of dollars developing 3D printing technology and announced the release of its Jet Fusion 3D 3200 and 4200 printers. The more powerful 4200 was slated to begin shipping in the fall of 2016, while the 3200 will be available in 2017. HP claims these polymer 3D printers are up to 10 times as fast and twice as cost-efficient as current 3D printers powered by the leading technologies. HP sees the incredible future for 3D printing and aims to become the leading 3D printing company.

3D Printing Stock Chart

Chart Comments: Not a great looking chart. Twiggs Money Flow is rising but still below the 0% line. The 50-day moving average (blue line) at $15.21 is currently being tested, and a breakout above this level would be bullish.

Stratasys Stock Chart

Chart Comments: Stratasys’ chart looks even worse than DDD. The Twiggs Money Flow is rising nicely, but it is still below the 0% line.

HP Inc Stock Chart

Chart Comments: Twiggs Money Flow falls below 0% line after missing on revenue; however, overall, the strongest looking chart of the 3D printing stocks. Fantastic valuation at P/E 9.9 and forward P/E 9.2. Wait for candle over candle bounce before taking a long entry.

Disclosure: I do not hold any stocks mentioned in this article.

What The Trump Win Means For Multinational Corporations

I predict that a Trump win means down for the economy at first, then upward as the US consumer strengthens from domestic job growth.

The down first move in the economy will come from inefficiencies caused by forcing multinational corporations to bring domestic production facilities back to the US or face steep tariffs.

Several traders have emailed me asking what stocks are good to short or go long in a Trump Administration.

Here is how a Trump win is likely to impact industries negatively.

IoT Industry

Tesla is the big driver of autonomous vehicles. Tesla is shipping all new Model 3 cars with the hardware for full autonomy. These autonomous cars are also electric cars. Tesla’s new Model 3, after tax credits, was priced for under $30,000. The Trump Administration is likely to be unfriendly towards companies like Tesla that benefited under the Democrats crony capitalism. The Trump Administration will likely offer few proposals for combating climate change. Trump will likely not pursue “green policies,” which means the discontinuation of “green” tax credits like the kind Tesla benefits from. Without these generous tax credits, Tesla automobiles will be more expensive which will slow purchases and slow the spread of the self-driving car.

Industrial IoT trends have been towards automation and replacing human workers with machines and robots. Trump has promised to renegotiate trade deals to bring manufacturing jobs back to the US. If IoT trends are taking away US jobs, it’s a pretty good bet that a Trump administration will advocate against industrial machines and robots that replace human labor.

Payments Industry

Trump has threatened to cut off remittance send from the US to Mexico until Mexico pays for a border wall. Trump is considering forcing Mexico to pay for the wall by invoking the US Patriot Act to cut off portions of the flow of money between the US and Mexico until Mexico makes a one-time $5 billion to $10 billion payment for the wall. Mexico is the largest receive destination for US remittances, cashing an estimated $25 billion in 2015. Western Union recently doubled the size of its retail network in the country, and MoneyGram unveiled a product in partnership with Walmart to make it easier and less expensive to send money from the US to Mexico. Cutting off the flow of money from the US to Mexico, even temporarily, would negatively impact Western Union and MoneyGram.

A Trump Administration will focus on bringing manufacturing back to America, specifically targeting firms like Ford and Apple to build products in the US rather than in Mexico or China. To implement a plan of bringing manufacturing back to the US, a Trump Administration will need to use tariffs and issue tougher manufacturing restrictions. This will likely cause a major decrease in international business spending as more businesses are either unable to make transactions due to restrictions or unwilling to pay the extra fees.

Technology Industry

Net neutrality is the concept that all data transmitted over the internet should be treated equally. Trump has not released official statements about the topic of net neutrality, but he has expressed distaste for President Obama’s approach. A Trump Administration could push to change the FCC’s net neutrality rules which would result in different price points for various data types and enable service providers to throttle data delivery.

In a Trump Administration, technology companies will likely be forced to change encryption policies to provide backdoor access to the US government. Trump supported the court order calling for Apple to facilitate access to an encrypted iPhone used by the San Bernardino shooter and asked consumers to boycott the company until it complied. Civil liberties groups are likely to take the Trump Administration to court. Requiring companies to provide backdoor access to the US government would violate consumers’ trust and likely lead to a decline in users of these companies’ products at first. Over time, though, consumers will likely not care.

Policy changes by a Trump Administration would harm tech companies that manufacture overseas, like IBM and Apple. Apple’s iPhone is likely going to become much more expensive for US consumers.

Apple and Google make more of their revenues overseas than within the US. Higher tariffs and protectionist policies could make it more expensive for tech companies to move and sell their products around the world. The broader use of trade tariffs would likely spur more countries to invest in domestic technology sectors within their own countries and to reduce their reliance on US technology providers, which would further hurt US tech multinational corporations.

Large mergers between service providers and digital content companies could face greater scrutiny. Trump said that the $85 billion AT&T and Time Warner merger would not be approved by a Trump administration because “it’s too much concentration of power in the hands of too few.” A Trump Administration could lead to a decrease in M&A activity.

The technology sector has been granting more H-1B immigration visas to highly skilled workers with STEM backgrounds.

A Trump Administration will likely include fees that will make it more expensive for companies to hire foreign workers through the H-1B visa program. If such fees are enacted, it would likely drive up wages for highly skilled IT talent even further across the technology sector.

