Politics, The Economy, and More

A Couple of Debt Thoughts

2011-05-12T04:06:00.000-07:00

I thought this was a really good point made by John Mauldin [who, as a side note, is from Texas and a Republican].

"As we bring government spending down, unless it is accompanied by private-sector growth, we will see overall real GDP shrink. That is just the how it works. Now, the smaller government expenditures and deficit will mean more money for private-sector investment and productivity growth, but the process of simply getting the deficit under control is going to mean slower growth. Wrap your head around that. While Republicans (including me) want to control Congress and the presidency in 2012, the policy choices made in 2013 will not be met with a robust return to 4% growth and immediate jumps in employment levels. It is going to take a lot of education to convince voters that there is no magic in spending cuts (or even tax increases) and that we will need to stay the course, even while there is a general malaise in the economy. My advice to my fellow Republicans? Do not sell the concept that voting Republican will provide a quick fix. It will get you slaughtered in 2014."

I think the real key is for the Republicans is to communicate the above very clearly in their campaigns. I don't have much hope for their ability to do that given their exceptionaly poor communication skills in the last two elections (and right now for that matter), but maybe more of the voters at least understand this than last election... maybe... hopefully...please? The way I see it, the solutions that need to be implemented are going to take a while and we will have to stick to the plan, even though it will hurt. If we decide, prematurely, that we would rather kick the can down the road then it is going to hurt all that much worse the next time we are almost forced to get our finances in order.

I also thought, given all the problems going on economically worldwide, that the following link to an article by Diane Swonk of Mesirow Financial is a great, down to earth, explanation of all of the pitfalls out there and how this all could play out. Obviously the U.S. debt and policy decisions made because of it are at the center of most of the problems. Click Here for the link.

Pulling the Splinter Out

2011-04-14T04:11:00.000-07:00

“Where would U.S. incomes, earnings and corporate cash-flows be today if it weren’t for the $4.5 TN increase in federal debt over the past 10 quarters? Ponder for a moment the liquidity backdrop in the Treasury market had the Fed not intervened in the marketplace with quantitative easing (#1) and “QE2” - in the process convincing the marketplace that the Fed had committed to operating as a reliable market “backstop bid?” What would be the state of the household balance sheet today if not for the unprecedented fiscal and monetary policy response? Is it sound analysis to trumpet the pristine state of the corporate balance sheet and celebrate the improving household balance sheet - when the Fed is doing unconscionable things to its balance sheet and the federal government is in the process of destroying theirs?”

“How would global markets and economies be functioning these days had it not been for the almost $1.6 TN increase in international central bank reserve holdings over the past 12 months – or the $2.75 TN, 40%, growth in two years, to $9.45 TN?”

“Today, ECB President Trichet stated that “it is important that the dollar is a strong currency.” He also said that “fixing imbalances must focus on deficit countries.” To this day, Greenspan argues that foreign central bank Treasury purchases were instrumental for the rate environment that inflated our nation’s housing Bubble. And the argument that our trading partners – and their undervalued currencies and steady accumulation of American I.O.Us – are most responsible for global imbalances will not be resolved anytime soon.”

“Let the world adjust; just ensure that the Fed keeps doing what it's doing. And I just scratch my head in disbelief at how little we’ve allowed ourselves to learn over a turbulent 20 year period of interplay between “activist” policymaking and serial market Bubbles. After doubling mortgage Credit in seven years, our system is now on track to double federal debt in 4 years. And the markets couldn’t be more pleased with it all. It leaves one pondering what type of circumstance will be necessary to finally force us to start getting our house in order – to return to some semblance of disciplined central banking and fiscal responsibility.” David Nolan - Weekly Commentary

As I was reading the above quote I really started to think about everything our government has inserted itself into and had to start thinking: Where would our economy be if our government had not made money and services so easily accessible to all?

I think that really you can take two views on that. You can either say that we would be in a complete pit of depression for years (probably what the fellow I quoted believes) after each economic correction or you can believe that deep down that Americans are workers. When our backs are against the wall, and sometimes even when they aren’t, we step up to the plate and work harder putting us into a new boom cycle.

So where do I think we would be without government “help”? I think we would be regularly going through the boom and bust cycles we have been, but with a lot less of the extremes like we saw in 2008, and in general we would be prospering. Of course the government and central bank did step in too much and now they will have to get out or we will again have a huge burst. When they do step out of the way it is going to hurt. This interference has become very much like a splinter that has been allowed to fester for too long. Sure we could leave it there and keep covering it up or we can remove it (with all of the complaining and whining that comes with it) and finally start the healing process. While I don’t believe that many of our current representatives have the stomach for it, some do. Also, while there is a lot of anger out there and most can’t agree on how to start getting the splinter out, most agree (according to some polls I have read) that it has to come out now.

If Only...

2011-03-05T05:54:00.000-08:00

"Winds of Change in Unionland" by Holman Jenkins

How's the view from Solidarity House? Just asking.

Solidarity House is the headquarters of the United Auto Workers in Detroit, whose windows gaze figuratively across the labor hinterland of the upper Midwest. At least it used to be a labor hinterland, though its politicians this week are taking an axe to public-sector unions. In Indiana and Michigan, proposals even target private-sector unions with bills to turn those states into "right to work" states, like Tennessee or South Carolina.

It all serves to underline the improbability of the agenda rolled out in January by the UAW's new boss, Bob King. Mr. King's grand plan is to organize Toyota and other transplant factories in Southern states where unions already aren't popular, where the laws already are unfriendly, and where previous campaigns have yielded nothing but defeat.

That Mr. King is not dumb is illustrated by his success in a previous job. He led the UAW's successful drive a decade ago to organize the auto parts suppliers. He won by playing the only card the UAW has to play, its politically-protected labor monopoly over the Big Three. He leaned on the Big Three to lean on their suppliers to accept the union on a card-check basis—without a secret ballot vote. In return, the UAW agreed to stand aside while the Big Three shut down some of their own plants and laid off workers.

That was the deal, and the episode offers three important insights. The union had little else to offer supplier companies or their workers, who folded simply under threat of losing their Detroit contracts.

Secondly, the supplier campaign was a distraction from the fact that the Big Three's own workers were giving ground on jobs and job security.

The third lesson, bluntly, is that Mr. King is blowing smoke about Toyota. The UAW has no card to play. The union's labor monopoly gives it no leverage over the transplant factories, and the union's appeal to their nonunion workers, realistically, is less than zilch right now.

The UAW finale has begun. It's the beginning of the end for the union, except as administrator of its membership's retiree health-care benefits (which increasingly looks like a bone thrown the union by the Big Three to give labor honchos a reason for living).

Let us put away our Woody Guthrie records. Detroit's "turnaround" has come not because everyone got a warm feeling and pulled together as a team. Accurately stating matters, the New York Times recently noted that the homegrown industry's "cost structure has been reduced substantially, first through worker buyouts and plant closings and then by eliminating debt during its bankruptcy."

This has the virtue of getting the chronology right. The big labor concessions all came before a government-sponsored bankruptcy that reorganized GM and Chrysler in 2009. In each case, the union gave ground because it knew the one way to outrun its all-important political support in Washington would be to drive the Big Three into Chapter 11.

Bankruptcy came to GM and Chrysler anyway in the financial crisis, followed by a taxpayer bailout. Mr. King knows, in the current political atmosphere, he can't go back to playing his monopoly card to extract anticompetitive terms from the Big Three.

He says the union has changed and wants a new nonadversarial relationship with management. But what exactly has the UAW got to offer? Evidence is lacking that organized labor actually adds value, creating gains workers and stockholders can share. If it did, Toyota et al. would be clamoring to have the UAW in their factories. They're not.

Mr. King's dilemma is evident in his lukewarm response to the Big Three's opening gambit in this year's quadrennial contract talks, an offer of enlarged profit-sharing. Here's the problem: Incentive pay is earned pay; workers see profits as something businesses create, not something union bosses create. And the foreign transplants will only be too happy to compete on the basis of performance-related pay. If the industry is headed toward compensation based on success, what are workers getting for their UAW dues? Good question.

Mr. King must have figured out the handwaving about Toyota no longer is going to fly. Expect him soon to change the subject to management compensation, especially the stock option and bonus payouts white-collar workers are enjoying as a result of the turnaround. Look for the Obama administration to pitch in with rhetoric about workers being denied their "fair share."
All the while Mr. King will be praying, praying—beseeching the heavens for some change in the political atmospherics to allow the union to go back to playing its monopoly card. Don't bet on it anytime soon.

Government Programs

2011-03-01T03:58:00.000-08:00

"The government's mortgage assistance program has helped just one in four of the 2.7M homeowners who applied to the program. The bulk of the applicants either failed to qualify for HAMP or were disqualified after initially being accepted into the program. As a result, just $1B has been spent on HAMP, a far cry from the government's initial estimate that $75B would be needed for the program."

So do we see this as being successful?

I was reading another article which pointed out that whenever the government tries to remove the consequences of the risk people/corporations (yes, there is risk when you purchase a home) take they create a more disastrous bubble within the economy, than the normal cycle bubbles we will always see.

While I believe the economy will be able to withstand the bubble that has probably been created from all of the recent government activity, we are going to see this pop later on, and it isn't always in a predictable sector that the bubble manifests.

The President's Budget

2011-02-15T05:15:00.000-08:00

My new favorite line regarding the President's budget:

"Claiming budget savings by freezing spending at today’s levels is like an alcoholic who says he’s sober because he’ll never drink more than yesterday’s bender. Trouble is, this alcoholic doesn’t even pay his own tab." - Brian Wesbury

2011 Outlook

2011-01-28T13:53:00.001-08:00

With 2011 already speeding by I thought it would be a good idea to get my annual outlook to you. There are so many things going on in the world and in particular here in the US that it has been difficult to narrow down exactly what we wanted to focus on. However, I feel that really there are four key themes that we will be watching play out this year which will have the greatest impact on the direction the economy and the market take: Politics, Debt, China, and Inflation.

Politics
I find it a little funny that over the last year people have become downright furious about the deficits. The topic itself isn’t funny at all, but what is funny to me is that these deficits are not new. We have spent in excess for quite a while. It is the result of asking for more and more “handouts” from our federal government and even getting some for which we didn’t even ask. Now, rather suddenly it seems, we have become enraged by this excess spending and have demanded it stop.

The problem of course comes when what we think is a misuse of federal funds happens to be the bread and butter (quite literally sometimes) of someone else who isn’t willing to part with that money. Who are we to say that funds sent to states for higher education is more important than the subsidies a farmer receives for continuing to farm?

Obviously there are the “easy” ones. Some were even outlined in the State of the Union recently (can we say too many federal government departments?). Unfortunately cuts to these programs is not really going to knock down the annual deficit in a meaningful way. What really has to be cut are the entitlements. We can’t keep increasing what and who we pay for social security. We also have to reign in Medicare and Medicaid. If you mention cuts to these of course you’ll get the massive push back from those about to or already receiving these benefits. It would almost be political suicide to disrupt those outflows. I don’t personally have the answers to the problem, but what the Social Security trustees have proposed seems fairly reasonable and necessary (i.e., push out full retirement age, raise tax slightly, and/or reduce payments).

Entitlement programs and the other necessary spending cuts aside, the real problem to be discussed right now is how much of these cuts can be done without severely hurting the system. Let’s face it, whether we agree with it or not the government has wormed its way rather deeply into the economy right now. If they were to rip themselves out now there would be some pain and perhaps so much pain we would relapse into another severe recession. It is an exceptionally difficult balance that those in Washington are trying to keep between supporting job growth (currently the focus of the Fed despite their dual mandate) and reducing spending.

While I’d like to tell you I am confident that the right long-term decisions will be made, I am concerned that the short-sighted mindset in Washington doesn’t appear to be going away quickly. It will be important to watch throughout the year as the election gets closer what we hear from Washington. Will tackling the deficit continue to take precedent over job creation or will they somehow be able to find the balance necessary to keep the economy moving while reducing spending? I have found it somewhat confidence boosting to hear that discussions are in the works to lower the corporate tax rate and more pressure has been placed on China. It will be interesting to watch those discussions continue and see what, if anything, comes by way of change to corporate tax laws after the President’s speech.

The good news is that job growth is expected to improve this year. However, even with job growth we will not likely see the unemployment numbers drop by much. This will likely keep the consumer on a slower spending rate than where we were at the peak (though the consumer spending numbers as measured by GDP for the 4th quarter of 2010 were impressive), but consumer spending will be one of the most important numbers to watch throughout the year.

China
Before we dive right into the issue of China, I want to review a few concepts which are directly related to the relationship between China and the United States. The current economical relationship between the majority of developed counties and developing countries is that developed countries are increasing their debt levels to fund their spending habits. This contributed to developed countries importing more goods than exporting. This relationship is known as ‘vendor financing’ and occurs when vendor countries (i.e., China, Germany, Brazil, etc.) buy bonds sold by major importing countries (i.e., the US and UK) and the money received by the importing countries for their bonds is then spent on purchasing goods from the vendor countries.

Over the years, this type of relationship between the US and China has been frustrated due to China’s currency devaluation policy of having the renminbi tied to the US dollar. This devaluation policy has the objective of holding the renminbi at a consistent price level below the US dollar. Basically this means that China is manipulating their currency so Chinese goods are cheaper than US goods and consumers are more inclined to purchase Chinese goods than more expensive US goods – of course there is the discussion of quality but that has yet to deter consumers to a large degree.

Of course, the Chinese are able to maintain their currency peg to the US dollar by either printing or selling bonds to control the amount of cash in the market. In the current situation of the US-Chinese currency relationship, the US is increasing the money supply (aka Quantitative Easing and QE2) in hopes of helping the recovery process. Keep in mind they have the dual mandate of keeping inflation in check and supporting the economy primarily through low unemployment; they have prioritized the latter mandate as the more important lately. With an ever increasing money supply in the US, China, has had to “print” large amounts of their own currency so it will stay below the deflated US dollar value. The Chinese currency which is now flooding the market due to the governments’ policy has the potential to cause inflation and move asset prices skyward. If the Chinese government does not stop pegging the renminbi to the US dollar or at least let their currency appreciate a greater amount than they have conceded of late, we could see more severe Chinese inflation.

You also need to factor in the effect of foreign investors heavily investing in developing markets because they currently offer the highest returns in the global market. This massive inflow of money is causing developing countries to experience a large amount of inflation which has begun to erode their production edge of cheap labor and raw materials. You will need to keep this in mind with your international investments this year.

China has recognized this potential issue and has implemented domestic policies with the objective of controlling inflation and drastic asset price increases. These policies have been somewhat successful and the rise in Chinese asset prices has not been explosive, but has been creeping upwards. I believe that the current Chinese policies are just a band-aid for the problem and need to be addressed in the near future lest we see severe inflation which has begun to erode their production edge of cheap labor and raw materials.

Our politicians have started to chime in on China’s policies and have even threatened stiffer trade regulations. I’ve talked about our focus on exporting our way out of this mess and China’s policies are making it hard to do that. Ben Bernanke has also joined in on highlighting this problem when he explained:

“Current policies of export dependent growth countries [China] have led to an unnatural balance of import/borrowing countries and export/savings countries. There should be a continuous balancing act between importing/borrowing powers and exporting/savings powers which is dependent upon the natural changes of currency prices. This means that countries with weaker currencies should be in the exporting/savings seat while those with stronger currencies should be in the importing/borrowing seat. Over time the export/savings countries accumulate wealth and their currency begins to rise in price while the importing/borrowing country’s currency begins to weaken and the countries switch places. It should be a continuous cycle of switching places, but China is purposefully keeping their currency price artificially low to stay in the export/savers position so they can fuel their growth through exports”

Bernanke believes that for the world to recover at a faster rate, China needs to relinquish control of the export/saving position and let their currency price rise. He does not want China to drastically decrease their GDP, but to focus on GDP growth through internal investing rather than relying on exporting goods.

U.S. Deficit
The main topic on everyone’s mind of late, it seems, has been the skyrocketing deficit, however, it seems that it is rare to find the reasoning written out as to why it is such a big deal (other than the rather ubiquitous statement of we are burdening our children). What it comes down to is: What is the lending rate we are paying on our debt?

As we add to our debt each year through excess spending (i.e., the deficit) the interest we are paying on the debt we owe becomes larger. For now we have a fairly low lending rate on our debt, however, should that rate rise even a small amount, we would begin paying more to interest payments than most other government programs. It is the excess spending that must be stopped. As mentioned before however, the government is in a little bit of a bind. How much can they cut spending while not sending unemployment shooting up again? What programs should be cut and what programs should remain?

There is also the much discussed predictions of state and municipal governments defaulting on billions of dollars of their debt in the coming year. The current situation facing most states and municipal governments are high debt levels and underfunded obligations. At the start of the crisis the federal government swooped in on their white horse and gave the states lots of funding and helped states raise or refinance their debt. Now, however, the federal government is not going to be able to do as much for individual states or municipals. As a result non-federal level governments will have to cut their deficits the old fashioned way by decreasing spending and increasing their revenue through budget cuts and taxes respectively. There is the chance that some will go bankrupt, but I do not believe that the problem will be as wide spread as many are predicting. States and municipalities will get their budgets back in line, albeit with a good amount of pain, and as we have seen plenty lately, refinancing the debt is possible and at reasonable rates.

These federal, state, and municipal issues will mean that throughout the year more research will have to be done for your fixed income investments. We will continue to keep an eye on the state and municipal levels to monitor the risks and plan accordingly.

Europe
News out of Europe has played a major factor in economic and market movements of late, and I believe that with some decisions that must be made we might see that role diminish. The critical decision point for Europe that I believe must be made within the upcoming year must be made by the European Central Bank (ECB). They are currently faced with a situation where a relatively small portion of European Union (EU) countries (i.e., Germany) are prospering due to their well established economies and manageable debt levels while the rest of the EU (i.e., Spain, Portugal, Greece, etc.) are experiencing high levels of debt and unemployment because of excess spending and the inability to export their way out of their problems due to the relatively high currency value. This situation will force the ECB to make one of two decisions:

1 – Maintain a strong currency and high interest rate thus keeping inflation stable in Germany and helping Germany attract new investment. For the southern European economies, this will result in increased competition with different export dependent countries with lower valued currencies and possible deflation resulting in a much slower recovery rate from their current recessionary states.

2 – The ECB will provide some form of stimulus by increasing the money supply and/or lowering interest rates. This will weaken the euro and cause Southern European goods to become more competitive in the export market. It will cause high inflation levels in Germany and the country will begin to shift from an exporting/saver model to an importer/borrower model.

I believe the ECB will eventually change to following a policy that is catered to the larger number of member states thereby following the second option, but no one should discount the power of Germany’s position.

So, what do you think? What are your thoughts on these four areas and is there some other critical area we should be watching for the year?

"Higher" Education

2011-01-19T05:13:00.000-08:00

I thought this recent study was interesting. If it is true (I haven't read the actual study, just this article about it), then we need to stop focusing so much on cranking out more college grads and focus on how we can increase the quality of education being provided. I would say that a big part has to do with the students not really going to learn, but to complete the next requirement, so I'm not sure how much the government can do for it, but obviously something has to change.

http://www.cnbc.com/id/41139685

China

2011-01-18T13:41:00.000-08:00

I have been reading as much as I can lately about China. I don't think I have a full grasp of it yet so there will probably be a better post later, but I came across this article and wanted to share and get some opinions.

Personally I don't think China can keep playing its game for too much longer because it has already started to hurt its own citizens enough to cause rumblings (it's hard to find evidence of these rumblings but they are there).

Anyway, here is the article: http://www.cnbc.com/id/41134710

"It's Not As Bad As You Think"

2011-01-04T12:47:00.000-08:00

I have to say that I really like Brian Wesbury. He is labeled as a perma-bull and I don't think he would have a problem with that in that long-term he believes in the US economy. Oddly enough however, one of the times he was named the top economist for the year it was back in 2000 and he was one of the few who was calling for a bear market. I think that too many out there are pessimistic in regards to our country's future. I think we can partly thank our politicians and media for that attitude because all of them have been saying that things are horrible and the world will end because the "other" party is in power and if you would just elect them they would be able to work on fixing the mess. Personally I think we should all take a step back, look at history, and start believing in what Americans are capable of accomplishing.

I love this video that he posted to their blog, which brings me to the other reason why I like Wesbury. He is with an independent firm and they say what they think without a care to who they might offend; unlike some of the other asset managers out there.

http://www.ftportfolios.com/retail/blogs/Economics/index.aspx

I would suggest that after watching the video you take a look at the pictures below it. Too funny!

Tax Proposal and Compromise

2010-12-10T09:36:00.000-08:00

I have read a lot in the media (mostly left-wing media, and I am including the official White House press release) about how President Obama offended everyone with his press conference regarding the tax cut deal he struck on Tues. night. I agreed that a lot of his comments were pretty offensive all around. He obviously was going into it with a very defensive mind set and took it too far in my opinion. However, most of the liberal media were emphasizing the Republicans staunch defense of the affluent income tax and talking about how President Obama gave up too much (most insinuated that he gave up quite a bit of his soul to have the audacity to allow the wealthy keep more of their earned wealth, but one or two didn’t go that far). I would suggest you read the transcript of his speech (you can get a copy by going here.), but there is something he said that I did like. It wasn’t necessarily how he said it, especially since I don’t agree with what the health care bill did (which is kind of his point here), but it was that he said it. It was in defense of striking a deal. He said:

“So this notion that somehow we are willing to compromise too much reminds me of the debate that we had during health care. This is the public option debate all over again. So I pass a signature piece of legislation where we finally get health care for all Americans, something that Democrats had been fighting for for a hundred years, but because there was a provision in there that they didn’t get that would have affected maybe a couple of million people, even though we got health insurance for 30 million people and the potential for lower premiums for 100 million people, that somehow that was a sign of weakness and compromise.

“Now, if that’s the standard by which we are measuring success or core principles, then let’s face it, we will never get anything done. People will have the satisfaction of having a purist position and no victories for the American people. And we will be able to feel good about ourselves and sanctimonious about how pure our intentions are and how tough we are, and in the meantime, the American people are still seeing themselves not able to get health insurance because of preexisting conditions or not being able to pay their bills because their unemployment insurance ran out.”

“That can’t be the measure of how we think about our public service. That can’t be the measure of what it means to be a Democrat. This is a big, diverse country. Not everybody agrees with us. I know that shocks people. The New York Times editorial page does not permeate across all of America. Neither does The Wall Street Journal editorial page. Most Americans, they’re just trying to figure out how to go about their lives and how can we make sure that our elected officials are looking out for us. And that means because it’s a big, diverse country and people have a lot of complicated positions, it means that in order to get stuff done, we’re going to compromise.”

Personally I don’t think it would be a big deal to allow the tax cuts for the “affluent” only to expire. It would affect things but not as greatly as many think. I also don’t think that with it in place it really affects the bottom line significantly (at the very least not enough to warrant such vehement backlash). This opinion piece agrees with me. I think it is far more important that we focus on the education system in the country and get out of the way (removing the red tape and lowering the taxes) of companies.

Clear Explanation of the Health Care Bill

2010-11-09T12:10:00.001-08:00

This is probably the clearest explanation of the Health Care bill that I have seen. It is long and has several graphs and pictures (Particularly illustrative is the one showing the bureaucratic structure created by the bill) so I didn't copy and paste it here. Instead you'll have to visit this LINK. If you have ever wanted a clear explanation of the actual bill (If you're like me and started to look at the summary of the bill and didn't get it and didn't want to read the hundreds of pages then you too have probably been relying on the various media outlets' highlights) from someone who really gets it, then this is it. For full disclosure the author uses as a main source the Heritage Foundation which is a very conservative group and the author works for fortune 500 companies consulting them on the benefits they offer. So obviously they are very biased, but hey, so am I since my costs went up due to the bill.

One of the criticisms that I heard, which really stuck, during the presidential campaign was that President Obama had pushed as a senator a bill for equal rights for women in the workplace, which would have required all companies to submit to a government agency the number of workers on their payroll, their salaries, and the explanation of differences in pay if there were any (I know there was a consequence if the person monitoring it thought there was an inequality, but I can't remember what it was). The article I was reading referred to it as being the same as using a sledgehammer instead of a flyswatter to kill a fly. Their main point was that if elected President Obama was likely to follow the same pattern and overshoot or miss completely the mark on the major issues of the day.

To me, this Health Care bill was similar to his previous work only, instead of a sledgehammer it's as if they just decided to bulldoze the house the fly was in. Hopefully more of it can continue to be repealed.

President Obama and Foreign Policy

2010-11-04T05:57:00.000-07:00

The following article is from Stratfor.

Global Expectations and Obama's Challenge

Having traveled a great deal in the last year and met a number of leaders and individuals with insight into the predominant thinking in their country, I can say with some confidence that the global perception of Obama today is as a leader given to rhetoric that doesn’t live up to its promise. It is not that anyone expected his rhetoric to live up to its promise, since no politician can pull that off, but that they see Obama as someone who thought rhetoric would change things. In that sense, he is seen as naive and, worse, as indecisive and unimaginative.

No one expected him to turn rhetoric into reality. But they did expect some significant shifts in foreign policy and a forceful presence in the world. Whatever the criticisms leveled against the United States, the expectation remains that the United States will remain at the center of events, acting decisively. This may be a contradiction in the global view of things, but it is the reality.

A foreign minister of a small — but not insignificant — country put it this way to me: Obama doesn’t seem to be there. By that he meant that Obama does not seem to occupy the American presidency and that the United States he governs does not seem like a force to be reckoned with. Decisions that other leaders wait for the United States to make don’t get made, the authority of U.S. emissaries is uncertain, the U.S. defense and state departments say different things, and serious issues are left unaddressed.

While it may seem an odd thing to say, it is true: The American president also presides over the world. U.S. power is such that there is an expectation that the president will attend to matters around the globe not out of charity, but because of American interest. The questions I have heard most often on many different issues are simple: What is the American position, what is the American interest, what will the Americans do? (As an American, I frequently find my hosts appointing me to be the representative of the United States.)

I have answered that the United States is off balance trying to place the U.S.-jihadist war in context, that it must be understood that the president is preoccupied but will attend to their region shortly. That is not a bad answer, since it is true. But the issue now is simple: Obama has spent two years on the trajectory in place when he was elected, having made few if any significant shifts. Inertia is not a bad thing in policy, as change for its own sake is dangerous. Yet a range of issues must be attended to, including China, Russia and the countries that border each of them.

Obama comes out of this election severely weakened domestically. If he continues his trajectory, the rest of the world will perceive him as a crippled president, something he needn’t be in foreign policy matters. Obama can no longer control Congress, but he still controls foreign policy. He could emerge from this defeat as a powerful foreign policy president, acting decisively in Afghanistan and beyond. It’s not a question of what he should do, but whether he will choose to act in a significant way at all.

This is Obama’s great test. Reagan accelerated his presence in the world after his defeat in 1982. It is an option, and the most important question is whether he takes it. We will know in a few months. If he doesn’t, global events will begin unfolding without recourse to the United States, and issues held in check will no longer remain quiet. Read more: The World Looks at Obama After the U.S. Midterm Election STRATFOR

CEOs on America

2010-11-01T09:08:00.000-07:00

This is a must watch video. I wish we could see the whole thing with all of the interviews.

In particular I want to point out the CEO of American Express and what he said. I couldn't agree more with him. That is the primary problem we face in the U.S., I believe. We need to change our education process (for example reward the good teachers regardless of how hard it is to measure "good" and get rid of the bad ones) and people need to let go of the idea that what worked for their grandfather and father as far as careers go will work for them. There is almost no way we can compete with other countries in areas of manufacturing and still keep up with our own cost of living. We also have to understand that we are very much in competition for the same jobs with those from other countries. That has nothing to do with what the representatives in Washington can or can't do. Honestly all they can really do in my opinion is hurt us in that competition. The competition comes about due to the global nature of the economy and despite what many think it is not a bad thing.

A Republican Win

2010-11-01T05:47:00.000-07:00

This is an excerpt from John Mauldin's weekly email. It is definitely something to focus on as you vote. The people we are voting in this week are the ones who are going to be driving local and a few national issues over the course of the next, economically critical, five years.

Be Careful What You Wish For

Everyone by now is predicting the Republicans to take the House and pick up anywhere from 6-8 Senate seats. We'll see. This is going to be a very interesting election, as there is a whole new dynamic in place.

Let's look down the road. I think we will at best be in a Muddle Through Economy for the next two years. Unemployment is going to be above 8%, best-case, in 2012. If the Bush tax cuts are not extended, in my opinion it is almost a lock that we go into recession next year, unemployment goes to 12%, and underemployment gets even worse. That is not a good climate for Obama and the Democrats in 2012. It is especially bad when you look at the number of Democratic Senate seats up for re-election that are in conservative states. The Republicans could take a serious majority in the Senate.

And then what? Right now Republicans are running on promises that they will not cut Medicare and Social Security, but are going to reduce spending and get us closer to a balanced budget. But everyone knows that the only way to get the budget into some reasonable semblance of balance will be to either cut Medicare benefits or increase taxes.

There are only the two options. Yes, you can reform medical care, and I think much of Obamacare should certainly be repealed, but that does not get us anywhere close to dealing with the real issue, and that's a fact. There are tens of trillions of unfunded liabilities in our future, which must be dealt with.

Let me be very clear on this. I am not really worried about the supposed $75 trillion in unfunded Medicare liabilities in our future. That is an impossible number. If something can't happen it won't happen. Long before we get to that apocalypse, we find a bond market that simply refuses to fund US debt at anywhere near an affordable cost. Crisis and chaos will ensue. Remember the quote that led this letter?

People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.
- Jean Monnet

The simple reality is that if We the People of the US want Medicare, in even a reformed and more efficient manner, we must find a way to pay for it. It will not be cheap. Raising income taxes on the "rich" is not enough. You have to go back and raise income taxes on the middle class, too. Oh, wait, that will be a drag on the economy and consumer spending. And in any event it will not be enough.

The only real way to pay for those benefits will be a value-added tax, or VAT. And while it could be introduced gradually, let there be no mistake that it will be a drag on economic growth. Government spending does not have a multiplier effect on the economy. It is at best neutral. What creates growth is private investment, increases in productivity, and increases in population. That's it. Tax increases have a negative multiplier.

A significant VAT along with our current income taxes will give us an economy that looks more like the slow-growth, high-unemployment world of Europe. Can we figure out how to deal with that? Sure. But it is not growth-neutral.

Republicans in 2013 will be like the dog that caught the car. What do you do with it? The last time they (embarrassingly, we) really screwed it up. The defining political question of this decade will not be Iraq or Afghanistan, or the environment or any of a host of other problems. The single most important question will be what do you do with Medicare? Cut it or fund it? Reform it for sure, but reform is not enough to pay for the cost increases that will come from an increasingly aging Boomer generation.

There is no free lunch. At some point, you cannot run on "no cuts in Medicare" and "no new taxes" and be honest. At least not this decade. Maybe when we have cured cancer and Alzheimer's and heart disease and the common cold at some future point, medical costs will go down, but in the meantime we have to deal with reality.

You may be able to fool the voters, but you will not be able to fool the bond market. Not dealing with reality will create a very vicious response. Ask Greece.

And that is the national conversation we must have with ourselves. There is a cost to government. There is a cost to extended Medicare benefits. (I am blithely assuming we deal with all the "easy" stuff like Social Security, and make real cuts in other areas.)

The State Income Tax Issue

2010-10-29T12:53:00.000-07:00

"Comparing the nine states with the highest tax rates on earned income to the nine states with no income tax shows how high tax rates weaken economic performance. In the past decade, the nine states with the highest personal income tax rates have seen gross state product increase by 59.8%, personal income grow by 51% and population increase by 6.1%. The nine states with no personal income tax have seen gross state product increase by 86.3%, personal income grow by 64.1%, and population increase by 15.5%."

—Arthur Laffer, Laffer Associates, as quoted in the WSJ, 10/6/10

We Need a Real Leader

2010-10-27T14:00:00.000-07:00

“The United States has stumbled into empire. It now faces the crisis of Rome that the empire will annihilate the republic. I argue that of all the institutions of our Constitution, it is the president who can preserve the republic while managing the empire. I also argue that the greatest threat to the republic is living in denial about what the United States has become. The issue, then, is how to manage the unintended and unwanted in the next decade.” – George Friedman, Stratfor.

I was reading this quote on the cover of an email I received from Stratfor (if you aren’t signed up for their free emails then you better get signed up!) and I immediately thought about President Lincoln. If you have never had the chance to actually read about him then I highly suggest you do. I made the mistake of just going by what I learned about him in school. I recently finished a biography on him which I really enjoyed because it would talk a good deal about his life and what was going on in the country at the time and then it would go to several pages of his letters, excerpts from talks and full speeches, and statements made to small groups of friends that illustrated his thoughts and feelings during the time period being discussed.

Our nation is being ripped apart because there is no clear and powerful leadership in the country. When Lincoln came into office the Presidency was looked at as more of a pomp role and the nation was literally being ripped apart for well known reasons. He came in and changed the role of the president and pushed the Union to be something better and led the war as wars should be led (He ran the war in the same way another hero of mine led in a war). While everything he did was not popular, in fact he was a rather embattled president, he had the reputation (and his letters reinforce that reputation) of being a man who would listen to all sides and then clearly make a decision with plenty of explanation as to why the decision was made. All of Lincoln’s decisions stuck to who he was and his core beliefs. While he was willing to listen to all sides and admit when he was wrong, he never wavered from his core belief in the constitution and his interpretation of what that document meant.

I believe President Obama started out on the campaign trail wanting to do the same thing with high hopes and a great vision but he is not strong enough of a leader and because of that he has given in on too many issues and he has allowed others to drive how things are run. He has turned the Presidency into a pomp role again. I would be interested to see if any previous President while in office sat in on so many talk shows and ran so many “town hall” meetings, in essence continuing their campaigning throughout their presidency.

My concern is that we have yet to hear about anyone from any party who would be strong enough of a leader, who could take up the mantle of being another Lincoln. Anybody know of anyone who might fit?

Barney Frank Caught in a Lie

2010-10-20T10:55:00.000-07:00

Barney Frank, Then and Now
A news story from 2003:
The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry....

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

A news story from yesterday:
In a sharp-edged debut debate, US Representative Barney Frank, a Democrat, and Sean Bielat, his Republican challenger, squared off yesterday over national security, illegal immigration, and the roots of the mortgage crisis....

Bielat, a former Marine officer from Brookline, said Frank had contributed to the downfall and subsequent recession by supporting lenient lending standards for prospective home buyers.
“He has long been an advocate for extending homeownership, even to those who couldn’t afford it, regardless of the cost to the American people,’’ said Bielat, 35.

Frank, a leading liberal who has represented the state’s Fourth Congressional District for nearly 30 years and became chairman of the House Financial Services Committee in 2007, said he and other Democrats fought to curb predatory lending practices before the recession but were thwarted by Republicans. He said he had supported efforts to help low-income families rent homes, rather than buy them.

“Low-income home ownership has been a mistake, and I have been a consistent critic of it,’’ said Frank, 70. Republicans, he said, were principally responsible for failing to reform Fannie Mae and Freddie Mac, the mortgage giants the government seized in September 2008.

Short Post

2010-10-19T05:24:00.000-07:00

Tell me what's wrong with this picture (if you can't see it, the top line is spending, the bottom line is revenue):

"The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit"
-- Franklin Delano Roosevelt, 1935 State of the Union address

Outside the Regular News

2010-10-18T06:14:00.000-07:00

I read this piece this morning and thought I would share. To me it makes a lot of sense, but I don't have a law background at all. Hopefully this will generate some comments as to the reality of this. This is from John Mauldin's eLetter and he is quoting someone else within it who is quoting someone else (Isn't there some rule that by the time it passes 3rd person recounting it automatically becomes fact?)

OK, in a serendipitous moment, Maine fishing buddy David Kotok sent me this email on the mortgage foreclosure crisis just as I was getting ready to write much the same thing. It is about the best thing I have read on the topic. Saves me some time and you get a better explanation. From Kotok:
"Dear Readers, this text came to me in an email from sources that are in the financial services business and with whom I have a personal relationship. The original text was laced with expletives and I would not use it in the form I received it. Therefore the text below has had some substantial editing in order to remove that language. The intentions of the writer are undisturbed. The writer shall remain anonymous. This text echoes some of the news items we have seen and heard today; however, it can serve as a plain language description of the present foreclosure-suspension mess. There is a lot here. It takes about ten minutes to read it. - David Kotok (www.cumber.com)
"Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper...only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan
"Before mortgage-backed securities, most mortgage loans were issued by the local savings & loan. So the note usually didn't go anywhere: it stayed in the offices of the S&L down the street.
"But once mortgage loan securitization happened, things got sloppy...they got sloppy by the very nature of mortgage-backed securities.
"The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.
"Therefore, as everyone knows, the loans were 'bundled' into REMICs (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes), and then "sliced & diced"...split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics.
"This slicing and dicing created 'senior tranches,' where the loans would likely be paid in full, if the past history of mortgage loan statistics was to be believed. And it also created 'junior tranches,' where the loans might well default, again according to past history and statistics. (A whole range of tranches was created, of course, but for the purposes of this discussion we can ignore all those countless other variations.)
"These various tranches were sold to different investors, according to their risk appetite. That's why some of the MBS bonds were rated as safe as Treasury bonds, and others were rated by the ratings agencies as risky as junk bonds.
"But here's the key issue: When an MBS was first created, all the mortgages were pristine...none had defaulted yet, because they were all brand-new loans. Statistically, some would default and some others would be paid back in full...but which ones specifically would default? No one knew, of course. If I toss a coin 1,000 times, statistically, 500 tosses the coin will land heads...but what will the result be of, say, the 723rd toss? No one knows.
"Same with mortgages.
"So in fact, it wasn't that the riskier loans were in junior tranches and the safer ones were in senior tranches: rather, all the loans were in the REMIC, and if and when a mortgage in a given bundle of mortgages defaulted, the junior tranche holders would take the losses first, and the senior tranche holder last.
"But who were the owners of the junior-tranche bond and the senior-tranche bonds? Two different people. Therefore, the mortgage note was not actually signed over to the bond holder. In fact, it couldn't be signed over. Because, again, since no one knew which mortgage would default first, it was impossible to assign a specific mortgage to a specific bond.
"Therefore, how to make sure the safe mortgage loan stayed with the safe MBS tranche, and the risky and/or defaulting mortgage went to the riskier tranche?
"Enter stage right the famed MERS...the Mortgage Electronic Registration System.
"MERS was the repository of these digitized mortgage notes that the banks originated from the actual mortgage loans signed by homebuyers. MERS was jointly owned by Fannie Mae and Freddie Mac (yes, those two again ...I know, I know: like the chlamydia and the gonorrhea of the financial world...you cure 'em, but they just keep coming back).
"The purpose of MERS was to help in the securitization process. Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds. MERS was essentially where the digitized mortgage notes were sliced and diced and rearranged so as to create the mortgage-backed securities. Think of MERS as Dr. Frankenstein's operating table, where the beast got put together.
"However, legally...and this is the important part...MERS didn't hold any mortgage notes: the true owner of the mortgage notes should have been the REMICs.
"But the REMICs didn't own the notes either, because of a fluke of the ratings agencies: the REMICs had to be "bankruptcy remote," in order to get the precious ratings needed to peddle mortgage-backed Securities to institutional investors.
"So somewhere between the REMICs and MERS, the chain of title was broken.
"Now, what does 'broken chain of title' mean? Simple: when a homebuyer signs a mortgage, the key document is the note. As I said before, it's the actual IOU. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the 'chain of title.'
"You can endorse the note as many times as you please...but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.
"If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.
"To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.
"Read that last sentence again, please. Don't worry, I'll wait.
"You read it again? Good: Now you see the can of worms that's opening up.
"The broken chain of title might not have been an issue if there hadn't been an unusual number of foreclosures. Before the housing bubble collapse, the people who defaulted on their mortgages wouldn't have bothered to check to see that the paperwork was in order.
"But as everyone knows, following the housing collapse of 2007-'10-and-counting, there has been a boatload of foreclosures...and foreclosures on a lot of people who weren't sloppy bums who skipped out on their mortgage payments, but smart and cautious people who got squeezed by circumstances.
"These people started contesting their foreclosures and evictions, and so started looking into the chain-of-title issue, and that's when the paperwork became important. So the chain of title became crucial and the botched paperwork became a nontrivial issue.
"Now, the banks had hired 'foreclosure mills'...law firms that specialized in foreclosures...in order to handle the massive volume of foreclosures and evictions that occurred because of the housing crisis. The foreclosure mills, as one would expect, were the first to spot the broken chain of titles.
"Well, what do you know, it turns out that these foreclosure mills might have faked and falsified documentation, so as to fraudulently repair the chain-of-title issue, thereby 'proving' that the banks had judicial standing to foreclose on delinquent mortgages. These foreclosure mills might have even forged the loan note itself...
"Wait, why am I hedging? The foreclosure mills did actually, deliberately, and categorically fake and falsify documents, in order to expedite these foreclosures and evictions. Yves Smith at Naked Capitalism, who has been all over this story, put up a price list for this 'service' from a company called DocX...yes, a price list for forged documents. Talk about your one-stop shopping!
"So in other words, a massive fraud was carried out, with the inevitable innocent bystanders getting caught up in the fraud: the guy who got foreclosed and evicted from his home in Florida, even though he didn't actually have a mortgage, and in fact owned his house free -and clear. The family that was foreclosed and evicted, even though they had a perfect mortgage payment record. Et cetera, depressing et cetera.
"Now, the reason this all came to light is not because too many people were getting screwed by the banks or the government or someone with some power saw what was going on and decided to put a stop to it...that would have been nice, to see a shining knight in armor, riding on a white horse.
"But that's not how America works nowadays.
"No, alarm bells started going off when the title insurance companies started to refuse to insure the titles.
"In every sale, a title insurance company insures that the title is free -and clear ...that the prospective buyer is in fact buying a properly vetted house, with its title issues all in order. Title insurance companies stopped providing their service because...of course...they didn't want to expose themselves to the risk that the chain of title had been broken, and that the bank had illegally foreclosed on the previous owner.
"That's when things started getting interesting: that's when the attorneys general of various states started snooping around and making noises (elections are coming up, after all).
"The fact that Ally Financial (formerly GMAC), JP Morgan Chase, and now Bank of America have suspended foreclosures signals that this is a serious problem...obviously. Banks that size, with that much exposure to foreclosed properties, don't suspend foreclosures just because they're good corporate citizens who want to do the right thing, and who have all their paperwork in strict order...they're halting their foreclosures for a reason.
"The move by the United States Congress last week, to sneak by the Interstate Recognition of Notarizations Act? That was all the banking lobby. They wanted to shove down that law, so that their foreclosure mills' forged and fraudulent documents would not be scrutinized by out-of-state judges. (The spineless cowards in the Senate carried out their master's will by a voice vote...so that there would be no registry of who had voted for it, and therefore no accountability.)
"And President Obama's pocket veto of the measure? He had to veto it...if he'd signed it, there would have been political hell to pay, plus it would have been challenged almost immediately, and likely overturned as unconstitutional in short order. (But he didn't have the gumption to come right out and veto it...he pocket vetoed it.)
"As soon as the White House announced the pocket veto...the very next day!...Bank of America halted all foreclosures, nationwide.
"Why do you think that happened? Because the banks are in trouble...again. Over the same thing as last time...the damned mortgage-backed securities!
"The reason the banks are in the tank again is, if they've been foreclosing on people they didn't have the legal right to foreclose on, then those people have the right to get their houses back. And the people who bought those foreclosed houses from the bank might not actually own the houses they paid for.
"And it won't matter if a particular case...or even most cases...were on the up -and up: It won't matter if most of the foreclosures and evictions were truly due to the homeowner failing to pay his mortgage. The fraud committed by the foreclosure mills casts enough doubt that, now, all foreclosures come into question. Not only that, all mortgages come into question.
"People still haven't figured out what all this means. But I'll tell you: if enough mortgage-paying homeowners realize that they may be able to get out of their mortgage loans and keep their houses, scott-free? That's basically a license to halt payments right now, thank you. That's basically a license to tell the banks to take a hike.
"What are the banks going to do...try to foreclose and then evict you? Show me the paper, Mr. Banker, will be all you need to say.
"This is a major, major crisis. The Lehman bankruptcy could be a spring rain compared to this hurricane. And if this isn't handled right...and handled right quick, in the next couple of weeks at the outside...this crisis could also spell the end of the mortgage business altogether."

Video Link

2010-10-08T13:45:00.001-07:00

Great follow-up video to my last post. This is an interview with Rod Smyth of Riverfront Investment Group.

Bloomberg Interview of Rod Smyth.

Two Issues

2010-10-05T10:05:00.000-07:00

"Penny-wise but pound foolish” I’m not sure where that saying came from, and I probably misquoted it, but it is an apt description of what is currently going on worldwide, but seemingly particularly so here in the U.S. I wanted to bring a couple of issues that you may not have heard about to light.

First is something the policy makers in Europe foolishly put into place under the idea that they were protecting their citizens from a potential future crash of the insurers. They decided that they wanted insurers to have more fixed income instruments and less equity in their accounts which cover their capital adequacy requirements. Basically they want to run a “stress” test that will see if the insurers will be able to withstand a couple of financial crises like the one we just went through while still holding enough capital to pay for all policies and then some. Sounds like a decent idea right? Make the insurers carry more “stable” investments in their coffers in case large problems occur and they need to pay out. In fact it sounded like such a great idea that the policy makers are not planning on stopping there, they now want pensions to do the same thing (since they function very much the same as insurers in Europe, in fact a lot are insurers); lower their equity exposure and add fixed income. Sounds great until you realize how bonds and other fixed income funds work.

Here’s a brief snippet from Niels Jensen of Absolute Return Partners that explains a little bit of the problem created from this.

“Going forward, the main issue facing the industry (and that is the same for insurers and pension funds) is the relentless drop in bond yields. As yields come down, so does the discount rate which is used to calculate future liabilities. A lower discount rate in turn leads to a falling solvency ratio. In the first half of this year alone, solvency fell by 13% on average as a result of falling bond yields. With Solvency II only two years away, a deeply worrisome situation is developing whereby low inflation forces bond yields down which again forces insurers and at least some pension funds to re-balance their portfolios in favor of more bonds and fewer equities, which will push bond yields even lower. This self-perpetuating mechanism amplifies an already unstable situation.

I am not sure if policy makers understand how potentially dangerous this situation is. We are on the road to insolvency. And, even if pension providers manage to stay solvent, future generations of retirees are likely to run into serious financial difficulties as their retirement savings earn next to nothing, because our political leaders forced new rules on the industry, the implications of which they did not grasp.”

The second item I wanted to bring to your attention is one you have likely heard a little about. A lot of the developed and developing nations are trying to devalue their currency in order to make their exports look more attractive than those of competing nations (Brazil just came out recently and openly talked about the currency war which has been going for a while now apparently). Let’s get into a little bit of the why this is happening and then the problems it is causing and will likely cause due to policy action.

As everyone knows GDP is the measure of a countries economy. The GDP is made up of four general measurements: Consumption (by far the largest portion in our GDP), Investment, Government, and Net Exports. If you add those up you get the GDP number. Our current government had the idea that they would get out of this mess in a two step method, they would take up the slack in consumer spending with massive government spending. Obviously that hasn’t worked as well as they would have liked because due to the government’s own regulations (at least for the most part) banks are not lending the massive amount of money that they have been basically given. Because this hasn’t been working as well they now are focused heavily on part two of their plan and that is to increase the exports significantly over imports. To do that we need to have better products, fair trade agreements with lots of other countries, and a currency that’s value is hopefully lower than our competitors and the receiving country. Rather than help with the first two they have decided to play the same political games they do here and they have blamed the trade “imbalance” on others. What you have likely seen is the increasingly heated arguments between the U.S. and China. The Obama administration is pushing so much on this issue that polls are showing greater numbers of people who believe we should put in trade policies to hurt China thereby saving jobs here(future post topic).

What most haven’t realized is that even if policies were put into place they would not likely change our export numbers significantly. They might change the import numbers a little and that is where it would probably hurt U.S. consumers who rely on cheap Chinese goods and probably don’t even know it. Many also don’t know or don’t want to look at the bigger picture.

China wants to change from being primarily an exporting economy. That is how they have grown to the size they are now, but they need more stable and home grown growth and so they have begun to focus on increasing consumption. That’s not a switch that can happen overnight and definitely not one which can be made during this economic slump. It will take time, but when the switch happens we had better be in a position to capitalize on these millions of new consumers.

In the mean time, why don’t we focus on the other parts of the GDP equation? The rule is, if you want to change GDP you have to change the population and/or production. Increasing the population is not going to be likely (I base this judgment on the looks my wife and I get in public when out with our four kids) and wouldn’t help us immediately anyway. So, why don’t we work on increasing production? To do that we need to get out of the way of entrepreneurs (i.e., taxes, over-regulation, etc.) and stop encouraging laziness (I read that unemployment is as long as 99 weeks in one state); it’s my opinion that the government should be stingy with handouts and the private sector should be freer with them. If we allowed good business to grow then we will get out of this. The problem with this in the politicians mind is that it will take a while and we will only experience slow growth until then and we have to stop spending money. Those three combined would mean re-election would be difficult at best.

Of course, we could do something about that attitude. We could stop “rewarding” politicians for their stupid, short-sighted ideas by voting for them again. We need to ignore what the politicians are saying and take a look at what they have done and are doing to fix problems for the long-term. That includes those running for office for the first time. What have they done? What are they doing now?

Here’s hoping for some real change.

From Brian Wesbury of First Trust

2010-10-04T10:37:00.001-07:00

"In the year 1000, the average infant could expect to live about 24 years. A third died in the first year of life. Hunger and epidemic disease ravaged the survivors. By 1820, life expectation had risen to 36 years in the west, with only marginal improvement elsewhere. After 1820, world development became much more dynamic. By 2003, income per head had risen nearly ten-fold, population six-fold. Per capita income rose by 1.2 per cent a year: 24 times as fast as in 1000-1820. Life expectation increased to 76 years in the west and 63 in the rest of the world.” Angus Maddison, Contours of the World Economy.

To paraphrase - for 1800 years, progress was virtually non-existent; then it accelerated sharply. It takes a severe case of denial for someone to ignore these lessons of history. What they show is that when freedom prevails, the ingenuity and inventiveness of people creates incredible wealth. This is the true source of improvement in the human condition.

The US Constitution was crucial in the process of freedom. It established a new country with protected property rights. The Declaration of Independence declared the “unalienable Rights” of “Life, Liberty and the Pursuit of Happiness.” It also declared that “whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government….”

Yes, the US has its history with slavery and women’s suffrage, but the Civil War, and 13th and 19th Amendments to the Constitution fixed those wrongs. It wasn’t easy, but the system worked. No system of social and economic organization has done more to lift living standards than the US system of “free market capitalism.” No system of governance has improved the lives of so many people.

So, why is this system under attack? Have we uncovered problems with free market capitalism that are the equivalent of slavery and women’s suffrage? President Obama thinks so. In a speech last week, he called belief in capitalism “blind faith.” He said this philosophy, of letting people “fend for themselves” has “failed.” He added that “people are frustrated, they’re anxious, they’re scared about the future. [But] now is not the time to quit....We’ve been through worse.... It took time to free the slaves. It took time for women to get the vote.”

This is the Progressive’s mantra – “Capitalism is unjust, unfair...A new system must be put in its place and this takes time.” There is only one problem with this logic. It’s not really progress and it has never, ever worked. Today’s progressives are the ones that ask for blind faith. They want people to believe that they have finally figured out how to do it right

But this is just wishful thinking. Every economic system, no matter how it is described, is a system that distributes resources among competing interests. In a Progressive system, government officials control this process. In a free market system, resources flow to those who use them best to improve the lives of others. The market votes every day on these products and services and the successful ones are given more resources. To prove how fluid this system is, more businesses fail each year than succeed.

This is not true of government. Once started, government programs rarely fail. The system perpetuates them with more money and more resources. The waste increases over time until it becomes so overwhelming that the entire system fails. The Roman Empire, the Soviet Union, Greece, California and Illinois are all the evidence needed.

The real problem with the economy these days it that we have moved too far away from free market capitalism. As government spending has increased, so has unemployment. This is not a mystery; the bigger the government, the smaller the private sector and the less dynamic the economy. If there is any emancipation needed these days it’s from the government, not from capitalism.

I can't stop laughing

2010-09-29T06:15:00.001-07:00

I can't stop laughing at this new quote of the week:

Bill Clinton, 9/21: "Do you know how many political and economic decisions are made in this world by people who don't know what in the living daylights they are talking about?"

and then I cry a little.

Unemployment - taken from an article from Mesirow Financial

2010-09-16T11:46:00.001-07:00

An elevated level of the “natural rate” of unemployment is a worrisome development in the United States, but it has been a sad reality in Europe for at least two decades. As is widely known, Europe has suffered higher unemployment rates than the U.S., and until recent years, European countries achieved little success in improving the performance of their labor markets.

There are at least six factors that are commonly advanced to explain this differential:

1- Generous levels of unemployment benefits
2- Longer duration of unemployment benefits
3- Higher degree of workers’ protection
4- Higher rates of unionization
5- Centralization of wage bargaining
6- Broader safety net provided by families to young adults

Overall, these six factors contributed to create and preserve a labor market significantly more rigid than the one existing in the United States. It was only after the roll-back of some of these protections that Europe began to experience some improvement in the 2000s.

Are we Europe yet? No. While recent policy decisions have moved us closer our supporting of the unemployed lifestyle it is not nearly the same as it was and is for Europe. Learning from the European mistakes, we should resist short-term fixes that would make the labor market more rigid, preventing the market to adjust to the new economic realities. Instead, we should focus on programs that facilitate, rather than hinder, the underlying changes taking place in the economy. From re-training programs to the portability of healthcare benefits, from the revision of the way unemployment benefits are calculated, to having them progressively phased-out rather than abruptly interrupted, there are many options to make incentives more aligned with the dynamics of the market process. The preservation of flexibility in the U.S. job market is of paramount importance.

From Dana Investment Newsletter

2010-09-15T14:04:00.000-07:00

"Economic data continues to be mixed. The latest jobs report continues to be weak, depending on who spins it. Non-farm payrolls fell by 54,000 in August, however, that included 114,000 September 13, 2010 temporary census jobs lost, so you could say the private sector gained 67,000. A positive number, to be sure, but it's not near enough to indicate a robust recovery. It is still the uncertainties holding the recovery back. Calvin Coolidge once said, “The business of America is business.” Our corporate tax rate at 35% is the second highest in the free world after Japan. Congress could help by reducing that rate to at least 20%."

"CEOs speak: Paul Otellini, CEO of Intel which employs 80,000 people, worries that America will not be the center of the innovation universe much longer. Otellini said, “I can tell you definitively that it costs $1 billion more per factory for me to build, equip, and operate a semiconductor manufacturing facility in the U.S.” He further stated that 90% of the added cost is due to taxes and regulations that other countries don’t have. CEO David Speer of Illinois Tool Works, whose company employs 60,000 workers, recently stated, “I could borrow $2 billion tomorrow for 3-1/2%, but what am I going to do with it?” And Ivan Seidenberg, CEO of Verizon, said, “Tax hikes, regulations and constant policy shifts harm our ability to gain private sector jobs in the US” (Investor’s Business Daily, 8.26.10).

These people know business and our policy makers should listen."

Great Article from Stratfor

2010-09-14T06:18:00.000-07:00

By George FriedmanWe are now nine weeks away from the midterm elections in the United States. Much can happen in nine weeks, but if the current polls are to be believed, U.S. President Barack Obama is about to suffer a substantial political reversal. While we normally do not concern ourselves with domestic political affairs in the United States, when the only global power is undergoing substantial political uncertainty, that inevitably affects its behavior and therefore the dynamics of the international system. Thus, we have to address it, at least from the standpoint of U.S. foreign policy. While these things may not matter much in the long run, they certainly are significant in the short run.

To begin thinking about this, we must bear three things in mind. First, while Obama won a major victory in the Electoral College, he did not come anywhere near a landslide in the popular vote. About 48 percent of the voters selected someone else. In spite of the Democrats’ strength in Congress and the inevitable bump in popularity Obama received after he was elected, his personal political strength was not overwhelming. Over the past year, poll numbers indicating support for his presidency have deteriorated to the low 40 percent range, numbers from which it is difficult, but not impossible, to govern.

Second, he entered the presidency off balance. His early focus in the campaign was to argue that the war in Iraq was the wrong war to fight but that the war in Afghanistan was the right one. This positioned him as a powerful critic of George W. Bush without positioning him as an anti-war candidate. Politically shrewd, he came into office with an improving Iraq situation, a deteriorating Afghanistan situation and a commitment to fighting the latter war. But Obama did not expect the global financial crisis. When it hit full blast in September 2008, he had no campaign strategy to deal with it and was saved by the fact that John McCain was as much at a loss as he was. The Obama presidency has therefore been that of a moderately popular president struggling between campaign promises and strategic realities as well as a massive economic crisis to which he crafted solutions that were a mixture of the New Deal and what the Bush administration had already done. It was a tough time to be president.

Third, while in office, Obama tilted his focus away from the foreign affairs plank he ran on to one of domestic politics. In doing so, he shifted from the area where the president is institutionally strong to the place where the president is institutionally weak. The Constitution and American tradition give the president tremendous power in foreign policy, generally untrammeled by other institutions. Domestic politics do not provide such leeway. A Congress divided into two houses, a Supreme Court and the states limit the president dramatically. The founders did not want it to be easy to pass domestic legislation, and tradition hasn’t changed that. Obama can propose, but he cannot impose.

Therefore, the United States has a president who won a modest victory in the popular vote but whose campaign posture and the reality under which he took office have diverged substantially. He has been drawn, whether by inclination or necessity, to the portion of his presidency where he is weakest and most likely to face resistance and defeat. And the weaker he gets politically the less likely he is to get domestic legislation passed, and the defeats will increase his weakness.
He does not, at the moment, have a great deal of public support to draw on, and the level of vituperation from the extremes has reached the level it was with George W. Bush. Where Bush was accused by the extreme left of going into Iraq to increase profits for Halliburton and the oil companies, Obama is being accused by the extreme right of trying to create a socialist state. Add to this other assorted nonsense, such as the notion that Bush engineered 9/11 or that Obama is a secret Muslim, and you get the first whiff of a failed presidency. This is not because of the prospect of midterm reversals — that has happened any number of times. It is because Obama, like Bush, was off balance from the beginning.

If Obama suffers a significant defeat in Congress in the November elections, he will not be able to move his domestic agenda. Indeed, Obama doesn’t have to lose either house to be rendered weak. The structure of Congress is such that powerful majorities are needed to get anything done. Even small majorities can paralyze a presidency.

Under these circumstances, he would have two choices. The first is to go into opposition. Presidents go into opposition when they lose support in Congress. They run campaigns against Congress for blocking their agenda and blame Congress for any failures. Essentially, this was Bill Clinton’s strategy after his reversals in 1994, and it worked in 1996. It is a risky strategy, obviously. The other option is to shift from the weak part of the presidency to the strong part, foreign policy, where a president can generally act decisively without congressional backing. If Congress does resist, it can be painted as playing politics with national security. Since Vietnam, this has been a strategy Republican presidents have used, painting Democratic Congresses as weak on national security.

There is a problem in Obama choosing the second strategy. For Republicans, this strategy plays to their core constituency, for whom national security is a significant issue. It also is an effective tool to reach into the center. The same isn’t true for the Democrats. Obama’s Afghanistan policy has already alienated the Democratic left wing, and the core of the Democratic Party is primarily interested in economic and social issues. The problem for Obama is that focusing on foreign policy at the expense of economic and social issues might gain him some strength in the center, but probably wouldn’t pick him up many Republican votes and would alienate his core constituency.

This would indicate that Obama’s best strategy is to go into opposition, government against Congress. But there are two problems with this. One of the underlying themes of the Obama presidency is that he is ineffective in getting his economic agenda implemented. That’s not really true, given the successes he has had with health-care reform and banking regulation, but it is still a theme. The other problem he has is the sense that he has surged in Afghanistan while setting a deadline for withdrawal and that his Afghan policy is merely a political gesture.

Obama can’t escape national security issues. Clinton could. In 1996, there were no burning issues in foreign policy. There are now two wars under way. Obama can’t ignore them even if his core constituency has a different agenda. Going into opposition against Congress could energize his base, but that base is in the low 40s. He needs to get others on board. He could do that if he could pass legislation he wanted, but the scenario we are looking at will leave him empty-handed when it comes time for re-election. His strongest supporters will see him as the victim, but a victimized president will have trouble putting together a winning coalition in 2012. He can play the card, but there has to be more.

We come back to foreign policy as a place where Obama will have to focus whether he likes it or not. He takes his bearings from Franklin Roosevelt, and the fact is that Roosevelt had two presidencies. One was entirely about domestic politics and the other about foreign policy, or the Depression and then World War II. This was not a political choice for Roosevelt, but it was how his presidency worked out. For very different reasons, Obama is likely to have his presidency bifurcated. With his domestic initiatives blocked, he must turn to foreign policy.

Here, too, Obama has a problem. He ran his campaign, in the Democratic tradition, with a vague anti-war theme and a heavy commitment to the American-alliance structure. He was also a strong believer in what has been called soft power, the power of image as opposed to that of direct force. This has not been particularly successful. The atmospherics of the alliance may be somewhat better under Obama than Bush, but the Europeans remain as fragmented and as suspicious of American requests under Obama as they were under Bush. Obama got the Nobel Prize but precious little else from the Europeans. His public diplomacy initiative to the Islamic world also did not significantly redefine the game. Relations with China have improved but primarily because the United States has given up on revaluation of the yuan. It cannot be argued that Obama’s strategy outside the Islamic world has achieved much. It could be claimed that any such strategy takes time, Obama’s problem is that he is running out of political maneuvering room.

That leaves the wars that are continuing, Iraq and Afghanistan. We have argued that Afghanistan is the wrong war in the wrong place. It is difficult to know how Obama views it, given his contradictory signals of increasing the number of troops but setting a deadline for beginning their withdrawal. We have argued that a complete withdrawal from Iraq without a settlement with Iran or the decimation of Iran’s conventional forces would be a mistake, but we don’t know, obviously, what Obama’s view on this is. We do not know his view of the effect of the Afghan war on U.S. strategic posture or on Pakistan, and we do not know his view of the impact of U.S. withdrawal from Iraq on Iranian influence in the Persian Gulf.

Let’s assume that he has clear views, which is likely for a president, and he is playing a long and quiet game. This would not be a bad strategy if he were stronger and had more time. But if the polls hold he will be weaker and running out of time. It would therefore follow that Obama will come out of the November election having to turn over his cards on the only area where he can have traction — Iraq, Iran and Afghanistan. The question is what he might do.

One option is to solve the Iraq problem by attacking Iran’s nuclear facilities. This carries the risk, as I have said many times, of Iranian retaliation in the Strait of Hormuz and a massive hit on the Western economic revival. In that sense, a strike against Iranian nuclear targets alone would be the riskiest. Far safer is a generalized air campaign against both Iran’s nuclear and conventional capability.

But launching a new war, while two others go on, is strategically risky. From a political point of view, it would alienate Obama’s political base, many of whom supported him because he would not undertake unilateral military moves. The Republicans would be most inclined to support him, but most would not vote for him under any circumstances. Plus, brilliant military strokes have the nasty habit of bogging down just as mediocre ideas do. That would end the Obama presidency. Clinton’s war in Kosovo was not an easy option for him strategically or politically.
That leaves another option that we have suggested before, one that would appeal both to Obama’s sensibility and to his political situation: pulling a Nixon. In 1971, Richard Nixon reached out to China while Chinese weapons were being used to kill American soldiers in Vietnam. Roosevelt did the same with the Soviets in 1941. There is a tradition in the United States of a diplomatic stroke with ideological enemies to achieve strategic ends.

Diplomatic strokes appeal to Obama. They also would appeal to his political base, while any agreement with Iran that would contribute to an American withdrawal from Iraq and perhaps from Afghanistan would appeal to the center. The Republicans would be appalled, but Obama can’t win them over anyway so it doesn’t matter. Indeed, he can use their hostility to strengthen his own base.