E-Commerce

Protectionist policies and tariffs will increase the cost of goods. Trump wants to tax US companies that choose to manufacture goods overseas. Such a policy would harm retail companies that manufacture their goods overseas. Most retail companies will raise their prices to offset these tax penalties and the added cost of building manufacturing plants in the US.

E-commerce companies are pushing to deliver products to consumers as fast as possible. Think Amazon, and it’s Amazon Prime membership with free two-day delivery as well as its drones for remote area deliveries. This fast delivery involves automation within distribution centers. A Trump Administration will likely move to protect American workers from being displaced by machines thus forcing e-commerce companies to invest in traditional forms of labor over cheaper and faster new ones.

While a Trump Administration will be great for the US economy long term IMO, short term, I think we get a pullback in the economy while corporations adjust to higher costs and lower sales.

Rising Wages and Rise of the Machines

As wages rise, more and more business owners are turning to machines instead of human labor. President Obama and Democrats have spent the last 8 years replacing high-paying jobs in the manufacturing sector with low-paying jobs in the services and health care sectors. But in all fairness, both Republicans and Democrats are to blame for outsourcing, offshoring, and the elimination of good-paying manufacturing jobs. Both Democrats and Republicans have demonstrated how not to build up a middle class that will support the economy.

Technology is a rising threat to jobs as more robots are used in the workplace. Since wages began rising in 2015, there has been a significant increase in the implementation of robots, starting with the fast-food industry.

In my home state of California, Zume Pizza has replaced its human chefs with robots, cutting labor costs in half. TechCrunch visited Zume Pizza for a tour of their robotic pizza factory.

In response to recent minimum wage hikes, Wendy’s is now replacing fast food workers with robots. The fast food chain announced it would start automating all of its restaurants by installing self-serve kiosks in 6,000 locations by the end of the year. Although McDonalds has already been experimenting with kiosks, Wendy’s announcement is the largest roll-out to date and will likely spark a trend leading to fully robotic restaurants.

Uber is experimenting with using self-driving cars in parts of America, and there’s a push to start using self-driving trucks for long-distance deliveries.

Research firm Forrester reports that robots could eliminate many positions in customer service, trucking and taxi service which amounts to about 6% of the U.S. job market.

Robots are slowly making their way into every industry. ICICI Bank Smart Vault now offers customers the ability to access their valuables 24 hours a day while reducing their labor costs to provide such a service.

Royal Bank of Scotland recently announced that it would soon unveil Luvo — a “human” AI that can answer questions online and mimic human empathy. This robot will be able to serve customers 24 hours a day, reduce the workforce and cuts costs.

A Swedish bank plans to use the robot Amelia for customer services. And companies in China, Japan, and Taiwan have already implemented Softbank’s Pepper robot.

Previous technological revolutions over the centuries have mainly focused on enhancing human productivity. My concern with the robotic revolution is that its goal is increasingly that of replacing human productivity.

Alex Tabarrok and Tyler Cowen of George Mason University, who had a significant impact on my life through their International Trade course, debate the issue of whether machines will take our jobs. Tyler Cowen agrees with me that the robotics revolution is one of the leading causes of concern for the future of the US economy. Alex Tabarrok’s “don’t worry, be happy” argument is the same one we heard regarding international trade in the 90s and about how it was going to create so many jobs in the US. After 20 years of economic data, we can now say that international trade was not so good for the US economy. Economists underestimated Game Theory and the “cheat” motivator regarding currency devaluation and government intervention in the free market.

Here is the debate between Tyler Cowen and Alex Tabarrok in its entirety and you can decide who you agree with more.

Terrifying US Pension Fund Charts

Pension funds in the US could be close to a collapse. There is an estimated $1.9 trillion shortfall in U.S. state and local pension funds because of low-interest rates and a sideways US stock market. Even stocks falling overseas is a problem for pension funds.

Credit Suisse published the chilling chart below on the funding gap at the largest 100 US pension funds.

Bloomberg writes

Pensions count on annual investment gains of more than 7 percent to cover much of the benefits that come due as workers retire. But public plans had a median increase of 1 percent for the year ended June 30, the smallest advance since 2009, when they lost 16.2 percent, according to the Wilshire Trust Universe Comparison Service.

Now it seems like there is a run on the Dallas Police and Fire Pension as employees try to claim benefits before the system becomes insolvent.

Pension funds are starting to drop hedge fund investments. Turn To 10 writes

Rhode Island plans to scale back its investments in hedge funds by more than $500 million over the next two years, and reallocate those funds to more traditional investments with lower fees.

Pension funds like Rhode Island are starting to be more defensive and are hunkering down. The problem though is that defensive US Treasury bonds mean way below 7 percent returns which means more shortfalls in funding are coming.

There’s no way pension funds can stay above water in an environment with low-interest rates and with equity markets at valuations that are sky high.

But wait, Democrats say everything is good, just look at consumer confidence that came out this week at 104.1.

consumer-confidence

There is massive offshoring of good paying US jobs, stagnant wages, soaring costs of health care and education, contraction in manufacturing, falling retail sales, and consumers pensions are dangerously close to collapse. Meanwhile, consumer confidence is hitting multi-year highs? Consumer confidence is starting to look like just another tool of public manipulation that’s out of touch with reality on the street.