What the settlement with Iran might look like is murky at best. Whether Iran has any interest in such a settlement is murkier still. But if Obama gets hammered in the midterms, his domestic agenda will be frozen. He doesn’t have the personal strength and credibility to run against Congress for two years and then get re-elected. He retains his power in foreign affairs but he has not gotten traction on a multilateral reconstruction of America’s global popularity. He has two wars ongoing, plus a major challenge from Iran. Attacking Iran from the air might or might not work, and it could weaken him politically. That leaves him with running against Congress or addressing the Middle East with a diplomatic masterstroke.

It is difficult to know the ways of presidents, particularly one who has tried hard to be personally enigmatic. But it is easier to measure the political pressures that are confronting him and shaping his decisions. I wouldn’t be so bold as to predict his actions, but I would argue that he faces some unappetizing choices that he could solve with a very bold move in foreign policy. His options on the domestic side will disappear if the polls are right.
Elections and Obama's Foreign Policy Choices STRATFOR

The Customer is Always Right

2010-08-11T15:22:00.000-07:00

Has anyone else noticed that this has pretty much disappeared from the thought processes of most businesses out there? Or at least it hasn’t passed on to those who actually interact with the customer/client.

Today, a couple of the folks I work with were talking about an upcoming meeting with the manager during which the manager had set as an agenda item to talk about general attitude and point out that the customer is always right. The conversation between these co-workers was not how true of a statement that was but more of how much the customer is wrong. Their thoughts regarding our customers was that they were a bunch of idiots who didn’t really know anything at all and we were nice enough to explain it once so why would they still have questions.

Wal-Mart is the prime example, but it seems that everywhere we go this attitude prevails. Now obviously the customer is not always right, but it is all about the attitude. For example, the other day I went to a restaurant for a business lunch and ordered what I thought was a chimichanga lunch combo. I ordered it by just stating its combo number. When the food came out they brought me an enchilada supreme. I told them that was not my order. They apologized and pulling out the order notes they asked if it was the #23 that I had wanted. I said that is what I had ordered and they explained that the #23 was the enchilada, but they would take it back and make the chimichanga combo meal if that is what I meant. I thanked them for the offer but feeling rather stupid told them I would eat the enchilada (which was good by the way) since that is what I ordered. The entire time their attitude was that of the customer is always right, even though they pointed out how stupid I was.

It’s rare that I get this kind of service however.

Personally I think this new attitude is prevailing due to the decrease in face-to-face interaction and increase of electronic “communication” (which isn’t really communication in its truest sense). This lack of interaction is changing perspectives from looking at everyone as a human being to them just being objects. There is a great book that I would recommend you read, if you have not already, that covers changing our perspective from looking at people as objects to looking at them as who they really are. The book is called “The Anatomy of Peace: Resolving the Heart of Conflict”.

I know that you are probably now wondering what on earth this has to do with politics and the economy. Well, I actually have been thinking lately about how this attitude and this move into the information age (aka., the age of everyone getting a massive amount of their contact with the outside world through the computer) is affecting the overall economic picture of our nation. How is this changing, if at all, for good or bad our nations ability to nurture and teach the next generation of rising stars? Is there a connection between this attitude and the feeling of the now majority (according to some polls) that the government should fix some to all of their problems? [I do find it interesting that this same majority, however, does not want or agree with becoming a socialist state. Talk about disconnect]

Anyway, what are your answers/thoughts to these questions?

Government Spending Example

2010-08-09T12:12:00.000-07:00

From Brian Wesbury at First Trust.

Christina Romer, the Chairwoman of president Obama’s Council of Economic Advisers has announced her resignation. While some people say her departure is a sign of deep divisions in the Obama team, we take her comments, about getting along with Larry Summers and enjoying every minute of her tenure, at face value. You, of course, can decide for yourself.

Romer’s infamous forecast that the $800 billion Obama stimulus bill would keep the unemployment rate at or below 8% will go down in history as one of the worst by any political economist. A 131,000 drop in jobs during July and an unemployment rate holding at 9.5% are not the headlines a president needs going into mid-term elections.

If Romer is taking the fall for all this, she has herself to blame. Her forecast of the economic benefits of government stimulus was not only wrong, but flawed. Politicians love Keynesian economists – they tell them what they want to hear – “bigger government is good.” Romer apparently fell into this trap. Now others are doing the same thing. We have one thing to say. Please, no more stimulus.

Don’t take this the wrong way. Up to a point, some government spending is good. Defending the nation and the rule of law, and helping create some national efficencies are positive additions to growth. But the US is past that point. No matter how many studies pretend that there is a positive multiplier (every dollar of government spending creates more than a dollar of GDP) they are all just political cover for expanding the size and scope of the political class.

A good test case is Canada. It has been cutting spending and tax rates for the past decade or so. While Canada bowed to pressure from the G-20 last year and is currently running a budget deficit of about 4.5% of GDP, this is well below the US and its $1.4 trillion, 10% deficits. This Canadian stimulus is smaller than in past recessions (see budget here). Canada ran deficits of 5.6% of GDP in 1992-93 and 7.6% in 1982-83 – both larger than in the US.

If Keynesians are right, the US economy should be outperforming the Canadian economy now and Canada should have done better back in the 1980s and 1990s, right? Wrong. It’s the opposite. The unemployment rate in Canada is currently 8% (Romer’s target rate) and has been below the US level since October 2008, when government spending started to go crazy. And from 1982 to 2008, the Canadian unemployment rate was always higher than the US rate – by an average of 2.8 percentage points.

This is the fruit of trusting the market and reducing the size of government. In Canada, total government spending fell from 53.3% of GDP in 1992 to 39.2% in 2007. Since then, stimulus spending boosted it to 43.8%, but the trend is down, not up. At the same time, tax rates have continued to fall. Corporate tax rates were cut from 21% in 2006 to 19.5% in 2008, 19% in 2009 and then 18% this year. The GST (a national sales tax) was cut from 6% to 5% in 2008.

The lesson is clear. Less spending, less taxing and more freedom work. Let’s not stimulate anymore. The US economy just can’t take it.

Perfect Quote

2010-07-21T14:14:00.000-07:00

This quote fits well with my previous post.

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." - Thomas Jefferson

Disconnect

2010-07-21T13:27:00.000-07:00

I don’t know about anyone else who reads this blog, but I have begun to notice a major disconnect between where our government has been heading (and yes that includes the last decade, not just the current Administration), and where our businesses (both small and large) are heading. I think that the difference is explained a little in the below snippet from Riverfront (emphasis added is mine):

“Mired in debt, dysfunctional government, and poor demographics, the developed world’s growth prospects are dimming and, if not careful, it risks slipping into irrelevance. Led by Japan, which began exhibiting signs of malaise two decades ago, we think the developed world’s vitality is being surpassed by younger, more numerous, and increasingly productive and competitive emerging market upstarts. We view this as a natural progression, but one that does not necessarily have to come at the expense of economic growth in the developed world. In our view, maintaining dynamism in the developed world will require gradually reducing the size of long-term government spending, growing wages through higher productivity, and maintaining leading edges in technology, innovation, marketing and finance. With these competitive advantages, rising wealth in emerging markets can create new customers as well as new competitors. While easier said than done, we believe successful implementation of these measures will characterize those developed world countries able to maintain economic growth and relevance. The alternatives – ignoring the changing world, failing to tackle structural spending issues, falling behind in technology, closing off trade and becoming protectionist – are a recipe for economic decline, in our opinion.”

I think our businesses exhibit the very ideas that Riverfront states are necessary in order to maintain relevance – and I 100% agree with their list. However, our government seems to be mired on the failing side, and in a way they are trying to vilify our businesses for going the right way. Government is getting bigger and less sophisticated. Creating a blog for every new project and government creation is not advancing technologically, in case there was any argument there. Adding committees and people to the payroll who will work on figuring out how the rest of the government can be more productive will not increase productivity. They are constantly threatening protectionist policies, and they seem to be establishing a brand – through our “silent” marketing – that is not attractive to businesses.

In fact, our “marketing” has shown businesses that our government wants an environment where rules will change at the whim of legislators. Some companies will get preferential treatment, but only for as long as congress decides (I wonder how that decision is made….billions in lobbying…perhaps?, with the occasional peer pressure cave-in?) Taxes will constantly be increased to fund the lazy and unproductive, with a dollop of help for the actual needy. And any time problems arise the "other" party will be to blame.

So, what will it take?

“The OECD concludes: ‘Rather than see the ‘rise of the rest’ in terms of the ‘decline of the west’, policy makers should recognize that the net gains from increased prosperity in the developing world can benefit both rich and poor countries alike. Improvements in the range and quality of exports, greater technological dynamism, better prospects for doing business, a larger consumption base – all these factors can create substantial welfare benefits for the whole world.”

Put simply…Get out of the way and encourage businesses to keep going the right way! If our government doesn't do this then eventually we will fall from the top.

Guess Who?

2010-06-30T13:11:00.000-07:00

I am currently reading a biography of Abraham Lincoln. It has definitely changed my perception of him. Not for better or worse, just different. I still respect and look at him as a great president, but now I know more of the reasons why he was.

As with a lot of people I have been doing a lot of thinking about what I personally would really want in a representative (thinking back through Lincoln and the many other greats has really brought it forward) and while it's not necessarily just what is said in the below, it definitely is how it is said. That's what I want and will be voting for. Does that make sense?

Let me know (without doing internet searches) if you know who gave this speech.

I am going to talk of controversial things. I make no apology for this.
It's time we asked ourselves if we still know the freedoms intended for us by the Founding Fathers. James Madison said, "We base all our experiments on the capacity of mankind for self government."

This idea? that government was beholden to the people, that it had no other source of power is still the newest, most unique idea in all the long history of man's relation to man. This is the issue of this election: Whether we believe in our capacity for self-government or whether we abandon the American Revolution and confess that a little intellectual elite in a far-distant capital can plan our lives for us better than we can plan them ourselves.

You and I are told we must choose between a left or right, but I suggest there is no such thing as a left or right. There is only an up or down. Up to man's age-old dream-the maximum of individual freedom consistent with order or down to the ant heap of totalitarianism. Regardless of their sincerity, their humanitarian motives, those who would sacrifice freedom for security have embarked on this downward path. Plutarch warned, "The real destroyer of the liberties of the people is he who spreads among them bounties, donations and benefits."

The Founding Fathers knew a government can't control the economy without controlling people. And they knew when a government sets out to do that, it must use force and coercion to achieve its purpose. So we have come to a time for choosing.

Public servants say, always with the best of intentions, "What greater service we could render if only we had a little more money and a little more power." But the truth is that outside of its legitimate function, government does nothing as well or as economically as the private sector.
Yet any time you and I question the schemes of the do-gooders, we're denounced as being opposed to their humanitarian goals. It seems impossible to legitimately debate their solutions with the assumption that all of us share the desire to help the less fortunate. They tell us we're always "against," never "for" anything.

We are for a provision that destitution should not follow unemployment by reason of old age, and to that end we have accepted Social Security as a step toward meeting the problem. However, we are against those entrusted with this program when they practice deception regarding its fiscal shortcomings, when they charge that any criticism of the program means that we want to end payments....

We are for aiding our allies by sharing our material blessings with nations which share our fundamental beliefs, but we are against doling out money government to government, creating bureaucracy, if not socialism, all over the world.

We need true tax reform that will at least make a start toward restoring for our children the American Dream that wealth is denied to no one, that each individual has the right to fly as high as his strength and ability will take him.... But we can not have such reform while our tax policy is engineered by people who view the tax as a means of achieving changes in our social structure....

Have we the courage and the will to face up to the immorality and discrimination of the progressive tax, and demand a return to traditional proportionate taxation? . . . Today in our country the tax collector's share is 37 cents of -very dollar earned. Freedom has never been so fragile, so close to slipping from our grasp.

Are you willing to spend time studying the issues, making yourself aware, and then conveying that information to family and friends? Will you resist the temptation to get a government handout for your community? Realize that the doctor's fight against socialized medicine is your fight. We can't socialize the doctors without socializing the patients. Recognize that government invasion of public power is eventually an assault upon your own business. If some among you fear taking a stand because you are afraid of reprisals from customers, clients, or even government, recognize that you are just feeding the crocodile hoping he'll eat you last.

If all of this seems like a great deal of trouble, think what's at stake. We are faced with the most evil enemy mankind has known in his long climb from the swamp to the stars. There can be no security anywhere in the free world if there is no fiscal and economic stability within the United States. Those who ask us to trade our freedom for the soup kitchen of the welfare state are architects of a policy of accommodation.

They say the world has become too complex for simple answers. They are wrong. There are no easy answers, but there are simple answers. We must have the courage to do what we know is morally right. Winston Churchill said that "the destiny of man is not measured by material computation. When great forces are on the move in the world, we learn we are spirits-not animals." And he said, "There is something going on in time and space, and beyond time and space, which, whether we like it or not, spells duty." You and I have a rendezvous with destiny. We will preserve for our children this, the last best hope of man on earth, or we will sentence them to take the first step into a thousand years of darkness. If we fail, at least let our children and our children's children say of us we justified our brief moment here. We did all that could be done.

Poverty Measurements

2010-06-01T14:36:00.000-07:00

I thought this was an interesting piece and fairly enlightening on government statistics.

Why Our Poverty Measure Misleads
By Robert Samuelson

Who is poor in America? This is not an easy question to answer, and the Obama administration would make it harder. It's hard because there's no conclusive definition of poverty. Low income matters, though how low is unclear. Poverty is also a mind-set that fosters self-defeating behavior -- bad work habits, family breakdown, out-of-wedlock births and addictions. Finally, poverty results from lousy luck: accidents, job losses, disability.

Despite poverty's messiness, we've tended to measure progress against it by a single statistic, the federal poverty line. It was originally designed in the early 1960s by Mollie Orshansky, an analyst at the Social Security Administration, and became part of Lyndon Johnson's War on Poverty. She took the Agriculture Department's estimated cost for a bare-bones -- but adequate -- diet and multiplied it by three. That figure is adjusted annually for inflation. In 2008, the poverty threshold was $21,834 for a four-member family with two children under 18.

By this measure, we haven't made much progress. Except for recessions, when the poverty rate can rise to 15 percent, it has stayed in a narrow range for decades. In 2007 -- the peak of the last business cycle -- the poverty rate was 12.5 percent; one out of eight Americans was "poor." In 1969, another business cycle peak, the poverty rate was 12.1 percent. But the apparent lack of progress is misleading for two reasons.

First, it ignores immigration, which has increased reported poverty. Many immigrants are poor and low-skilled. From 1989 to 2007, about three-quarters of the increase in the poverty population occurred among Hispanics -- mostly immigrants, their children and grandchildren. The poverty rate for blacks fell during this period, though it was still much too high (24.5 percent in 2007). Poverty "experts" don't dwell on immigration, because it implies that more restrictive policies might reduce U.S. poverty.

Second, the poor's material well-being has improved. The official poverty measure obscures this by counting only pre-tax cash income and ignoring other sources of support. These include the earned-income tax credit (a rebate to low-income workers), food stamps, health insurance (Medicaid), and housing and energy subsidies. Spending by poor households from all sources may be double their reported income, reports a study by Nicholas Eberstadt of the American Enterprise Institute. Although many poor live hand-to-mouth, they've participated in rising living standards. In 2005, 91 percent had microwaves, 79 percent air conditioning and 48 percent cellphones.

The existing poverty line could be improved by adding some income sources and subtracting some expenses (example: child care). Unfortunately, the administration's proposal for a "supplemental poverty measure" in 2011 -- to complement, not replace, the existing poverty line -- goes beyond these changes. The new poverty number would compound public confusion. It also raises questions about whether the statistic is tailored to favor a political agenda.

The "supplemental measure" ties the poverty threshold to what the poorest third of Americans spend on food, housing, clothes and utilities. The actual threshold -- not yet calculated -- will almost certainly be higher than today's poverty line. Moreover, the new definition has strange consequences. Suppose that all Americans doubled their incomes tomorrow, and suppose that their spending on food, clothing, housing and utilities also doubled. That would seem to signify less poverty -- but not by the new poverty measure. It wouldn't decline, because the poverty threshold would go up as spending went up. Many Americans would find this weird: People get richer but "poverty" stays stuck.

What produces this outcome is a different view of poverty. The present concept is an absolute one: The poverty threshold reflects the amount estimated to meet basic needs. By contrast, the supplemental measure embraces a relative notion of poverty: People are automatically poor if they're a given distance from the top, even if their incomes are increasing. The idea is that they suffer psychological deprivation by being far outside the mainstream. The math of this relative definition makes it hard for people at the bottom ever to escape "poverty."

The new indicator is a "propaganda device" to promote income redistribution by showing that poverty is stubborn or increasing, says the Heritage Foundation's Robert Rector. He has a point. The Census Bureau has estimated statistics similar to the administration's proposal. In 2008, the traditional poverty rate was 13.2 percent; estimates of the new statistic range up to 17 percent. The new poverty statistic exceeds the old, and the gap grows larger over time.To paraphrase the late Sen. Daniel Patrick Moynihan: The administration is defining poverty up.

It's legitimate to debate how much we should aid the poor or try to reduce economic inequality. But the debate should not be skewed by misleading statistics that not one American in 100,000 could possibly understand. Government statistics should strive for political neutrality.

This one fails.

Why Financial Reform

2010-05-25T10:23:00.000-07:00

I think that most believe in financial reform. As to how to do it apparently is all befudled (using a term in the below article) in Washington. I thought this article was by far the best description of our system, how the crisis was created in the system and how the system should be reformed in order to prevent and help manage future crisis.

Again, to point out, this article does not state that the system proposed will remove all crisis, it will just set up management for it. I'll also point out that my concern, as with most I talk with, is how much our befudled representatives in Washington are involved in and able to manipulate the management of our current system and the proposed system in this article. Anyway, great article, though it took me over an hour to get through it and several trips to the thesaurus, from the Managing Director of Pimco. If you are not all that interested in the banking system then don't start the article.

After the Crisis: Planning a New Financial Structure Learning from the Bank of Dad

Thank you very much. It is an absolute pleasure and honor to be here. I gave the keynote a couple years ago and it was my first time to be at the Minsky Conference. I feel that I'm part of a church, and it's a good church in that we're on the right side of history. And it's absolutely wonderful to be attending services with you again.

I want to open up with a little story that should make everybody in the room feel particularly good, and then we'll get into discussing economics. Harry Markowitz has been a friend of mine for about a decade. I became friends with Harry through two channels. Number one, Rob Arnott of Research Affiliates has an Advisory Panel of famous academics, such as Harry and Jack Treynor, that he gets together every year. I'm frequently invited to speak. We spend two or three days over a weekend together. I've also gotten to know Harry because he and the late great Peter Bernstein were very close friends. Peter and I were also very close friends.

I've been preaching the Minsky Framework at Rob's event for a number of years. And Harry's always been very, very polite. I spoke again just this past Sunday morning. After I finished, we had a nice Q&A. And Harry said, "Paul, if I had to read one book by Minsky, which one would it be?" And I said, "Harry, please, tell me that you've read at least one book by Minsky." And he says, "No, I haven't, but I think I would like to, and I think I'm probably old enough now."
I promised Harry that I would send him one personally. And I'm quite sure that if I don't follow up on that, somebody at the Levy Institute would gladly follow up. So, the bottom line is that one of the fathers of the Efficient Market Hypothesis has finally decided to attend services at the Church of Minsky. I think that is a glorious, glorious moment. Don't you? Harry is an absolutely delightful man.

From the standpoint of what I want to talk about tonight, a great deal of it has already been discussed today. I feel a little bit like St. Louis Federal Reserve President Jim Bullard did at lunch when he said that Paul Krugman, who spoke just before Jim, had already given 90% of his speech. That's basically true for me as well. Paul's speech was superb, laying out six possible culprits in the financial crisis.1

I want to focus on Paul's Number 3, the Shadow Banking System. Paul was drawing a lot of his comments today from the work of Professor Gary Gorton of Yale, which is absolutely fantastic material. Have a lot of you read Gary's essay, "Slapped in the Face by the Invisible Hand"?2 I see a lot of nods here. That's where the phrase that Paul used, "Quiet Period," came from. Gary coined it. He'd be a great person to have here next year at the Minsky Conference.
And one of the fascinating things that he details is the nature of banking. That's where I want to start tonight. Let's start with first principles. If we do, then I think we can understand why we shouldn't look at the conventional banking system and the Shadow Banking System as separate beasts, but intertwined beasts.

The essence, or the genius of banking, not just now, the last century or the century before that, but since time immemorial, is that the public's ex-ante demand for assets that trade on demand at par is greater than the public's ex-post demand for these types of assets. Let me repeat this, because this is a first principle: The public's ex-ante demand for liquidity at par is greater than the public's ex-post demand. Therefore, we can have banking systems because they can meet the ex-ante demand, but never have to pony up ex-post. In turn, the essence or the genius of banking is maturity, liquidity and quality transformation: holding assets that are longer, less liquid and of lower quality than the funding liabilities.

A second principle: A banking system is solvent only if it is believed by the public to be a going concern. By definition, if the public's ex-post demand for liquidity at par proves to be equal to its ex-ante demand, a banking system is insolvent because a banking system ends up, at its core, promising something it cannot deliver. Everyone following me here?

Professor Gorton, in his paper, goes through how that promise was dealt with during the 19th century, before the New Deal Era. There were panics all the time, otherwise known as runs, because we didn't have a lender of last resort and we didn't have deposit insurance. During the 19th century, the system dealt with its reoccurring panics in lots of novel ways, including clearing houses which would de facto be a central bank, and suspension of convertibility of deposits into cash. So the problems we've been dealing with in the last couple of years are not new. They go back to the origin of banking.

The Quiet Period, from the New Deal Era until the Panic of 2007, was actually unique in history. And the Quiet Period came about, I think, for a lot of the reasons that were articulated earlier today in that banks, conventional banks, after the Great Depression, were considered to be special. And, in fact, banks are special. If you think that the banking system can be guided to stability as if by an invisible hand, then you are deluding yourself. But, that is, in fact, what happened with the explosive growth of the Shadow Banking System.

Banking is a really profitable business. In its most simple form, think in terms of a bank issuing demand deposits, which are guaranteed to trade at par because they've got FDIC insurance around them and also because the issuing bank can rediscount its assets at the Fed in order to redeem deposits in old-fashioned money, also known as currency.

In fact, let's take a look at the $1 bill I am holding in my hand. It says right at the very top, "Federal Reserve Note." It also says right down here, "This note is legal tender for all debts, public and private." This is what the public ex-ante wants: the knowledge that they can turn their deposits into these Federal Reserve Notes. And if the public knows they can turn them into these notes, they don't. With me here? If I know I can, I don't.

Now, this is a unique note. This is a Federal Reserve liability. And, actually, it's really cool. It's missing two things. It doesn't have a maturity date on it. So, it's perpetual. And it doesn't have an interest rate on it. I would love to be able to issue these things. It would make me very, very happy to issue these things. But it would be against the law! But, in fact, that's what banks did in the 19th century. They issued currency. After the creation of the Federal Reserve, it was given monopoly power to create currency, which I think was a pretty bright idea. But demand deposits issued by banks are just one step away from a Federal Reserve Note.

Conceptually, demand deposits have a one-day maturity. I can write a check on it, and it goes out at par tomorrow, if not today. Demand deposits, conceptually, have a one-day maturity. But in aggregate, they have a perpetual maturity. So, therefore, banking can engage in maturity, liquidity and quality transformation: a very profitable business. Banks can issue, essentially, perpetual liabilities – call them demand deposits – and invest them in longer dated, illiquid loans and securities, earning a net interest margin. It's a really, really sweet business.
In the early years of the Quiet Period, we regulated that really sweet business. I think that was a really bright idea. In order for that business not to be prone to panics and, therefore, financial crises, you needed to have deposit insurance. Deposit insurance, by definition, cannot come about as if by the invisible hand. Deposit insurance cannot be, cannot be a private sector activity. It is a public good. The deposit insurer must be a subsidiary of the fiscal authority. And in extremis, the monetary authority can monetize the liabilities of the fiscal authority. I'm not saying that pejoratively. I'm not being pejorative at all. Just descriptive. Bottom line: Deposit insurance is inherently a public good.

Access to the Fed's balance sheet is also inherently a public good, because the Federal Reserve is the only entity that can print currency. So essentially, banking has two public goods associated with it. Therefore, naturally, it should be regulated.

That was the Quiet Period Model. And regulation took the form of what you could do, how you could do it and how much leverage you could use in doing it. And, as was mentioned by Paul Volcker a number of times earlier this afternoon, the regulatory burden that has historically come with being a conventional bank has been actually quite high. During the early years of the Quiet Period, however, banking was nonetheless a very profitable endeavor.

There was a quid pro quo, which actually led to the old joke – which was actually said about the savings and loan industry – that banking was a great job: Take in deposits at 3, lend them out at 6, and be on the golf course at 3. 3-6-3 banking was a pretty nice franchise. So, therefore, bankers had a pretty strong incentive not to mess it up. Essentially, there were oligopoly profits in the business. I think Gary Gorton is actually right on that proposition.

The invisible hand, however, naturally wanted to get the oligopoly profits associated with banking while reducing the impact of some regulation. Thus, the Shadow Banking System came into existence, where the net interest margin associated with maturity, liquidity and quality transformation could be earned on a much smaller capital base.

And, in fact, that's what happened starting essentially in the mid-1970s, accelerating through the 1980s and 1990s, and then exploding in the first decade of this century.

The birth of the Shadow Banking System required that capitalists be able to come up with an asset – which actually for shadow bankers is a liability – that was perceived by the public as just as good as a bank deposit. Remember, the public has an ex-ante demand for something that trades on demand at par. Therefore, shadow bankers had to be able to persuade the public that its asset – which is actually the shadow banker's liability – was just as good as the real thing. If they could do that, then they could have one whale of a good time.

That asset – which, again, is the bank's liability – needed, in Gary Gorton's terms, to be characterized by "informational insensitivity," meaning that the holder didn't need to do any due diligence, just taking it on faith that this asset could be converted at par on demand. And, in fact, money market mutual fund shares achieved that status. With one small exception prior to the Reserve Primary Fund breaking the buck, they always traded at par. And if there was any danger they wouldn't trade at par, the sponsor would step in and buy out any dodgy asset at par. So, essentially, the money market mutual fund industry was at the very core of the growth of the Shadow Banking System.

It created a liability perceived as just as good as a demand deposit wrapped with deposit insurance, issued by a bank with access to the Fed. It was a great game. But in and of itself, that didn't lead to the explosive growth in the Shadow Banking System. There needed to be another link in the chain. Yes, money market mutual funds needed an asset that the public perceived as just as good as a bank deposit. But they also had to put something on the other side of the balance sheet.

What went on the other side of the balance sheet? Money market instruments such as repo and commercial paper (CP). And under Rule 2a-7, they were allowed to use accrual accounting for their assets. The assets didn't have to be marked to market. So, therefore, 2a-7 funds could actually maintain the $1 share price, unless they did something really dumb.

At their peak, money market mutual funds were about $4 trillion. They are about $3 trillion now. They interacted with the larger Shadow Banking System. And the largest shadow banks were the vehicles of investment banks, funded heavily with repo and CP. So, explosive growth of the Shadow Banking System was logically the result of the invisible hand of the marketplace wanting to get the profitability of the regulated banking system, but without the regulation. Shadow banks created information-insensitive assets for the public that were perceived as just as good as a demand deposit, and then levered the daylights out of them into longer, less liquid, lower-quality assets. And it all worked swimmingly well, for a while. But then they embarked on the Forward Minsky Journey.3

Shadow banks were the predominant place where securitizations of subprime mortgages were placed, as well as securitizations of other types of assets. So the Shadow Banking System was, essentially, mirroring the banking model, which had deposits and loans.

Turn the deposit into asset-backed commercial paper. Turn the loan into a security. What you end up with is the same vehicle as a bank from a functional standpoint, but you have it outside the conventional bank regulatory structure. Actually, let me correct myself. There was a de facto regulator in the Shadow Banking System. They are called the rating agencies.

In order to do the trick of creating a shadow bank, you had to have the rating agencies declare that your senior short-dated liabilities were just as good as bank deposits. In fact, most money market mutual funds get themselves rated, and S&P, Moody's, and Fitch do have particular rules for giving a AAA rating to a 2a-7 money market fund, mirroring SEC Rules. But, for the rest of the Shadow Banking System, the rating agency rules evolved on the fly, often under the guidance of shadow bankers themselves. It didn't work out very well, as the Shadow Banking System became the lead owner of what was created in the originate-to-distribute model of mortgage creation.

On August 9, 2007, game over. If you have to pick a day for the Minsky Moment, it was August 9. And, actually, it didn't happen here in the United States. It happened in France, when Paribas Bank (BNP) said that it could not value the toxic mortgage assets in three of its off-balance sheet vehicles, and that, therefore, the liability holders, who thought they could get out at any time, were frozen. I remember the day like my son's birthday. And that happens every year. Because the unraveling started on that day. In fact, it was later that month that I actually coined the term "Shadow Banking System" at the Fed's annual symposium in Jackson Hole.
It was only my second year there. And I was in awe, and mainly listened for most of the three days. At the end, Marty Feldstein always does the wrap-up. Everybody wanted to talk. And since I was a newbie, I didn't say anything until almost the very end. I stood up and (paraphrasing) said, "What's going on is really simple. We're having a run on the Shadow Banking System and the only question is how intensely it will self-feed as its assets and liabilities are put back onto the balance sheet of the conventional banking system."

Now, I certainly didn't anticipate that it was going to lead to the debacle that eventually unfolded. In fact, while the run commenced on August 9th of 2007, it was pretty much an orderly run up until September 15, 2008. And it was orderly primarily because the Fed – and here I give the Fed credit, not criticism – evoked Section 13-3 of the Federal Reserve Act in March of 2008 in order to facilitate the merger of under-a-run Bear Stearns into JPMorgan. Concurrently, the Fed opened its balance sheet to the biggest shadow banks of all, the investment banks that were primary dealers, including most important, the big five. It was called the Primary Dealer Credit Facility.

I'm sure that was an incredibly difficult decision for the Federal Reserve Board to make – to open its balance sheet to borrowers it didn't regulate. But it was necessary, because runs are self-feeding; you can't stop them without the aid of somebody with the ability to print legal tender. That's the only way you can stop it, because only the Fed can create an asset that will definitionally trade at par in real time. During a run, that's what the public wants. A run turns upside down the genius of banking. A run is when the public's ex-post demand for liquidity at par equals its ex-ante demand.

Post-Bear Stearns, financial life regained some sense of normalcy. But then came the run on Lehman Brothers, and the Fed didn't have the legal power to implement a Bear-like rescue. And then the Reserve Fund broke the buck. That week will be one that we remember for the rest of our lives. It will also be one that we will remember where the Fed was at its finest hour. The Fed created a whole host of facilities to stop the run. In fact, they expanded the Primary Dealer Credit Facility to what are known as Schedule 2 assets, which meant that dealers could rediscount anything at the Fed that they could borrow against in the tri-party repo market.

Concurrently, the FDIC stepped up to the plate, doing two incredibly important things. Number one, they totally uncapped deposit insurance on transaction accounts, which meant that the notion of uninsured depositors in transaction accounts became an oxymoron. If you were in a transaction account, there was no reason to run. And then the FDIC effectively became a monoline insurer to nonbank financials with its Temporary Liquidity Guarantee Program (TGLP) allowing both banks and shadow banks to issue unsecured debt with the full faith and credit of Uncle Sam for a 75 basis points fee. No surprise some $300 billion was issued.
So, bottom line, you had the Fed step up and provide its public good to the Shadow Banking System. You had the FDIC step up and do the same thing with its public good. And as Paul Volcker was noting this afternoon, you had the Treasury step up and provide a similar public good for the money market mutual funds, using the Foreign Exchange Stabilization Fund. It was a triple-thick milk shake of socialism. And it was good. Again, I'm not being pejorative. I'm being descriptive.

Banking is inherently a joint venture between the private sector and the public sector. Banking inherently cannot be a solely capitalistic affair. I put that on the table as an article of fact. And, in fact, speaking at a Minsky Conference, I know I'm preaching to the converted. Big bank and big government are part of our catechism. And, in fact, that's exactly what came to the fore to save us from Depression 2.0.

Let me draw to a few conclusions. How should we re-regulate the financial landscape – as President Bullard was calling it today – to make sure this doesn't happen again? We must, because the collateral damage to the global economy has been truly a tragedy.

And I think the first principle is that if what you're doing is banking, de jure or de facto, then you are in a joint venture with the public sector. Period. If you're issuing liabilities that are intended to be just as good as a bank deposit, then you will be considered functionally a bank, regardless of the name on your door. That's the first principle.

Number two, if you engage in these types of activities – call it banking, without making a big distinction here between conventional banking and shadow banking, as Paul Krugman intoned this morning – in such size that you pose systemic risk, you will have higher mandated capital requirements and you will be supervised by the Federal Reserve. Yes, I just told you who I think the top-dog supervisor should be. You will have tighter leverage and liquidity restrictions: You will have to live by civilized norms. In fact, a great deal of what is on the regulatory reform table right now proceeds precisely along those lines. If you're going to act like a bank, you're going to be regulated like a bank. That simple. And maybe you just might find the time to go back to working on your golf game at 3. That is the core principle.

There truly is a devil in the details, because it's quite natural that non-bank levered-up financial intermediaries don't want to be treated like banks. I wouldn't either. But the truth of the matter is if you're going to have access to the public goods associated with banking, then you're going to be treated like a bank.

In fact, here is an example of this concept in my own life, which I'm sure most of you have experienced who have older children. When my son turned 18, he said, "Dad, I'm now the age of majority and I can do whatever I want." I said, "Son, that's absolutely true. However, I still control the Bank of Dad. And if you want to have access to the Bank of Dad, there are going to be rules. If you don't want access to the Bank of Dad, that's fine. But if you want access to the Bank of Dad, there are going to be rules."

The Federal Reserve and the FDIC and the Treasury, together, are the Bank of Dad. And Mom. I expect regulation to be similar to that which I have imposed on my son. It doesn't mean I want to stifle his innovation. That doesn't mean I want to stifle his creativity. I want him to be all he can be. But as long as he's banking at Bank of Dad, there are going to be rules.

So there's my regulatory framework for you. Yes, think in terms of the Federal Reserve and the FDIC and the Treasury as all providing public goods to banking. But the Federal Reserve has got to be at the top of the totem pole, because the Fed truly is the Bank of Dad. The entity that can print money has got to be the lead supervisor. To me, it's unambiguously clear. And the fact that it's being debated actually befuddles me. I operate on the notion that self-evident truths should be self-evident. But apparently Washington doesn't operate on that thesis.

I've talked too long. I promised you I wouldn't do this. I was going to talk short and then have a long Q&A, but I'm a Baptist minister's son, and we can't help ourselves. Regardless of how simple the sermon may be, it always goes on too long because the minister always enjoys giving it more than the audience enjoys receiving it.

Thank you very much.
Paul McCulley
Managing Director

Frightening

2010-05-21T09:38:00.000-07:00

I know I have not been posting much lately. Way too much going on. However, I had to share this because it scared me. It is from an investment group Wentworth, Hauser and Violich with emphasis added by me.

"While the near-term outlook for the United States economy appears favorable, the longer-term prospects are problematic because of the large increase in government spending, expansion of entitlement programs, large federal budget deficits and unfunded liabilities. Additionally, the increase share of the economy controlled by the federal government will crowd out the private sector and have adverse consequences for longer-term growth. Finally, the enormous expansion in the Federal Reserve's balance sheet has inflationary implications of unprecedented proportions."

"In fiscal year 2009, ended in September, the federal budget deficit jumped to $1.4 trillion from $459 billion in fiscal 2008. The deficit is forecast to be $1.6 trillion for fiscal 2010 and $1.4 trillion for fiscal 2011. The Congressional Budget Office (CBO) in March estimated that deficits between 2011 and 2020 would total more than $9.7 trillion. Total outstanding federal debt as of this writing is $12.8 trillion and based upon CBO estimates will jump to over $22.5 trillion in ten years. The federal government debt is growing at about $4.5 billion a day. These estimates do not include the two newly enacted entitlement programs of health care and student loans. The first full decade of health care legislation will cost about $2.4 trillion."

"Federal spending has increased from its historic post-WWII range of 20-21 percent of GDP to a baseline of 24-25 percent. Federal government spending currently represents about 27 percent of GDP. Revenues have averaged about 19 percent of GDP over the past 60 years. Historically the federal government has run a deficit of about 2 percent of GDP which is sustainable when GDP trend line growth is about 3.3 percent. Currently the deficit relative to GDP is about 11 percent. Interest on the federal debt is equal to about 13 percent of the deficit. by 2016 interest on federal debt will take up 100 percent of the deficit."

"Federal government debt will exceed 100 percent of GDP within ten years compared to 88 percent currently and 56 percent in 2007. Economists generally agree that 3 percent budget deficits and 60 percent debt to GDP are sustainable. Those criteria established by the Euro zone. The United States does not qualify for entry into the European Union."

"The unfunded liabilities of Social Security, Medicare, Medicaid, and other federal government employee pension programs together with the new health care entitlement are as high as $75 trillion, an amount that exceeds total world GDP. The Medicare trust fund runs out in 2017 while the Social Security trust fund runs out in 2037. This past year was the first time Social Security paid more in benefits than it received in payroll taxes and interest. Past CBO estimates of forward costs of current entitlement programs have understated the actual costs by a factor as large as 10. There are 78 million 'baby boomers', those born between 1946 and 1964, that will be moving from work to retirement in the period ahead."

"Additionally the various states are running unprecedented budget deficits. the new health care legislation places great burdens on the states as it expands Medicaid, the health care program for the poor that is shared by the federal government and the states. the recession and uncontrolled spending have created an estimated $196 billion deficit for state governments in fiscal 2010 resulting in Moody's Investors Service lowering the credit rating for five states' bonds. State and local government debt is a record 20.7 percent of U.S. GDP."

"There appears to be no political will to face these problems. Spending continues to grow. Tax increases are being budgeted, with taxes on individuals making more than $200,000 and couples making more than $250,000 for 2011, 2013 and beyond. However taxing this income group 100 percent would not close the budget gap. The probabilities of a European style value-added tax are high. Uncontrolled spending, expanded entitlement programs, further government intrusion into the economy, increased regulation and higher taxes are not conducive to optimum economic growth. The results may well be the loss of the AAA rating for the United States government obligations, a collapse of the dollar and runaway inflation."

Wow, is all I can say...

2010-04-19T14:45:00.000-07:00

All right, so not really. I am all for financial reform, but my ideas are crazy things like: enforcing existing laws, putting a lot of the "hidden" securities that are packaged up and sold by banks with no real disclosure on an exchange so they are openly traded, remove at least half of the insane rules that put government too much into the private sector and prohibit the free markets from working. I don't think we need more rules and stricter rules. For that reason I like what John Mauldin has to say this week.

John Mauldin Weekly

When you draft a 1,300-page "financial reform" bill, various special interests get language tucked into the bill to help their agendas. However, the unintended consequences can be devastating. And the financial reform bill has more than a few such items. Today, we look briefly at a few innocent paragraphs that could simply kill the job-creation engine of the US. I know that a few Congressmen and even more staffers read my letter, so I hope that someone can fix this.

The Wall Street Journal today noted that the bill, while flawed, keeps getting better with each revision. Let's hope that's the case here.Then I'll comment on the Goldman Sachs indictment. As we all know, there is never just one cockroach. This could be a much bigger story, and understanding some of the details may help you. As an aside, I was writing in late 2006 about the very Collateralized Debt Obligations that are now front and center. There is both more and less to the story than has come out so far. And I'll speculate about how all this could have happened. Let's jump right in.

First, Let's Kill the Angels

I wrote about the Dodd bill and its problems last week. But a new problem has surfaced that has major implications for the US economy and our ability to grow it. For all intents and purposes, the bill will utterly devastate angel investing in the US. And as we will see, that is not hyperbole. For a Congress and administration that purports to be all about jobs, this section of the bill makes less than no sense. It is a job and innovation killer of the first order.First, let's look at a very important part of the US economic machine, the angel investing network. An angel investor, or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business startup, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally managed fund. Although it typically reflects the investment judgment of an individual, the actual entity that provides the funding may be a trust, business, limited liability company, investment fund, etc.Angel capital fills the gap in startup financing between "friends and family" (sometimes humorously given the acronym FFF, which stands for "friends, family and fools") who provide seed funding, and venture capital. Although it is usually difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds are usually not able to consider investments under $1-2 million. Thus, angel investment is a common second round of financing for high-growth startups, and accounts in total for almost as much money invested annually as all venture capital funds combined, but invested into more than ten times as many companies (US$26 billion vs. $30.69 billion in the US in 2007, into 57,000 companies vs. 3,918 companies). (Wikipedia) (Incidentally, angel investing got its name from people who invested in Broadway plays, and the term began to be used for investors in similarly risky startups.)

This has become a very big deal in the US. Angel investors put as much money to work as all the mainstream venture capital funds. And the internet has greatly expanded the network of angel investors. In 1996 there were about ten organized angel networks, most quite small. Now there are many hundreds, and some of them are quite large and organized, with some serious money amongst the members. "Angel investors committed fewer dollars but increased the number of investments during the first half of 2009," according to "The Angel Investor Market in Q1Q2 2009: A Halt in the Market Contraction" by the Center for Venture Research at the University of New Hampshire. Total investments in the first half of 2009 were $9.1 billion, a decrease of 27% over the first half of 2008, the study reports. However, 24,500 entrepreneurial ventures received angel funding during the period, a 6% increase from the first half of 2008. The number of active investors in the first half of 2009 was 140,200 individuals, virtually unchanged from the same period in 2008. (Tech Transfer Blog)And according to a conversation I had with the very enthusiastic David Rose of Angelsoft this week in New York, the numbers are growing as the economy improves. If you assume that as many new ventures were funded in the latter half of 2009, then we are looking at 50,000 new businesses last year. At an average of (my guess) 10 employees a firm, plus all the business they contract for, that is at least 500,000 jobs, with the promise of many more for the firms that become viable.

Angel investors do more than just provide money. Many are successful businessmen, and they give guidance and often bring their networks of contacts and potential business partners to the new venture. While I can't find the statistics, I will bet you that companies that are started with angel money are more successful than those that aren't.And remember, that is 50,000 new businesses or more every year, as 2009 was not exactly a banner economic year. This is the very heart of the job-creation machine in the US. It is what keeps this country competitive. And the Dodd bill places this at severe risk. Let's look at how it would handcuff potential investors.

Here are a few quotes from Venture Beat, a publication of the venture industry. ( http://venturebeat.com/2010/03/26/angel-investing-chris-dodd/) "There are three changes that should have a particular effect on angel investors, a catch-all category which includes everyone from friends and family members who invest in a startup, to unaffiliated wealthy individuals, to side investments made by venture capitalists acting on their own."First, Dodd's bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the SEC to review their filing. A second provision raises the wealth requirements for an "accredited investor" who can invest in startups - if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000). The third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states.

"This is not a partisan issue. Let's look at what former Google employee, angel investor, and Obama supporter Chris Sacca has to say:"Obviously, I'm deeply concerned about Senator Dodd's proposal to place these restrictions on angel investing. I think angel investing is undeniably one of the largest engines for job creation as well as innovation and competitiveness on the global scale for the United States. There's no doubt about it that the restrictions that he's proposing would absolutely chill investing."

Specifically, one of the things we need to take into account is while 10 years ago it may have taken years to build a company, companies are now built in a matter of weeks. So this 120-day waiting period is frankly ridiculous. I have companies with tens of thousands and hundreds of thousands of users that are built in a matter of weeks. They're generating actual dollars of revenue, creating jobs, investing in real estate office space, capital equipment, etc. If they had to wait 120 days to actually apply for the ability to obtain financing it would absolutely just crush that market." "I think this is a very short-sighted proposal. It seems far afield from the problems that the banking committee is actually trying to address."

Additionally, allowing states to set the rules rather than having one set of rules that governs business startups, is guaranteed chaos and adds another layer of costs. Which state will require what rules and how will they conflict? Will a startup have to register with each state where there might be an investor? Aaaggghh! Seriously?

So why is it in there? Let me offer an informed speculation. Remember when I was writing about four years ago about the SEC wanting to raise the accredited investor standards to $2.5 million? I provided a link to let readers comment on that proposal, and about 400 of my readers made 99% negative comments. It went away. And the SEC also lost the ability to regulate hedge funds, through a court decision that said the agency didn't have appropriate Congressional authority.

So, what's a regulator to do? Get the language you want inserted into a 1,300-page bill, and add a few extra dollops of authority just to see if you can get it. (And someone from some state regulatory organization had to have lobbied for removing the federal exemption. Those things just don't appear without someone pushing them.)During the last contretemps, the SEC had a carve-out (if I remember correctly) for venture capital and private equity funds, as far as the accredited investor qualifications were concerned. They left the limits at "just" $1 million for venture and private equity, while appropriately acknowledging that they had no wish to hurt the venture capital or angel investing mechanisms in the US.I testified before Congress that the limits should be removed altogether with regard to investments like hedge funds. My argument is philosophical in nature. Quoting from my 2007 testimony (the entirety of which is here: http://www.2000wave.com/article.asp?id=mwo012607): "Why should 95% (or maybe soon to be 99%!) of Americans, simply because they have less than $1,000,000 (or $2,500,000?), be precluded from the same choices available to the rich? Why do we assume those with less than $1,000,000 to be sophisticated enough to understand the risks in stocks (which have lost trillions of investor dollars), stock options (the vast majority of which expire worthless), futures (where 95% of retail investors lose money), mutual funds (80% of which underperform the market), and a whole host of very high-risk investments, yet deem them to be incapable of understanding the risks in hedge funds?"Equal Choice, Equal Access, Equal Opportunity ".... If you were to tell investors that they would be discriminated against because of their gender or race or sexual preference, there would be an outcry. To put it simply: it is a matter of Choice. It is a matter of Equal Access. It is a matter of Equal Opportunity. Congress should change the rules and allow all investors to be truly equal, at least as to opportunity.

"I believe it is time to change a system where 95% (and maybe soon to be almost 99%) of Americans are relegated to second-class status based solely on their income and wealth and not on their abilities. It is simply wrong to deny a person equal opportunity and access to what many feel are the best managers in the world, based upon old rules designed for a different time and different purpose.

I hope that someday Congress will see to it that small investors are invited to sit at the table as equals with the rich." Let me sadly acknowledge that it is likely that the accredited investor limits will be raised. The handwriting is on the wall, as regulators seem to really want that and have the ear of the bill writers. I hope that is not the case, but I fear that it is. It is not the end of the world, but rather more of a point of personal liberty to me.

But that is not the case in respect to venture and angel investing. There, the difference between the definition of an accredited investor, at a level of $1 million vs. $2.5, million is absolutely critical to the national enterprise. Think of it as a wide pyramid. The number of individuals with a net worth of over $1 million was about 4% of the population a few years ago (it may be less now). The percentages then drop fast for each increase of a million dollars. By raising the standards to $2.5 million, we would be cutting out millions of potential angel investors.

Unless I am missing something, I hear no cry to protect angel investors from themselves. This is a relatively seasoned group. They know that the majority of their angel investments will fail, which is why they get larger portions of the companies they do invest in. The risks are high.It is not enough that we are going to raise taxes on angel investors. Do we also need to restrict their activities? Registering an offering with the SEC can be VERY expensive. Legal and accounting bills can mount up to a $100,000 before you know it. And does the SEC really want to monitor 50,000 additional offerings each year? Do you think there would be any hope of a 4-month response time? The most a poor regulator could do would be a cursory reading to make sure the proposal checked all the boxes. I can tell you that an angel investor does more than cursory checking before he puts in money.

Let's do a back-of-the-napkin cost analysis. 50,000 new ventures times $100,000. That's $5 billion. That is a hefty cost burden to put on risky new businesses, many of which are raising less than a million. And angel investors typically will not pay for that cost. That will have to be borne by the entrepreneurs, who don't have the money to being with. Otherwise they wouldn't need the angels. This will kill many new businesses before they can even get launched.Quite frankly, I think when the SEC commissioners look into this they will realize the disaster that would be visited upon them if this became law. Their budgets and man-power are already stretched. A little pushing and prodding from those who can should go a long way. If you can make a few phone calls, please do so. I know I will.

Here's what needs to happen. Get rid of the disastrous rule requiring filing with the SEC. It makes no sense and will cost hundreds of thousand of jobs and divert the SEC from their main tasks. Angel investing has not been a problem to date, and there is no need to fix something that is not broken.

Second, if you really think we need to raise the accredited investor limits, then carve out an exemption for venture capital.And keep the clause that gives startups federal exemption.

And, if you really want to create jobs, then cut capital-gains taxes on new ventures and angel investing to 10% or less. Let's create some incentive to get America moving!Some Quick Thoughts on GoldmanGoldman Sachs is all over the news after being charged with fraud. The way I see it, this is essentially a charge that there was not full disclosure. And it appears to me that that is true. It also is true that Goldman will argue (or I think they will) that only very sophisticated investors who signed very lengthy offering documents were involved, and they should have known better. They were also reaching for yield.

But this is just the tip of the iceberg. I was writing about these "CDOs Squared" in late 2006, and many of these were done in 2007. It was obvious to me (and others) that they were going to blow up. I often wondered who was buying the equity tranches of these synthetic CDOs.

Last week I read a very interesting report from propublic.org about a hedge fund called Magnetar, which basically did the same trade as in the Goldman deal. And they did those deals with nine banks. I should apologize here and note that I intended last week to send you the entire, if lengthy, article as an Outside the Box, but for the first time in years just got overwhelmed in New York and did not have the time. You can read the whole article at http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going.

Let me quote a few paragraphs."From what we've learned, there was nothing illegal in what Magnetar did; it was playing by the rules in place at the time. And the hedge fund didn't cause the housing bubble or the financial crisis. But the Magnetar Trade does illustrate the perverse incentives and reckless behavior that characterized the last days of the boom. "Magnetar worked with major banks, including Merrill Lynch, Citigroup, and UBS. At least nine banks helped Magnetar hatch deals. Merrill Lynch, Citigroup and UBS all did multiple deals with Magnetar. JPMorgan Chase, often lauded for having avoided the worst of the CDO craze, actually ended up doing one of the riskiest deals with Magnetar, in May 2007, nearly a year after housing prices started to decline. According to marketing material and prospectuses, the banks didn't disclose to CDO investors the role Magnetar played. [emphasis mine]"Many of the bankers who worked on these deals personally benefited, earning millions in annual bonuses.

The banks booked profits at the outset. But those gains were fleeting. As it turned out, the banks that assembled and marketed the Magnetar CDOs had trouble selling them. And when the crash came, they were among the biggest losers."Look at the charts below. The financial institutions are once again soaring on new profits, with almost 30% of total corporate profits and a huge proportion of the growth in profits coming in the last 12 months.

Side bet: Goldman and at least 8 other banks are going to have serious litigation costs, if they don't actually have to eat the losses of the investors in these synthetic CDOs. Understand, these were not securitizations of actual mortgages. They were securitizations of derivatives that acted like these mortgages, and the worst tranches of them to boot. On top of their loan losses, there could be tens of billions of losses to investors in the CDOs they sold. This will play out over years. As Pro Public noted, the hedge funds did nothing illegal. If the housing market had continued to go up another year or two, most of them would have imploded while waiting for the market to break. More than a few funds did. It can be a difficult thing to bet on the end of the world and then have to wait. The issue is disclosure. I wonder if the ratings agencies knew. Would that have changed their views? I hope someone writes an in-depth investigative book about this. I'll buy it.

Federal Workers

2010-03-01T14:04:00.000-08:00

Here is one from Brian Wesbury. Here is a little disclaimer: I don't blame the federal workers 100% for their high wages. Everyone always wants a raise and everyone will always ask for a raise. It takes an understanding from both the employer and the employees as when those raises make sense and when they don't. As to whether or not they are ultimately paid out, however, is entirely up to the employer.

From Brian Wesbury:

"Imagine a company that dominates its field. It’s been #1 in its industry as long as anyone can remember. But, lately, it’s fallen on hard times. Revenue has dropped dramatically. The only thing keeping it afloat is record borrowing based on its stellar credit rating, earned many years ago. Meanwhile, independent analysts have shown that workers at this company earn higher than average wages. Moreover, the workers have skills that are not easily transferrable. If this were an airline or an automaker, the solution would be a no-brainer: it would be time for a big pay cut. If the company didn’t cut pay, or increased it, creditors and investors would question the seriousness of management. But this is exactly what President Obama did in his most recent budget – request a wage increase of 2% for civilian federal workers in 2010. It’s no wonder that some are questioning the financial stability of the USA. So why don’t we do something serious.

"How about an outright pay cut of 10% for all civilian federal workers? Total compensation per federal worker – cash earnings plus fringe benefits – already averages twice that of the private sector. So cutting cash earnings by 10% across-the-board seems not only reasonable, but justified. Truth be told, it would not save a great deal of money, at least not up front. The payroll (wages and salaries) for civilian federal workers is about $150 billion per year, so a 10% cut would only net $15 billion in outlay savings. Nonetheless, a one-time pay cut of 10% permanently shifts future wages onto a lower path. With today’s interest rates, the present value of all future outlay savings would total roughly $750 billion. This is a drop in the bucket when compared to the total of all of the federal government’s unfunded liabilities, which have reached nearly $70 trillion. But the message is just as important as the amount.

"Lenders around the world are rethinking sovereign credit risk. Lately, Greece has been the focal point, but talk of a US debt downgrade has also occurred. We doubt the US’s debt rating will be downgraded, but just hearing the discussion is making Alexander Hamilton (the first Secretary of the Treasury) turn over in his grave. For the President’s budget to propose federal worker pay hikes, with unemployment at 9.7%, after many private-sector workers have had to suffer pay cuts, the signal being sent is clear: The US is not yet serious about the deficit."

The End Game

2010-02-22T16:39:00.000-08:00

It seems that with all of the news now days about Europe, and in particular Greece, the media seems to leave out the fundamental source of their problems. I think this paragraph from John Mauldin starts in on the root of the problem:

“This is the nature of the End Game I have been writing about. The decisions are now political. How do we unwind the debts and the leverage? How much pain do we postpone and how much do we take on today? It is the same question for much of Europe, Great Britain (serious problems there), Japan (which is a bug in search of a windshield), and the US. We now have a limited number of path-dependent options. By that I mean the political paths chosen by the various governments will dictate the economic path we go down.”

What it really comes down to is that governments have been put into place in order to represent and make decisions for the people they govern. Throughout the world and in the U.S. over the last 50 years or so, the people have demanded that their government do more. Whether they want them to help the suffering poor or better protect them we have seemed to look to government more and more to solve all of the problems. The people have seemed to demand this without giving a thought to the consequences. For example (and I am not giving this to pass judgment on whether it was a good or bad idea): After the 9/11 attack the people demanded to know why the government had not protected them from this terrible disaster. We wanted them to fix the problems and do what it takes to prevent a horrible thing like this from ever happening again. Well, we got what we asked for in the way of more acts which gave the government the power to watch for terrorists and terrorist actions more closely. That same power gave them the ability to invade privacy, which is not something people wanted.

While protection is one thing, the problem that is at the forefront has to do with money. Money, when it comes from the government, is pretty much labeled as an entitlement. Meaning, the people feel they should always get that kind of support and that the government is responsible for ensuring that support never ends. At the start these entitlements may seem like a good thing. Shouldn’t we all help those who have worked hard all their life and now can’t work due to age? Shouldn’t we provide medical care for those who can’t pay for the service and resources used in their care? Well, what happens if we decide that in order to help all those who are no longer able to work our government will choose to start paying them towards the end of their life and they decide on an age based on life expectancy at the time, but life expectancy increases? Or better yet, what if individuals encounter a set back in their working career and decide to not work anymore because the government will pay them? Or, what about the widow of the person who worked? Shouldn’t we provide for her and her children too?

My point is, once money starts to flow for free you will have millions of people lining up to claim it. They will flock to those who promise more free money, especially when it comes from someone else who has “too much” of it. When the politicians who, let’s face it, got into their position to perhaps help but now must keep their job regardless of their current motivation see that all they have to do is make some promises of money (in virtually any form) and they’ll get re-elected, they will offer up more entitlements or one-up the current ones.

Now, back to our current predicament. What we are seeing now, especially in the more socialist countries, is that this spending and money (which has always had to come from somewhere) is starting to dry out. They have either been getting money from leveraged borrowing or taxing their citizens. Those citizens have gotten smart and have figured how to better hide their money (and I say all the power to them). The problem, of course, is that governments are finding that they have increased these entitlements so much, that they can no longer fund them. In fact many of these governments (Spain, Greece, Ireland, etc.) see that if they don’t go back to the people and reclaim some of what was promised they will face a myriad of painful outcomes. Some of these governments have done it and already are seeing the reaction from the people.

The problem in the U.S., as I see it, is that our government sees this problem and they are facing it in pretty much the same way they have addressed these problems over the last several decades: A lot of blaming, a lot of spending, and further putting off of the tough decisions.

When John Mauldin, and many others who may title it differently, refers to the End Game, he is talking about the fact that these decisions were able to be put off for years, but now they must be addressed. The painful game that we are playing is what choice will be made? Will we rip off the band-aid and deal with the immediate pain that very well could temporarily shock the system? Or do we slowly pull it off dragging out the pain but perhaps avoiding the shock?

Many will argue against the idea of having to remove any of these entitlements. Just because we are in a fiscal crisis and the money has slowed doesn’t mean the tough questions will go away. How do we take care of the widow and the suffering? The answer to most reading this blog is simple. We take care of them and the government does not. Meaning, government needs to get out of the way and allow the people to choose to take care of those in need. Charitable donations are massive in this country and do a lot of good. While many would say this is hopeless faith, I believe that if more of the wealthy – and I include myself here since I am definitely above the poverty line – had greater and freer (meaning they wouldn’t have to go to excessive lengths to hide it from the government) ability to use their own money they would give even more. I have mentioned the fourth turning before in this blog. I believe the fourth turning, or major shift our country makes, will be to bring us back to power for the people. The tea parties are a small evidence of that. I believe the rising generations will take these problems head on and make the right decisions and by rising generations I mean those who are at the tail end of Generation X and all of Generation Y.

While it does seem that everyone in the media is pessimistic these days I, and I hope you do too, still have a lot of hope for our nation.

President's Budget

2010-02-17T17:32:00.000-08:00

I thought this snippet from Greg Mankiw summed up my feelings on the budget fairly well. I usually try to read through anything before commenting on it but when I downloaded the budget and it was over 400 pages I decided there were plenty of other books I'd rather read. That, and after the first paragraph where it stated that the American dream was to become middle class. Not too sure if I agree with that. Anyway, on to Mankiw's comments:

"The troubling feature of Mr. Obama’s budget is that it fails to return the federal government to manageable budget deficits, even as the wars wind down and the economy recovers from the recession. According to the administration’s own numbers, the budget deficit under the president’s proposed policies will never fall below 3.6 percent of G.D.P. By 2020, the end of the planning horizon, it will be 4.2 percent and rising.As a result, the government’s debts will grow faster than the economy. The administration projects that the debt-to-G.D.P. ratio will rise in each of the next 10 years. By 2020, the government’s debts will equal 77.2 percent of G.D.P.

This level of indebtedness has not been seen since 1950, in the aftermath of the borrowing to finance World War II.Making matters worse, these bleak budget projections are based on relatively optimistic economic assumptions. The administration forecasts economic growth of 3.0 percent from the fourth quarter of 2009 to the fourth quarter of 2010, followed by 4.3 percent the next year. By contrast, the Congressional Budget Office predicts growth of 2.1 percent and 2.4 percent for these two years. Lower growth would mean less tax revenue, larger budget deficits and a more rapidly increasing debt-to-G.D.P. ratio.The president seems to understand that the fiscal plan presented in his budget is not sustainable and, as such, is not really a plan at all. That is why the budget prominently calls for a fiscal commission that will be charged with “identifying policies to improve the fiscal situation.” The goal, the budget says, is “to stabilize the debt-to-G.D.P. ratio at an acceptable level once the economy recovers.”

In other words, President Obama’s long-term fiscal strategy is to appoint a commission to figure out a long-term fiscal strategy.

Greece and Other Countries

2010-02-16T15:08:00.000-08:00

I thought the following from Brian Wesbury was exceptionally well stated.

As of 2008, Greece had a top income tax rate of 40% and a
value-added-tax (VAT) of 19%. In addition, employers paid
28% of salary for social security, while employees paid 16%.
The debt issues in Greece have little to do with revenue; they
have everything to do with the worldwide inability of
governments to spend within their means. The same is true in
the US. It is not tax rates that are the problem; it is spending
that threatens solvency. Just look at Illinois and California. If
these states raise tax rates again, more people will leave, hurting
the attempt to raise revenue.

Even if Greece, Illinois, California or the United States
itself repudiated their debt – declared they would make zero
payments – they would all still have substantial annual budget
deficits. At that point, the only fix would be to cut spending
because potential lenders would go on strike.

This is a structural problem, not a systemic and cyclical
one. The housing crisis was an easy-money-induced-bubble.
The issue with sovereign debt is partly caused by easy money
(meaning central banks have helped to mask the pain of
spending and taxes), but mostly caused by politicians and
voters who greedily spend future generations’ resources today.
It’s ironic, but markets and investors (the ones many populists
like to berate) make up the system that will help protect these
future generations from the greed of politicians and voters.

Government Spending

2010-02-11T14:26:00.000-08:00

For all those who don't think Government Spending is going to get us more jobs...

You're right.

Economic and Market Outlook

2010-02-05T15:35:00.000-08:00

This is the 2010 Outlook that Rob Rose and I wrote and sent to clients.

“Certainty is the mother of quiet and repose, and uncertainty the cause of variance and contentions.” – Edward Coke

I, as well as many of my esteemed resources, believe that the Market will continue its emotionally-led recovery on a course to return to levels just before the collapse of Lehman Brothers (around 11,500 Dow and about 1250 S&P 500). This probably will not be a straight run up and most likely will come with some headwinds that could slow the trajectory or change the direction completely, depending on the severity of the issue. In addition to the increasing potential for an act of terrorism coming to fruition, below we have detailed some of the primary issues that we will be watching for. These issues and the overall economic condition at the time of the attainment of pre-Lehman levels will determine where we go from there.

Political Influence: With the way this crisis has been handled – a focus on the government to fix things – the government will continue to be the primary area to watch. Since this is an election year and major policies will continually be discussed with more bravado than usual (i.e., health care, Social Security – this will eventually need to be discussed, international trade, wars, etc.), we should continue to see uncertainty in the markets and the economy. Historically, these mid-term elections have seen changes in political party dominance. Usually, this creates a type of gridlock in legislation that investors like (i.e., no major policy shifts can take place in a gridlock).

The Fed: I think that Riverfront Investment Group does a good job describing this area in their outlook for the year:

“The Fed’s current quantitative easing program is due to be completed in March. We think it will then face a difficult choice. The Fed can stop purchasing government bonds, there by risking higher long-term interest rates, dampening the housing market and potentially endangering economic recovery. Alternatively, it can extend quantitative easing and continue funding these purchases by printing more dollars, which would continue weakening the dollar and likely raise inflation expectations.”

“With government stimulus spending expected to peak in mid-2010, we do not believe that the Fed will risk derailing the economic recovery. Thus far, there has been little reason for concern over inflationary consequences of Fed policy. Headline CPI could approach 2.5% by mid-2010 and potentially higher if there are spikes in food and/or energy prices as we expect. However, the Fed is focused on core inflation (excluding food and energy) and projects that this inflation rate will remain in a comfortable 1.0% to 1.5% range.

Fed Chairman Bernanke’s writings on both the Great Depression and Japan’s more recent battles with deflation suggest that he views the primary policy risk to be withdrawing stimulus too quickly rather than applying too much. For these reasons, we believe that the Fed will not hesitate to extend the current quantitative easing program and keep buying bonds beyond its $1.7 trillion target, if deemed necessary. Extending the Fed’s reflationary policies would likely support financial markets, especially risk assets, and prompt renewed dollar weakness.”*

The Consumer: With unemployment expected to remain high, credit still not as easy to come by, and (as discussed previously) the possibility of continued housing difficulties, U.S. consumer spending is expected to be low this year. Many are calling this higher saving, lower spending consumer “The New Normal” (although the must-have gadgets appear to break the mold). This lower spending is expected to keep sales below pre-crisis highs. There are some possible bright spots in regard to global consumers; China showing the highest promise (though there are significant obstacles to overcome there). Sales in general will be very important to keep an eye on this year; not necessarily comparing them to pre-crisis years, but watching for growth quarter by quarter.

As I have mentioned before, I believe this year will have an emphasis on quality. However, as this theme seems to have finally caught on to the rest of Wall St., I would like to make sure my definition of quality is clearly stated. First off, I do not believe that in order to be quality the investment has to be a defensive position (typically thought of as those companies whose products or services maintain demand in a declining market). To me, a quality stock is one where the company’s fundamentals are in place (i.e., good management, strong balance sheet, good earnings – both current and forecast, etc.) and they are able to consistently grow their dividend. Why is this dividend growth such an important measure of quality? Because typically a company that can consistently raise its dividend is one that has the fundamentals in place. Also, in the past, dividend growers have outperformed over the long-term. Of course, dividends can decline or be removed completely by the company and are not guaranteed.

As always, your investments should be matched to your goals not necessarily the latest hot picks. Please let me know if you have any questions. I wish you and your loved ones a wonderful and profitable year!

*www.riverfrontig.com

Great Reply

2010-02-05T15:34:00.001-08:00

Like I mentioned in my last blog, I am a little sick of the rhetoric regarding who's fault this current crisis is. I thought this article did a great job arguing against blame game.

http://keithhennessey.com/2010/02/04/need-future-focus/

The State of the Union

2010-01-28T13:15:00.000-08:00

I am sure that most reading this blog were pretty bothered by the President’s State of the Union Address last night, if they watched it.

In my mind the economy has always moved based on certainty and when there is uncertainty they economy slows. Right now there is no certainty as to what the government is going to do. I would say that 80% of the speech was the “same old” stuff. A lot of political rhetoric and statements about what a great job they’ve done since taking over from the previous administration (because we all know it’s the administration that enacted all of the laws that grew the government and created the bubbles…right?). Then, of course, there was the obligatory sharing of personal stories from around the country that we know the President was involved with personally…or maybe it was a letter that a staff member read and put on his teleprompter (Does it bother anyone else that the Presidents – I do realize all of them have done this – parade these personal stories around for their own political agenda?). And then the statements of how great we are and how great we’ll be if everything said is taken care of, etc.

No, it wasn’t the same old stuff that bothered me as much (though it would be nice if everyone would give the “I inherited this problem” line a rest); it was the direct attack on the Republicans.

Now, in interest of full discloser, I haven’t been exactly thrilled with the work done by the Republicans of late either. But for the President of the United States to come right out in a combative posture towards one political party, while at the very same moment talking about the need to work in a bi-partisan way, is just downright maddening. From his snide comment while talking about freezing government spending for three years that his party would find it difficult because they would want to use that money to help people (because we all know Republicans just want to withhold money so that we can enjoy watching people suffer), to his tone and body language when he was giving both(?) parties a “talking to” about their partisan fighting of late (Did you notice how most of the time was spent looking at the Republican side of the aisle as he talked about the need to quit fighting and even when he did occasionally glance towards the Democrat side he still kept his body angled slightly to the Republicans, giving the impression that the entire talk was for them), he just seemed to ooze out his true colors as a hypocrite. I am not naïve enough to think that cases of hypocrisy are rare in politics, but usually the President is better at covering it up in his major speeches.

Then to reiterate to the Democrats that they still held the majority and therefore should press on (more attacking the Republicans too in my mind), despite what their constituencies told them showed his true colors as a politician. I have said it once and will continue saying it most likely until we can get rid of most of those currently in office: Why is it that the Democrats seem to think that the definition of bi-partisanship means that the Republicans should quit causing such a stink and just agree to what the Democrats want? It would be nice if the Democrats – and especially the President now after this attacking speech – would come to understand the true meaning of bi-partisanship. In my mind that definition would include the thoughts that even though, as the President himself stated in his speech, the very reason for two parties comes from the vastly different philosophical points of view which have existed for centuries, we should still be able to come together and in a form of compromise (that means give and take from both sides…just to clear that up) pass laws that the majority of Americans can believe in.

And, again to clear things up, that doesn’t mean that when elected they can ignore their constituencies until the next election. Just because you won, doesn’t mean that the voters agree with everything you stand for or will stand for over the course of your term, and even if they do agree now they have the right to change their mind. I have to say that I agree with the President when he said that now is the time to be more open and transparent than ever. There is a severe amount of distrust from the American people. DOESN’T HE AND THE REST OF THE POLITICIANS UNDERSTAND WHY?!!!! It is because of the exact things he did in his speech: spit out several inconsistent statements, tell outright lies, and in general pretend that they weren’t part of the problem (Let’s all keep in mind that voting records don’t lie). I still think that every speech and every proposal should include sources of where they came up with the information to base their viewpoints on. If they feel like they can't cite the source because it is from a lobbyist then maybe they should change the way they do things or quit.

All that aside there were a couple of proposals that bothered me. One of the proposals that bothered me was regarding his proposal to lower taxes on the small business owner. He seemed to push that quite hard and several in the media were talking about how great and benevolent that was. What a great idea! Except for the fact that the majority of small business owners make over $250,000 a year and they are going to be taxed up the wazoo since they dared make more than most and the government is now going to need that money to pay for their agendas (which brings up another thought: it makes sticking to the budget easier when you tax everyone like crazy to expand income doesn't it? But, of course, the Democrats are only doing that because they can't stand seeing anyone suffer unlike their Republican counterparts).

The other proposal is something that has always bothered me, and I do realize that this is an unpopular opinion, is this idea that we need to “punish” (though removal of tax shelters and I would be willing to bet the addition of taxes by the time their through) those businesses that “ship our jobs overseas.” How exactly would they delineate what it means to ship the jobs overseas? How exactly are they then going to help those American companies, which for the vast majority still employ a significant number of Americans, compete? Despite all the rhetoric and chest puffing that we do to say we only buy American we tend to buy the cheapest product without regard as to where it came from. If American companies are to compete they will have to cut costs somehow and, for now, one way to do that is to outsource some jobs. As to my question regarding how they are going to delineate, think about those companies who purchase parts from all over the world. A lot of those parts are produced here in the U.S. too, so aren’t they “shipping our jobs overseas” by not buying American? If you look at the comments from those who are angry about their jobs being taken by someone overseas, a good portion of them fit this scenario. It may sound great to some, especially when jobs are so hard to find (especially for the less educated, who’s jobs tend to be the ones outsourced), to say that we should punish those companies who take jobs away from U.S. citizens, but in practice it makes a lot less sense. Why don’t we instead focus on making American made products more competitive? Lower/eliminate the massive amounts of taxes levied on American companies. Quit the verbal trade fights that just close borders not open them wider. In other words, get the Government out of the way and let the world’s most innovative and entrepreneurial business owners and workers compete on an even playing field.

In all, if not completely obvious after reading this post, I was very disappointed with the President’s Address. I thought that while he claimed to be moving forward politically, he un-abashedly continued the backward process that has picked up pace in the last 3 years.

Just Some Current Political Thoughts

2010-01-22T09:06:00.000-08:00

On occasion I feel really bad for President Obama. While I do disagree with him on his methods and I definitely don’t agree with him philosophically, overall, I think he truly does want to make things better. I am not with that small group that thinks President Obama is out to "get" America. I think that he feels he is doing what is right for the country.

I think that the discussion about how to reform Health Care is one of those areas that I do feel bad for the President, to an extent. Where I don’t feel bad for him, or the other Democrats, is how they have gone about trying to pass this Health Care bill. I think this quote I saw on CNBC epitomizes where they have been doing wrong:

"There is only one guarantee -- that if we don't pass something the notion of trying to put Humpty Dumpty together again is a real long shot," said Rep. Patrick Kennedy, D-R.I., son of Edward Kennedy. "It's a lot easier to pass something and fix it later."

They have been pushing so hard to just pass something, as if they didn’t really care what the bill said (honestly there is no way any of them actually did know since it was over 2,000 pages of legaleze). As long as it had something to do with health care and looked big then it should fix things right? I don't believe any of them actually spent the time to really figure out what would be best for the American people and what the American people would want.

Every time I hear anyone say, this is just what needs to pass and if we could just pass it then the American people will understand that it is in their best interest (President Obama has been quoted as saying something along these lines), I can’t help but think – Then explain it now so that we understand before passing it into law. If lack of knowledge is truly the problem then help us understand. If, after all efforts to educate us, the majority of Americans are still opposed to the plan then go back to the drawing board to work on something we would like. You are our representative, not our parent.

If passing health care reform is as critical as they have been trying to sell it as being (Personally I think it is important but not more pressing than some of the other issues we are facing), then spend the time necessary to get it right. I am 100% against the notion of “Let’s pass it now and fix it later.” How often has that worked out before?

On a different, but related note. After reading the following article, I couldn’t help but think that this is the route we are taking as a nation if we continue with the notion that the government should bail us out and ensure that no company fails.

China: Lending Restrictions and Beijing's Predicament
Stratfor Today January 20, 2010 1808 GMT

Liu Mingkang, head of the China Banking Regulatory Commission (CBRC), said in an interview Jan. 20 that several Chinese banks had been asked to restrain their lending after proving to have inadequate capital reserves. Chinese media reports claimed that new bank loans so far in January have risen to as high as 1 and 1.5 trillion yuan ($146-$220 billion) — approaching or equaling the massive hike in January 2009. As a result, several major Chinese commercial banks (whose names were not given) were given oral commands to stop new lending for the rest of the month.

While the regulators will strive to control credit flows, the broader Chinese imperative to maintain growth at any cost contradicts the ability to preserve loan quality and allocate capital efficiently.

Under the guidance of the central government, bank lending — the dominant form of financing in China — has skyrocketed in the past year to spur growth, fend off the effects of slower global trade and thereby maintain social order. Amid the loan boom, Chinese authorities have at times sought to restrain banks, fearing a massive buildup of bad loans. In February, April, July and October 2009, Beijing restrained the banks, only to see lending spike again in March, June and September 2009 — and now again in January 2010. Essentially, Beijing was caught in a cycle of speeding up and slowing down credit expansion. With each deceleration, China's loan-dependent businesses, mostly state-owned and state-controlled, cry out in pain, resulting in another acceleration to make sure they do not grind to a halt.

2010 is expected to be another year of high lending, with Beijing projecting 7.5 trillion yuan ($1 trillion) in new loans — a smaller sum than the 9.6 trillion yuan ($1.4 trillion) lent in 2009, but indicative of a glut of credit consumption. In order to achieve even a mild reduction in lending in 2010 (not to mention the roughly 28 percent reduction target), the Chinese authorities know they will have to take some serious actions to restrict the banks. Hence, the demands for banks to increase their capital bases beginning in late 2009, and the raising of reserve ratio requirements on Jan. 12, forced banks to set more cash aside that would otherwise be lent out.

The Jan. 20 demand that certain commercial banks stop lending for the rest of the month is another such move.

The problem for China is that the entire economy depends on extremely loose lending policies, and when credit slows, companies in the critical manufacturing and trade sectors get squeezed. A great many Chinese companies rely on external consumers for their profits, but while exports showed growth for the first time in December, they face the usually slow months of January and February; only when spring comes around will it really be clear whether global demand has recovered sufficiently to support China's exporters. Thus, exports are no refuge yet, and since Beijing has no intention of knocking the legs out of growth, it will continue shoving credit into the system.

I Love Technology...

2010-01-12T08:06:00.000-08:00

So, I know this is the second post in just a few days, and very few people (of those few who actually read this blog) have probably even had the chance to read what I posted last night, but I had to post this. I consider myself pretty up to date on what's going on out there but some of the stuff in this article blew me away.

You'll have to ignore some of his typing errors, and excuse his constant sales pitch (though I did edit out some of them - especially ignore the 'get rich' spot because that is like many of the 100 excercises with just this ball) to invest in biotech, and the length isn't exactly small reading, but it is fascinating what they are doing now. Anyway, here you are:

The Coming BioTech Bubble

"So now, I'm going to give you an overview of some of the truly remarkable breakthroughs in biotech, as John Mauldin has asked me to do. First, however, I'll tell you how to live longer, get richer and feel better, as promised.

It is this: Optimal vitamin D serum blood levels, attained through sunlight or supplementation, dramatically reduce the risk of most serious diseases by an astonishing 50 to 80 percent. These diseases include osteoporosis, osteomalacia, hypertension and a range of cancers from breast and colon to deadly melanoma skin cancers.

Yes, that's right. The risk of contracting the really nasty skin cancers can be dramatically lowered by getting moderate, sensible sunshine or through vitamin D supplementation. Non-melanoma skin cancers do increase somewhat with sun exposure, especially with sun burns but they are relatively benign and are easily detected and removed.

This is not the end of the list, though. The big killers and most expensive diseases respond similarly to adequate D. I'm talking about cardiovascular disease and stroke. So do type 1 diabetes, type 2 to a lesser extent, rheumatoid arthritis, peripheral vascular disease, multiple sclerosis, dementia, autoimmune diseases and apparently even viral diseases such as H1N1 and AIDs. I emphases that some of these diseases are not "cured" by sufficient D as some bone diseases are. The risk of developing other diseases and the severity of their symptoms if you do is much lower, however, if you are not vitamin D deficient.

There is, by the way, no simple prescription in terms of sunlight exposure or vitamin D supplementation because age, skin color, body weight and even location play huge factors in your circulating blood levels, which should be at least 40 ng/ml of 25-hydroxyvitamin D. Ideally, you should consult a physician who can prescribe blood tests to see where your D levels are.
This information is not new but the odds are that you are unaware of it unless you read the New England Journal of Medicine or other scientific publications. I'll include links at the end of this article for you to investigate this matter further, including the NEJM paper I just referred to.
This new consensus regarding vitamin D must be viewed as a sign of the biotech revolution on the horizon. Just as new IT and nanotech sensing technologies have shed light on the function of vitamin D, they are leading scientists to entirely unexpected discoveries in other areas as well. More importantly, these discoveries, unlike sunshine, can be patented. You, therefore, can invest in the companies that own the IP and reap transformational profits.

Some of the contributing technologies include supercomputing, without which the human genome could not have been decoded. We now know, by the way, that the activity of about 2000 human genes is moderated by vitamin D. Supercomputing has also enabled an entire new means of biological experimentation called in silico. Simply put, in silico experimentation uses 3D computer models of organic molecules. These models, existing in virtual reality environments, can be manipulated at incredibly high speeds to quickly yield results that once would have taken decades in physical labs.

Regenerative Medicine

This is numero uno; stem cell technologies. They may not be first to market, but the technology's potential is unparalleled in history for reasons I'll explain. Other huge transformational technologies may treat and prevent currently incurable diseases before regenerative medicine matures. Stem cells, however, are unique in their ability to rejuvenate the human biology. I'm not, by the way, talking about obsolete embryonic stem cells (eSCs). Despite the political rhetoric, the scientific action has moved far beyond eSCs to several other forms of stem cells.
Unless you are reading scientific publications, however, you probably wouldn't know this. In fact, the scientific literature itself is usually outdated because leading stem cell scientists are not working in academia with its "publish or perish" pressures. The last thing that scientists in start-ups and small caps want to do is give away the inside information about their innovations. As a result, almost none of the real breakthrough news in stem cell or other cutting edge science makes it to the mainstream or financial medias. Let me prove my point with a pop quiz.

Q: How long will it be before scientists can duplicate the army of clones scenario that George Lucas portrayed in Star Wars II: Attack of the Clones. In other words, when will scientists be able to swab the inside of your mouth, take a single cell and turn it into an unlimited horde of healthy babies, each with your identical DNA?

A: If you said "several years ago," you are right. This is routine, well-established science at this point. We don't believe anybody has actually used this ability with humans yet, for obvious ethical reasons. Scientists, however, have taken adult skin cells from mice and transformed them into a new kind of stem cell called an induced pluripotent stem (iPS) cells. Those iPS cells have, in turn, been allowed to develop into healthy adult mice.

As dramatic as this ability is, it is not particularly useful outside of agriculture where the technology will be used to produce perfect livestock. The real promise of iPS cells is "potentiation" for specific medical needs. What I'm talking about is taking an iPS cell, which is fundamentally identical to an embryonic stem cell, and programming it to repair aged or damage tissues.

Potentiated iPS cells could be be grown, using your own cells, that would rejuvenate your heart muscles, one of the muscle tissues that cannot regenerate on its own. These cells could be programmed to become fresh cartilage, another cell type that doesn't regenerate, thus giving the aged and arthritis sufferers youthful pain-free joints.

We're looking at non-surgical organ replacement, one cell at a time. An injection or series of injections of these potentiated stem cells would, for example, transform an aged, damaged liver into a healthy youthful organ.

Someone suffering from severe diabetes could get off-the-shelf islet cells that produce insulin, saving their lives and allowing them to live normal lives. People who are blind due to macular degeneration could see again. You name it, these extraordinary cells will do it. In fact, they did do it. Every cell in your body, cartilage, kidney, heart, skin and bones, started out as a stem cell.
So let's have another quiz.

Q: How long will it be before the programming code for cartilage stem cells is cracked.

A: Once again, the answer is that it has already happened. Top private industry scientists have decoded the secrets of hundreds of cell types and are experimenting now with cartilage, nerve and other cell types. Human tests, probably offshore because of the FDA's snail pace, will begin if not this year, then next year. These therapies will be offered initially outside the United States. Many of us believe that, once Americans begin coming back home healed of conditions previously thought incurable, the FDA will bow to public demand. Regenerative medicine will inevitably be fast-tracked.

(Note: there will be lots of scams offering all sorts of purported stem cell therapies offshore offering "cures" for all sorts of diseases. Don't buy them or subject yourself to them. The legitimate players will surface over time, associated with real hospitals and researchers.)

There is one final aspect to the regenerative medicine picture that makes it especially attractive to long-term investors. Let me tell you a story to make this point.

Last year, I was in Canada speaking at a financial conference about emerging biotechnologies. I was privileged to share the forum with Harvard futurist, best-selling author and venture capitalist, Juan Enriquez. Enriquez is a major force in cellular engineering, working closely with the genius ex-surfer Craig Venter who cracked the human genome for a fraction of the cost and in a fraction of the time that the US government had allotted. President Clinton, in fact, issued an emergency executive order denying Venter IP rights to the genome he had decoded.
Today, Venter is applying his genetic genius to the other end of DNA complexity. He is developing the tools to reprogram the genetically simplest life: microorganisms. Venter compares DNA to computer code and scientists following his work say he will create the first artificial life form, probably this year. It will be, in fact, a designer bacteria. More importantly, his next step is engineer algae that secrete high-grade hydrocarbons that can be refined into transportation fuels. ExxonMobil believes him and gave Venter's research firm $300 million to work on the project.

Anyway, I asked Venter's associate, the venture capitalist Enriquez, why his biotech funds weren't invested in stem cells. His answer was straightforward. He said that the IP was already tied up. This is an astonishing fact. The intellectual property, the patents, for this phenomenal rejuvenative technology is already applied for or awarded.

The IP structure of regenerative medicine is unlike most other pharmaceutical or biotech industries, including cellular engineering. Traditional drug discovery, in fact, consists largely of identifying which of many molecules can do a certain thing. Frequently, only a small percentage of possible candidates are identified and then, through an elimination process, one is identified for testing and approval.

Cellular engineering is more dramatic but the potential number of new biofuel-producing algae is theoretically unlimited. Anyone who creates a new breed of algae can patent only that microorganism.

This is not the case with stem cells. There are very few "pluripotent" stem cell types that can become all the other cells. Already, the means of producing these cells and, in many cases, the cells themselves have been patented or applied for.

To invest in algae biofuels, which I probably will do, I will have to pick the most likely winners from a field of players to guarantee owning the big transformational winners. This is possible but it is much riskier than the stem cell space. This is because the number of companies that hold the bulk of the really valuable IP and patent applications can be counted on one hand. If big pharma wants into the regenerative medicine business, and they will, they're going to have to pay these tiny small caps for the right. This reduces the risk of buying losers enormously.

RNA Interference

There are many standalone breakthroughs in biotech and I'll mention a few in a bit. First, I want to tell you about the other big biotechnology industry, RNA interference. RNAi is a perfect fit with regenerative medicine, which has the power to restore damaged and aged tissues but does not attack the causes of diseases. This is where RNA interference fits in.

This field is actually younger even than stem cell sciences. The scientific paper that broke open the field was published in 1998 and the Nobel Prize for medicine was awarded to its authors in just four years ago in 2006. RNAi had one major advantage over regenerative medicine, however. It was not effected by the political and moral controversies that regenerative medicine faced before it moved past embryonic stem cells. As a result, researchers have had no trouble getting government and private funding.

Here is the overview. Our DNA is, in effect, locked and protected in a cellular clean room without a door. DNA communicates with the rest of the body by sending out messages with orders to turn genes on or off. Those messages are RNA, or ribonucleic acid. Therefore, the right RNA sequence can be introduced to the body to mimic those messages, which are then identified as invaders. The provokes the body to treat certain of its own RNA messages as invaders and destroy them.

This is RNA interference and it provides the ability to control any of the genes in our body and the proteins they produce. Those proteins, in turn, are the key to most human diseases. RNAi can both increase and decrease these proteins, providing cures for innumerable diseases. The companies that own those therapies will, in turn, become new pharm giants or they will be acquired by existing pharma.

RNAi researchers are working on drugs that could reduce production of bad cholesterol or increase production of the good form. RNAi could be used to turn off the gene that allows cancers to develop capillary networks. Similarly, it has been demonstrated to turn off the gene that provokes the excess blood delivery that causes wet macular degeneration. It could moderate the ability of the body to store fat or increase muscle mass. In could turn off hypertension or insulin resistance as well as neoplasias such as tumors, infections, and neurodegenerative disorders like Parkinson's and Alzheimer's Disease.

For the first time, science is looking not to treat symptoms, but to actually stop the gene functions that cause diseases. This is truly a revolution. The challenge to this remarkably young science now is the actual delivery of RNAi drugs to cells. We know they work in the lab but RNA molecules are large and fragile, so they don't penetrate cellular membranes under normal circumstances. Additionally, the body tends to clear itself of RNAi drugs through the kidneys or inside the cell itself. Nuclease, which exists inside the cell, also breaks down RNA.

For this reason, a number of delivery mechanisms are being developed to safely transport the RNA as a payload. A handful of small companies with superb talent and IP are racing to perfect their own varying solutions. Each has a different approach to solving the delivery problem but all have demonstrated efficacy. At this point, we don't know which will yield the big solutions. It appears increasingly likely, however, that different platforms will be best suited for different RNAi applications. Each has huge profit potential. RNAi drugs are in trials and big pharm has already snapped up one small cap player.

The Nanotech/IT/Biotech Convergence

I've already mentioned cellular engineering. Craig Venter calls cells hardware and DNA software. He treats DNA like the ones and zeroes in current software. The same IT/biotech convergence is also evident in new in silico experimentation.

Nanotechnologies are contributing indirectly to the explosion in biotech innovation indirectly through new lithographic chip fabrication techniques that increase computer speed and power. The decoding of the stem cell potentiation process relies on this power and would have been impossible only ten years ago. Nanotechnologies are also directly impacting a whole range of biotech applications by allowing increasingly smaller interventions.

I read very recently an editorial in the Wall Street Journal by a writer and research at Ethics and Public Policy Center. In it, he basically declares Richard Feynman's original vision of nanotechnologies a bust. He obviously isn't reading my newsletter because we are currently seeing animal tests of new medicines that combing nanotech polymer structures with biological parts in ways that trick and attack viruses. Already on the market are nanotech sensing systems using submicrosopic biological components married to metal molecules that provide nearly instantaneous diagnoses of a rapidly expanding range of pathogens.

These sensors are going to power an even larger revolution in personalized medicine. For those unfamiliar with the concept, allow me to explain.

Currently, medicine is, to a large degree, a "one size fits all" proposition. Doctors watch for adverse effects and check personal and family histories. Medical technologies, however, are designed for the general population, not individuals.

That's going to change.
We know that many current treatments work on some people, yet not others. Some drugs are safe for many people, but have dangerous side effects for others. Some are just the opposite. This is because all of us have individual differences in our genetic code based on heredity and environment. Even slight differences can lead to very different reactions to medications.
This has created serious regulatory problems. Drugs are denied regulatory approval not because they do not work, but because some fraction of the population suffers adverse effects. As a result, patients are often denied incredibly effective therapies simply because they are not universally effective.

This shockingly primitive state of affairs exists because, until very lately, we simply have not had the tools to get to the genetic roots of disease. Scientists and pharmaceutical companies haven't precisely known how a particular drug's chemical profile interacts with a genetic one. Medical science, in turn, has been unable to tailor drugs to work with a specific genetic makeup. That is rapidly changing.

The Impact of the Genome

With the mapping of the genome, scientists can now identify single genes and their individual expressions. Nanotech biosensors can identify genetic characteristics in individuals so that individual reactions to drugs can be known before they are taken. It is meaningful, from the investor's perspective, that Dr. Francis Collins, the head of the Human Genome Project, now heads the National Institutes of Health. Collins has long been a prominent champion for using the knowledge gained from human genome to accelerate personalized medicine.

Collins has also stated that genomics is currently where the computer industry was back in the 1970s - at the beginning of a technological revolution. While he was speaking in scientific terms, we should remember that the '70s was also the right time to begin investing in a diversified portfolio of breakthrough computer technologies.

I believe this is true across the board for a range of revolutionary biotechnologies. I also like to remind readers that important innovations traditionally do not slow down during economic turn downs. The Great Depression, in fact, is considered by many to be one of the most important periods in the history of innovation.

What I'm hearing now, talking to people who range from Nobel Prize winners to CEOs of biotech start-ups and small caps, is that the world is going to change very soon in ways that no one is prepared for. Our lives are going to be significantly better and longer.

I also like to point out that private investors will not only profit from this revolution, they will power it. This is especially meaningful because one of the most dramatic impacts of these new technologies is longer life spans. By investing in regenerative medicine and other important biotechnologies, you are helping extend your own life. Traditionally, financial analysts have always told us that we should invest more conservatively as we age, with less of our portfolio in speculative higher-risk stocks.

For the first time in history, I believe this is exactly the wrong advice. You don't know how long you are going to live and, with these new therapies, it could be much longer than you've been led to believe. By investing as a younger person, you might actually make it so.

One last thing, here is the link regarding vitamin D that I promised.
http://www.vitamindhealth.org/

Some Thoughts from John Mauldin

2010-01-11T18:23:00.000-08:00

The Great Experiment

So this is the backdrop as we look into the future. Unemployment is rising and is likely to remain stubbornly high (over 10%) for some time, except for the few months this coming summer when the Labor Department will hire hundreds of thousands of temporary census workers. The savings rate is rising, and consumer spending is at the very least challenged. The stimulus starts to drop sharply in the latter half of the year.

States, counties, and cities are short about $260 billion and will either have to cut services (and thus jobs) or increase taxes. Housing is likely to get weaker, as there are large numbers of defaults coming because of mortgage-rate resets this year and next (more on that in a few weeks). Valuations on stocks are in the high range, and do not portend well for long-term returns.

Further - and this is the most important item to me - Congress is likely to allow the Bush tax cuts to expire and to add insult to injury with some form of large tax increase for heath care. Between the local, state, and federal tax increases, we could see a massive increase in taxes of perhaps $500 billion in a $13-trillion economy, or about 4% of GDP.Think about that for a moment. It is likely we will begin 2011 with close to 10% unemployment, if not higher.

Christina Romer's work shows that tax cuts have a three-times benefit to GDP. Tax increases presumably have a similar negative effect. (Ms. Romer, by the way, is President Obama's Chairwoman of the Council of Economic Advisors. This is not a partisan idea.)

This is the great experiment to which we are going to be subjected. There are those who agree with Art Laffer and company that tax cuts are a positive for the economy (that would include your humble analyst). And there are those who contend that the economy did just fine in the Clinton years before the Bush tax cuts and that we will do just as well if we take them away. And further, taxing the rich a little more is not really going to change their behavior.

My contention is that if such a tax increase is enacted all at once, the economy will at a minimum dip back into a nasty recession. If I am wrong, then I will have to abandon one of my long-cherished beliefs. I will have to stop arguing that tax cuts are as important as I think. Right now, when I read the data and studies, they confirm my tax-cutting bias. But I have to be willing to change my mind if The Great Experiment proves me wrong.

But if you think unemployment is high now, you will really not like what happens if we dip back into recession. It could go a lot higher. They are truly risking a great deal if they decide to pursue this experiment.

Whither the Fed?

The futures market is pricing in rate hikes from the Fed beginning this fall. I highly doubt a politicized Fed will hike rates with unemployment over 10%, ahead of a November election. We are going to have a very easy monetary policy for longer than most observers think.

The Fed has painted itself into a very tough corner. Raising rates in a high-unemployment environment is risky. Bernanke knows what happened in 1937 and does not want a repeat. But by keeping rates too low for too long, they risk an asset bubble or two. And the federal fiscal deficit of over $1.5 trillion is not making their situation any easier. The Fed has announced it is ending many of their various and sundry programs in the first quarter. They have essentially been the mortgage market.

What will happen to rates? I think that is one of the reasons why Geithner has essentially lifted any limit on explicit guarantees for Fannie and Freddie. It will be seen as higher-paying government debt. It will also cost you, Mr. and Ms. Taxpayer, hundreds of billions in increased deficits, as they are telling those entities to eat the losses from large numbers of loan modifications. This is outrageous on so many levels. Congress should at least have to approve this.

Let me end by saying that, as we face the next crisis - and we will (there is always another crisis) - we will find we have not fixed the causes of the last one. We still have banks too big to fail, we have not put the credit default swaps on an exchange, we have not reinstated Glass-Steagall, Barney Frank's bill (which was not the one that came out of committee) now makes it exceedingly more difficult to short stocks, we keep in power the same people who missed the problems the last time, and the list of bad policies bought (typo intended) to you by bank lobbyists grows ever longer. If the current bill looks like it was written by the bank lobby, that's because it was. But it means we will have to face the same problems all over again.

Another Reason Why the United States is the Greatest Nation on Earth

2010-01-08T09:23:00.001-08:00

I find it sad that lately there has been a lot of press regarding “The decline of the US Superpower.” No one has come straight out and said it, but there is that general feeling when reading or listening to the news. Personally, I think that part of that feeling comes from a 2 year long political campaign in which both candidates and their respective parties trashed on what the U.S. was doing domestically and internationally. Unfortunately the President still is trying to push an agenda that would have us believe that he is fixing the tainted image of the U.S. worldwide and how he is working hard to bring the U.S. back to greatness.

I would like to do my part in setting the record straight.

Obviously there are so many ways in which the U.S. is the greatest country in the world that it is shocking there is even a perception that it might not be. I won’t delve into all of those ways (i.e., the freedoms we enjoy, the spirit of capitalism, the envy of other nations, etc.), but I would like to point out one that I had, to my embarrassment, not thought of before. This note is brought from the folks at STRATFOR written back in June of 2009.

The United States and the Free Market

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land – and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.

Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio, and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands and a few miles off the shores of Texas and the East Coast form a water-based highway – an Intracoastal Waterway – that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

The beauty is that the two overlap with near perfect symmetry. The Intracoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops – and not just the ability to easily and cheaply move the crops to local, regional and global markets – but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies. [Think of our massive road networks. Russia didn’t even have a intercontinental highway until this century, and even that is only two lanes for much of the way]

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy – transport capability – geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free – and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and –rail networks anyway, resulting in even greater economic advantages over competitors.)

Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network – The Great Lakes – St. Lawrence Seaway – is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.

Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are not useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico is completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).

With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is not more than a fence in most locations – a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.

Like the transport network, this also helps the U.S. focus its resources on other things.

Taken together, the integrated transport network, large tracts of usable land and lack of a need for standing military have one critical implication: The U.S. government tends to take a hands-off approach [relative to other countries] to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States – and especially its government – comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.

Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States, the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.

Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.

They go on to talk about China and Russia more in depth in their article. Regardless of what you hear about the U.S. in the media, we are still the greatest nation in the world. We still have major advantages over every other country. I think that the above article highlights nicely the major reasons why this land is a choice and promised land. As long as we keep our freedoms the United States can’t help it but be the greatest nation on earth.

Dave Barry

2010-01-06T10:00:00.000-08:00

This was too funny from Dave Barry's 2009 Recap article. I clipped out some of the parts to keep it small (ish).

In short, it was a year that we will be happy to put behind us. But before we do, let's swallow our anti-nausea medication and take one last look back, starting with ...

January
... during which history is made in Washington, where a crowd estimated by the Congressional Estimating Office at 217 billion people gathers to watch Barack Obama be inaugurated as the first American president ever to come after George W. Bush. There is a minor glitch in the ceremony when Chief Justice John G. Roberts Jr., attempting to administer the oath of office, becomes confused and instead reads the side-effect warnings for his decongestant pills, causing the new president to swear that he will consult his physician if he experiences a sudden loss of sensation in his feet. President Obama then delivers an upbeat inaugural address, ushering in a new era of cooperation, civility and bipartisanship in a galaxy far, far away. Here on Earth, everything stays pretty much the same.

The No. 1 item on the agenda is fixing the economy, so the new administration immediately sets about the daunting task of trying to nominate somebody -- anybody – to a high-level government post who actually remembered to pay his or her taxes. Among those who forgot this pesky chore is Obama's nominee for Treasury secretary, Timothy F. Geithner, who sheepishly admits that he failed to pay $35,000 in federal self-employment taxes. He says that the error was a result of his using TurboTax, which he also blames for his involvement in an eight-state spree of bank robberies. He is confirmed after the Obama administration explains that it inherited the U.S. Tax Code from the Bush Administration.

February
... that Congress passes, without reading it and without actually finishing writing it, a stimulus package totaling $787 billion. The money is immediately turned over to American taxpayers so they can use it to stimulate the economy.

No! What a crazy idea THAT would be! The money is to be doled out over the next decade or so by members of Congress on projects deemed vital by members of Congress, such as constructing buildings that will be named after members of Congress. This will stimulate the economy by creating millions of jobs, according to estimates provided by the Congressional Estimating Office's Magical Estimating 8-Ball.

Despite this heroic effort, the economy continues to stumble. General Motors, which has sold only one car in the past year -- a Buick LaCrosse mistakenly purchased by an 87- year-old man who thought he was buying a power scooter -- announces a new four-part business plan, consisting of (1) dealership closings; (2) factory shutdowns; (3) worker layoffs; and (4) traveling backward through time to 1955. The stock market hits its lowest level since 1997; this is hailed as a great investment opportunity by all the financial wizards who failed to let us know last year that the market was going to tank. California goes bankrupt and is forced to raise $800 million by pawning Angelina Jolie.

The Obama administration's confirmation woes continue as Thomas A. Daschle is forced to withdraw as nominee for secretary of Health and Human Services following the disclosure that he, too, failed to pay all of his federal taxes. He blames this oversight on the fact that his tax returns were prepared by Treasury Secretary Geithner.

March
... an angry nation learns that the giant insurance company AIG, which received $170 billion in taxpayer bailouts and posted a $61 billion loss, is paying executive bonuses totaling hundreds of millions of dollars. This news shocks and outrages Obama and members of Congress, who happen to be the very people who passed the legislation that authorized both the bailouts and the bonuses, but of course they did that during a crisis and thus had no time to find out what the hell they were voting for. To correct this situation, some congresspersons propose a 90 percent tax on the bonuses, followed by beheadings, followed by the passage of tough new financial legislation that nobody in Congress will read or understand.

In other economic news, the chief executive of GM resigns under pressure from the White House, which notes that it inherited the automobile crisis from the Bush Administration. GM is now essentially a subsidiary of the federal government, which promises to use its legendary business and marketing savvy to get the crippled auto giant back on its feet, starting with an exciting new lineup of cars such as the Chevrolet Consensus, a "green" car featuring a compressed-soybean chassis, the world's first engine powered entirely by dew, and a 14,500-page owner's manual, accompanied by nearly 6,000 pages of amendments.

Businessman Bernard Madoff pleads guilty to bilking investors out of $65 billion in a Ponzi scheme, forcing the Obama administration to withdraw his nomination for secretary of commerce.

The annual observance of Earth Hour is observed with one hour of symbolic energy conservation as hundreds of millions of nonessential lights and appliances are turned off. And that's just in Al Gore's house.

April
... as leaders of the world's powers, looking for a way out of the worsening world
economic crisis, gather in London for the G-20 summit, which ends abruptly in a violent argument over the bill for the welcoming dinner. A short while later, in what many economists see as a troubling development, the International Monetary Fund moves into a refrigerator carton.

In other international bad news, North Korea launches a test missile that experts say is capable of hitting Hawaii, based on the fact that it actually hits Hawaii. The United States swiftly pledges to issue a strongly worded condemnation containing "even stronger words than last time."

On the domestic front, the struggling Chrysler Corp. declares bankruptcy, but its chief executive confidently predicts that the company will come back "bigger, better and stronger than ever," thanks to its 2010 product line, spearheaded by the all-new Dodge Despair.

The big health story in April is the rapid spread of swine flu, a dangerous new virus strain developed by the makers of Purell. Public anxiety over the flu increases when Vice President Biden, demonstrating his gift for emitting statements, declares on the "Today" show that he would not recommend traveling by commercial airplane or subway. A short while later, White House spokesman Robert Gibbs assures reporters that he is "not aware of any 'Vice President Biden.'" In another embarrassment for the White House, New York is temporarily thrown into a panic when Air Force One flies low over Manhattan for a publicity photo shoot. Responding to widespread criticism, Gibbs notes that Obama inherited Air Force One from the Bush administration.

May
... the finale of "American Idol" produces a shocking outcome that sends shock waves of shock reverberating around the planet when the winner turns out to be -- incredibly – that guy singer, what'shisname, despite the fact that the overwhelming favorite was that OTHER guy singer. Congress vows to hold hearings after reports surface that, of the nearly 100 million votes, 73 million were phoned in by ACORN.

But the big political drama takes place in Washington, where Justice David Souter announces that he is retiring from the U.S. Supreme Court because he is tired of getting noogies from Chief Justice Roberts. To replace Souter, Obama nominates Sonia Sotomayor, setting off the traditional Washington performance of Konfirmation Kabuki, in which the Democrats portray the nominee as basically a cross between Abraham Lincoln and the Virgin Mary, and the Republicans portray her more as Ursula the Sea Witch with a law degree. Sotomayor will eventually be confirmed but only after undergoing the traditional Senate Judiciary Committee hazing ritual, during which she must talk for four straight days without expressing an opinion.

In crippled U.S. auto giant news, General Motors announces a new business plan under which it will fire everybody but Howie Long, who will continue to make what GM calls "some of the most popular commercials on the market." Meanwhile, Chrysler, looking to the future, invests $114 million in an Amway distributorship.

On the international-tension front, a meeting of the U.N. Security Council to discuss possible sanctions against North Korea is forced to adjourn hastily when the council chamber is penetrated by a missile.

July
... when Sarah Palin unexpectedly announces that she will not complete her term as elected governor of Alaska, explaining, in a prepared statement, that she has a hair appointment. Asked by reporters if she plans to seek the Republican presidential nomination, she replies, "You leave my personal life out of this."

Elsewhere in state politics, the FBI arrests pretty much every elected official in New Jersey on suspicion of being New Jersey elected officials. On Independence Day, the nation takes a welcome break from its worries to celebrate in traditional fashion with barbecues, parades and -- as night falls -- spectacular aerial North Korean missile detonations.

In government news, top Washington thinkers, looking for a way to goose the economy along, come up with the "Cash for Clunkers" program, under which the federal government provides a financial inducement for people to take functional cars, which are mostly American-made, to car dealers, who deliberately destroy these cars and sell the people new replacement cars, which are mostly foreign-made. This program, which was budgeted for $1 billion, ends up costing $3 billion and is halted after a month. The administration declares that it has been a huge success, which everybody understands to mean that it will never, ever be repeated. With this mission accomplished, the top Washington thinkers are free to train all of their brainpower on the nation's health-care system.

August
... Obama, in the first serious test of his presidency, announces that he will send U.S. troops to rescue Democratic members of Congress pinned down in town hall meetings by constituents firing hostile questions concerning the administration's health-care plan, which turns out not to be wildly popular outside of the immediate Capitol Hill area. The president dismisses concerns that his health-care agenda is in trouble, observing, "There's something about August going into September where everybody in Washington gets all wee-weed up." White House spokesperson Gibbs explains that the "vast majority" of the wee-wee was inherited from the Bush administration.

California, in a move apparently intended to evade creditors, has its name legally changed to South Oregon.

In an alarming technological development, hackers shut down Twitter, leaving a desperate and suddenly vulnerable America with no way to find out what the Kardashian sisters are having for lunch. The Federal Emergency Management Agency urges the nation to "remain calm" and "use Facebook if you can." Twitter service is eventually restored, but most of the estimated 875 million thoughts that went untweeted during the outage will never be recovered, making it the nation's worst social-networking disaster ever.

September
... Obama, speaking on health care before a joint session of Congress, is rudely
interrupted by Kanye West, who grabs the microphone and declares that Beyoncé has a better health-care plan. No, wait, sorry: The president is rudely interrupted by Republican congressman Joe Wilson, who shouts, "You lie!" Wilson later apologizes for his breach of congressional etiquette, saying, "I should have just mooned him."

With public support for the administration's health-care plan continuing to slip, the
president orders U.S. troops into Fox News, then goes on a media blitz, appearing, in a three-day span, on "Meet the Press," "Face the Nation," "Meet the Nation," "Face the Press," "Press Your Face Against the Nation," Letterman, Leno, Judge Judy, Iron Chef and "Dog the Bounty Hunter."

The president also delivers a back-to-school speech to the nation's students, telling them to work hard and get a good education. Fortunately, thanks to the vigilance of the talk-radio community, many parents realize that this is some kind of secret socialist code message and are able to prevent their children from being exposed to it.

On the international-finance front, leaders of the world's economic powers gather for the G-20 summit meeting in Pittsburgh, where, in a rare display of unity, they vote unanimously to fire whomever is responsible for selecting their meeting sites.

October
…On a happier note for the White House, President Obama wins the Nobel Peace Prize, narrowly edging out Beyoncé.

In the Middle East, hopes for peace soar when Iran announces that it will allow U.N. inspectors to visit its nuclear-enrichment facility. Hopes plunge soon after when the inspectors report that they were taken to what appears to be a hastily abandoned kebab stand with a hand-painted sign that says "NUCLEAR ENRICHMENT," as well as what the inspectors describe as "numerous health-code violations."

November
... a Washington couple, Tareq and Michaele Salahi, penetrate heavy security and enter the White House, a feat that Joe Biden has yet to manage. As details of the incident emerge, an embarrassed Secret Service is forced to admit that not only did the couple crash a state dinner, but they also met and shook hands with the president, and they "may have served briefly in the Cabinet."

In other White House news, the president, in a much-debated post-Thanksgiving decision, announces that he is sending U.S. troops into the electronics departments of 1,400 Best Buy stores to prevent Black Friday shoppers from killing one another over flat-screen TVs. Hours later, the president withdraws the troops, calling the situation "hopeless." Press Secretary Gibbs notes that the president inherited Black Friday from the Bush administration. Attorney General Eric H. Holder Jr. announces that, to maintain the principle of due legal process, alleged Sept. 11 mastermind Khalid Sheikh Mohammed will be tried in federal court in New York City, but as a precaution, "he will be executed first."

December
... Obama, after weeks of pondering what to do about the pesky war situation he inherited, announces a decision -- widely viewed as a compromise -- in which he will send 30,000 additional troops to Afghanistan but will name their mission "Operation Gentle Butterfly."

On the economic front, the nation's unemployment rate remains stubbornly high as it becomes clear that the $787 billion stimulus package has created a total of only eight jobs, all in the field of highway-construction flagperson. Looking for solutions, the president hosts a White House "jobs summit" attended by political, business and labor leaders, as well as 23 Portuguese tourists who got lost while trying to visit the Washington Monument and somehow penetrated White House security. Meanwhile, in what is believed to be the largest Craigslist transaction ever, California sells San Diego to Mexico.

On the environmental front, Copenhagen hosts a massive international conference aimed at halting manmade global warming, attended by thousands of delegates who flew to Denmark on magical carbon-free unicorns.

In the Middle East, U.N. nuclear inspectors become suspicious when Iran attempts to ship to Israel, via UPS, a large crate labeled "HARMLESS ITEMS -- DELIVER BEFORE TIMER REACHES 00:00."

Some Comments

2009-12-28T13:15:00.000-08:00

I have quoted the CHOICE Asset Management Team before. I will try to not do it too much given how sarcastic they tend to be, but I thought the following comments were fitting.

"The 5.4 billion share Citigroup offering designed to repay TARP did not go particularly well for taxpayers, who actually came out of the botched secondary (was priced 20% below prevailing prices the day prior to the deal’s announcement, pushing the offering below the government’s $3.25 cost and thwarting plans to sell 1 billion of our shares) with more restrictions on our stock than we had going in (can’t sell for 90 days, and don’t forget that our common-share stake originally came in the form of a more-senior interest-bearing preferred). We still own 7.7 billion shares (“down” from a 34% to a 27% stake in the company due to the share dilution), but the bank that never sleeps can pay bonuses in 2010 now, hoo-ray!"

"The IRS and Treasury did what they could to help the deal, by giving it an exception for longstanding change-of-ownership rules that “would have” eliminated the value of Citi’s $38 billion of tax loss carry-forwards. Didn’t Mr. Obama just a week ago say something about getting tough on “fat cat bankers”? (Recall that C employs 46 full time lobbyists, more than any other company – Mr. “Whatever it takes” Geithner may have missed 60 Minutes that night.)"

"Today Bloomberg is running a story mentioning that C shares need to at least triple by 2018 for the warrants that taxpayers own to have any value (we own 255 million warrants to buy stock at $10.61/share and another 210 million at $17.85/share). The latter would give it a half-trillion market capitalization, more than what any US bank has ever achieved."

"We should note that Wells Fargo’s $10.7 billion offering appeared to go off without a hitch (and probably contributed to buyer indigestion for Citi), allowing it to repay its $25 billion loan from taxpayers."

"That occurred even as Citigoup and Wells Fargo repaid their respective $20 and $25 billion TARP borrowings to the US Treasury (taxpayers)."

"Positive as that is, we hope Americans can see through officials’ curious assessment that TARP has been “profitable,” since taxpayer “investments” in AIG, Fannie Mae, and Freddie Mac (among others) have expanded, rather than contracted. In referring to TARP “profits,” officials are ignoring unrealized losses on AIG, Fannie Mae, and Freddie Mac. Using the same logic, an investor might declare his or her portfolio to be “profitable,” provided they excluded underwater positions they still own in their portfolio."

"The Treasury announced it is lifting its $400 billion cap to support Fannie Mae and Freddie Mac, and now will provide “unlimited” support, likely signaling that mortgage losses are set to grow in 2010. Treasury said its announcement “should leave no uncertainty about Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis.”

"The same day, Fannie and Freddie announced its chief executives would receive $6 million in remuneration for 2009, a year in which both firms lost billions of dollars and required taxpayer support to remain solvent."

"Was the timing of these announcements on Christmas Eve merely a coincidence, or was the timing strategically designed so that the news would get “lost” over a long weekend, in which Americans were focused on family, friends, and the holiday season? You know the answer."

"Does anyone recognize that Treasury is conducting fiscal policy, which once (see Article 1, Section 7 of the US Constitution) was thought to be Congress’ responsibility?"

IRAN

2009-12-22T10:30:00.000-08:00

This very long, but important, article makes me feel warm and cozy all over. (Insert dripping sarcasm graphic here).

The Iranian Incursion in Context
By George Friedman

A small number of Iranian troops entered Iraq, where they took control of an oil well and raised the Iranian flag Dec. 18. The Iranian-Iraqi border in this region is poorly defined and is contested, with the Iranians claiming this well is in Iranian territory not returned after the Iran-Iraq War. Such incidents have occurred in the past. Given that there were no casualties this time, it therefore would be easy to dismiss this incident, even though at about the same time an Iranian official claimed that Iraq owes Iran about $1 trillion in reparations for starting the Iran-Iraq War.

But what would be fairly trivial at another time and place is not trivial now.

Sending a Message With an Incursion
Multiple sources have reported that Tehran ordered the incident. The Iranian government is aware that Washington has said the end of 2009 was to be the deadline for taking action against Iran over its nuclear program — and that according to a White House source, the United States could extend that deadline to Jan. 15, 2010.

That postponement makes an important point. The United States has treated the Iran crisis as something that will be handled on an American timeline. The way that the Obama administration handled the Afghanistan strategy review suggests it assumes that Washington controls the tempo of events sufficiently that it can make decisions carefully, deliberately and with due reflection. If true, that would mean that adversaries like Iran are purely on the defensive, and either have no counter to American moves or cannot counter the United States until after Washington makes its next move.

For Iran, just to accept that premise puts it at an obvious disadvantage. First, Tehran would have to demonstrate that the tempo of events is not simply in American or Israeli hands. Second, Tehran would have to remind the United States and Israel that Iran has options that it might use regardless of whether the United States chooses sanctions or war. Most important, Iran must show that whatever these options are, they can occur before the United States acts — that Iran has axes of its own, and may not wait for the U.S. axe to fall.

The incursion was shaped to make this point without forcing the United States into precipitous action. The location was politically ambiguous. The force was small. Casualties were avoided. At the same time, it was an action that snapped a lot of people to attention. Oil prices climbed. Baghdad and Washington scrambled to try to figure what was going on, and for a while Washington was clearly at a loss, driving home the fact that the United States doesn’t always respond quickly and efficiently to surprises initiated by the other side.

The event eventually died down, and the Iranians went out of their way to minimize its importance. But two points nevertheless were made. The first was that Iran might not wait for Washington to consider all possible scenarios. The second was that the Iranians know how to raise oil prices. And with that lesson, they reminded the Americans that the Iranians have a degree of control over the economic recovery in the United States.

There has never been any doubt that Iran has options in the event that the United States chooses to strike. Significantly, the Iranians now have driven home that they might initiate a conflict if they assume conflict is inevitable.

U.S. and Iranian Options
Iran’s problem becomes clear when we consider Tehran’s options. These options fall into three groups:
1. Interdicting the flow of oil through the Strait of Hormuz and Persian Gulf through the use of mines and anti-ship missiles. This would result in a dramatic increase in world oil prices on the Iranian attempt alone and could keep them high if Tehran’s efforts succeeded. The impact on the global economy would be substantial.

2. Causing massive destabilization in Iraq. The Iranians retain allies and agents in Iraq, which has been experiencing increased violence and destabilization over the past months. As the violence increases and the Americans leave, a close relationship with Iran might be increasingly attractive to Iraqi troops. Given the deployment of American troops, direct attacks in Iraq by Iranian forces are not out of the question. Even if ultimately repulsed, such Iranian incursions could further destabilize Iraq. This would force the Obama administration to reconsider the U.S. withdrawal timetable, potentially affecting Afghanistan.

3. Use Hezbollah to initiate a conflict with Israel, and as a global tool for terrorist attacks on American and allied targets. Hezbollah is far more sophisticated and effective than al Qaeda was at its height, and would be a formidable threat should Iran choose — and Hezbollah agree — to play this role.

When we look at the three Iranian options, it is clear that the United States would not be able to confine any action against Iran to airstrikes. The United States is extremely good at air campaigns, while it is weak at counterinsurgency. It has massive resources in the region to throw into an air campaign and it can bring more in using carrier strike groups.

But even before hitting Iran’s nuclear facilities, the Americans would have to consider the potential Iranian responses. Washington would have to take three steps. First, Iranian anti-ship missiles and surface vessels — and these vessels could be very small but still able to carry out mine warfare — on the Iranian littoral would have to be destroyed. Second, large formations of Iranian troops along the Iraqi border would have to be attacked, and Iranian assets in Iraq at the very least disrupted. Finally, covert actions against Hezbollah assets — particularly assets outside Lebanon — would have to be neutralized to the extent possible.

This would require massive, coordinated attacks, primarily using airpower and covert forces in a very tight sequence prior to any attack on Iran’s nuclear facilities. Without this, Iran would be in a position to launch the attacks outlined above in response to strikes on its nuclear facilities. Given the nature of the Iranian responses, particularly the mining of the Persian Gulf and Strait of Hormuz, the operations could be carried out quickly and with potentially devastating results to the global economy.

From the Iranian standpoint, Tehran faces a “use-it-or-lose-it” scenario. It cannot wait until the United States initiates hostilities. The worst-case scenario for Iran is waiting for Washington to initiate the conflict.

At the same time, the very complexity of an Iranian attack makes the United States want to think long and hard before attacking Iran. The opportunities for failure are substantial, no matter how well the attack is planned. And the United States can’t allow Israel to start a conflict with Iran alone because Israel lacks the resources to deal with a subsequent Iranian naval interdiction and disruptions in Iraq.

It follows that the United States is interested in a nonmilitary solution to the problem. The ideal solution would be sanctions on gasoline. The United States wants to take as much time as needed to get China and Russia committed to such sanctions.

Iranian Pre-emption
The Iranians signaled last week that they might not choose to be passive if effective sanctions were put in place. Sanctions on gasoline would in fact cripple Iran, so like Japan prior to Pearl Harbor, the option of capitulating to sanctions might be viewed as more risky than a pre-emptive strike. And if sanctions didn’t work, the Iranians would have to assume a military attack is coming next. Since the Iranians wouldn’t know when it would happen, and their retaliatory options might disappear in the first phase of the military operation, they would need to act before such an attack.

The problem is that the Iranians won’t know precisely when that attack will take place. The United States and Israel have long discussed a redline in Iranian nuclear development, which if approached would force an attack on Iran to prevent Tehran from obtaining nuclear weapons. Logically, Iran would seem to have a redline as well, equally poorly designed. At the point when it becomes clear that sanctions are threatening regime survival or that military action is inevitable, Iran must act first, using its military assets before it loses them.

Iran cannot live with either effective sanctions or the type of campaign that the United States would have to launch to take out Iran’s nuclear facilities. The United States can’t live with the consequences of Iranian counteractions to an attack. Even if sanctions were possible, they would leave Iran with the option to do precisely those things Washington cannot tolerate. Therefore, whether the diplomatic or military route is followed, each side has two options. First, the Americans can accept Iran as a nuclear power, or Iran can accept that it must give up its nuclear ambitions. Second, assuming that neither side accepts the first option, each side must take military action before the other side does. The Americans must neutralize counters before the Iranians deploy them. The Iranians must deploy their counters before they are destroyed.
The United States and Iran are both playing for time. Neither side wants to change its position on the nuclear question, although each hopes the other will give in. Moreover, neither side is really confident in its military options. The Americans are not certain that they can both destroy the nuclear facilities and Iranian counters — and if the counters are effective, their consequences could be devastating. The Iranians are not certain that their counters will work effectively, and once failure is established, the Iranians will be wide open for devastating attack. Each side assumes the other understands the risks and will accept the other’s terms for a settlement.

And so each waits, hoping the other side will back down. The events of the past week were designed to show the Americans that Iran is not prepared to back down. More important, they were designed to show that the Iranians also have a redline, that it is as fuzzy as the American redline and that the Americans should be very careful in how far they press, as they might suddenly wake up one morning with their hands full.

The Iranian move is deliberately designed to rattle U.S. President Barack Obama. He has shown a decision-making style that assumes that he is not under time pressure to make decisions. It is not clear to anyone what his decision-making style in a crisis will look like. Though not a prime consideration from the Iranian point of view, putting Obama in a position where he is psychologically unprepared for decisions in the timeframe they need to be made in is certainly an added benefit. Iran, of course, doesn’t know how effectively he might respond, but his approach to Afghanistan gives them another incentive to act sooner than later.

There are some parallels here to the nuclear warfare theory, in which each side faces mutual assured destruction. The problem here is that each side does not face destruction, but pain. And here, pre-emptive strikes are not guaranteed to produce anything. It is the vast unknowns that make this affair so dangerous, and at any moment, one side or the other might decide they can wait no longer.

"This report is republished with permission of STRATFOR"

Stimulus

2009-12-16T09:38:00.000-08:00

My brother-in-law Tom made a comment on my last post that I totally agree with and have also been wondering for a while. His point was, how come none of our representatives seem to remember Econ 101? Further we can ask, why is it they don't seem to pay attention to any of the current studies? You would think that at the very least one of their many aides would have read something that completely contradicts what they are working on.

I think that this article from Greg Mankiw is yet another example of something you hope that our representatives read and, more importantly, take into consideration as they are looking at policy changes.

Tax Cuts Might Accomplish What Spending Hasn’t
By N. GREGORY MANKIW

IMAGINE you are a physician and a patient arrives in your office with a troubling and mysterious disease. Some of the symptoms are familiar, but others are not. You have never treated anyone with quite this set of problems.

Based on your training and experience, imperfect as it is, you come up with a proposed remedy. The patient leaves with a prescription in hand. You hope and pray that it works.
A week later, however, the patient comes back and the symptoms are, in some ways, worse. What do you do now? You have three options:

STAY THE COURSE Perhaps the patient was sicker than you thought, and it will take longer for your remedy to kick in.

UP THE DOSAGE Perhaps the remedy was right but the quantity was wrong. The patient might need more medicine.

RETHINK THE REMEDY Perhaps the treatment you prescribed wasn’t right after all. Maybe a different mixture of medicines would work better.

Choosing among these three reasonable courses of action is not easy. In many ways, the Obama administration faces a similar situation right now.

When President Obama was elected, the economy was sick and getting sicker. Before he was even in office in January, his economic team released a report on the problem.
If nothing was done, the report said, the unemployment rate would keep rising, reaching 9 percent in early 2010. But if the nation embarked on a fiscal stimulus of $775 billion, mainly in the form of increased government spending, the unemployment rate was predicted to stay under 8 percent.

In fact, the Congress passed a sizable fiscal stimulus. Yet things turned out worse than the White House expected. The unemployment rate is now 10 percent — a full percentage point above what the administration economists said would occur without any stimulus.
To be sure, there are some positive signs, like reduced credit spreads, gross domestic product growth and diminishing job losses. But the recovery is not yet as robust as the president and his economic team had originally hoped.

So what to do now? The administration seems most intent on staying the course, although in a speech Tuesday, the president showed interest in upping the dosage. The better path, however, might be to rethink the remedy.

When devising its fiscal package, the Obama administration relied on conventional economic models based in part on ideas of John Maynard Keynes. Keynesian theory says that government spending is more potent than tax policy for jump-starting a stalled economy.

The report in January put numbers to this conclusion. It says that an extra dollar of government spending raises G.D.P. by $1.57, while a dollar of tax cuts raises G.D.P. by only 99 cents. The implication is that if we are going to increase the budget deficit to promote growth and jobs, it is better to spend more than tax less.

But various recent studies suggest that conventional wisdom is backward.
One piece of evidence comes from Christina D. Romer, the chairwoman of the president’s Council of Economic Advisers. In work with her husband, David H. Romer, written at the University of California, Berkeley, just months before she took her current job, Ms. Romer found that tax policy has a powerful influence on economic activity.

According to the Romers, each dollar of tax cuts has historically raised G.D.P. by about $3 — three times the figure used in the administration report. That is also far greater than most estimates of the effects of government spending.

Other recent work supports the Romers’ findings. In a December 2008 working paper, Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago apply state-of-the-art statistical tools to United States data to compare the effects of deficit-financed spending, deficit-financed tax cuts and tax-financed spending. They report that “deficit-financed tax cuts work best among these three scenarios to improve G.D.P.”

My Harvard colleagues Alberto Alesina and Silvia Ardagna have recently conducted a comprehensive analysis of the issue. In an October study, they looked at large changes in fiscal policy in 21 nations in the Organization for Economic Cooperation and Development. They identified 91 episodes since 1970 in which policy moved to stimulate the economy. They then compared the policy interventions that succeeded — that is, those that were actually followed by robust growth — with those that failed.

The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.

All these findings suggest that conventional models leave something out. A clue as to what that might be can be found in a 2002 study by Olivier Blanchard and Roberto Perotti. (Mr. Perotti is a professor at Boccini University in Milano, Italy; Mr. Blanchard is now chief economist at the International Monetary Fund.) They report that “both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is difficult to reconcile with Keynesian theory.”

These studies point toward tax policy as the best fiscal tool to combat recession, particularly tax changes that influence incentives to invest, like an investment tax credit. Sending out lump-sum rebates, as was done in spring 2008, makes less sense, as it provides little impetus for spending or production.

LIKE our doctor facing a mysterious illness, economists should remain humble and open-minded when considering how best to fix an ailing economy. A growing body of evidence suggests that traditional Keynesian nostrums might not be the best medicine.

Jobs

2009-12-14T10:48:00.001-08:00

Now with everyone focused on the jobs front I wanted to share a few of my thoughts as I've read the headlines.

First, I thought that Jobs were supposed to be the focus the whole time? Wasn't that what the point of the second stimulus (the first under President Obama) was for? I thought that was the whole promise of we will create - adding in later the whole bit about saving - millions of jobs in less than a year. That's not to say I am bothered by their sudden turn, again, to the jobs focus, I just found it interesting that some in the media are portraying this as President Obama's first attempt.

Second, I like the points made by John Mauldin in his newsletter:

"In the '50s through the early '80s, recessions were typified by large layoffs at manufacturing businesses, as they had built up too much inventory. Businesses had increased capacity and often borrowed a little too much. Rising prices in the '70s, along with extremely high interest-rate costs, led to the two severe recessions of the early '80s, which Paul Volcker had to essentially force into existence, in order to begin the process of wringing inflation out of the economy.

"But, and this is important, as the economy improved, inventories were eventually worked through and employees were brought back to work. Things returned to normal. The economy would once again grow at a robust rate. Then, in the last two recessions, in the early '90s and early '00s, it took longer for employment to rise. A great part of this was because the manufacturing sector of national employment was becoming an ever smaller part of the economic pie. We were, and still are, turning into an economy driven by services.

"I should note that, on an absolute basis, manufacturing in the US has grown (going back to before this recession started.) We just produced more "stuff" with fewer employees. We became more productive. But this means that there are fewer jobs that will be brought "back" to make up for increasing sales than in past recessions. There are estimates out that as many as 2 million of the 8 million jobs lost are permanent job losses.

"We know that businesses have made large cuts in numbers of employees in order to address lower sales and to increase their profits. Increasing profits by cutting costs even as the "top-line" sales number is shrinking is not a growth strategy that can be sustained. It also eats into research and development and postpones growth."

In other words, if we are going to focus on jobs then we have to do so realistically. If 2 million jobs were permanently lost then how are we going to allow and encourage the creation of 2 million new jobs? We all know that students are currently being prepared for jobs that don't currently exist. There are tons of ideas out there which we don't even know are possibilities at this point.

I think all of this brings up my main point: The real question that government should be asking itself as it tries to come up with ideas on job creation is - In what ways can we get out of the way of job creation in the private sector? I think that they would all do well to read Gallup's World Poll studies on how "Brain Gain" works and more importantly right now (since we are beginning to experience this) how to avoid "Brain Drain."

I am slightly encourage to see some Supply-Side rhetoric coming from President Obama's recent speeches. However, I am not dumb enough to think that the current legislative body will follow through even on the tiniest bit of what could and should happen to get government out of the way. I think that our only hope for new jobs will be for the Legislature to change this coming election.

Here Come the Higher Taxes

2009-11-27T08:34:00.000-08:00

"A government big enough to give you everything you want, is strong enough to take everything you have."
-Thomas Jefferson

Wouldn't it be great if the above quote, and especially its meaning, could be engrained in every voters head before they cast their vote? Sure it sounds nice that the government is promising cheaper healthcare for the poor (in the current bill the rich - middle class and up will pay for it), but at some point realistic goals and budgets have to be set.

Next thing we know they'll be proposing chocolate milk in the drinking fountains paid for by the "rich" because it is the "right" of every poor American to have a daily dose of calcium filled euphoria (yes, I like chocolate milk).

Wave of Debt Payments Facing U.S. Government
By Edmund L. Andrews, the New York Times

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.'s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.
Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.
Even as Treasury officials are racing to lock in today's low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government's tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.

The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States' long-term budget crisis is becoming too big to postpone.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.

"The government is on teaser rates," said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. "We're taking out a huge mortgage right now, but we won't feel the pain until later."

So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt.

The government's average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.'s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent.

"All of the auction results have been solid," said Matthew Rutherford, the Treasury's deputy assistant secretary in charge of finance operations. "Investor demand has been very broad, and it's been increasing in the last couple of years."

The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation's oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government.

"What a good country or a good squirrel should be doing is stashing away nuts for the winter," said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. "The United States is not only not saving nuts, it's eating the ones left over from the last winter."
The current low rates on the country's debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money.

On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.

Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.

Articles in this series will examine the consequences of, and attempts to deal with, growing public and private debts.

The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.
Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels.

The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.

Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury's average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.

But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury's tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government's marketable debt — about $1.6 trillion — is coming due in the months ahead.

To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.

Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed's purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government's annual tab for debt service.

This month, the Treasury Department's private-sector advisory committee on debt management warned of the risks ahead.

"Inflation, higher interest rate and rollover risk should be the primary concerns," declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4.

"Clever debt management strategy," the group said, "can't completely substitute for prudent fiscal policy."

President Abraham Lincoln Thanksgiving Address

2009-11-24T07:12:00.000-08:00

Proclamation of Thanksgiving
By Abraham Lincoln, 16th President of the United States of America

The Year that is drawing to a close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God.

In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke the aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theater of military conflict; while that theater has been greatly contracted by the advancing armies and navies of the Union.

Needful diversion of wealth and strength from the fields of peaceful industry to the national defense, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore.

Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege, and the battle-field; and the country, rejoicing in the consciousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom.
No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy.

It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People.

I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens.

And I recommend to them that while offering up the ascription's justly due to Him for such singular deliverance's and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty hand to heal the wounds of the nation, and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquility, and Union.

In testimony whereof, I have hereunto set my hand and caused the seal of the United States to be affixed.

Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the United States the Eighty-eighth.

By the President: Abraham Lincoln

Week's Summary

2009-11-10T05:20:00.000-08:00

While I have tried not to be overly cynical on this blog, sometimes with the news that comes in, I can't help it. That's why I am posting this commentary from George Shipp. Sometimes his commentary is too cynical, even for me, but today I am finding it to be right along the lines of how I feel.

CHOICE Asset Management Commentary:
It was quite a week, chock full of news. The Dow Industrials reversed the prior week’s loss and climbed back above 10,000 with a 311-point gain, as our governmental authorities once again collectively said “whatever it takes.” (And whatever the consequences down the road, some would say) Before getting to economic and other details, consider these moves out of Washington, all coming in just a single week:

- By a rare 98-0 Senate vote, following similarly overwhelming 403-12 House passage, Congress is extending unemployment benefits, to provide at least another 14 weeks of relief for the jobless (20 weeks in states with 8.6% or higher unemployment).

- Buy a home before May 1, and you will receive at least $6,500 ($8,000 for first time buyers).
So far, 1.4 million have claimed the 1st-time benefit, at an overall cost of $10 billion. The new version expands the program to “move up” buyers, with a 50% increase in income ceilings for qualification ($225,000 for couples).

- H.R. 3548 also widens the time period businesses (like homebuilders) can claim losses, to offset previously booked income. That portion was deemed budget-neutral because large businesses paying foreign taxes will not receive a planned tax credit until 2018.

- And an additional employer payroll surtax of 0.2% helped fund the unemployment benefit. [Yeah, that'll be a good incentive to bring back jobs.]

- Fannie Mae reported an $18.9 billion quarterly loss, and asked for an additional $15 billion of taxpayer support.

- Fannie introduced a home “deed for lease” plan whereby, if you are facing foreclosure and cannot qualify for a mortgage modification (i.e. even after re-works and interest rate subsidies your income does not reach 31% of the new payment), you may be able to exchange your home ownership claim for a lease “at market rates” (which by definition will be lower). That’s right, taxpayers, you will be the lucky landlords who will assume responsibility for homes that have proven to be unaffordable, and you will rent them through a third-party management company to help out your neighbors who made those decisions.

- Fannie was going to sell $3 billion of tax credits to Goldman, Sachs and/or Berkshire Hathaway, but the Treasury ultimately nixed that as not in the taxpayers’ best interest.

- The FHA was unable to meet its deadline to issue an updated financial report. Its auditor said its computer models were “creating unexplained inconsistencies,” according to the New York Times.

- The House of Representatives passed a 1,994-page, $1.05 trillion Health Reform bill by a narrow 220-215 vote. Obviously, there is still a long road ahead before the plan becomes law. According to the (libertarian, i.e. small-government advocate) CATO Institute, the bill “would create 111 government agencies, boards, commissions and other bureaucracies -- all overseen by a new health-care czar bearing the Orwellian title ‘commissioner of health choices.’" About $730 billion of new taxes and fees would support the expansion. [There is just something majorly wrong with our political system if the majority are screaming they don't want this bill, but it passes anyway.]

From the “we don’t know whether to laugh or cry department,” following Administration assertions that the ARRA legislation (stimulus bill) had “saved” 640,249 jobs, many localities and reporters seemed to question the calculation, for example:

- The Associated Press reported that President Obama’s economic recovery program saved 935 jobs at the Southwest Georgia Community Action Council. “Trouble is, only 508 people work there.”

- The Milwaukee Journal Sentinel said that federal data indicated more than 10,000 jobs were saved or created in Wisconsin, but “that is rife with errors, double counting and inflated numbers based more on satisfying federal formulas than creating real jobs.”

- The Chicago Tribune reported that official counts of 473 teachers “saved” at the North Chicago Community Unit Schools District 187 could not be accurate, since the district only employs 290 teachers. “In the official report, Wilmette Public Schools District 39 was credited with 166 jobs saved by stimulus aid. Superintendent Raymond Lechner said the number should be zero. At Dolton-Riverdale School District 148, stimulus funds were said to have saved the equivalent of 382 full-time teaching jobs -- 142 more than the district actually has.”

- The Sacramento Bee said that the California State University system calculated it was able to retain 26,156 employees, equating to more than half its workforce and more than all “jobs saved” in Michigan, the highest unemployment state. But CSU spokeswoman Clara Potes-Fellow said “This is not really a real number of people.”

[Personally I was wondering how on the earth the government was going to measure their promise of "saving" jobs. I am not exactly sure why I wondered that when you can say just about anything with statistics; especially with statistics that are not based on any real data. Sounds like these were put together by the same statistics department that helped Pelosi with her statement of: "500 million Americans will lose their jobs" without the stimulus bill. According to her, that would occur every month without proper government action. However, according to the US census bureau, the current population of residents in the country stands at about 305,000,000. Ironically, her numbers would include her and the rest of the Senate, which I am all for.

The good news is that this also came in from another Economists commentary: "...The overriding message of last week's elections in the United States was that people are highly focused on the economy in general, and on unemployment in particular. As a result, politicians are becoming increasingly nervous about their re-election prospects. Notably, we would point out that current approval ratings for the US Congress are below the lows reached in 1994 and 2006 - the years marketing the two most recent major party takeovers of Congress." Personally I am focused on more than just unemployment, but I am happy that most others notice the poor job of representing the government is doing. Personally I don't think this definitely means there will be a party shift. I think it means we are headed for a more fundamental shift and both parties better make some changes.]

Great Ideas for Reform

2009-11-04T09:03:00.000-08:00

It's articles like the following that make me wonder how much of this current 2,000 page bill were written by lobbyists. In other words; it seems to me that reform is not that complicated, unless you were trying to pander to specific groups.

I did remove some paragraphs from the article becuase they weren't relevant to my post.

The Whole Foods Alternative to ObamaCare
By John Mackey

“The problem with socialism is that eventually you run out of other people’s money.”
- Margaret Thatcher

With a projected $1.8 trillion dollar deficit for 2009, several trillions more in deficits projected over the next decade, and with both Medicare and Social Security entitlement spending about to ratchet up several notches over the next 15 years as Baby Boomers become eligible for both, we are rapidly running out of other people’s money. These deficits are simply not sustainable. They are either going to result in unprecedented new taxes and inflation, or they will bankrupt us.

While we clearly need health-care reform, the last thing out country needs is a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits and move us much closer to a government takeover of our health-care system. Instead, we should be trying to achieve reforms by moving in the opposite direction – toward less government control and more individual empowerment. Here are eight reforms that would greatly lower the cost of health care for everyone:

1) Remove the legal obstacles that slow the creation of high-deductible health insurance plans and health savings accounts (HSAs). The combination of high-deductible health insurance and HSAs is one solution that could solve many of our health-care problems. For example, Whole Foods Market pays 100% of the premiums for all our tea members who work 30 hours or more per week (about 89% of all team members) for our high-deductible health insurance plan. We also provide up to $1,800 per year in additional health-care dollars through deposits into employees’ Personal Wellness Accounts to spend as they choose on their own health and wellness.

Money note spent in one year rolls over to the next and grows over time. Our team members therefore spend their own health-care dollars until the annual deductible is covered (about $2,500) and the insurance plan kicks in. This creates incentives to spend the first $2,500 more carefully. Our plan’s costs are much lower than typical health insurance, while providing a very high degree of worker satisfaction.

2) Equalize the tax laws so that employer-provided health insurance and individually owned health insurance have the same tax benefits. Now employer health insurance benefits are fully tax deductible, but individual health insurance is not. This is unfair.

3) Repeal all state laws which prevent insurance companies from competing across state lines. We should all have the legal right to purchase health insurance from any insurance company in any state and we should be able to use insurance wherever we live. Health insurance should be portable.

4) Repeal government mandates regarding what insurance companies must cover. These mandates have increased the cost of health insurance by billions of dollars. What is insured and what is not insured should be determined by individual customer preferences and not through special-interest lobbying.

5) Enact tort reform to end the ruinous lawsuits that force doctors to pay insurance costs of hundreds of thousands of dollars per year. These costs are passed back to us through much higher prices for health care.

6) Make costs transparent so that consumers understand what health-care treatments cost. How many people know the total costs of their last doctor’s visit and how that total breaks down? What other goods or services do we buy without knowing how much they will cost us?

7) Enact Medicare reform. We need to face up to the actuarial fact that Medicare is heading towards bankruptcy and enact reforms that create greater patient empowerment, choice and responsibility.

8) Finally revise tax forms to make it easier for individuals to make a voluntary, tax-deductible donation to help millions of people who have no insurance and aren’t covered by Medicare, Medicaid, or the State Children’s Health Insurance Program.

Rather than increase government spending and control, we need to address the root causes of poor health. This begins with the realization that every American adult is responsible for his or her own health.

Unfortunately many of our health-care problems are self-inflicted: two-thirds of Americans are now overweight and one-third are obese. Most of the diseases that kill us and account for about 70% of all health-care spending – heart disease, cancere, stroke, diabetes and obesity – are mostly preventable through proper diet, exercise, not smoking, minimal alcohol consumption and other healthy lifestyle choices.

Health-care reform is very important. Whatever reforms are enacted it is essential that they be financially responsible, and that we have the freedom to choose doctors and health-care services that best suit our own unique set of lifestyle choices. We are all responsible for our own lives and our own health. We should take that responsibility very seriously and use our freedom to make wise lifestyle choices that will protect our health. Doing so will enrich our lives and will help create a vibrant and sustainable American society.

Disappointing, but Not Surprising

2009-11-02T12:42:00.000-08:00

I have not confirmed the below statements, but I did want to pass this along.

I know this isn't a popular statement amongst my fellow Republicans, but honestly I thought the Baucus plan was ok. It had some things I disagreed with, but for the most part it fit with what I thought would be a good compromise on health care reform that might work. That is until I started seeing the marginal tax arguments against it (which personally I don't understand why it changes things, but the evidence is there).

Anyway, how soon can we get rid of Speaker Pelosi?

CHOICE Asset Management Commentary from George Shipp:

The House released its health care reform bill on Thursday and it is a whopper, weighing in at 19
pounds and measuring nearly nine inches tall. The 1,990 page, 400,000-word printout is longer
than War & Peace. The plan is estimated to cost $894 billion over ten years ($2.24 million per
word, notes the Politico blog). The bill includes a government sponsored health plan, mandates
everyone to buy health insurance with a penalty equivalent to 2.5% of their modified adjusted
gross income or the average premium, whichever is less, removes the ability to use flexible
spending accounts or health savings accounts to purchase over-the-counter medicines with pretax dollars, and bans insurance companies from denying coverage to those with pre-existing
conditions.

Hopefully our elected representatives are fast readers, since Speaker of the House
Nancy Pelosi commented that a vote could come as early as this Thursday. Wouldn’t it be more
prudent to actually give people time to read and review the bill before cramming it through?

Here’s a link to the bill in case you’re up all night trying to finish off that leftover
Halloween candy and you need something to put you to sleep:

http://energycommerce.house.gov/Press_111/20090714/aahca.pdf

Too bad that if you do want to read it, it might be un-readable -- again thanks to Politico,
you will stumble across paragraphs like:

“(a) Outpatient Hospitals – (1) In General – Section 1833(t)(3)(C)(iv) of the
Social Security Act (42 U.S.C. 1395(t)(3)(C)(iv)) is amended – (A) in the first
sentence – (i) by inserting “(which is subject to the productivity adjustment
described in subclause (II) of such section)” after “1886(b)(3)(B)(iii); and (ii) by
inserting “(but not below 0)” after “reduced”; and (B) in the second sentence, by
inserting “and which is subject, beginning with 2010 to the productivity
adjustment described in section 1886(b)(3)(B)(iii)(II)”.

Me again. So, anyone think they can figure out that one paragraph's impact on our healthcare system would be before Thursday? How about this one along with the thousands of others? Better yet, how many of the primary supporters of this Bill have any clue as to what this paragraph says and then its impact on our healthcare system? And what on earth is the argument for getting rid of HSAs!!!!!!!

Response to a Bear

2009-10-27T06:57:00.000-07:00

John Mauldin wrote a fantastic letter that I couldn't agree more with this week. He responds to a friend of his who is overall bearish on the future (and not just the economy). John's response fits with what I have been reading about the Fourth Turning and my own personal beliefs.

I highly recommend you not only read this, but share it with others. This is the hope that our nation needs now. Not blind hope built on desires for everything to turn out rosy, but the hope that comes with hard work and individual responsibility to make our own and combined future a happy one. Not a happy one because we didn't have trials and struggles and disagreements, but because we overcome them all for our greater good.

It's More Than Half Full
Ok, Bill, let's review those wonderful days from whence we sprang, so fraught with the advantages of having nothing. So potent with opportunity. It was the middle of the '70s when we started our careers. Inflation was high and rising. The Soviets were seen as a major threat. Japan was beating our brains out and buying everything, even if nailed down (like Pebble Beach and New York skyscrapers). I had to borrow money at 15% (or more) to buy paper in order to meet customer demands for printing. And guess what? The banks got into trouble and called loans willy-nilly. (My bank even called my mother and threatened her to pay off my loan - against written agreements - and she did. Evil -----------. The more things change... And that bank did fail, I report delightedly! Not that I hold a grudge.)

There were multiple successive and ever-deeper recessions. Gold was rising and the dollar was seen as a joke. Howard Ruff (a good friend to both of us when we were starting out!) and almost every newsletter writer were telling people to buy gold and freeze-dried food to protect themselves against a near-certain economic, if not apocalyptic, catastrophe. Unemployment was high and rising for a decade.

The correct answer to the question, "Where will the jobs come from?" back then was, "I don't know, but they will." And that is the correct answer today.

In 20 years, no one will want to come back to the halcyon days of 2005. Our kids (all 13 of them) are getting ready to live through what will be the most exciting period in human history. There will be a century's worth of change, measured by the standard of the 20th century, just in the next ten years, and then we will double that pace in the next ten after that. Medical miracles will mean our kids and grandkids will live a lot longer than their dads, although I intend to be writing well into my 80s, like our mutual hero Richard Russell.

There will be whole new industries developed in the US. How do I know that? Follow the money. The rest of the world spends a fraction of what we do on research and development. Where do you go if you are looking for venture capital?

Do I care if the Chinese and the "developing" world are far better off, relatively speaking, than the US in 20 years? Not a whit. Good on them. I hope they make discoveries and inventions and grow new businesses that benefit us all. But we are not going into some long dark night. We, and our kids, get to choose how we respond to what is the reality of the day.

Our nation had to almost hit the wall in 1980 before a Volker could come along and force us to take the pain of recession to beat back inflation. And we will have to come perilously close to the wall this time before we take action as a nation. Way too close for comfort. Maybe you are right, and we have a soft depression. I hope not; but even so, the world will be better, far better, in 20 years, with far more opportunities than today.

It was not fun starting new businesses in the '70s and early '80s. But we did. I remember coming to Baltimore and being (literally) afraid to get out of the car to visit your offices in the slums. But that was what you could afford. A far cry from the chateau in Ouzilly.

I lived in a small mobile home. Tiffani was born there, and we converted part of the kitchen to be her bedroom. (Yes, I was white "trailer trash.") But I got up every morning just like you did and killed as many alligators as I could. The rest had to wait 'til the next day.

And that is the legacy our kids have. They know what it is to wade into the swamp every morning. Never quitting. In thinking about this, you may be the father I respect the most. You have raised your kids to be multilingual children of the world. What a work ethic. How did you get them to scrape window shutters at your chateaus? (I actually saw this, and my kids marveled. Thereafter I threatened to make them go live with you when they didn't behave!)
You have given your kids the opportunity to follow their dreams, even demanded that they do so. And such dreams they (and mine) have. Will they succeed? Who knows? But they will go at it with gusto, in a world with more opportunities than you and I ever imagined 40 years ago. And, oh boy, were we optimists back then. How else could we have done what we did? If we believed the rhetoric that the world was coming to an end, would we have dared to venture out?

You cannot have raised your kids to be such bold adventurers without instilling in them a certain high level of optimism. I am going to out you, Mr. Bonner. You present yourself to your readers as a bona fide end-of-the-world pessimist. But you are a really and truly a closet optimist. Your whole business empire (and what an empire it has become!) is based on finding people who are optimists, in the sense that they think they can actually get people to send them money for what they write. Which they do! Even if it is to read why the world will come to an end, which thankfully it never does.

You are right in this: it is personal gumption that makes or breaks us. There are those who started out with less than we did (hard to imagine but true) and made a lot more. And there are those who started out with far more and made less. But there are very few who are happier than either of us. Or luckier.

Our kids? It is not the times that dictate the man (or daughter!), but the response of the man which dictates his own time. Today promises a brighter future for someone young than any other time in history, whether they are in the US or Brazil or China. They just have to seize it.
And as our kids do just that, and as the millions of kids of those who read us do so, and the billions of kids who are just now getting ready to bust loose all work to achieve their dreams, the world is going to be a far more fantastic place. Smooth ride? Not a chance. We didn't get one; and in thinking through history, there have not been many smooth rides. Why should we think that will get any better? Our kids will just have to live with our generational (and individual) iniquities, government debt and all, and figure out how to master their own fates. But if I had a choice to take the '70s or today? In less than a heartbeat I would choose today. And I bet you would too!

Job Creation

2009-10-19T07:52:00.000-07:00

I like these proposals to help bring jobs back. Unfortunately these will never be put into place because they put the responsibility on individuals and employers and those currently in power don't believe they are capable of making good decisions.

The union point (number 3) is a good one. I had an interesting conversation with someone who is currently a member of a union. It was interesting to talk to him about his situation because I happen to know a good amount concerning the macro level of his company. If the union gets its way, which is what this fellow wanted, they would literally ruin this company and defeat their own purposes of keeping their jobs. His standpoint is that because the company made deals with the union they had to stick to their agreements. I can see his point, and it is unfortunate that the economy has worked the way it has (and honestly this company has an outdated business model), but if the company is to survive it has to do what other companies have and cut the excessive costs (tighten the belt).

Steve Davis - Forbes Magazine:

1. Roll back costly benefit mandates for health insurance. The high cost of health insurance acts as a drag on job creation and wage growth. Benefit mandates set by the states prevent health insurance companies from offering inexpensive, no-frills plans. State-level mandates cover acupuncture, alcoholism treatments, chiropractors, fertility treatments, marriage counseling and much more--about 1,900 mandates across the 50 states. The effect is to limit choice among insurance plans, raise health insurance costs for employers and individuals and depress job creation. State governments should undo these harmful effects by repealing costly benefit mandates.

A bigger step is to eliminate barriers to interstate commerce in health insurance. Under current law, most employers cannot shop across state lines for health insurance. As a result, employers in states with onerous benefit mandates are stuck with high-cost health insurance. Barriers to interstate commerce limit choice, suppress competition and raise health insurance costs. One of the harmful consequences is to depress job creation.

Some argue that health care reform demands a comprehensive approach. However, there is no sound economic reason to delay proposals that would cultivate greater competition in the current system, expand choice for employers and workers, shrink labor costs and stimulate job creation.

2. Suspend federal minimum wage mandates. The current unemployment rate among American teenagers is nearly 26%. Minimum wage mandates are among the factors that drive teen unemployment rates to such high levels. These mandates raise the cost of labor for employers who would otherwise hire unskilled and inexperienced workers. As a result, employers substitute away from these workers and rely instead on capital-intensive production methods, skilled workers and self-service by customers. In this way, minimum wage laws undercut job opportunities for the least skilled and the least experienced. The effects are especially pernicious for the young, who are robbed of opportunities to land a job, acquire valuable training and experience, and demonstrate their worth to employers.

To help young and unskilled workers gain a toehold in the labor market, the federal government should suspend minimum wage mandates until unemployment returns to normal levels. Better yet, abolish the federal minimum wage. If these steps are too radical, then allow states to opt out of the federal minimum or set a lower state floor. States and localities already have the option to set a higher minimum and, unwisely, many have taken that path.

3. Renounce the grossly misnamed Employee Free Choice Act. This legislation, currently before Congress, threatens to stack the deck against employers in the union certification process. Current law requires a secret ballot election among workers when the employer opposes union certification. If the union wins majority support, the National Labor Relations Board certifies the union as the exclusive workplace representative in collective bargaining with the employer.

The Free Choice Act would eliminate the secret ballot requirement. Instead, union certification would require only that a majority of workers sign cards supplied by the union. This "card check" process is rife with potential for strong-arm tactics and intimidation by union supporters. Sign here or else!

It's unclear whether the Free Choice Act and card-check provision will become law. Fears that the act might become law are enough to chill investment by firms that could be targets of card-check union certification. To allay these fears and remove the chill from investment, President Obama and congressional leaders should forcefully renounce the act now. If they won't, moderate Democrats should step forward and publicly announce their opposition to the act. By taking this step, they would help restore business confidence and set the stage for more job-creating investments.

4. Experiment with how best to put the unemployed back to work and assess the results. Government agencies and community organizations have tried many programs to help the unemployed return to work. Some programs focus on job search assistance and interviewing skills. Others provide counseling about education and training opportunities. Yet others rely on re-employment bonuses for job losers or financial inducements to hire the unemployed. There is much potential to learn from these programs about which approaches are cost effective, and which are not.

Unfortunately, it's very hard to assess effectiveness unless programs are properly designed and implemented. Reliable evaluation requires careful measurement of program features, participant characteristics, local economic conditions and outcomes. It also requires the systematic use of treatment and control groups, as in testing regimes for new drugs and medical procedures. Each new unemployment assistance program that does not include a reliable evaluation regime is a wasted opportunity to learn about what works, and under what conditions.

There are several useful roles for the federal government here. One is to develop robust guidelines for evaluating programs that aid the unemployed. Another is technical assistance to governments or other organizations that seek to follow the guidelines. The federal government should also offer financial incentives to encourage experimentation and reliable program evaluation.

How should the government cover the cost of the financial incentives? Let the states re-channel a small portion of the funds for extended unemployment benefits into new programs for putting the unemployed back to work, provided that the new programs include a reliable method for program evaluation.

Experimentation and program evaluation won't solve the immediate jobs crisis, but they will help develop more powerful and cost-effective tools for putting the unemployed back to work in the future. Effective evaluations will also help identify ineffective programs that drain government coffers.

These four proposals will foster job creation and help reverse the downward slide in the labor market--and unlike the proposals attracting attention in Washington, they won't break the budget or raise tax burdens.

The Impossible Promise

2009-10-13T06:01:00.000-07:00

Great article (at least this is a portion of it) by Hoisington investment Management Company:

The Impossible Promise

The federal government's promise to extricate the U.S. economy from this recession involves more spending (increasing public debt) and more subsidies for consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt. In previous letters we have discussed the fact that the government spending multiplier is zero (read Professor Robert Barro's book, Macroeconomics - a Modern Approach, p. 370). This means there is no long term income benefit from stimulus programs. According to the latest academic research, the most recent $800 billion stimulus plan will boost economic activity in the short run, but will surely depress economic activity over time. The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009, "NBER Working Paper 15369") suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output.

From a fiscal policy perspective the outlook for economic growth appears to be one of stagnation for several years due to the size of the federal debt, which is expected to rise 35.7% from 2008 levels to 76.5% of GDP over the next ten years according to the Office of Management and Budget (Chart 4). This exercise in government spending is, of course, an exact replica of the Japanese experience from 1989 to the present. Their debt to GDP ratios have gone from about 50% in 1988 to about 178% today, and yet their nominal GDP is no higher than it was 17 years ago, and their employment stands at twenty year ago levels. It is somewhat unsettling that as of the last employment report the United States employed 131 million people, a level that was first reached in 2000, which means the United States has had no net job gains for almost ten years.

Indeed, it appears that the fiscal chain around the free market neck is sufficiently onerous to restrain growth for several years. The promise of the government to revive growth through increased indebtedness is, indeed, an impossible promise.

Best Economic Article I've Read in a While

2009-10-05T09:35:00.000-07:00

This is from John Mauldin, who is fast becoming my favorite analyst to read. Now don't avoid this article because of its length or because I said it had to do with the economy. It is a great general read. I'd be interested to hear comments from anyone who understands physics better than I do or chaos theory for that matter.

Fingers of Sustainability
"To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown - the first instinct is to eliminate these distressing states. First principle: any explanation is better than none...
The cause-creating drive is thus conditioned and excited by the feeling of fear ..." Friedrich Nietzsche

This weekend I turn 60 and have been a little more introspective than usual. I am often told that the letter I wrote well over three years ago on ubiquity and complexity theory and the future of the economy was the best letter I have ever done. I went back to read it, and it has aged well. I basically outlined how a financial crisis would unfold, and now it has.

On reflection, I think that there are perhaps other, even larger, events in our future than the recent credit crisis and recession; yet, just as in 2006, there is a great deal of complacency. But as we will see, there are fingers of instability building up that have the potential to create large disruptions, both positive and negative, in our future. And for the political junkies in the room, I offer a brief insight into what may be one of the more intriguing behind-the-scenes developments in recent years. Now, to the letter.

"Any explanation is better than none." - Nietzsche
And the simpler the explanation, it seems in the investment game, the better. "The markets went up because oil went down," we are told (except that when oil went up, then there was another reason for the movement of the markets). But we all intuitively know that things are far more complicated than that. However, as Nietzsche noted, dealing with the unknown can be disturbing, so we look for the simple explanation.

"Ah," we tell ourselves, "I know why that happened." With an explanation firmly in hand, we now feel we know something. And the behavioral psychologists note that this state actually releases chemicals in our brain that make us feel good. We become literally addicted to the simple explanation. The fact that what we "know" (the explanation for the unknowable) is irrelevant or even wrong is not important in achieving the chemical release. And thus we look for reasons.

The credit crisis happened because of Greenspan's monetary policy. Or maybe it was a collective mania. Or any number of things. Just as the proverbial butterfly flapping its wings in the Amazon triggers a storm in Europe, maybe an investor in St. Louis triggered the credit crisis. Crazy? Maybe not. Today we will look at what complexity theory tells us about the reasons for earthquakes, tornados, and the movement of markets. Then we look at how the world and that investor in St. Louis are all tied together in a critical state. Of course, what state and how critical are the issues.

Ubiquity, Complexity Theory, and Sandpiles
We are going to start our explorations with excerpts from a very important book by Mark Buchanan, called Ubiquity: Why Catastrophes Happen. I HIGHLY recommend it to those of you who, like me, are trying to understand the complexity of the markets. Not directly about investing, although he touches on it, it is about chaos theory, complexity theory, and critical states. It is written in a manner any layman can understand. There are no equations, just easy-to-grasp, well-written stories and analogies.

As kids, we all had the fun of going to the beach and playing in the sand. Remember taking your plastic buckets and making sandpiles? Slowly pouring the sand into an ever bigger pile, until one side of the pile started an avalanche?

Imagine, Buchanan says, dropping one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. Most of the time it is a small one, but sometimes it builds on itself and it seems like one whole side of the pile slides down to the bottom.

Well, in 1987 three physicists, named Per Bak, Chao Tang, and Kurt Weisenfeld, began to play the sandpile game in their lab at Brookhaven National Laboratory in New York. Now, actually piling up one grain of sand at a time is a slow process, so they wrote a computer program to do it. Not as much fun, but a whole lot faster. Not that they really cared about sandpiles. They were more interested in what are called nonequilibrium systems.

They learned some interesting things. What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found that there is no typical number. "Some involved a single grain; others, ten, a hundred or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur."

The piles were indeed completely chaotic in their unpredictability. Now, let's read this next paragraph from Buchanan slowly. It is important, as it creates a mental image that helps me understand the organization of the financial markets and the world economy. (emphasis mine)
"To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, 'ready to go,' color it red. What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever."

Something only a math nerd could love? Scientists refer to this as a critical state. The term critical state can mean the point at which water would go to ice or steam, or the moment that critical mass induces a nuclear reaction, etc. It is the point at which something triggers a change in the basic nature or character of the object or group. Thus, (and very casually for all you physicists) we refer to something being in a critical state (or use the term critical mass) when there is the opportunity for significant change.

"But to physicists, [the critical state] has always been seen as a kind of theoretical freak and sideshow, a devilishly unstable and unusual condition that arises only under the most exceptional circumstances [in highly controlled experiments]... In the sandpile game, however, a critical state seemed to arise naturally through the mindless sprinkling of grains."

Thus, they asked themselves, could this phenomenon show up elsewhere? In the earth's crust, triggering earthquakes, or as wholesale changes in an ecosystem - or as a stock market crash? "Could the special organization of the critical state explain why the world at large seems so susceptible to unpredictable upheavals?" Could it help us understand not just earthquakes, but why cartoons in a third-rate paper in Denmark could cause worldwide riots?

Buchanan concludes in his opening chapter, "There are many subtleties and twists in the story ... but the basic message, roughly speaking, is simple: The peculiar and exceptionally unstable organization of the critical state does indeed seem to be ubiquitous in our world. Researchers in the past few years have found its mathematical fingerprints in the workings of all the upheavals I've mentioned so far [earthquakes, eco-disasters, market crashes], as well as in the spreading of epidemics, the flaring of traffic jams, the patterns by which instructions trickle down from managers to workers in the office, and in many other things. At the heart of our story, then, lies the discovery that networks of things of all kinds - atoms, molecules, species, people, and even ideas - have a marked tendency to organize themselves along similar lines. On the basis of this insight, scientists are finally beginning to fathom what lies behind tumultuous events of all sorts, and to see patterns at work where they have never seen them before."

Now, let's think about this for a moment. Going back to the sandpile game, you find that as you double the number of grains of sand involved in an avalanche, the likelihood of an avalanche becomes 2.14 times more likely. We find something similar with earthquakes. In terms of energy, the data indicate that earthquakes become four times less likely each time you double the energy they release. Mathematicians refer to this as a "power law," a special mathematical pattern that stands out in contrast to the overall complexity of the earthquake process.
Fingers of Instability

So what happens in our game? "... after the pile evolves into a critical state, many grains rest just on the verge of tumbling, and these grains link up into 'fingers of instability' of all possible lengths. While many are short, others slice through the pile from one end to the other. So the chain reaction triggered by a single grain might lead to an avalanche of any size whatsoever, depending on whether that grain fell on a short, intermediate or long finger of instability."
Now, we come to a critical point in our discussion of the critical state. Again, read this with the markets in mind (again, emphasis mine):

"In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size."

Now, let's couple this idea with a few other concepts. First, Nobel laureate Hyman Minsky points out that stability leads to instability. The more comfortable we get with a given condition or trend, the longer it will persist and then, when the trend fails, the more dramatic the correction. The problem with long-term macroeconomic stability is that it tends to produce unstable financial arrangements. If we believe that tomorrow and next year will be the same as last week and last year, we are more willing to add debt or postpone savings in favor of current consumption. Thus, says Minsky, the longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior. (And, three years later, we can now all see that truth. But it was not as obvious to a lot of people in 2006.)
Relating this to our sandpile, the longer that a critical state builds up in an economy, or in other words, the more "fingers of instability" that are allowed to develop a connection to other fingers of instability, the greater the potential for a serious "avalanche."

Or, maybe a series of smaller shocks lessens the long reach of the fingers of instability, giving a paradoxical rise to even more apparent stability. As the late Hunt Taylor wrote, in 2006:
"Let us start with what we know. First, these markets look nothing like anything I've ever encountered before. Their stunning complexity, the staggering number of tradable instruments and their interconnectedness, the light-speed at which information moves, the degree to which the movement of one instrument triggers nonlinear reactions along chains of related derivatives, and the requisite level of mathematics necessary to price them speak to the reality that we are now sailing in uncharted waters.

"... I've had 30-plus years of learning experiences in markets, all of which tell me that technology and telecommunications will not do away with human greed and ignorance. I think we will drive the car faster and faster until something bad happens. And I think it will come, like a comet, from that part of the night sky where we least expect it."

A second related concept is from game theory. The Nash equilibrium (named after John Nash) is a kind of optimal strategy for games involving two or more players, whereby the players reach an outcome to mutual advantage. If there is a set of strategies for a game with the property that no player can benefit by changing his strategy while (if) the other players keep their strategies unchanged, then that set of strategies and the corresponding payoffs constitute a Nash equilibrium.

A Stable Disequilibrium
So we ended up in a critical state of what Paul McCulley called a "stable disequilibrium." We have players of this game from all over the world tied inextricably together in a vast dance through investment, debt, derivatives, trade, globalization, international business, and finance. Each player works hard to maximize their own personal outcome and to reduce their exposure to "fingers of instability."

But the longer we go on, asserts Minsky, the more likely and violent an "avalanche" is. The more the fingers of instability can build. The more that state of stable disequilibrium can go critical on us.

Go back to 1997. Thailand began to experience trouble. The debt explosion in Asia began to unravel. Russia was defaulting on its bonds. Things on the periphery, small fingers of instability, began to impinge on fault lines in the major world economies. Something that had not been seen before happened: the historically sound and logical relationship between 29- and 30-year bonds broke down. Then country after country suddenly and inexplicably saw that relationship in their bonds begin to correlate, an unheard-of event. A diversified pool of debt was suddenly no longer diversified.

The fingers of instability reached into Long Term Capital Management and nearly brought the financial world to its knees.

So, where are the fingers of instability today? Where are the fault lines that could trigger another crisis? Are there any early warning signs? I see two possibilities, one positive and one negative.
Chad Starliper sent me the following graph. It shows the debt-to-GDP ratio for the US, adding in various levels of debt. For instance, the ratio of debt to GDP for all levels of government debt is 87%. But if you add household and business debt along with the GSE (government-sponsored enterprises) like Fannie and Freddie, the ratio rises to 331%. If you add in future benefits of Social Security and Medicare, the number becomes more like 1,000%.

The Obama administration tells us that the government deficit is going to be well over $1 trillion a year for at least ten years. And that does not take into account the outlier years in the 2020s when the really heavy lifting of Social Security and Medicare kicks in.

There is a truism that goes a little like, "If something can't happen, then it won't." Let me make a prediction. We won't have a trillion-dollar deficit in ten years. Why? Because it can't happen. The market will simply not allow it.

As I have written, we can run large deficits almost forever, as long as the deficits are less than nominal GDP. While it may not be the wise thing to do, it does not bring down the system.
But when you start adding to the deficit in amounts significantly larger than nominal GDP, there is a limit. Each dollar, like the grains of sand, adds to the potential instability of the system. Is it $2 trillion more? $3 trillion? No one can know, but the longer it goes, the worse the ensuing financial earthquake will be.

The current political class and their intentions are dangerously close to killing the golden goose. It is one thing to steal the eggs; it is an altogether different thing to kill the goose through ignorance of the consequences. And the size of the deficit, for as long as they plan to have it, will most assuredly kill the goose.

Just as I was writing in 2006 about the potential for a crisis, and yet the party went on for quite some time, I think the party can limp along now. But there will come a point when the party is over. Interest rates on the long end will rise precipitously, forcing mortgages up and making the deficit even worse. It will be an even worse crisis than the one we have just gone through. And there will be fewer options for policy makers, and none of them will be good or pleasant. And it will take most people unawares. They will see the current trend and project it into the future. And they will be hit hard.

Can we avoid this calamity? Yes, we can wrestle the US budget deficit back under some kind of control, close to nominal GDP or on a clear trajectory to get there within a reasonable time (say, a few years). As noted above, we can run deficits close to nominal GDP almost forever. But there is no political willpower to do that now. And so, the market will at some point force the hand of the political class. That investor in St. Louis, or China or (????) will decide not to buy government debt at such low rates. The avalanche will start. And everyone will be surprised at the ferocity of the crisis. Except you, gentle reader. You have been warned.

Let me re-emphasize that point. If we do not get our act together, the results could be truly serious. And it is not just the US. Japan, as I have written, unless it changes, will hit the wall in the next few years. There are some really sick actors in Europe. You are going to have to be far more nimble and prepared for this next crisis, should it arise, than you were for the last one. Over the next few months, I will be devoting some space to helping us think through how we do that.

3 Billion and Counting
And now for something a little more positive. From the beginning of the wireless revolution and the development of the internet, it was not until 2001 that we finally had one billion people connected. It only took another six years to add another billion. And sometime in 2011, somewhere in the world, we will add yet another billion. We are adding some 70,000 people a day, with smarter and cheaper computers, phones, and netbooks. By some estimates, there will be five billion connected to the network by 2015.

A study done in 2005 of 21 developing countries by Leonard Waverman of the London Business School "... showed that an extra 10 mobile phones per 100 people in a typical developing country leads to an additional 0.59% of growth in GDP per person." (Jump Point)
Think of each one of those additional connected people as a grain of sand. We have already seen a large surge in productivity from the internet and mobile phones. Farmers in India now know what the prices are for their products and don't have to take lowball offers from middlemen. Fishermen in Indonesia can call around and find where they can get the best price for their day's catch.

Tom Hayes argues in his book Jump Point that, because of the growing connectivity, rather large changes are coming to the way we organize our lives. It is a very interesting book and one that I will review in depth at some point.

But what Hayes calls the Jump Point is what I referred to as critical mass. "In mathematics it is called a 'jump discontinuity.' In engineering, this is known as a 'step phase change.' In climatology, it is called an 'abrupt delta.' I call it a Jump Point - a change in the environment, in this case the business environment, so startling that we have no choice but to regroup and rethink the future." (from the introduction)

Not all of the changes are benign. The potential for business and marketing models to be turned on their head is rather striking. I recommend the book to those who are thinking about the future. It is easy to read, provocative, and well written. You can get it at Amazon.com. I wrote this three years ago: "Today more than ever your portfolio should be targeting absolute return strategies. In a world with fingers of instability that may be connected in ways we have not seen in the past, caution is the order of the day. If we do see a slowing US economy later this year, the average complacent investor is not going to be happy as his diversified portfolio all seems to be going south at the same time."

More from Germany - Bad Example This Time

2009-09-29T13:44:00.001-07:00

This is an article from Kevin Brekke - a switzerland based editor at Casey Research. Like the previous article stated - So we want to be more like Europe?

As a note for a future post that I will make in a few days, I am reading a great interview regarding The Fourth Turning. I am interested in the book, but this article explains a lot about President Obama and the recent election and upcoming elections for that matter.

There Will Always Be Takers of Free Money
By Kevin Brekke

Well, Sunday was national election day in Germany (why can’t Americans vote on the weekend?), and although the results will produce a decided shift in German coalition government, they also mark the culmination of another story told by the voters that likely will go unnoticed. Bear with me here – this has relevance to an upcoming event in the U.S. Congress.
In 2002, a commission was formed to examine the German social safety net system of programs and make recommendations on how to reform them – kinda like the American Congress putting together a blue-ribbon commission for this or that study. The commission was headed by Peter Hartz, an executive at Volkswagen, and hence was known as the Hartz Commission, and the eventual legislation that was passed by parliament was named Hartz IV (there were four stages of changes phased in over a few years).

One impetus for the commission’s forming was to explore possible changes to the unemployment scheme in Germany. At the time, unemployment benefits were high, at about two-thirds of your previous wage, and lasted 18-24 months. However, there was no minimum benefit guarantee, and for those low-wage earners who lost their jobs the benefit was very small. The German government was under pressure to change the law and implement a lower benefit percentage, a “minimum livable benefit” floor, and to extend the term that benefits could be drawn. And, no surprise, the commission’s recommendations conformed to the government’s concern.
Changes were made to unemployment benefits that included a minimum monthly guarantee, a lowered monthly benefit percentage, and essentially extended the benefits to an unlimited term. Uh-oh.

Nationwide street protests took place in reaction to the lowering of the benefit amount.

Let’s now return to Sunday’s election. The party that pushed hard for the passage of the Hartz IV amendments was the SPD, the Social Democrat Party. And they have been losing voter support and political power since. The SPD’s support fell to 23% from 33% in the last national election, a phenomenal drop in a multi-party system, and they will be replaced by another, far smaller party in the ruling coalition government formed with the CDU/CSU, the biggest party in Deutschland. Voters always want smaller government, just don't touch my sacred benefit. The SPD is a fading party due to its backing of more restrictive government benefits.

And here’s a telling anecdote showing how the jobless game the system. After the last national elections, one of the TV stations was polling voters asking about their choices and their feelings about the elections. One gentleman, after sharing his thoughts, was asked by the interviewer about his personal situation, and his profession.

“I’m a Hartz IV man,” was his reply. My jaw went slack. His chosen profession was unemployed. And under the new rules, he had likely figured out how to work the system and stay on the dole for as long as the gravy flowed. A permanent underclass of long-term unemployed now exists in Germany. When governments opt to give away free money, there will always be takers.
Last week the House voted to pass a third extension in unemployment benefits, and the Senate is expected to do the same as early as this week.

Now, I’m as sensitive as the next guy to the hardship suffered when a job is lost. But the path being trodden by Congress is a dangerous one. The longer the unemployed are subsidized, the more likely it is that the “benefit” will come to be seen as an “entitlement,” and entitlements seldom come with expiration dates.

Like Social Security, the question of unemployment benefits is evolving into a parallel third-rail in politics, where neither party nor politician will touch them for fear of political suicide.
I hope that whatever decision is made by Congress, it comes with clear guidelines and a set term. I fear that neither of these is likely to be on the agenda.

Germany

2009-09-28T13:13:00.001-07:00

Great article from Brian Wesbury of First Trust -

Much of the modern social welfare state (which liberals in the US seem intent on expanding) dates back to German Chancellor Otto von Bismark in the late 1800s. But now, even as the US moves toward more government, Germany may be on the verge of a giant leap in the opposite direction.

Angela Merkel, the current premier of Germany won re-election this weekend. Back in 2005, Merkel’s party, the Christian Democratic Union (CDU - a “center-slightly right” group), had gained power by forming a coalition with the “liberal” Social Democrats (SDP). This time, the SDP saw their worst election returns in 60 years. This means that Merkel will form a coalition with the Free Democrat Party (FDP - a “somewhat free-market” group). The FDP was nearly extinct just ten years ago, but won 14.6% of the vote this time around, a record for their party.

The Free Democrats ran on a platform that included a significant across-the-board cut in marginal income tax rates – the German equivalent of the Kennedy or Reagan tax cuts. At present, income tax rates range from 14% to 45%. The Free Democrats want three brackets – 10%, 25% and 35%.

Initial news stories suggest the euro will rally and German bond yields rise, as tax cuts would increase economic growth and widen the German budget deficit. We agree that these tax cuts would push up the euro, but don’t think German bond yields will rise much, if at all, and would not worry about the impact on the budget deficit. Lower tax rates would not only accelerate the recovery from the recent economic turmoil but also encourage the work, saving, and investment that Germany needs to raise its long-term growth potential and address its massive Baby Boom-related fiscal imbalance.

Cutting the top income tax rate translates into a healthy 18% increase in the after-tax return to work for those with the highest incomes. (Top-income workers now keep 55% of their income gains; a tax cut would raise this to 65%, an increase of 18%).

Even if the budget deficit did rise – and we doubt it would if the tax cuts are like the Free Democrats want – a larger economy with better incentives would handle a larger deficit better than a weaker economy could handle a smaller one. A 325-pound barbell is always heavier than a 250-pound barbell. But an NFL tackle can lift the first barbell easier than a jockey can lift the second.

These tax cuts would also put pressure on other countries, particularly Germany’s main competitors, to reduce tax rates themselves. After Reagan’s tax cuts in the 1980s, many advanced countries around the world also cut taxes, and not just those with “conservative” governments. Sometimes it was just a defense mechanism to hold onto capital and productive workers.

Given the inclination of many policymakers in the US to look to Europe as a model for where we should head next, the election results in Germany are going to cause a great deal of confusion in Washington, DC.

Hmmmm....

2009-09-21T12:35:00.000-07:00

There have been a couple of things this last week that I have heard which scare me a little. I'll post the second one in a few days, but the first has to do with the negotiations(?) taking place in the middle east concerning Iran. If you have not read anything about it then here are some ideas from the STRATFOR, a global intelligence group that, from what I have read so far, is very unbiased and very good at what they do. While reading this article two big things came to mind, first: What happened to our supposedly on top of the news reporters on this one? I mean, I haven't seen a single front page story on these talks and from the sound of things there is war brewing. (I know the answer is that our "top" reporters have been re-assigned to cover celebrities, but...I mean, come on). Second: How much goodwill does the current administration think is going to come from not building the missile shield as was announced this week? I have another great piece from STRATFOR that goes through how Russia views their current world and options versus what the U.S. would like to think Russians want and is trying to give them. Very interesting considering everything in the below.

Misreading the Iranian Situation
By George Friedman September 15, 2009

The Iranians have now agreed to talks with the P-5+1, the five permanent members of the U.N. Security Council (the United States, the United Kingdom, France, Russia and China) plus Germany. These six countries decided in late April to enter into negotiations with Iran over the suspected Iranian nuclear weapons program by Sept. 24, the date of the next U.N. General Assembly meeting. If Iran refused to engage in negotiations by that date, the Western powers in the P-5+1 made clear that they would seriously consider imposing much tougher sanctions on Iran than those that were currently in place. The term “crippling” was mentioned several times.

Obviously, negotiations are not to begin prior to the U.N. General Assembly meeting as previously had been stipulated. The talks are now expected to begin Oct. 1, a week later. This gives the Iranians their first (symbolic) victory: They have defied the P-5+1 on the demand that talks be under way by the time the General Assembly meets. Inevitably, the Iranians would delay, and the P-5+1 would not make a big deal of it.

Talks About Talks and the Sanctions Challenge
Now, we get down to the heart of the matter: The Iranians have officially indicated that they are prepared to discuss a range of strategic and economic issues but are not prepared to discuss the nuclear program — which, of course, is the reason for the talks in the first place. On Sept. 14, they hinted that they might consider talking about the nuclear program if progress were made on other issues, but made no guarantees.

So far, the Iranians are playing their traditional hand. They are making the question of whether there would be talks about nuclear weapons the center of diplomacy. Where the West wanted a commitment to end uranium enrichment, the Iranians are trying to shift the discussions to whether they will talk at all. After spending many rounds of discussions on this subject, they expect everyone to go away exhausted. If pressure is coming down on them, they will agree to discussions, acting as if the mere act of talking represents a massive concession. The members of the P-5+1 that don’t want a confrontation with Iran will use Tehran’s agreement merely to talk (absent any guarantees of an outcome) to get themselves off the hook on which they found themselves back in April — namely, of having to impose sanctions if the Iranians don’t change their position on their nuclear program.

Russia, one of the main members of the P-5+1, already has made clear it opposes sanctions under any circumstances. The Russians have no intention of helping solve the American problem with Iran while the United States maintains its stance on NATO expansion and bilateral relations with Ukraine and Georgia. Russia regards the latter two countries as falling within the Russian sphere of influence, a place where the United States has no business meddling.

To this end, Russia is pleased to do anything that keeps the United States bogged down in the Middle East, since this prevents Washington from deploying forces in Poland, the Czech Republic, the Baltics, Georgia or Ukraine. A conflict with Iran not only would bog down the United States even further, it would divide Europe and drive the former Soviet Union and Central Europe into viewing Russia as a source of aid and stability. The Russians thus see Iran as a major thorn in Washington’s side. Obtaining Moscow’s cooperation on removing the thorn would require major U.S. concessions — beyond merely bringing a plastic “reset” button to Moscow. At this point, the Russians have no intention of helping remove the thorn. They like it right where it is.

In discussing crippling sanctions, the sole obvious move would be blocking gasoline exports to Iran. Iran must import 40 percent of its gasoline needs. The United States and others have discussed a plan for preventing major energy companies, shippers and insurers from supplying that gasoline. The subject, of course, becomes moot if Russia (and China) refuses to participate or blocks sanctions. Moscow and Beijing can deliver all the gasoline Tehran wants. The Russians could even deliver gasoline by rail in the event that Iranian ports are blocked. Therefore, if the Russians aren’t participating, the impact of gasoline sanctions is severely diminished, something the Iranians know well.

Tehran and Moscow therefore are of the opinion that this round of threats will end where other rounds ended. The United States, the United Kingdom and France will be on one side; Russia and China will be on the other; and Germany will vacillate, not wanting to be caught on the wrong side of the Russians. In either case, whatever sanctions are announced would lose their punch, and life would go on as before.

There is, however, a dimension that indicates that this crisis might take a different course.
The Israeli Dimension

After the last round of meetings between Israeli Prime Minister Benjamin Netanyahu and U.S. President Barack Obama, the Israelis announced that the United States had agreed that in the event of a failure in negotiations, the United States would demand — and get — crippling sanctions against Iran, code for a gasoline cutoff. In return, the Israelis indicated that any plans for a unilateral Israeli strike on Iran’s nuclear facilities would be put off. The Israelis specifically said that the Americans had agreed on the September U.N. talks as the hard deadline for a decision on — and implementation of — sanctions.

Our view always has been that the Iranians are far from acquiring nuclear weapons. This is, we believe, the Israeli point of view. But the Israeli point of view also is that, however distant, the Iranian acquisition of nuclear weapons represents a mortal danger to Israel — and that, therefore, Israel would have to use military force if diplomacy and sanctions don’t work.
For Israel, the Obama guarantee on sanctions represented the best chance at a nonmilitary settlement. If it fails, it is not clear what could possibly work. Given that Supreme Leader Ayatollah Ali Khamenei has gotten his regime back in line, that Iranian President Mahmoud Ahmadinejad apparently has emerged from the recent Iranian election crisis with expanded clout over Iran’s foreign policy, and that the Iranian nuclear program appears to be popular among Iranian nationalists (of whom there are many), there seems no internal impediment to the program. And given the current state of U.S.-Russian relations and that Washington is unlikely to yield Moscow hegemony in the former Soviet Union in return for help on Iran, a crippling sanctions regime is unlikely.

Obama’s assurances notwithstanding, there accordingly is no evidence of any force or process that would cause the Iranians to change their minds about their nuclear program. With that, the advantage to Israel of delaying a military strike evaporates.

And the question of the quality of intelligence must always be taken into account: The Iranians may be closer to a weapon than is believed. The value of risking delays disappears if nothing is likely to happen in the intervening period that would make a strike unnecessary.

Moreover, the Israelis have Obama in a box. Obama promised them that if Israel did not take a military route, he would deliver them crippling sanctions against Iran. Why Obama made this promise — and he has never denied the Israeli claim that he did — is not fully clear. It did buy him some time, and perhaps he felt he could manage the Russians better than he has. Whatever Obama’s motivations, having failed to deliver, the Israelis can say that they have cooperated with the United States fully, so now they are free by the terms of their understanding with Washington to carry out strikes — something that would necessarily involve the United States.
The calm assumptions in major capitals that this is merely another round in interminable talks with Iran on its weapons revolves around the belief that the Israelis are locked into place by the Americans. From where we sit, the Israelis have more room to maneuver now than they had in the past, or than they might have in the future. If that’s true, then the current crisis is more dangerous than it appears.

Netanyahu appears to have made a secret trip to Moscow (though it didn’t stay secret very long) to meet with the Russian leadership. Based on our own intelligence and this analysis, it is reasonable to assume that Netanyahu was trying to drive home to the Russians the seriousness of the situation and Israel’s intent. Russian-Israeli relations have deteriorated on a number of issues, particularly over Israeli military and intelligence aid to Ukraine and Georgia. Undoubtedly, the Russians demanded that Israel abandon this aid.

As mentioned, the chances of the Russians imposing effective sanctions on Iran are nil. This would get them nothing. And if not cooperating on sanctions triggers an Israeli airstrike, so much the better. This would degrade and potentially even effectively eliminate Iran’s nuclear capability, which in the final analysis is not in Russia’s interest. It would further enrage the Islamic world at Israel. It would put the United States in the even more difficult position of having to support Israel in the face of this hostility. And from the Russian point of view, it would all come for free. (That said, in such a scenario the Russians would lose much of the leverage the Iran card offers Moscow in negotiations with the United States.)
Ramifications of an Israeli Strike

An Israeli airstrike would involve the United States in two ways. First, it would have to pass through Iraqi airspace controlled by the United States, at which point no one would believe that the Americans weren’t complicit. Second, the likely Iranian response to an Israeli airstrike would be to mine the Strait of Hormuz and other key points in the Persian Gulf — something the Iranians have said they would do, and something they have the ability to do.
Some have pointed out that the Iranians would be hurting themselves as much as the West, as this would cripple their energy exports. And it must be remembered that 40 percent of globally traded oil exports pass through Hormuz. The effect of mining the Persian Gulf would be devastating to oil prices and to the global economy at a time when the global economy doesn’t need more grief. But the economic pain Iran would experience from such a move could prove tolerable relative to the pain that would be experienced by the world’s major energy importers. Meanwhile, the Russians would be free to export oil at extraordinarily high prices.
Given the foregoing, the United States would immediately get involved in such a conflict by engaging the Iranian navy, which in this case would consist of small boats with outboard motors dumping mines overboard. Such a conflict would be asymmetric warfare, naval style. Indeed, given that the Iranians would rapidly respond — and that the best way to stop them would be to destroy their vessels no matter how small before they have deployed — the only rational military process would be to strike Iranian boats and ships prior to an Israeli airstrike. Since Israel doesn’t have the ability to do that, the United States would be involved in any such conflict from the beginning. Given that, the United States might as well do the attacking. This would increase the probability of success dramatically, and paradoxically would dampen the regional reaction compared to a unilateral Israeli strike.

When we speak to people in Tehran, Washington and Moscow, we get the sense that they are unaware that the current situation might spin out of control. In Moscow, the scenario is dismissed because the general view is that Obama is weak and inexperienced and is frightened of military confrontation; the assumption is that he will find a way to bring the Israelis under control.

It isn’t clear that Obama can do that, however. The Israelis don’t trust him, and Iran is a core issue for them. The more Obama presses them on settlements the more they are convinced that Washington no longer cares about Israeli interests. And that means they are on their own, but free to act.

It should also be remembered that Obama reads intelligence reports from Moscow, Tehran and Berlin. He knows the consensus about him among foreign leaders, who don’t hold him in high regard. That consensus causes foreign leaders to take risks; it also causes Obama to have an interest in demonstrating that they have misread him.

We are reminded of the 1962 Cuban Missile Crisis only in this sense: We get the sense that everyone is misreading everyone else. In the run-up to the Cuban Missile Crisis, the Americans didn’t believe the Soviets would take the risks they did and the Soviets didn’t believe the Americans would react as they did. In this case, the Iranians believe the United States will play its old game and control the Israelis. Washington doesn’t really understand that Netanyahu may see this as the decisive moment. And the Russians believe Netanyahu will be controlled by an Obama afraid of an even broader conflict than he already has on his hands.
The current situation is not as dangerous as the Cuban Missile Crisis was, but it has this in common: Everyone thinks we are on a known roadmap, when in reality, one of the players — Israel — has the ability and interest to redraw the roadmap. Netanyahu has been signaling in many ways that he intends to do just this. Everyone seems to believe he won’t. We aren’t so sure.

Great Quotes

2009-09-14T12:39:00.001-07:00

I read a lot. Sometimes I read an article that really can't be broken down so I post the whole thing. Most of the time I read articles that can easily be broken down into 3 or 4 good ideas and I can expound on them. Then there are sometimes the articles are either too long to share, too poorly written to share, or just plain old stink - yet they have a quote or two that I really like. Here is a compendium of some of those quotes.

"In my experience it takes an expert with a powerful computer to truly foul things up." - John Mauldin (Instant classic)

"The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse." - John Cochrane (Why couldn't/can't anyone running for office argue this point for free markets this simply?)

"I should now apprise you of the resolution I have formed, to decline being considered among the number of those of whom a choice [in President] is made. I beg you at the same time to do me the justice to be assured that this resolution has not been taken without strict regard to all the considerations appertaining to the relation which binds dutiful citizen to his country - and that, in withdrawing the tender of service which silence in my situation might imply, I am influenced by no diminution of zeal for your future interest, no deficiency of grateful respect for your past kindness, but am supported by a full conviction that the step is compatible with both." - George Washington (This was President Washington's farewell address. Can you imagine any of our current politicians bowing out like this, without some big scandal forcing them to, but doing so because they felt they could no longer physically and mentally do the job necessary?)

"Intensely desired goals, clearly defined with detailed plans for their accomplishment act as a continual stimulus for ideas to achieve them." - Brian Tracy (Think about this quote in terms of our nation as a whole)

"We have a host of members of Congress, but there's one that I have to single out because he is going to be helping to shape the agenda going forward to make sure that we have one of the strongest, most dynamic, and most innovative financial markets in the world for many years to come, and that's my good friend, Barney Frank" - President Obama (I included this one not because the chills I got were the warm and fuzzy goosebumps, but because..well...it scared the heck out of me to hear it stated so bluntly)

What is one misplaced assumption in business today?
"That's a thoughtful question. [For] investors or businesses, that any problem can be quickly solved without a long-term plan. And that's held by business leaders as well as government." - Meredith Whitney (The current Health Care proposals come to mind here.)

Economics

2009-09-08T05:25:00.000-07:00

I know that some will find this boring, but I think it is very important. I think that John Mauldin describes very well why it is important to understand the many schools of economic thought. He mentions an analogy of a train. I would expound on that a little. It is supremely important to know where the train is headed. Many reading this blog will know about the time President Hinckley had to find a train car that was supposed to be shipped to a city in the south and found it in the upper north. It was just one little move on the switch that sent the train car way off track. The economic policy that our leaders are following right now is in line with Keneysian in theory, though not strictly applied. I suggest reading up on it a little to decide whether or not you agree with that philosophy as it pertains to our current economic struggles.

From John Mauldin:

"Among the economists and writers I regularly read, there are some who, if they agree with me, I go back and check my assumptions - I must have been wrong. Paul Krugman is one of those thinkers. I admit to his brilliance, but his left-leaning philosophy does not particularly square with mine, and I find that most of the time I disagree.

"That being said, I strongly encourage you to read his essay in the New York Times Magazine, which comes out this weekend. It is worth the high price of the Times to read it, if you can't get it online. It is a very hard critique and analysis of the failure of current macro and financial economic thought, which didn't even come close to predicting the current financial malaise. Indeed, as he points out, most schools of thought said the state we are in could not happen. You can read at the essay if you are a member, or register for free if you are not. http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1.

"Krugman writes, as I have in repeated columns, that we have taught two generations of economists and financial practitioners faulty theories. Even now, believers in the Efficient Market Hypothesis and CAPM hold to their beliefs in the face of clearly contrary evidence. It is a very thought-provoking piece and worthy of a long weekend read. He names specific names and pulls no punches. This is as close to starting a barroom brawl as you get in economic circles.

"He calls for a return to and fresh analysis of Keynesianism. Sigh. I would go further. A plague on all their houses. Whether Keynes or Friedman (monetarism) or von Mises (the Austrian school of economics) or the rather new school of behavioral economics, they all have deficiencies and (sometimes gaping) holes in their logic. At the same time, they all contribute to our general understanding of the world, and there are benefits to studying them.

"Let me risk an analogy. It is like reading about some religious scheme for interpreting the world and then becoming a true believer, arguing for that point of view as received wisdom - it's your belief system. Five Nobel laureates say this and seven say that. My guru is smarter than your guru. Look at how the math proves this point. And so on...

"Krugman concludes: "So here's what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit - and this will be very hard for the people who giggled and whispered over Keynes - that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they'll have to do their best to incorporate the realities of finance into macroeconomics.

"'Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: 'There is always an easy solution to every human problem - neat, plausible and wrong.'"

"I agree we need to examine our assumptions. I am not sure that makes me want to unreservedly embrace Keynes. Keynesians missed as badly as anyone else in this crisis. Yes, the Austrians generally called some of the problem, but their solutions call for 25% unemployment and an unworkable global economy and a serious depression. Not sure that I want to sign up for that, either. And, they totally discount the concept of the velocity of money, which we will look at next week.

"We need a new and better economic understanding, not some semireligious adherence to dogma laid down by men who were in no way familiar with current world conditions. Keynes, von Mises, Fisher, Schumpeter, Minsky, Hayek, Smith, et al. were giants. They absolutely must be read and understood. But a real science builds on the work of the former generations and does not hold onto theories as if they were scripture.

"As much as many economists would like to think so, economics is not a precise science. A global economy cannot yield to hard math in the way that one can model a protein, at least not with any model that has yet been offered. At best, the models let us see through a glass darkly, suggesting the potential for connections between a few variables, while assuming that all others are held constant. It is precisely the illusion that we can model the economy that got us into the current mess.

"(By the way, good friend Paul McCulley has written a very interesting essay on why the Fed has to change their models on inflation targeting - the Taylor Rule is not up to the task - and whether or not to deal with bubbles before the fact, rather than mopping up after they burst. What was assumed has clearly not worked. You can read it at www.pimco.com.)

"I am often asked what school of economic thought I adhere to, and the answer is, none. I would rather try to get it right. And rather than argue for one policy or another (which admittedly I sometimes do), it is more important to figure out what those who actually will effect policy will do, and then make sure we are not in the way of the train they are sending down the tracks. Agree with Krugman or not, he is one of the principal conductors on the train."

It's Not All Bad

2009-09-04T11:29:00.000-07:00

I have posted a lot of negative, and lengthy, stuff lately so I wanted to keep this somewhat short and sweet. These are the closing remarks on a Summer-End commentary made by a group of money managers that I really like. George Shipp is credited as being the author.

"We are aware that a great political debate is ongoing, and admit that it can sometimes complicate the task of fundamental securities analysis. We agree with many who feel that our country is 'at a crossroads.' We worry sometimes that we are tipping toward becoming a 'bailout nation' (cash for washing machines, puh-leeze?!), or that it has become more fashionable to walk away from financial obligations than to meet them. We are embarrassed at the national debt we are handing our children. We wish more stimulus monies [and only what had been necessary] had been applied toward long-term productive investments like infrastructure and education, less toward wealth transfer.

"...We believe in market discipline, AND we believe in appropriate regulation. Let's enforce existing laws. We all need to pay our fair share of taxes.

"This country has survived many crises, and we are confident we will not waste this one [to pull ahead and come out on top], to borrow a phrase. if our collective problem is too much debt (and it is), then it's just common sense that more borrowing is unlikely to be the answer. That din you hear in the background is the formerly silent majority, exercising their power to 'encourage' our political leaders to find that common sense middle ground for the greater good. Have you ever heard such political passion in your lives, as during the last several months? All that gnashing of teeth is not a symptom of weakness or sign of the apocalypse, it's a beacon of strength - democracy in action. The road to recovery will not be straight up, but we believe we're on it, and slowly, but surely, appear to be making progress."